February 10 – February 16, 2017

Venezuela having difficulties meeting its oil delivery commitments. REITs backing away from apartments. Chinese companies lending to the tune of $2tn where bankers have pulled back.


FT – Alphabet opts to spell out its stock options 2/9. Google recently let slip that it will be treating stock based pay as a cost in its financials (normally relegated to the GAAP footnotes).

FT – Oil and gas discoveries dry up to lowest total for 60 years 2/12. As oil and gas companies have been pulling back on exploration it’s no surprise that new discoveries are down; however, they are yielding more from existing fields.

Special Reports / Opinion Pieces


  • Jon Sindreu of The Wall Street Journal illustrated foreigner’s recent dumping of US debt, putting up a test for rates.
    • “Foreign buyers, led by China, are taking a smaller slice of debt issued by the U.S. and other major economies, a change that may test the long-held belief that overseas money has kept interest rates low in the developed world.”
    • “Foreigners are steadily pulling back: As of November, for the first time since 2009, less than 30% of the $20 trillion market for U.S. government debt was held overseas, according to the latest official data, released in January, from the Treasury Department and Federal Reserve. In the U.K., it is now 27%, compared with a record of 36% in 2008. In Germany, it is 49%, down from a peak of 57% in 2014.”
    • wsj_government-debt-held-by-foreigners_2-9-17
    • “In the longer term, the decline in foreign buyers might not matter so much. For countries that print their own currency, bond yields – and thus the price of bonds – are strongly determined by where investors believe central banks will set interest rates in the future. In theory, at least, bonds whose prices are pushed up or down excessively by supply-and-demand forces will eventually correct to correspond to interest-rate expectations.”
    • “In Japan, the central bank now directly fixes 10-year borrowing costs for the government at 0%. There, foreigners own just 9.2% of the government debt market; yet bond yields have stayed at record lows for decades, despite a government debt load amounting to 229% of Japan’s economy that has elicited repeated warnings from ratings companies.”
  • Adding on to Sindreu’s article, Brian Chappatta of Bloomberg discussed how America’s biggest creditors dump treasuries in warning to Trump.
    • “From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it’s the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world’s safest debt market seems less of a sure thing – particularly after the upswing in yields since November. And then there is Trump’s penchant for saber rattling, which has made staying home that much easier.”
    • bloomberg_selling-of-us-treasuries_2-12-17
    • “Nobody is saying that foreigners will abandon Treasuries altogether. After all, they still hold $5.4 trillion, or roughly 43% of the U.S. government debt market. (Though that’s down from 56% in 2008.) A significant drawdown can harm major holders like Japan and China as much as it does the U.S.”
    • “In December, Japanese investors reduced their investments in U.S. debt by 2.39 trillion yen ($21.3 billion) after a smaller pullback in November. While only a fraction of Japan’s $1.1 trillion of holdings, they were the first back-to-back declines since the start of 2014. China, which owns just over $1 trillion of Treasuries, has been selling since May. Its holdings are at a seven-year low.”
    • Bottom line there is too much unpredictability for many foreign investors right now, despite there being clear advantages in the rate spread between foreign and domestic markets.
  • Anjli Raval of the Financial Times highlighted that recently Opec beat oil output cut expectations.
    • “Opec countries drastically curbed their output in the first month of their new production agreement, in the clearest sign to date that the world’s biggest oil producers are committed to living up to the November pact to cut global supplies.”
    • “The limits adopted by the oil cartel in January have been ‘one of the deepest in the history of Opec output cut initiatives’, the International Energy Agency said on Friday.”
    • “The IEA said Opec crude production fell by 1m b/d to 32.06m b/d in January, surpassing expectations at the start of the six-month supply agreement…”
    • The Opec target cut is 1.2m barrels per day.
    • “‘Opec and Saudi get plaudits for month one but there are still five months of the  deal to run,’ said Bill Farren-Price, head of Petroleum Policy Intelligence. ‘It’s unlikely cuts are going to get deeper from here.'”
    • “Opec’s cuts drove a big drop in world oil supplies of 1.5m barrels a day in January. If the cartel maintains its level of compliance, excess inventories should fall by about 600,000b/d during the first half of 2017.”
    • “Even though stockpiles are falling, higher prices have driven an increase in drilling in the US as well as Brazil and Canada, where the IEA expects ‘significant increases in production.’ Non-Opec production, led by US shale oil supply, is forecast to grow by 400,000b/d in 2017 from last year.”
  • Sarah Krouse of The Wall Street Journal covered the milestone that Vanguard just passed $4 trillion in assets under management.
    • “Indexing pioneer Vanguard Group has climbed to $4 Trillion ($4.048tn) in assets for the first time, accentuating a loss of faith among investors in traditional money managers who handpick stocks.”
    • “Of the $533 billion of net flows into all mutual funds and exchange-traded funds last year, 54%, or $289 billion, went to funds managed by Vanguard, according to research firm Morningstar Inc. The fund company’s own tally for the year was even higher, at $322.8 billion.”
    • Similarly, “BlackRock topped $5 trillion in assets late last year for the first time. It has a larger international business than Vanguard.”
    • “Rival firms who have long been synonymous with their star pickers of stocks and bonds have been hurt by years of subpar performance and relatively high fees. Investors pulled a net $340.1 billion from U.S.-based actively managed funds last year, according to Morningstar, while pouring a record $504.8 billion into U.S.-based passively managed funds.”
    • For reference, “Vanguard crossed the $3 trillion threshold in August 2014.”
  • The Data Team over at the Economist illustrated the migration and labor shortages in Asian countries.
    • “Although Asia is home to half the world’s population, it provides only 34% of the total number of emigrants and host a mere 17% of immigrants. Just one-third of Asians who move abroad remain on the continent, and of those, most stick to neighboring countries. This makes it hard to fill jobs in many countries where they are needed, despite a surplus of labor elsewhere.”
    • “The imbalance of workers will only grow more dire as populations get greyer. For now, China is still a net exporter of labor. But during the next 30 years its working-age population is set to shrink by 180m, and it will need 20m more domestic workers. Overall, East Asia would have to import 275m people between the ages of 15 and 64 by 2030 to keep the share of its population at working age steady. Singapore, Malaysia, Vietnam and especially Thailand need workers, while Myanmar, Indonesia and the Philippines have too many. South Asia, meanwhile, could afford to lose 134m  laborers – India alone could send more than 80m abroad – without worsening its dependency ratio. China’s projected shortfall in 2030 is equivalent to 24% of its current working-age population; in Bangladesh the likely surplus is 18%.”
    • economist_asian-migration-and-labor-shortages_2-10-17
  • Kiran Stacey of the Financial Times covered how the number of deaths by air pollution in India is set to surpass those in China.
    • “India is on the verge of overtaking China as the country with the most deaths caused by air pollution, the world’s biggest environmental killer, according to research published on Tuesday.”
    • “In 2015 both countries suffered about 1.1m premature deaths as a result of polluted air, with India just 18,000 behind China, the US-based research organization Health Effects Institute found, making air pollution the fifth-highest cause of death among all health risks.”
    • ft_indias-air-pollution-deaths-to-exceed-chinas_2-14-17
    • “Worldwide, air pollution caused 4.2m deaths in 2015, a 7.5% jump from a decade earlier. Toxic air now kills almost as many people as high cholesterol and even more than excessive sale or being overweight, according to the study.”
  • Laura Kusisto of The Wall Street Journal highlighted a current measure being put forth in Los Angeles that would seek to ban major real-estate developments – at least for a few years.
    • “The second-largest U.S. city is considering a measure that would effectively halt major real-estate projects, the most extreme example yet of a revolt against development breaking out across the country.”
    • “The moves threaten to further constrict a tight supply of housing. Housing starts dropped 2.6% in January, the Commerce Department said Thursday. The number of single-family and multifamily starts per 1,000 households last month was about 36% below the 50-year average, according to Ralph McLaughlin, chief economist at Trulia.”
    • “In Los Angeles, residents in early March are set to vote on a ballot initiative that, if passed, would suspend for two years any development that requires a modification to the city’s existing planning rules.”
    • “‘People feel the system is rigged,’ said Michael Weinstein, president of the AIDS Healthcare Foundation, which has poured some $3.7 million into promoting the measure. ‘It’s all about billionaires getting what they want.'”
    • If you’re wondering why the AIDS Healthcare Foundation is spending donation money on this initiative, it’s because “many of the patients served by the AIDS Healthcare Foundation are struggling with rising housing prices.”
    • “San Francisco in June passed a ballot initiative that puts a 25% on-site affordable-housing requirement on most new residential buildings…”
    • “In Oregon, the Portland City Council in December unanimously passed a similar ordinance requiring buildings with 20 units or more to set aside 20% of units for affordable housing…”
    • “Despite complaints in Los Angeles about a deluge of development, housing construction now is at only a fraction of the rate of the mid-20th century, before strict zoning rules were put in place. From 1950 through 1959, about 250,000 units of new housing were added in the city of Los Angeles, according to an analysis of the census data by advocacy group Abundant Housing LA. From 2010 to 2015, the figure was 25,000, though the city issued permits for about 50,000 units in roughly the same period.”
    • “In the middle of the last century, zoning regulations were such that there was enough capacity in the city to build housing for 10 million residents, according to David Waite, a local planning lawyer.”
    • “The adoption of ‘community plans’ in the 1970s and a ballot initiative in the mid-1980s knocked that down to 4.5 million people, meaning Los Angeles is now almost at full capacity.”
    • “The proposed rule up for vote in March, called the ‘Neighborhood Integrity Initiative’ and referred to as Measure S, would require the city to update all community plans.” Essentially, if passed, development would be put on hold while the neighborhood plans are updated with input from the community.


