October 14 – October 20, 2016

The Chinese housing market is looking rather shaky. Investors are going to have to brush up on their social sciences. China is smarting from an aggressive push into developing world loans.



    • “The collective wealth of the world’s ultra-rich has fallen for the first time since the aftermath of the global financial crisis even as Asia, powered by China, continues to create a billionaire every three days, according to research published on Thursday.”
    • “Last year the world’s billionaires lost 5% of their fortunes, or $300bn, and their wealth growth failed to match stock market performance for the first time in two decades, according to a report by UBS, the world’s largest wealth manager, and PwC, the professional services firm.”
    • “Over the past 20 years billionaires have increased their wealth sevenfold – double the rate of global stock market growth – in what has been termed a second ‘Gilded Age’ for wealth creation.”
    • Easy for some to say.
    • “Among the causes for the fall in billionaires’ fortunes last year were transfers of wealth…, falling commodity prices and a rising US dollar, the currency on which the report is based.”
    • “But such vast wealth can prove fleeting. While 41 billionaires made the cut in the US for the first time last year’s UBS/PwC report, 36 dropped below that level. In China the situation was even more volatile: while Asia generated 113 billionaires last year, 80 dropped below that level, of whom 50 were Chinese. Their declining fortunes were attributed to fluctuating markets and a government crackdown on corruption and graft.”
    • “The new fund, dubbed the SoftBank Vision Fund, will be based in London and seeded with $25bn from SoftBank and up to $45bn from Saudi Arabia’s Public Investment Fund over the next five years, according to a statement from the Japanese telecoms group.”
    • “At $100bn, the new fund would be the same size as all funds raised by US venture capital firms over the past two and a half years, according to data from the National Venture Capital Association.”
    • “SoftBank said the fund would be investing over a five-year time horizon, which at $20bn a year would represent roughly a quarter of total annual investments in US-based venture-backed start-ups.”
    • According to Masayoshi Son, the fund will be “the biggest investor in the technology sector.” Quite a statement.
    • “China, long the world’s factory floor, is taking control of a bigger portion of the world’s supply chains as well, causing a shift in global trade patterns by buying less from abroad.”
    • “Exports to China, which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s. They are down another 8.2% this year, through September. The decline helped shave 0.3 percentage points off world trade growth last year, and is a big reason that growth is expected to slow to 1.7% this year from the 5% a year it has averaged over the last two decades.”
    • One of the reasons, simply Chinese companies have been using less product from foreign sources. “The proportion of foreign-made inputs in Chinese exports has been shrinking by an average 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data.”
    • wsj_china-to-world-we-dont-need-your-factories-anymore_10-18-16
    • “To build domestic capabilities on the high end, the Chinese government last year announced a plan to raise the domestic content of core components and key materials to 40% by 2020 and 70% by 2025. It has been spending large amounts on research and development: $213 billion last year, or 2.1% of gross domestic product, according to state media reports. In June it pledged more money for ‘technological innovation.'”

Special Reports / Opinion Pieces


Twitter – Nick Grealy @RelmagineGas 10/10

Twitter_Nick Grealy @RelmagineGas_10-10-16

WSJ – Bleak Times at the Mall – Justin Lahart 10/14


WSJ – China’s Property Frenzy Spurs Risky Business – Lingling Wei 10/19


FT – Saudi Arabia’s $17.5bn bond sale has lessons for debt market – Elaine Moore and Simeon Kerr 10/20



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

China’s Ballooning Mortgage Debt Built on Shaky Foundation. Anjani Trivedi. Wall Street Journal. 14 Oct. 2016.

A brief and well-articulated article on precarious position of the Chinese mortgage/housing market.

“Seeking to quell worries that China’s home-finance market has gotten out of hand, a banking regulator disclosed this week that the loan-to-value ratio in the housing market, or the ratio of the value of mortgage loans to the value of underlying property, was on average 55%.”

“But the absolute level may not matter as much as the pace of increase. UBS estimates the loan-to-value ratio of new-home purchases is even higher, closer to 70%, having surged from 15% in 2012. Much of that rise has happened in the past year.”