Business Insider – Here’s how many people in every state don’t have health insurance – Bob Bryan 2/9


Bloomberg – Demand for Treasuries Is Now a ‘Made in the U.S.A’ Phenomenon – Luke Kawa, Liz McCormick, and Tracy Alloway 2/7


Economist – The world’s biggest gamblers – The Data Team 2/9


NYT – Why Falling Home Prices Could Be a Good Thing – Conor Dougherty 2/10nyt_where-housing-costs-too-much_2-10-17

Bloomberg – China’s Zombie Province Shows Trouble With Its Bond Market – Bloomberg News 2/12


Visual Capitalist – Visualizing the Tallest Building in Each State – Jeff Desjardins 2/13


WSJ – Daily Shot: Moody’s Investors Service – Chinese Wealth Management Products – 2/13

  • “China’s WMPs (Wealth Management Products) continue to grow, with the asset-liability mismatch remaining elevated. Imagine a product that ‘guarantees’ a certain rate, gives you a 1-3 month liquidity, and invests in 5-year corporate bonds.”


WSJ – Bond Buying Surges, Tightening U.S. Corporate Spreads – Chris Dieterich 2/13


Business Insider – An ‘investment mania’ is propelling Canada’s home prices to their biggest gain since 2007 2/14

FT – China Inc hits brakes on foreign property investment – Gabriel Wildau 2/16



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

Venezuela falls behind on oil-for-loan deals with China, Russia. Marianna Parraga and Brian Ellsworth. Reuters. 10 Feb. 2017.

“Venezuela’s state-run oil company, PDVSA, has fallen months behind on shipments of crude and fuel under oil-for-loan deals with China and Russia, according to internal company documents reviewed by Reuters.”

“The delayed shipments to such crucial political allies and trading partners – which together have extended Venezuela at least $55 billion in credit (about $50bn from China and $5bn from Russia’s Rosneft)- provide new insight into PDVSA’s operational failures and their crippling impact on the country’s unraveling socialist economy.”

“Because oil accounts for almost all of Venezuela’s export revenue, PDVSA’s crisis extends to a citizenry suffering through triple-digit inflation and food shortages reminiscent of the waning days of the Soviet Union.”

“The total worth of the late cargoes to state-run Chinese and Russian firms is about $750 million, according to a Reuters analysis of the PDVSA documents.”

“At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms – with shipments delayed by as much as 10 months, according to the documents. It also failed to make timely deliveries of another 3.2 million barrels of crude shipments to China’s state-run China National Petroleum Corporation (CNPC).”

“A total of 45 cargoes bound for Russian and Chinese companies are late for a variety of reasons, according to internal operational reports about shipments of crude and refined products.”

“The problems include operational mishaps, such as refining outages and delayed cleaning of tanker hulls, and financial disputes with service providers owed money by PDVSA.”

For example, “… a company official said PDVSA was unable to deliver a 1.8 million-barrel cargo of fuel oil to PetroChina because Bahamas terminal Borco, where PDVSA rents storage space, has intermittently prevented the firm from using the tanks since 2016 due to lack of payment.”

“Another 2 million-barrel cargo of fuel oil bound for China in November was postponed because of stained crude tankers, which cannot navigate international waters due to environmental regulations.”

Adding salt to the wound… “the fall in crude prices has made the oil-for-loan agreements more onerous. Because loan payments were negotiated when crude prices were higher, the agreements require PDVSA to ship more oil in order to continue servicing the debts at the same rate.”

Which all of course “saps its ability to ship to other customers – such as India, or customers in the United States – who would pay in cash, which PDVSA desperately needs.”

As an anonymous trader that regularly buys Venezuelan oil so aptly put it “at this point, everybody is trying to collect pending debts from PDVSA by receiving cargoes, but production is not enough.”

In Echo Of ’07, REITs Back Away From Multifamily. Andrew Barnes, Jake Mooney, and Zach Fox. S&P Global Market Intelligence. 7 Feb. 2017.

“Amid concerns of a peaking multifamily market, publicly traded U.S. real estate investment trusts in 2016 were net sellers of multifamily properties for the first time since 2009.”

“In total, REITs sold $13.0 billion more multifamily properties than they bought. In the past 10 years, the only previous time REITs off-loaded more multifamily assets than they bought by such a large amount was in 2007, when sales dwarfed purchases by $21.11 billion.”

“REITs’ caution around making new property investments follows a long and steady escalation in apartment values, which have more than doubled since 2010, according to a national index from Moody’s/Real Capital Analytics. In recent months, a flood of new construction has depressed rents in coastal markets. New York and San Francisco, both key markets for the largest multifamily REITs, Equity Residential and AvalonBay Communities Inc., saw rent growth flatline in 2016.


“‘Multifamily has just been overbuilt throughout the United States,’ said Jay Rollins, co-founder and managing principal at JCR Capital Investment Corp., which invests in properties valued at $50 million or less. ‘Everywhere. And it will decline everywhere.'”


Despite rising interest rates and expectations of further rises “…sales data does not show property prices declining in response. According to data firm Real Capital Analytics, cap rates dipped to 3.9% for mid- and high-rise apartments nationwide in 2016 third quarter. In San Francisco, the average cap rate stood at just 2.7%, barely above the 10-year Treasury rate, but with considerably more risk.”

“Broadly, observers say, property buyers seeking near-term yield are avoiding coastal cities, leaving them to long-term investors like sovereign wealth funds and high-net-worth individuals. But whereas REITs have cooled on acquisitions nationwide, some prominent private equity firms have still pursued deals in the middle of the country, where ‘the math can still work,'” according to Drew Babin, an analyst at Robert W. Baird & Co. Inc.

“Most notably, Starwood Capital Group kicked off 2016 by buying 72 properties from Equity Residential for $5.37 billion, and said Jan. 19 that it will acquire Milestone Apartments Real Estate Investment Trust, a Canadian REIT that owns U.S. Sun Belt properties, for $2.85 billion.”

“Historically, apartments have been a relatively safe bet. Apartment buildings are one of the more stable real estate asset classes over time, Babin said – in part because they have the backstop of funding from Freddie Mac and Fannie Mae. Even for top-of-the market buyers, patience can be valuable. Apartment prices rose 62% over the decade beginning in November 2006, despite two years of sharp price declines that began in 2008, according to the Moody’s/RCA index.”


Chinese Companies Rush In With Nearly $2 Trillion Where Bankers Fear to Lend. Rachel Rosenthal and Anjie Zheng. The Wall Street Journal. 9 Feb. 2017.

“Chinese companies are increasingly stepping in as lenders, as banks reduce their funding to struggling industries and the country’s mammoth bond market comes under strain.”

“Company-to-company loans in China jumped by 20% last year to 13.2 trillion yuan ($1.92 trillion), according to research firm CEIC. That is roughly double the size of the loan book at Wells Fargo & Co., the U.S.’s biggest lender. This entrusted lending, so named because banks serve as middlemen, is now the fastest-growing major component of the country’s elaborate system of informal, or shadow, banking.”

“The most recent surge came during the selloff in China’s $9.3 trillion bond market late last year. Big, cash-rich companies – mostly state-owned enterprises and some private companies – stepped in: New entrusted loans rose to 405.7 billion yuan ($59.02 billion) in December, more than double the month prior, according to data tracker Wind Information, and the highest monthly issuance in two years.”

“Instead of investing in their core business, companies can earn interest rates of up to 20% making entrusted loans, often with only cursory checks on borrowers’ creditworthiness. Such lending often props up companies in sectors like mining and property where Beijing wants to reduce excess capacity. It also adds to China’s $18 trillion corporate debt pile, already equal to 168% of gross domestic product, according to the Bank for International Settlements.”

“Some entrusted loans are between a company and its own subsidiaries, similar to how many big companies globally loan cash to different parts of their business. Still, between 2007 and 2013 more than 60% of entrusted loans were channeled to companies in industries with overcapacity, according to a study by the U.S.-based National Bureau of Economic Research.”

“‘It’s not a sustainable business model’ for the lending companies, said  Julian Evans-Pritchard, China economist at Capital Economics. ‘Their main operations are only staying afloat by acting like a shadow bank.'”

“Company-to-company lending took off in China in the 1990s when, after a period of rapid growth, many state-owned firms started generating large amounts of cash. With no private shareholders pushing for dividend payouts, many put that cash to work by lending it out.”


“But entrusted lending is unusual. Banks are involved, but only as a middleman: Direct company-to-company lending is still legally prohibited. Banks can charge fees of up to 5% of the loan, according to BMI Research, but leave credit checks to the lending company.”

“In some cases, lending companies aren’t pulling back even when loans sour.”  Why, because they’re usually to subsidiaries…

Other Interesting Articles

Bloomberg Businessweek

The Economist


A Wealth of Common Sense – Where You Live & the 50/30/20 Rule 2/14

Bloomberg – Yellen Sets High Hurdle for Reducing Fed’s Massive Bond Holdings 2/14

Business Insider – Paul Singer’s Elliott: ‘There is a deep underlying complacency which we think permeates global financial markets’ 2/1

FT – Take a deep breath: we must all help clean up London’s toxic air 2/3

FT – The importance of bubbles that did not burst 2/10

FT – Major Chinese bitcoin exchanges halt withdrawals after crackdown 2/10

FT – China’s Wanda circles Postbank in search of European bank assets 2/13

FT – Swiss signals that cash may no longer be king 2/13

FT – US labels Venezuelan vice-president a drug kingpin 2/13

FT – Down on China? Not Morgan Stanley (Alphaville) 2/14

FT – China’s top football team vows to phase out foreign players 2/15

FT – China returns as net buyer of US Treasuries 2/15

FT – What Chinese monetary tightening? 2/15

Investment News – Changing direction, FS Investments launching a nontraded REIT 2/14

NYT – Japan Limited Immigration; Now It’s Short of Workers 2/10

NYT – Amazon’s Living Lab: Reimagining Retail on Seattle Streets 2/12

NYT – India’s Air Pollution Rivals China’s as World’s Deadliest 2/14

Reuters – U.S. investors brace for mounting political risks as they decode Trump 2/14

ValueWalk – BCG: Hedge Funds Face Potential Doomsday Scenario 2/10

WSJ – Race to Revamp Shopping Malls Takes a Nasty Turn 2/14

WSJ – Bonds Tied to Dying Malls Could Be the Next ‘Big Short’ 2/14

WSJ – Retail Zombies Haunt Industry 2/15

WSJ – A Harsh Reality Is Hitting the Housing Market 2/15



February 3 – February 9, 2017

Chinese companies stashing cash ($110bn) in wealth management products. Italian banking sector depending on UniCredit?


FT – Bank of Japan intervenes to buy 10-year JGBs 2/3. Well for now it appears that the Bank of Japan’s tolerance for the Japanese 10-year bond is about 0.11% – the point at which it just intervened in the market indicating it would buy an unlimited amount of bonds to keep them at that rate or less.

FT – Overseas Chinese acquisitions worth $75bn cancelled last year 2/5. “Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through.”

WSJ – U.S. Firms Slash Interest Tab in $100 Billion Refinancing Blitz 2/8. Borrowers are using investor demand for yield to impose rate reductions on their debt.

NYT – A Crack in an Antarctic Ice Shelf Grew 17 Miles in the Last Two Months 2/7. A rift in the Larsen C ice shelf (one of the largest) that started in late 2014 is about 2 months away from pushing a very large glacier into the sea and leading to an eventual collapse of the Larsen C – which is not good.

Bloomberg – Supply Is the Technical Factor Behind Global Rally in Markets 2/8. “In short, a world with excess savings is still struggling to sate its appetite for investable assets in public markets, amid a net shortage of new stocks and corporate bonds.”

Special Reports / Opinion Pieces


  • Stephen Foley and Hannah Kuchler of the Financial Times elaborated on institutional investor anger over Snap’s decision to offer voteless shares.
    • Snapchat (Snap) is a first in pursuing an IPO that will issue shares to the market with NO voting power. “The two founders, Evan Spiegel, chief executive, and Bobby Murphy, chief technology officer, will control the company and continue to do so even if they step down.”
    • “The prospectus says a founder’s voting power will only be diluted if he cuts his stake substantially or ‘nine months after his death.'”
    • “Other technology companies, including Google and Facebook, have concentrated control in the hands of their founders, creating different classes of stock. But none has gone public with a class that has no votes whatsoever.”
    • The pros – management can focus on long-term value. The cons – management is not accountable to its outside shareholders.
    • The downside to index funds – “many funds will be forced to own Snap when it is included in major stock market indices…”
    • The concern is the precedent this could set…
  • Anne Richards of the Financial Times discussed the challenges posed to markets by long-term demographic trends.
    • “The global economy has now passed an important tipping point. For the first time in recorded history, children under the age of five no longer outnumber those aged 65 and above. We have arrived at ‘peak child.'”
    • “The United Nations has estimated that the global population will continue to age and, by 2050, more than 15% of the global population will be aged over 65. Economists often point to the challenges that Japan faces as the population ages; by 2050, most of the G7 will have a similar demographic profile as Japan does today, as will China, Brazil and Russia.”
    • “In a world where immigration policy reform is increasingly dominating political agendas, policymakers should recognize that gross domestic product largely reflects a demographic profile where more workers enter the workforce, who (if everything goes to plan) will then produce, earn and consume more than the previous quarter.”
    • “Naturally, as the workforce shrinks due to aging, the reverse will be true. However, it does not necessarily mean than an economy is underperforming if the trend rate of growth is falling to reflect a smaller workforce.”
  • Peter Grant of The Wall Street Journal highlighted that several large investors have cut back on their property exposure due to the bull market losing steam.
    • Some prominent real-estate investors (i.e. Blackstone Group, Brookfield Asset Management, United Parcel Service Inc’s pension trust and Harvard Management Company) are reducing their holdings and getting more selective about new deals, in a sign that the eight-year bull market for U.S. commercial property is coming to a close.”
    • “Deal volume decreased by $58.3 billion, or 11% in 2016, the first annual decrease since 2009, according to data firm Real Capital Analytics.
    • “Caution among investors in the $11 trillion U.S. commercial property sector is being driven by lofty prices, the length of the market cycle so far and the recent rise in interest rates, which makes bonds look more attractive compared with commercial property. Also, developers are adding new supply of some property types at the fastest rate since the recovery began.”
    • “For example, more than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real-estate tracker Axiometrics Inc.”
  • Lucy Hornby of the Financial Times covered the vow made by Beijing’s mayor to banish parts of the city to the provinces.
    • “Beijing’s new mayor has vowed to gut the city of all functions unrelated to its status as national capital, in an effort to push the growing population into the surrounding provinces.”
    • “Mr. Cai said he would reduce Beijing’s land zoned for construction and cap the city’s population at 23m.”
    • “Almost 22m people now live in Beijing or surrounding satellite cities, up from 4m in 1950 and 9m in 1980.”
  • Robin Wigglesworth of the Financial Times pointed US small-caps guru Henry Ellenbogen’s recent concerns over the post-election rally.
    • “US small stocks guru Henry Ellenbogen is concerned that the ferocious post-election equity rally could unravel unless the economy accelerates sharply to justify the frothy valuations, warning that most of the gains were powered by fickle inflows into exchange traded funds.”
    • “Over $20.6bn has gushed into US small-caps ETFs since early November, according to EPFR, while dedicated small-caps mutual funds have actually suffered some outflows, underscoring the role of passive investment vehicles in the move.”
    • “‘When you have those kind of flows into an illiquid asset class, you can really drive performance. Stuff that was outside the index has been roughly flat, while everything in the index has risen significantly,’ Mr. Ellenbogen said. ‘If there is a setback, the fund flows that drove small-caps higher will be just as aggressive on the way out.'”


WSJ – Daily Shot: US Major Inflation Components 02/02


WSJ – Daily Shot: US Cord Cutting 02/02


WSJ – Daily Shot: FRED – Domestic Bank Demand for Commercial Real Estate Loans 02/06


WSJ – Daily Shot: S&P Retail – S&P 500 Relative Performance 02/06

  • “US retail shares continue to underperform as investors question business models.”


WSJ – Daily Shot: Domestic Water Use Per Capita by U.S. State 02/06


WSJ – Daily Shot: FRED – US Student Loan Balance 02/07


WSJ – Daily Shot: Statista – Lawsuits filed against US Administrations in first 14 days 02/07


WSJ – Daily Shot: Global Skyscraper Construction 02/07


FT – China forex reserves dip under $3tn to touch 5-year low – Gabriel Wildau 2/7


FT – Investors pile into risky bonds in bet on Trump economy – Eric Platt 2/8



WSJ – Daily Shot: EIA – US Electricity Production 02/08


WSJ – Daily Shot: US Market Volatility 02/08

  • “Volatility is dead. We’ve now hit 85 consecutive days without a 1% drop in the S&P 500. The last time this occurred was in 2006.”


Bloomberg – The Race to the Speed of Light Is Accelerating – John Detrixhe 2/8


WSJ – For Chinese Home Buyers, Seattle Is the New Vancouver – Laura Kusisto and Kim Mackrael 2/7


WSJ – Daily Shot: Pew Research – US Religiosity Index 02/08


Economist – Emerging markets’ Trump tantrum abates, except in Turkey 2/4



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

Chinese companies park record $110bn in wealth products. Don Weinland. Financial Times. 6 Feb. 2017.

“Cash-rich Chinese corporations are running out of places to invest.”

“As economic growth cooled and investment opportunities ebbed in China last year, listed companies moved a record $110bn of idle cash into financial products, mainly at banks, according to data from Wind Financial Information.”

“The flood of company funds into wealth management products – up some 40% on the previous year – was a sign that many groups in the country shunned risky corporate expansion amid the economic slowdown, instead preferring short-duration investments.”

“About $64bn of the cash companies invested in wealth products had been raised from investors through initial public offerings and private placements…” Why raise cash if you’re not going to use it?

“Over the past four years, Chinese regulators have leaned on listed groups to pay out regular dividends in the hope of bringing mainland bourses more in line with international standards.”

“The wealth management investments show that many state-held groups still refuse to return cash to shareholders.”

“‘The state still has strong holdings in many of these companies, often more than 50%. So institutional investors cannot put pressure on companies to pay out dividends,’ said Wong Chi-man, executive director at China Galaxy International Securities.”

Okay, so if all of these companies (which are traditionally where idle capital is sent to generate economic returns) are preferring to sit on cash for a lack of investment opportunities within their own business, how are the wealth management products being sold going to generate returns – especially at scale?

Is Italy’s financial future resting on UniCredit? Rachel Sanderson, Martin Arnold and Jonathan Ford. Financial Times. 6 Feb. 2017.

“Jean-Pierre Mustier, chief executive of UniCredit, has criss-crossed the world in the past two months seeking to cajole investors into buying 13bn in new shares – a major test of confidence not just for Italy’s largest bank but also the country’s teetering banking sector.”

“As UniCredit launched its bumper rights issue on Monday – at a steep 38% discount to its theoretical ex-rights issue price – bankers in the underwriting consortium said they were confident that it would be successful. It needs to be… Besides worries about profitability and governance, investors fear the industry’s 360bn mountain of doubtful loans, of which 200bn are in default.”


“The offering comes at a tumultuous moment. The implementation of a government decree – earmarking 20bn to rescue several midsized banks, including Monte dei Paschi di Siena, the world’s oldest lender – remains up in the air.”

“The broader issue is whether a successful fundraising by UniCredit will help draw a line under concerns about Italy’s largest bank by assets, and in turn Italy’s banking sector.”

“Italian banks have long been burdened by a large stock of non-performing loans, which they have valued at prices higher than investors are willing to pay.”


“Gross non-performing exposures measured 356bn, or 17.7% of total loans, according to the latest financial stability report. That is three times the amount that is normal in most European economies. The stock of gross sofferenze – the worst kind of defaulted loan – remains at about 200bn; net of provisions that the banks themselves have taken these amount to 85bn.”

“Mr. Mustier, speaking to the Financial Times in December, suggested that the problem of its NPLs (Non-Performing Loans) is deeper than many appreciate.”