“As a comparison, U.S. mortgages before the housing bubble burst had a loan-to-value ratio of less than 60%… In any event, that basic number very quickly rose to over 90% when the bubble popped and prices dropped.”

“Because so many of China’s mortgages are of recent vintage, the value side of their loan-to-value calculation rests on the most recent surge in prices. Simplistically, should prices correct, say, 20%, LTVs would suddenly on average be at 70%. That doesn’t take into account individual markets where leverage and price increases might be higher. Nor does it factor in the vast market for shadow lending, which anecdotally has been helping buyers fund down payments, heaping leverage on top of leverage.”

Keep in mind, “home prices have a way of overcorrecting.”

Granted, with so much at stake for the Chinese economy, I would expect the government will do almost anything to keep the real estate cycle trending up as it moves to the right.

Investors are ill equipped for our unfathomable future. Gillian Tett. Financial Times. 13 Oct. 2016.

Ms. Tett does a good job of highlighting recent remarks by Axel Weber, former head of the Bundesbank and now chairman of UBS, at one of the International Monetary Fund meetings held recently.

Essentially, he sees three primary themes shaping the market today.

First, “the banking system today is much stronger than a decade ago as a result of post-crisis reforms.” Despite the effects of low-to-negative interest rates. So we have that going for us.

Second, “while the banking system looks healthier, markets do not.” Markets are no longer ‘markets’ in the traditional sense. There is too much distortion. For example, “in the government bond markets, where the central banks of Japan, US and eurozone currently hold a third, a fifth and a tenth of the outstanding local government bonds.”

“Central bank purchases are distorting the price of European corporate bonds and Japanese equities, with knock-on effects in numerous other asset classes. ‘I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention,’ Mr. Weber warned.”

Third, “these distorted markets are increasingly hostage to unfathomable political risk.”

“Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as Britain’s vote to leave the EU, herald a new protectionism?”

“Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science.”

China rethinks developing world largesse as deals sour. James Kynge, Jonathan Wheatley, Lucy Hornby, Christian Shepherd and Andres Schipani. Financial Times. 13 Oct. 2016.

Just because you want something to be so, doesn’t mean it will be.

Entering the world of international development finance about a decade ago, China has jumped in head first.  “With a loan portfolio larger than all six western-backed multilateral organizations put together. Outstanding loans form the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions, according to a recent study.”


Well, the thing is that when they entered the game, they backed a lot of risky players/countries.  As one Chinese official put it “China had no choice but to lend a lot to risky countries because they had the commodities we needed and because the western multilateral organizations already dominated the rest of the world.”

Of course the lesson is being learned. “These days we need viable projects and a good return. We don’t want to back losers.”

All told China has invested $65bn in Venezuela since 2007 in 17 tranches. Which “for context, $65bn is more than the World Bank has lent to any country – with the single exception of India – since 1945, data from the bank show.”

Now, in regard to Venezuela “China is no longer willing to ‘put good money after bad, unless it is the only way for it to avoid losing its entire position through the collapse of the regime.'” A possibility.

“Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the Paris-based OECD. By contrast, only two of the top 10 recipients of World Bank development finance fell into the same category.”


Lesson learned. We’ll see how it works out.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – China’s uncannily stable growth versus the price of reform 10/19

FT – How the west has lost the world 10/12

FT – Snap: high altitude (Lex) 10/13

FT – Inflation fears cast shadows over long-dated bonds 10/13

FT – China escapes deflation but are rising global prices on the way? 10/14

FT – Didi Chuxing to be hit by rules on migrant drivers 10/15

FT – Investment in UK commercial property sinks after Brexit vote 10/17

FT – Time to buy ‘real assets’ in age of inflation – BAML 10/17

FT – IPOs brought down to earth amid market uncertainty 10/18

FT – Airbnb faces fight for survival in New York City 10/19

Reuters – Manhattan office market booming as asking rents set record: report 10/13

WP – NFL ratings plunge could spell doom for traditional TV 10/14

WSJ – SoftBank’s Elephant Gun Packs a Scare 10/14

WSJ – Immigrant Investor Program for Poor Neighborhoods Benefits Rich Ones More, Study Shows 10/19

WSJ – Here’s Just How Much Building It Would Take to Boost Big-City Affordability 10/20


October 7 – October 13, 2016

There are the pension obligations kept on the books based on industry guidelines and then there are the books that track what they really think. America’s tech boom has been great for the consumer, but not so much for the employees that have been displaced.