“He said the issue stems from Italy’s double-dip recession but also from Italian companies’ practice of funding themselves with ‘hot money.’ The companies had ‘the wrong kind of balance sheet,’ he said. ‘They had not enough capital and they were managing their liabilities by having short-term liabilities to cover long-term assets.'”

“It has taken Mr. Mustier, a Frenchman who lived in London for 20 years, to call out the deeper cultural problems facing Italy’s banking sector. The question is whether his remedy will last beyond this month’s share sale.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – What are China’s 12345 hotlines? 2/7

Economist – Buttonwood: Bubbles are rarer than you think 2/8

Economist – Melania Trump’s “once-in-a-lifetime” opportunity to profit 2/9

FT – Snap: clickbait 2/2

FT – Shanghai shows changing face of FDI in China 2/3

FT – US protectionism and deglobalization spell inflation 2/5

FT – Foreign investors cut holdings of China bonds for first time since 2015 2/5

FT – IMF board split over bailout terms for Greece 2/6

FT – Facebook and Google team up to fight fake news in France 2/6

FT – Thinking the unthinkable on Germany going nuclear 2/6

FT – China credit flood set to persist despite PBoC rate rises 2/8

FT – Why is the eurozone back in crisis over Greece? 2/8

FT – South Korean court all but sinks Hanjin Shipping 2/9

FT – US inflation expectations slide 2/9

NYT – Steve Bannon Carries Battles to Another Influential Hub: The Vatican 2/7

WSJ – The Next American Farm Bust Is Upon Us 2/9

WSJ – Landlord Concessions Rising in Manhattan and Brooklyn 2/9



January 26 – February 2, 2017

There is a lot of money sloshing around between football (soccer) teams to trade players.  Chinese football club worth more than AC Milan?  Bad credit – no problem.


FT – Rock-bottom rates squeeze German lenders 2/1. Interest rate sensitive German lenders continue to be squeezed by low-to-negative interest rates, if this keeps up, many are going to have a hard time making a profit.

NYT – Tesla Gives the California Power Grid a Battery Boost 1/30. Utility level electricity battery storage coming to a town near you.

FT – Microsoft issues biggest bond of the year in debt market boom 1/30. Microsoft just borrowed another $17bn on Monday as they and others seek to tap debt markets before pending rate increases – already $600bn has been issued in 2017.

Special Reports / Opinion Pieces


  • Eric Platt of the Financial Times illustrated the drop in negative-yielding debt, now below $10tn.
    • “Roughly $9.6tn of bonds trade in negative territory, down from nearly $14tn four months ago and $10.7tn near the end of December, as rising inflation expectations and hopes of a rebound in economic activity propels yields higher.”
    • ft_negative-yielding-debt_1-27-17
    • “European and Japanese sovereign debt comprise the vast majority of negative-yielding securities, while some $514m of euro-denominated corporate bonds also trade with a yield below zero. That figure is down from $916m in September.”
    • “The declining value of debt trading with a negative yield also reflects a stronger US dollar, which makes foreign obligations appear smaller when converted back to the greenback.”
  • Don Weinland of the Financial Times covered the risks to Chinese banks from the One Belt, One Road initiative as reported by Fitch Ratings.
    • Fitch Ratings recently issued a report pointing to the risks that Chinese lenders are facing in funding the One Belt, One Road (Obor) initiative.  Indicating that “the investments have been driven more by China’s desire to exert global influence than focusing on real demand for infrastructure.”
    • “‘The lack of commercial imperatives behind Obor projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors,’ Fitch said on Thursday.”
    • Why… “credit ratings for countries where China has big infrastructure plans provide a gauge for the projects’ underlying creditworthiness, Fitch said. Most of the countries are of speculative sovereign-rating grade but several, such as Laos, are not rated at all.”
    • However, to be clear it appears that only Fitch is humbugging the Obor initiative whereas the other ratings agencies are praising it, especially as the U.S. appears to be getting out of global infrastructure investment business.
  • Tom Mitchell of the Financial Times illustrated the renminbi’s retreat as an international payment currency.
    • “The Society for Worldwide Interbank Financial Telecommunication (Swift) said the value of international renminbi payments fell 29.5% compared with 2015.”
    • “The renminbi was only the sixth most used currency in 2016 despite its formal recognition in October by the International Monetary Fund as a global reserve currency, alongside the dollar, euro, yen and sterling.”
    • “The Swift rankings are the latest sign that Beijing’s global ambitions for the renminbi have been put on hold as the People’s Bank of China focuses instead on stemming both the redbacks’s fall against the dollar and steady erosion of the country’s foreign exchange reserves, which have declined 25% to $3tn since 2014.”
    • ft_currencies-used-for-international-payments_1-26-17
  • Emily Cadman, Sharon Smyth, Dingman Zhang, Prashant Gopal, and Emma Dong of Bloomberg News highlighted how China’s army of global homebuyers is suddenly short on cash.
    • “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.”
    • “Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”
    • “Among other requirements, SAFE (State Administration of Foreign Exchange) said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subject to money-laundering investigations, SAFE said.”
    • “At The Spire in London, a 67-story tower with sweeping views of the River Thames and flats starting at 595,000 pounds ($751,901), prospective buyers were caught off guard by the new rules. Less than 70% of clients who signed purchase contracts last year have made their initial payments, with the rest now facing ‘problems,’ a press official at Greenland Holdings Corp., the project’s Shanghai-based developer, said on Jan. 12.”
  • Gabriel Wildau of the Financial Times pointed to the record $33bn of foreign real estate acquisitions by Chinese in 2016.
    • Prior to the new restrictions from SAFE, “overseas investment from China in residential, commercial and industrial property totaled $33bn in 2016, up 53% from a year earlier, according to global real estate group JLL, as Chinese buyers snapped up office buildings, hotels and residential land.”
    • ft_china-outbound-re-investment_1-28-17
    • “The biggest deal of the year was Anbang Insurance Group’s $6.5bn purchase of Strategic Hotels and Resorts from private equity group Blackstone.”
    • “A survey by the Hurun Report found that property is the most popular form of overseas investment for Chinese with $1.5m or more. Of this group, 60% plan to invest in property over the next three years, implying 800,000 prospective buyers.”
    • “‘Prices in major Chinese cities have risen so fast in the past year that an overseas house seems to offer good bang for your buck,’ Rupert Hoogewerf, chairman of the Hurun Report, said in October.”
  • Kim Slowey of ConstructionDIVE reported on another record year for the construction delivery of global skyscrapers.
    • “The Council on Tall Buildings and Urban Habitat’s annual review of the world’s tall buildings – 656 feet (200 meters) or higher – found that 128 were completed in 2016, the third straight year that the number of completed skyscrapers has broken the record.”
    • “In a country-by-country breakdown, China was home to the most tall-building projects (84) in 2016, followed by the United States (7), South Korea (6), Indonesia (5), the Philippines (4) and Qatar (4).”
    • “The tallest building completed in 2016 was the 1,739-foot-high Guangzhou CTF Financial Centre in Guangzhou, China, while the tallest towers built in the U.S. were both in New York City – 30 Park Place (926 feet) and 10 Hudson Yards (879 feet).”


WSJ – Daily Shot: FRED Average Sales Price for New Homes Sold in US 01/26


WSJ – Trump Orders Wall at Mexican Border – Laura Meckler 1/25


FT – HK renminbi deposits fall at record pace in December – Hudson Lockett 1/27


WSJ – Daily Shot: Cost of Borrowing – Pan Europe 01/29


MarketWatch – The most corrupt countries in the world – Shawn Langlois 1/28


FT – US universities’ endowments shrink as investments lose money – Stephen Foley 1/30


WSJ – Daily Shot: Japan 10yr Government Bond Yield 02/01


It’s a mad, mad, mad, Maduro world – Venezuela’s leaders ignore reality – 1/26



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

China spree pushes football transfer spending to record $4.8bn. Murad Ahmed. Financial Times. 26 Jan. 2017.

What happens when Xi Jinping decrees that he wants China to become a great football nation… entrepreneurs and politicians do their best to oblige.

“Chinese football clubs splashed out more than $450m in transfer fees (the fee one club pays to another club to poach talent) last year, a spree that helped global spending on the acquisition of players reach a record high.”

“According to Fifa’s Transfer Matching System, an arm of the sport’s world governing body, the total spent on transfer fees worldwide hit $4.8bn in 2016, a 14.3% increase compared with the year before.”

“Among the recent deals, Shanghai SIPG bought Brazilian midfielder Oscar from Chelsea for $63m.”

Granted, Chinese authorities have caught on to the reality that a lot of cash is leaving China in pursuit of football clubs, talent and media rights.  Hence, “Chinese sporting authorities have sought to crack down on spending on players,… with efforts such as cutting the number of foreign footballers allowed to play in each match from four to three per team.”

Regardless, the transfer fees paid by China are still behind that of England, Germany, Spain, and Italy – especially the English clubs that “spent $1.37bn on transfer fees in 2016, an 8.7% increase on the year. This included the world-record signing of Paul Pogba worth up to 110m, by Manchester United from Italy’s Juventus last August.”

Still it seems that the Spaniards have the best farming system (or acquirers of talent from an investment standpoint) in that they “were the largest seller of players, receiving $554.5m in transfer fees last year, more than the $508.7m they spent on players.”


Chinese football club is worth more than AC Milan. Ben Bland and Murad Ahmed. Financial Times. 26 Jan. 2017.

More to the story about football in China.

“A football club in the Chinese Super League has been sold to a local property developer at an equity valuation of more than $800m, suggesting it is worth more than European giants such as AC Milan and Atletico Madrid.”

“The high price put on Beijing Guoan, the top team in the capital, underlines the investment surge in football in China, despite recent efforts by the government to crack down on what it called ‘irrational’ spending on foreign players.”

“Sinobo Land, a little-known property developer, is buying 64% of the club for Rmb3.6bn from current owner Citic, a state-owned investment group, giving it a valuation of Rmb5.6bn ($807m).”

“Football industry analysts said that the premium paid for the club, which finished fifth in last season’s CSL, could not be justified based on its sporting performance or immediate commercial prospects.”

However, the team is in Beijing, regularly attracts 40,000 attendees to each match, and President Xi Jinping has aspirations for China to host a World Cup and win.  So maybe it’s not too far of a stretch.

I suppose it’s less ostentatious than paying $400m for a 13% stake in Manchester City (Li Ruigang in 2015).

Risky corporate borrowers make hay as yields slide. Eric Platt and Joe Rennison. Financial Times. 26 Jan. 2017.

“The combination of rebounding commodity prices and hopes for faster US economic growth under Donald Trump is helping some of the riskiest corporate borrowers secure cheaper financing and underlines investors’ growing stomach for risk.”

“An expanding list of companies with a triple-C rating – deep within speculative territory – have been able to lock in borrowing costs below 7%, as yields have fallen over the past 10 months.”

“Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6%. Last February, triple-C paper traded with a yield of 18.57%, according to Bloomberg Barclays Indices. That figure has nearly halved to 9.36% today.”


“‘It seems there is insatiable demand for yield,’ said Kevin Lorenz, a high-yield portfolio manager with TIAA CREF. ‘Triple-Cs are routinely pricing at 7% or less. The compensation you get paid to take risk is getting narrower and narrower, much like in 1997-98 and 2004-2006.'”


“High-yield groups have raised $25bn in the US so far this year – up more than fivefold from 2016 – including $3.4bn from triple-C rated issuers, according to Dealogic. It marks the greatest haul from triple-C groups at the start of a year since 2011.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – How Stadium Development is Killing Loyalty in American Sports 2/1

Economist – India flirts with a UBI 2/2

Economist – How to get rich in America 2/2

FT – Shark antibodies join battle against Alzheimer’s 1/25

FT – German bond yields hit year-high in broad sell-off 1/26

FT – China spells out curbs on capital outflows 1/27

FT – Sleepy Saudi sovereign wealth fund wakes and shakes global finance 1/28

FT – Asia borrowing binge hits record high in January 1/29

FT – Bonds start year at breakneck pace, but higher rates loom 1/29

FT – Fitbit: huffing and puffing 1/30

FT – Renminbi internationalization remains elusive 1/30

FT – Are tougher times for Wall Street’s ‘Flash Boys’ here to stay? 1/30

FT – Chinese billionaire abducted from Hong Kong 1/31

FT – Xiao Jianhua, student leader who became an abducted tycoon 1/31

FT – Derivatives ‘Big Bang’ catches market off guard 2/1

FT – US university endowment woes put spotlight on hedge funds 2/1

FT – Chinese defaults: failing better 2/1

NYT – A Costly Drug, Missing a Dose of Disclosure 1/27

NYT – In America’s Heartland, Discussing Climate Change Without Saying ‘Climate Change’ 1/28

NYT – For Couriers, China’s E-Commerce Boom Can Be a Tough Road 1/31

WSJ – India’s Growth Doesn’t Have a Story 1/26

WSJ – Accused Ponzi Schemer Not Sleeping Easy 1/27

WSJ – Here’s What Can Drive the Economy Higher 1/27

WSJ – Suburban Offices Woo Millennials With Food, Fitness and Fun 1/29

WSJ – The Coming Squeeze on Profit Margins 1/30
WSJ – Young People Lose Confidence In Their Prospects as Homeowners 2/1



January 20 – January 25, 2017

San Francisco becoming a childless city. Now China is making it difficult for banks to move currency overseas.

This week’s post is going to be short a day – I’ll cover it in next weeks’ post – as me and my family are in the process of moving to Phoenix, AZ. Enjoy. 


FT – China GDP hits 2016 target as Trump headwinds loom 1/19. Like clockwork.

Bloomberg Businessweek – Drug Cartels Are Looting Mexican Gas Pipelines 1/12. A reduction in fuel subsidies has caused the price of gas to jump about 20% in Mexico, a side effect – cartels and entrepreneurs are siphoning about $1 billion a year from Pemex (the state oil utility).

WSJ – BT’s Italian Scam Is Just One of Many Problems 1/24. British Telecom’s Italian subsidiary had some shady practices, specifically borrowing cash and disguising it as sales, about £500 million in sales actually…

CoStar – Blackstone’s New REIT Makes First Acquisition 1/25. Blackstone’s new non-traded REIT bought a hotel at UC Davis, more importantly are the different characteristics of Blackstone’s non-traded REIT versus the industry norms. Specifically, fees capped at less than 8.75% and a hurdle rate of 5% before Blackstone participates in the upside.

NYT – When Snap Goes Public, Some Shareholder’s Voting Rights May Disappear 1/24. Sounds like a good deal… for the founders.


  • Yuan Yang and Xinning Liu of the Financial Times highlighted Didi Chuxing’s recent dramatic workforce cuts following Shanghai’s and Beijing’s new anti-migrant rules.
    • “Didi Chuxing, China’s dominant car-sharing company, is gutting its fleet of drivers in Shanghai to comply with the city’s new regulations restricting car-sharing platforms to the use of local drivers and locally-registered cars.”
    • “Less than 3% of Didi’s 410,000 drivers in Shanghai have a local hukou (household registration) that would allow them to continue picking up passengers via the platform, according to the company.”
    • “Compliance with the new regulations will further discourage Didi’s already-disgruntled drivers, who have seen subsidies plummet since Didi bought out its major competitor Uber in August. Last month, two Didi drivers were arrested in Fujian province for protesting the reduced subsidies. Drivers in Liaoning staged a similar protest.”
  • Leslie Hook of the Financial Times covered the recent $20m fine paid by Uber for misleading drivers about their potential earnings.
    • “Uber has agreed to a $20m fine to settle claims that it misled drivers with inflated promises about potential earnings, the latest in a series of fines and settlements the company has faced around the world.”
    • “According to the FTC (Federal Trade Commission) statement, Uber had claimed its drivers in New York had a median income of more than $90,000, while drivers in San Francisco made over $74,000. Instead, the FTC found that the drivers’ actual median income in those cities was just two-thirds of what Uber had claimed.”
    • “The suit over misleading earnings claims highlights a persistent complaint from many Uber drivers who say they barely make enough to cover their costs.”
  • Mehreen Khan of the Financial Times discussed rating agency Fitch’s recent report on economic growth in China being fueled by unsustainable stimulus.
    • “Responding to official government figures which showed the Chinese economy expanded by 6.8% in annualized terms in the fourth quarter, Fitch said developments in the Chinese economy are becoming a ‘significant risk to medium-term macroeconomic stability.'”
    • “In particular, the agency noted Beijing’s attempts to pump ‘direct fiscal expansion and quasi-fiscal stimulus’ into its state-owned enterprises (SOE’s), where the annual pace of investment growth climbed to 19.1% from 10.7% from 2015.”
    • “‘Outside of the SOE sector, fixed-asset investment growth slowed markedly, underlining the importance of stimulus in propping up demand and highlighting the risk that the economy might lack self-sustaining growth momentum,’ said Fitch.”
    • “It pointed to climbing credit growth, capital outflows, and depreciation pressures on the currency which could all combine to result in slowing growth. China should however avoid an ‘outright financial crisis’ due to the over-sized role of the state in managing economic decline, said Fitch.”
  • Esther Fung of The Wall Street Journal pointed out how many Mall Owners are divesting themselves of their less desirable malls by giving back the keys to the lenders.
    • “Mall landlords are increasingly walking away from struggling properties, leaving creditors in the lurch and posting a threat to the values of nearby real estate.”
    • “In the period from January to November 2016, 314 loans secured by retail property – totaling about $3.5 billion – were liquidated, 11% more loans than in the same period a year earlier, according to data from Morningstar Credit Ratings. The liquidations resulted in a loss of $1.68 billion.”
    • And it’s not just companies with financial difficulties. Retail landlords with billions in market cap and plenty of cash are walking away from properties, i.e. Simon Property Group and Washington Prime Group. But don’t you worry, their credit ratings haven’t been effected…
    • “Despite a strengthening economy in 2016, the delinquency rate for loans backing retail property rose by 0.6% point last year to 5.76%, according to Trepp LLC, a real-estate data service. Special servicers, which deal with troubled commercial mortgage securities, managed $3.1 billion worth of mall-backed loans last year, up from $2.9 billion in 2015, according to Trepp.”
    • “One reason mall owners struggle to restructure loans is that many were packaged into commercial mortgage-backed securities, and these bonds in turn are owned by numerous investors, making it difficult to negotiate new deals.”
  • Alan Rappeport of the New York Times reported on the recently released report by the CBO indicating that the Federal Debt is projected to grow by nearly $10 Trillion over the next decade.
    • “After seven years of fitful declines, the federal budget deficit is projected to swell again, adding nearly $10 trillion to the federal debt over the next 10 years, according to projections from the nonpartisan Congressional Budget Office. The numbers reveal the strain that government debt could have on the economy as President Trump presses to slash taxes and ramp up spending.”
    • “The deficit figures released Tuesday will be a major challenge to House Republicans, who were swept to power in 2010 on fears of a bloated deficit and who made controlling red ink a major part of their agenda under former President Barack Obama.”


WSJ – Daily Shot: India’s Currency in Circulation 01/22


WSJ – California Housing Crunch Prompts Push to Allow Building – Chris Kirkham 1/25



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

San Francisco Asks: Where Have All the Children Gone?. Thomas Fuller. New York Times. 21 Jan. 2017.

“A few generations ago, before the technology boom transformed San Francisco and sent housing costs soaring, the city was alive with children and families. Today it has the lowest percentage of children of any of the largest 100 cities in America, according to census data…”

“As an urban renaissance has swept through major American cities in recent decades, San Francisco’s population has risen to historical highs… at the same time, the share of children in San Francisco fell to 13%, low even compared with another expensive city, New York, with 21%. In Chicago, 23% of the population is under 18 years old, which is also the overall average across the United States.”

“In an interview last year, Peter Thiel, the billionaire Silicon Valley investor and a co-founder of PayPal, described San Francisco as ‘structurally hostile to families.'”