    • “Sovereign wealth funds have pulled almost $90bn from asset managers over the past two years, as state-backed investment vehicles grapple with low commodity prices and disappointed returns.”
    • “The Norwegian government has tapped the Scandinavian country’s $890bn oil fund, the largest sovereign wealth fund in the world, for almost $6bn this year.”
    • “Moody’s, the rating agency, has predicted that sovereign outflows would be at least 25% higher in 2016 than in 2015, due to the low oil price.”
    • Other reasons stated for the pullback include: poor performance from fund groups, bringing investment management in-house, diversification, and having cash-on-hand for opportunistic investments.
    • “Between 20 and 30% of people in the US and Europe are working independently in the so-called “gig economy” according to a new study that counts moonlighters as well as full-timers.”
    • While many are satisfied with their gig arrangement, “about 30% are doing it as a last resort.”
    • Further, ‘gig’ work is not only for the young. “The survey found that in the UK, 39% of adults aged 55 and over were working independently versus 31% of 25 to 54 year olds. The same pattern was found in Sweden and Germany.”
    • “Scaling up the results of our survey suggests that 50 million Americans and Europeans are independent out of necessity, and more than 20 million of them rely on independent work as their primary source of income.”
    • In an effort to grow its inventory, Airbnb is reaching out to apartment landlords to rent out some of their vacant inventory. So far, most landlords have been declining.
    • Why?  1) “Under Airbnb’s new plan, called the Friendly Building Program, if landlords allow tenants to lease units on Airbnb, they have an opportunity to take a cut of the nightly revenue at a suggested rate of 5% to 15%.” I.E. for a “one-night, $200 stay that means the landlord would make $30 or less, an amount that many landlords say doesn’t justify the hassle.” And 2) as illustrated by “Cortland Partners, which owns 36,000 apartment units primarily in the Southeast, in a recent survey found that nearly 40% of residents would be significantly less likely to renew their leases if the company allowed tenants to rent out units on Airbnb.” Basically, as Margette Hepfner, Senior VP of Lincoln Property Co (manages or owns 175,000 units), so aptly puts it “There’s just inherent risk in allowing unknown guest to come onto your property.”
  • Josh Zumbrun of the Wall Street Journal discussed the findings from the Journal’s recent economist survey. Essentially, economists believe a recession is likely within the next four years.
    • “Economists in The Wall Street Journal’s latest monthly survey of economists put the odds of the next downturn happening within the next four years at nearly 60%.”
    • Why… because “the American economy has never grown for more than a decade without a recession.”
    • “The current expansion began in June 2009, and has now continued for 88 months, making it the fourth-longest period of growth in records stretching to 1854.”
    • However, “to be clear, the length of an expansion bears little relation to its strength. The U.S. economy has grown at a 2.1% annual pace since 2009. That is the slowest growth of any expansion after World War II.”
    • “But over the next four years, few think a recession is absolutely guaranteed. A quarter of economists place the odds below 50%.”
    • “It is precisely because the economy has grown slowly that some think the recovery could last a long time. ‘Slow and steady leaves plenty of fuel to keep going,’ said Russell Price, senior economist for Ameriprise Financial.”
  • Henny Sender of the Financial Times covered the continuing bull run in the Chinese property sector.
    • “Property as an asset class has become important in China – maybe too important. It is critical to the financial system (since 70% of all bank loans are backed by real estate collateral), as a source of economic growth and as a source of savings and wealth for many households.”
    • As Nicole Wong, the regional head of property research for CLSA in Hong Kong puts it “property is an alternative currency in China.”
    • “But no asset class is as sensitive to liquidity’s soothing effect as property and there is a lot of liquidity in China. And as it always does, liquidity is buoying the property market, well beyond the first-tier cities where so many couples go through staged divorces just so that they can each buy a starter home on more attractive terms.”
    • “‘Liquidity is coming from the sky,’ says one Hong Kong-based hedge fund manager, noting that 40% of all global money supply in recent years has come from China. So even as central banks in Japan and the US debate helicopter money for local infrastructure and other ambitious development projects, China comes closest to realizing that concept as it ramps up its money printing presses. China’s total social financing for August was again at highs set earlier this year, while for the first half it amounted to $1.5tn, he adds.”