“Prohibitive housing costs are not the only reason there are relatively few children. A public school system of uneven quality, the attractiveness of the less-foggy suburbs to families, and the large number of gay men and women, many of them childless, have all played roles in the decline in the number of children, which began with white flight from the city in the 1970s. The tech boom now reinforces the notion that San Francisco is a place for the young, single and rich.”

China clamps down on banks moving currency overseas. Tom Mitchell, Gabriel Wildau, and James Kynge. Financial Times. 22 Jan. 2017.

“Chinese regulators are stamping out moves by banks to shift renminbi out of the country as they attack one of the few loopholes remaining in the country’s strict new capital controls regime.”

“According to several people briefed on rules introduced this month, banks in Shanghai must ‘import’ Rmb100 for every Rmb100 they allow a client to remit overseas, ensuring no net outflows of the Chinese currency. Shanghai-based banks had been allowed to remit Rmb160 overseas for every Rmb100 they brought back into China.”

“The clampdown goes even further in Beijing where banks must import Rmb100 for every Rmb80 they remit overseas on behalf of clients, ensuring a net inflow into the capital.”

“Overseas banks, whose domestic market share in China is tiny, have been more affected by the clampdown because they derive a higher percentage of revenues from cross-border business. ‘This regulation is a bigger nightmare for foreign banks because we are more reliant on cross-border business than Chinese banks,’ one banker said.”

“Bankers have also complained that the central bank and Safe are only communicating regulatory ‘window guidance’ over the phone or during face-to-face meetings, rather than in writing.”

“They added that Safe (State Administration for Foreign Exchange) has instructed banks not to inform clients why their overseas remittances are being rejected and is checking their net renminbi flows on a weekly basis, compared with every month previously.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Hedge Funds Risk Treasuries Wipeout After Bearish Bets Soar 1/22

FT – ECB to buy bonds below deposit rate: but what does it mean? 1/20

FT – China’s ‘Kamikaze Squad’ hedge fund leader jailed for five years 1/22

FT – Hong Kong SFC to take legal action against Hanergy directors 1/23

FT – Hong Kong watchdog seeks disqualification of Hanergy founder 1/23

FT – Hedge funds’ bets on rising oil prices hit record high 1/23

FT – China corruption prosecutions drop for first time in five years 1/24

NYT – Doubts Arise as Investors Flock to Crowdfunded Start-Ups 1/24

NYT – In Its Third Month, India’s Cash Shortage Begins to Bite 1/24

WSJ – How Electric Vehicles Could End Car Ownership as We Know It 1/15

WSJ – The Mortgage Market’s $1 Trillion Pocket of Worry 1/19

WSJ – Amazon Expands Into Ocean Freight 1/25



January 13 – January 19, 2017

China’s maritime footprint. Judicial independence in China – don’t count on it. Music streaming to the rescue. 


NYT – Samsung Heir Faces Arrest on Charges of Bribing South Korea’s President 1/15. It appears that no one is ‘safe’ if the arguably the most powerful person in the country can be taken down – it’s like watching House of Cards.

NYT – Earth Sets a Temperature Record for the Third Straight Year 1/18“The heat extremes were especially pervasive in the Arctic, with temperatures in the fall running 20 to 30 degrees Fahrenheit above normal…”

FT – China’s 2016 capital outflows estimated at over $700bn 1/18. A recent report from Standard Chartered puts the 2016 total at $728bn, slightly less than the record $744bn in 2015.


  • Sue-Lin Wong and Lusha Zhang of Reuters highlighted the continued flow of credit by Chinese banks and the concerning increase in debt levels.
    • “China’s banks extended a record 12.56 trillion yuan ($1.82 trillion) of loans in 2016 as the government encouraged more credit-fueled stimulus to meet its economic growth target, despite worries about the risks of an explosive jump in debt.”
    • “In December alone, Chinese banks extended 1.04 trillion yuan in net new yuan loans, far more than economists had expected, central bank data showed on Thursday.”
    • “Analysts polled by Reuters had expected new lending would fall to 700 billion yuan from November’s 794.6 billion yuan.”
    • “New bank loans last year surpassed the levels of China’s massive credit-led stimulus during the global financial crisis in 2009, according to Reuters calculations based on central bank data. The 2016 total was some 8% above the previous all-time high of 11.72 trillion yuan set just the year before.”
  • Dexter Roberts of Bloomberg Businessweek brought attention to the crisis facing China’s aging rural poor.
    • “Unlike people in much of the rest of the world, China’s citizens spend less on their health as they grow older, not more, says Albert Park, an economist at the Hong Kong University of Science and Technology.”
    • Why, simply because they seek to avoid healthcare costs due to the cost relative to their incomes.“The average cost of a hospital visit is 50% of the annual income of a city dweller; for rural residents it’s 1.3 times annual income, according to Gerard La Forgia, the lead author of Healthy China: Deepening Health Reform in China, a joint report by the World Bank, the World Heath Organization, China’s finance ministry, and other government agencies.”
  • Onur Ant and Benjamin Harvey of Bloomberg Businessweek covered the purge that is paralyzing Turkey.
    • Following the failed coup in Turkey,“at least 100 media outlets have been closed and more than 36,000 suspected Gulenists detained.”
    • The markets are not amused.“The lira has tumbled more than 18% since the coup attempt, the largest depreciation among major currencies worldwide, data compiled by Bloomberg show. The Borsa Istanbul 100 index fell as much as 28% in dollar terms by early December.”
    • Further“on Dec. 12 the Turkish government released third-quarter numbers for gross domestic product, which contracted for the first time in seven years, by 1.8%.”
    • Bottom line, now is a terrible time to have any affiliation with Gulenists. If you do have any, be prepared to have assets seized.“If a seizure is endorsed by the courts, the Savings Deposit Insurance Fund, a government-backed fund that manages companies the government takes over, will prepare the underlying assets for sale. The fund estimates the collective value of all the companies seized to date at about $10 billion.”
    • As Sevket Pamuk, an economist at Bogazici University in Istanbul puts it“what I find most striking is how easily ownership rights are being ignored. Why would local businesses invest in such an environment?”
  • Art Patnaude of The Wall Street Journal illustrated the growing amounts of ‘dry powder’ being accumulated by real estate funds as for-sale supply has been limited.
    • “Investors are piling money into real-estate funds – but fund managers are finding it a challengeto spend it.”
    • “Global fund managers had a record $237 billion available to invest in commercial property at the end of last year, according to data firm Preqin, up from $229 billion at the end of 2015 and $136 billion at the end of 2012.”
    • “Global fund managers have raised $446 billion for commercial property in the last four years, on par with the total raised between 2015 and 2008 in the run-up to the global financial crisis, Preqin said.”
    • However, there simply has not been enough property to buy.  “One reason for the lack of property to buy: Landlords aren’t willing to sell. Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later, analysts said.”
    • Another are the“potential returns down the road. Strong levels of demand now suggest that if they wait, the value of their property could rise even more.”
    • Further, don’t forget that if they do sell, then there are the taxes to pay and what to do with the proceeds?
  • Tom Hancock of the Financial Times highlighted a recent acknowledgement by a Chinese provincial governor that they had been falsifying fiscal data.
    • “The Chinese province of Liaoning fabricated fiscal data for four years, a senior official has admitted, the latest blow to the already shaky reputation of China’s economic statistics.”
    • “Fiscal revenues in the province were inflated by at least 20% from 2011 to 2014, said provincial governor Chen Qiufa, according to Communist party mouthpiece The People’s Daily.”
    • “Economists and investors have long expressed doubts about Chinese economic data, particularly gross domestic product figures.Compared with other countries, China’s inflation-adjusted GDP growth rates are remarkably stable from quarter to quarter.”
    • “Following Mr. Chen’s admission, respected Chinese financial publication Caijing said it had already exposed Liaoning’s fake data in a 2015 report… that report dated the falsification of the data back to 2009, earlier than the 2011 date given by Mr. Chen, who became provincial governor in 2015.”
  • Yuan Yang of the Financial Times covered that China’s housing boom appears to have ended now that prices have fallen in its top cities.
    • “House prices have fallen across most of China’s hottest property markets for the first time in almost two years, marking an end to the enormous growth that saw prices rise as much as 40% last year.”
    • “Prices of newly built residential properties dropped between 0.1 and 0.4% in December from the previous month in 12 out of 15 ‘hotspot’ cities, according to data released by the National Bureau of Statistics on Wednesday.”
    • “Although many analysts expect property prices to fall at most 5% year on year in the current downturn, local governments are ready to move to avoid sharper crashes.”


WSJ – Daily Shot: China’s credit-driven Growth Model 01/12


WSJ – Forecasters See Upside Risks to Their Economic Outlooks at Highest in More Than Two Years – Josh Zumbrun 1/12


WSJ – Daily Shot: FRED Retail Department Store Sales 01/15


FT – The problem with US healthcare in one chart – Federica Cocco 1/16


NYT – How 2016 Became Earth’s Hottest Year on Record – Jugal K. Patel 1/18


WSJ – Daily Shot: US Cost of Living Changes by Category 01/17



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

How China rules the waves. James Kynge, Chris Campbell, Amy Kazmin, and Farhan Bokhari. Financial Times. 12 Jan. 2017.

“Investments into a vast network of harbors across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation – five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels.”

“China understands maritime influence in the same way as Alfred Thayer Mahan, the 19th century American strategist. ‘Control of the sea,’ Mr. Mahan wrote, ‘by maritime commerce and naval supremacy, means predominant influence in the world; because, however, great the wealth of the land, nothing facilitates the necessary exchanges as does the sea.”


“‘There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,’ says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. ‘They are great for the soft projection of hard power.’

“Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18% of all container shipping handed by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group.”

“In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010, according to FT research.”


“And those ports handled 67% of global container volumes, up from 42% in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists.”


“Rounding out a picture of China’s merchant fleet dominance is the country’s fishing fleet, which is by far the largest in the world, according to a recent paper by Michael McDevitt, a former rear admiral in the US navy and now a senior fellow a CNA Strategic Studies, a US think-tank.”

Bottom line, “analysts say that China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the South, a natural maritime barrier called the ‘first island chain’ within which China identifies its strategic sphere of influence.”


China’s top judge denounces judicial independence. Lucy Hornby. Financial Times. 16 Jan. 2017.

“China’s top judge has fired a warning shot at judicial reformers by formally acknowledging that China’s court system is not independent of the Communist Party and rejecting attempts to make it so.”

“‘Bare your swords towards false western ideals like judicial independence,’ Mr Zhou told a gathering of higher court officials. Only two months before, he had said that party committees should not interfere in the judicial process.”

“‘This statement is the most enormous ideological setback for decades of halting, uneven progress toward the creation of a professional, impartial judiciary,’ said Jerome Cohen, an 86-year old American lawyer who has spent most of his career promoting legal exchanges between the US and China. ‘It has already provoked some of China’s most admirable legal scholars to speak out in defiance, and I fear not only for their academic careers but also for their personal safety.'”

“Mr. Zhou, once seen as a reformist, is one of the highest-ranking members of the Communist Youth League faction, which Mr. Xi moved to neutralize last summer ahead of a leadership reshuffle later this year.”

Further, “a crackdown on lawyers has intensified since 2015, ‘disappearing’ hundreds of lawyers. The most recent is Jiang Tianyong, a particularly active civil rights lawyer, who has been missing since November.”

How streaming saved the music industry. Anna Nicolaou. Financial Times. 16 Jan. 2017.

“Thanks to growth in Spotify and Apple Music, music streaming has passed the milestone of 100m paying subscribers worldwide, a feat few imagined possible a few years ago. The US music industry is on track to record a second consecutive year of growth – something that has not happened since 1999, the year Napster launched. Some analysts and executives are beginning to confidently predict a new golden age.”


“It has been hard to imagine how the music industry could ever match its pre-Napster performance in the 1990s, when compact disc sales ruled. But now one monthly payment zaps 30m songs into your smartphone, tablet or desktop app, enabling artists like Drake to notch up streams by the billions. The Canadian rapper’s music was streamed more than 4.7bn times on Spotify alone last year. Every hour, his songs are streamed more than 500,000 times on the service.”

“Artists like Drake helped power Universal to profitability last year, earning the company $.1bn in streaming revenues in the first nine months – enough to offset the fall in sales of digital downloads and CDs.”


“In a research note called Music in the Air, Goldman Sachs projected that streaming will help revenues double to $104bn by 2030.”

“Each year more people are buying access to digital music; Americans streamed 431bn songs on demand in 2016.”

Doesn’t mean there aren’t detractors – i.e. Taylor Swift – but the format continues to gain momentum.

As to control of this pipeline, “the music groups hold the leverage. The source of their power is…through ownership of the rights to… master recordings, Vivendi-owned Universal, Warner Music and Sony together control 80% of all recorded music, with Universal having a one-third share.”

Further, “streaming is a high-margin business. The labels no longer face the costs of hauling truckloads of CDs to Walmart. Instead of ownership, they are selling access to a digital music fortress.”

“This compares well with television studios, which have lost some grip over content as video streaming services like Netflix make shows and offer a limited selection of programs. Music fans, though, expect streaming services to offer more comprehensive digital back-catalogues, forcing them to cut deals with the labels. As one label executive puts it: ‘TV and film studios have to coexist with Netflix now. We haven’t made that mistake.'”

However, the “one large thorn in the labels’ side is Google-owned YouTube, whose music draws more regular listeners than Spotify and Apple Music combined. Most music consumption on YouTube takes place on its free, ad-supported tier, a revenue stream vulnerable to the fortunes of the advertising market.”


At this point “streaming is the industry’s latest white knight but after decades of grappling with pirates, new technologies and evaporating sales, music executives know there will be twists to come.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – How smartphones are transforming healthcare 1/12

FT – Over half of China’s white-collar workers go without year-end bonus 1/12

FT – Toyota marks break from past with fund for tech investments 1/15

FT – US companies rush to reprice debt as higher rates loom 1/15

FT – China’s energy strategy: power and independence 1/15

FT – Fingerprint theft points to digital danger 1/16

FT – Saudi Arabia energy minister downplays US shale threat 1/17

FT – Mall staple Claire’s pulls IPO 1/17

FT – Capital Group chief says post-Trump change in markets ‘is real’ 1/17

NYT – With the Rain Comes Hope That 6-Year California Drought Is Ending 1/13

WSJ – Pulling Retirement Cash, but Not by Choice 1/16

WSJ – Mall Owners Find Relief From Unlikely Source: Online Retailers 1/17

WSJ – Mortgage-Rate Rise Hits Coastal Property Markets Hardest 1/18


January 6 – January 12, 2017

Saudi Arabia looking for savings where it can find them.


FT – Venezuela’s president raises minimum wage 50% 1/8. Despite minimum salary raises of 322% since February of 2016, Venezuelan workers now earn about $60 a month on the legal exchange rate or $12 a month at the black market exchange rate – bottom line is that goods inflation is outpacing wage inflation.

FT – Tillerson sets stage for clash with Beijing over South China Sea 1/11. In his confirmation hearing, US secretary of state nominee – Rex Tillerson, said in regard to the South China Sea “we’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands also is not going to be allowed.” If he is confirmed, you can bet there will be more tension to come.

Special Reports / Opinion Pieces


  • Ben McLannahan of the Financial Times illustrated the growing discrepancy between GAAP and non-GAAP reporting at public companies.
    • “According to research company Audit Analytics, 96% of companies in the S&P 500 presented non-GAAP metrics in their earnings releases in the fourth quarter of last year. That was up from 88% in the third quarter.”
    • “Most of those non-GAAP numbers make the company look better. Last year a FactSet study found that the average difference between non-GAAP and GAAP profits reported by companies in the Dow Jones Industrial Average was 31%, up from 12% in 2014.”
    • Worse, “problems arise when companies go off-piste, using metrics that bear no relation to GAAP.”
    • Granted not all do this. “Telsa Motors, which is reckoned to be among the fastest and loosest with its anti-GAAP measures, said three months ago it would stop recognizing revenues according to its own peculiar formula.”
  • John Gittelsohn of Bloomberg covered Bill Gross’ recent comments regarding the importance of 10-Year rate reaching 2.6% being a bigger deal than the Dow at 20,000.
    • “Investors should watch for 10-year Treasuries to move above 2.6%, a threshold that would mark an end to the three-decade bond bull market and be a more important barometer than the Dow Jones Industrial Average passing 20,000, according to billionaire bond manager Bill Gross.”
    • “‘It is the key to interest rate levels and perhaps stock price levels in 2017,’ Gross, manager of the $1.8 billion Janus Global Unconstrained Bond Fund, wrote in a monthly investment outlook released Tuesday. ‘Investment happiness and/or despair may lie ahead over the next 12 months depending on it.'”
  • The Economist brought attention to recent research into “stand-your-ground” laws in America.
    • According to research published in the current Journal of the American Medical Association, soon after the 2005 “stand-your-ground” law passed in Florida (which allows “citizens who ‘reasonably believed’ their lives to be threatened were given the right to ‘meet force with force, including deadly force’ – even in public places and, critically, without the duty to try and retreat first”), “there was a sudden and sustained 24% jump in the monthly homicide rate. The rate of homicides caused by firearms increased by 32%.”
    • economist_legal-force_1-11-17
    • “The authors found that in states without a stand-your-ground law over the same time period those rates remained flat, suggesting that a nationwide crime wave was not to blame for the abrupt increase.”


WSJ – Developers Build on Home Rental Success With Whole Communities – Chris Kirkham 1/6


Business Insider – This Goldman Sachs chart sums up the global fallout from the 2008 financial crisis – Ben Moshinsky 1/9


WSJ – Daily Shot: FRED Revolving Credit v Hourly Earnings 01/09


WSJ – Daily Shot: FRED Student Loans 01/09

WSJ – Daily Shot: Northern Migration 01/09


WSJ – Daily Shot: Business Insider – US Income Disparity by State 01/09


WSJ – A Dark Day for Chinese Inflation – Nathaniel Taplin 1/10


WSJ – Daily Shot: PitchBook U.S. Venture Capital Activity 01/11



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

Saudi Arabia to cull billions of dollars of projects. Simeon Kerr. Financial Times. 11 Jan. 2017.

“Saudi Arabia is planning to cull billions of dollars of projects as part of its latest cost-cutting measures to narrow a gaping budget deficit and balance the books by 2020.”

In this effort PwC has been engaged to find savings between SR50bn and SR75bn ($13bn – $20bn).  “The focus of the cuts will be on capital expenditure, such as infrastructure projects, as Riyadh hopes to avoid any politically sensitive spending reductions after austerity measures last year triggered an outburst of public discontent.”

Bad for contractors – but really they just want to be paid what they’re already owed.  As it is “the government has halted or restructured hundreds of projects across the kingdom over the past two years. It has also delayed payments to companies, exacerbating the problems in the private sector and helping drive non-oil growth to less than 1% last year, its lowest level in years.”

“The finance ministry has pledged to finalize SR105bn in late payments by February.”

Saudi Arabia is not the only Gulf state making cuts. “The value of infrastructure contracts awarded in the Gulf last year fell 44% to $100bn, compared with $178bn in 2015, according to data from the Middle East Economic Digest. That compares with a high of $186bn in 2014.”

Other Interesting Articles

The Economist

CoStar – Blackstone Breaks Escrow on New Non-Traded REIT with Net Proceeds of $279 Million 1/4

FT – Vanguard is best-selling fund manager of 2016 1/7

FT – China’s coming property oligopoly, charted 1/8

FT – German bonds offer the best way to bet on a break-up of the euro 1/9

NYT – Department Stores, Once Anchors at Malls, Become Millstones 1/5

WSJ – Why Beijing’s Grip on the Yuan Is Becoming Tenuous 1/6
WSJ – How the Auto Makers Can Survive the Self-Driving Car 1/9

WSJ – Time to Start Worrying Again About Chinese Property 1/9

WSJ – America’s Fastest – Growing Loan Category Has Eerie Echoes of Subprime Crisis 1/10

WSJ – More Home Buyers Backed Out of Offers in 2016 1/11



December 30, 2016 – January 5, 2017

China insurance crackdown – meaningful implications. Fewer and fewer U.S. public companies.


 Special Reports / Opinion Pieces


  • Yuan Yang of the Financial Times highlighted recent promises made by Beijing’s mayor that house prices will not rise in 2017.
    • So here’s a new approach, with prices haven risen by more than 25% in 2016 “Beijing’s mayor has promised that house prices in the capital will not rise in 2017 in an attempt to ease concerns over the city’s property bubble.”
    • Good for people wanting to get in on the action, bad for those that own property.
    • “We must be firm in stamping out speculative investment [in property], increase the supply of residential housing, and guarantee that there will be no month-on-month increases in house prices.” – Mayor Cai Qi
    • This message is consistent with national policy that “houses are for living in, not for speculating with.”
    • The trick though will be to apply the break and the gas in a manner that keeps pricing static and not falling.
  • Tom Hancock of the Financial Times covered the new NGO regulation in effect in China.
    • In a previous post I highlighted Edward Wong’s article on China’s new regulations on Non-Government Organizations (NGOs) requiring each NGO within the country to have an official sponsor.  Well the policy is in effect as of January 1, and guess what…
    • “China’s Ministry of Public Security (MPS) waited until last week to publish a list of eligible sponsors, meaning that almost none of the thousands of foreign non-profits in China – ranging from charities such as Greenpeace and Oxfam to funds such as the Ford Foundation – will meet the law’s conditions before the January 1 deadline.”
    • Oh and there is no grace period.
    • As a result organizations are dialing down their operations to shuttling out personnel before December 31.
    • At issue is that “the law puts foreign organizations under direct supervision of Chinese police, who in the last two years have detained scores of human rights lawyers and cracked down on local groups advocating for reform via the courts. This month an office of the MPS promoted a video accusing foreign governments of using civil society to promote ‘color revolution’ in China.”
    • Bottom line, “the law says: ‘Foreign NGOS carrying out activities within mainland China shall abide by Chinese laws, must not endanger China’s national unity, security or ethnic unity; and must not harm China’s national interests.'”
    • As it stands “the MPS has said there are 7,000 foreign NGOs in China, suggesting it has a more expansive definition of the term than foreign experts who put the number closer to 1,000.”
  • Jacky Wong of The Wall Street Journal illustrated an interesting ploy by China Evergrande to sell equity that acts a lot like debt.
    • In a word, shenanigans.
    • “China Evergrande Group, the country’s largest developer by assets, said Monday that it has agreed to sell a 13.2% stake in its major subsidiary, Hengda Real Estate, to eight investors for 30 billion yuan ($4.3 billion). This values Hengda, which owns Evergrande’s core property development business, at $33 billion – almost four times the parent’s current market capitalization.”
    • So the rest of the company is worth much less than $0?
    • “The investment is basically a form of bridge financing in preparation for the company to list Hengda in mainland China, something the developer proposed back in October.”
    • Basically, the company is “effectively guaranteeing the investors an average 7.8% yield for the next three years. That is more cash drain for a company that hasn’t had a full year of positive operating cash flow since 2009 and has net debt equal to more than four times its equity, counting perpetuals as debt, among the highest in the sector.”
    • wsj_china-evergrande-operating-cash-flow_1-3-17
  • Dave Gershgorn of Quartz pointed to the automation of Japanese white-collar workers in the insurance industry.
    • “One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with ‘IBM Watson Explorer,’ starting January 2017.”
    • “Fukoku Mutual will spend $1.7 million (200 million yen) to install the AI system, and $128,000 per year for maintenance, according to Japan’s The Mainichi. The company saves roughly $1.1 million per year on employee salaries by using the IBM software, meaning it hopes to see a return on investment in less than two years.”
    • “Watson AI is expected to improve productivity by 30%, Fukoku Mutual says.”
    • “Artificial intelligence systems like IBM’s are poised to upend knowledge-based professions, like insurance and financial services, according to the Harvard Business Review, due to the fact that many jobs can be ‘composed of work that can be codified into standard steps and of decisions based on cleanly formatted data.’ But whether that means augmenting workers’ ability to be productive, or replacing them entirely remains to be seen.”


WSJ – Daily Shot: Cities Where Rent Swallows Your Salary 12/29


WSJ – Daily Shot: Selfie-Fatalities 12/29


FT – China/US real estate: safe as houses – Lex 12/30


WSJ – China and the Debt-Refinancing Game in 2017 – Nathaniel Taplin 1/3


WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 – Laura Kusisto 1/2



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

How China’s Insurance Crackdown Spawns More Risks. Anjani Trivedi. The Wall Street Journal. 4 Jan. 2017.

“Following a year in which Chinese insurers aggressively built risky and illiquid portfolios, acquired real estate, companies and stakes in companies at home and across the world, under loose regulation, China’s insurance regulator has taken to severe tightening measures in recent weeks. Regulators have effectively barred insurers from making risking investments and banned certain insurers and insurance products with high cash value and low protection.”

“The repercussions could cause trouble far and wide. Almost 60% of China’s wealth-management products are invested in bond and money-market funds and a growing portion of these products are backed by bonds. And, they account for almost 20% of banking-system deposits.”

“China’s unlisted insurers-infamous among them, Anbang-will now see their wealth-management, product-backed financing platforms squeezed under new rules that bar investing cash raised from investment products. With policyholder deposits accounting for more than 70% of written premiums, more asset-selling may be on the cards.”

Chinese insurers under pressure to rein in overseas deals. Henny Sender. Financial Times. 3 Jan. 2017.

Adding to the WSJ article.

“Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod, acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.”

“Until recently, many analysts expected Chinese insurers to increase their offshore activity.”

Further, due to low interest rates worldwide, insurance companies have been seeking higher return investment categories. As Boston-based consultancy Cerulli Associates notes “investments in the ‘others’ category – which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate – rose from 23.7% in 2014 to 34.2% in June 2016.”

“Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that ‘the insurers have shifted to investing in riskier assets to sustain investment yields. This make their credit profiles more vulnerable to unfavorable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown.”

Thus considering these insurers will find it quite difficult purchase overseas assets with capital from China, they will have to already have the cash overseas, have a means to raise cash abroad, or they will need to sell overseas assets to pursue continued investments.

“Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US ratings agencies suggested that it was likely to receive a non-investment grade rating.”

In fact, “Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed (to). That in turn would crimp its ability to buy more.”

“In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued (hurting SWF liquidity), and the US focused inward, it is not clear who will take their place.”

America’s Roster of Public Companies Is Shrinking Before Our Eyes. Maureen Farrell. The Wall Street Journal. 4 Jan. 2017.

“With interest rates hovering near record lows, big investment funds seeking higher returns are showering private companies with cash. Companies also are leaving the stock market in near-record numbers through mergers and acquisitions.”

“The U.S. is becoming ‘de-equitized,’ putting some of the best investing prospects out of the reach of ordinary Americans.”

“The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.”


“In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.”

“‘There’s no great advantage of being public,’ says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of ‘The Vanishing American Corporation.’ ‘The dangers of being a public company are really evident.'”

“Among them, Mr. Davis and other say: having an investor base that clamors for short-term stock gains and being forced to disclose information that could be useful to competitors.”

“While it is difficult to quantify, there has been an explosion in private investment capital in recent years. Sovereign-wealth funds-pools of capital invested by nations-have roughly $7.4 trillion under management, more than double the $3.5 trillion they held in 2007, according to the Sovereign Wealth Fund Institute, a research and data firm. Assets under management at U.S. private-equity firms totaled $1.4 trillion, an increase of more than 30% since 2007 and nearly four times the tally in 2000, according to the most recent data from PitchBook, a data provider and research unit of Morningstar Inc.”

Last year, 111 companies went public on U.S. exchanges, raising $24.2 billion, a dollar-volume drop of 33% from the previous year and the lowest dollar volume since 2003, according to Dealogic.”

“Meanwhile, M&A activity targeting U.S. listed companies has risen since 2012 to more than 9,300 transactions a year, on a 10-year rolling average. Before 2012, the average ranged from 8,000 to 9,200.”

“With fewer places for investors to spread their cash and more companies combining, the average size of a public company in the U.S. has swelled, hitting an all-time high of $4.7 billion in 2014… the average public company is more than three times as large as it was in 1997, after adjusting for inflation.”

Unfortunately for investors, it is unlikely that they’re going to be able to invest in a start-up with huge upside potential through the public markets…


Other Interesting Articles

Bloomberg Businessweek

Bloomberg – Wall Street, America’s New Landlord, Kicks Tenants to the Curb 1/3

Bloomberg – Harvard Academic Sees Debt Rout Worse Than 1994 ‘Bond Massacre’ 1/4

FT – French luxury hotels woo daytime lovers 12/29

FT – Chinese government enters storm over domestic filmmaking 12/30

FT – Stalling Chinese box office raises Hollywood fears 12/30

FT – Uber and Airbnb business models come under scrutiny 12/30

FT – Tesla falls short of vehicle delivery target in 2016 1/3

FT – Apple removes New York Times app from its China store 1/4

FT – Apple-SoftBank: noncore bets 1/4

FT – German push for home ownership drives price bubble fears 1/4

NYT – A Peek Inside the Strange World of Fake Academia 12/29

NYT – Uncertainty Over New Chinese Law Rattles Foreign Nonprofits 12/29

NYT – In a Brutal Year in Venezuela, Even Crime Fighters Are Killers 12/30

Visual Capitalist – Infographic: Vancouver Real Estate Mania 6/2/16

WSJ – The Chinese Theme-Park Honey Trap 1/3

WSJ – Shanghai Tower Fails to Meet High Leasing Hopes 1/3

WSJ – Slippery Logic to Russia’s Oil-Cut Claim 1/4

WSJ – Ignore Tesla’s Latest Slip at Your Peril 1/4