Special Reports / Opinion Pieces

  • FT – Investors ignore messages from ‘global AGM’ at their peril – Mohamed El-Erain 10/9
    • “In sum, the AGM (Annual General Meeting) reinforces three concerns about the global economy. 1) Its prospects are becoming more fragile in terms of growth, financial stability, indebtedness and, therefore, inclusive prosperity. 2) Bizarre political dynamics add fuel to the fire, directly and by holding back timely policy adjustments. 3) The potential damage now extends beyond forgone opportunities to also undermining future potential, including open trading systems and politically-autonomous central banks.”


FT – Gap widens between China’s ‘old’ and ‘new’ economies – James Kynge 10/6

FT_New China economy companies outperforming_10-6-16

Bloomberg – Grocery Prices Are Plunging – Craig Giammona 9/26

Bloomberg_Falling Food Prices_9-26-16

FT – China anti-corruption campaign backfires – Hudson Lockett 10/9

FT_China's top concerns_10-9-16

WSJ – Worries Grow That China Faces a Perilous Property Bubble – Dominique Fong and Lingling Wei 10/7

WSJ_Chinese lending growth_10-7-16

WSJ – Mainland China’s Property Bubble Leaks Into Hong Kong – Jacky Wong 10/12


Visual Capitalist – These 3 Maps Help to Visualize America’s $18 Trillion Economy – Jeff Desjardins 10/12



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

A Sour Surprise for Public Pensions: Two Sets of Books. Mary Williams Walsh. New York Times. 17 Sep. 2016.

Turns out, the California Public Employees Retirement System (CalPERS) – and many similar pension funds for that matter – keep two sets of books on calculating their pension obligations and funding requirements.  One based on actuarial values and another based on “market values.”  Well the issue just came to light in a small case for the Citrus Pest Control District No. 2 that just received a very hefty bill to cover a shortfall (plus interest) for deciding to convert to a 401(k) plan.  What changed at the moment of that decision…basically Calpers went from calculating the benefit owed based on actuarial tables to using a more prudent ‘market approach’ considering it no longer had the right to go after the community for future contributions.

What is the ‘market value?” Basically, “the market value of a pension reflects the full cost today of providing a steady, guaranteed income for life – and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.”

If you want to see the difference between the two values, the Stanford Institute for Economic Policy Research now publishes the two for California pensions.

Thing is that pensions operate on the actuarial standards, standards which exacerbate pension shortfalls.  “Actuarial values determine the annual contributions that states and local governments make to their pension plans, so if the target numbers are too low, the contributions will always be too small. Shortfalls will be compounding, invisibly.”

As Jeremy Gold, an actuary and economist, made note in a speech last year “actuaries shamelessly, although often in good faith, understate pension obligations by as much as 50%… Their clients want them to.”

In the case of Citrus Pest Control District No. 2, Calpers was calculating the municipality’s obligations at an assumed rate of return on assets “now generally around 7.5%,” but when calculating the ‘market value’ of the obligation when the Citrus made the switch, Calpers used a more realistic (based on the current risk-free rate for a similar duration) 2.56%.  Boom, $447,000 shortfall – this is for only 6 people.

‘Houston we have a problem.’

America’s Dazzling Tech Boom Has a Downside: Not Enough Jobs. Jon Hilsenrath and Bob Davis. Wall Street Journal. 12 Oct. 2016.

The highlight is that for all the wealth created from the tech boom, jobs have been cut rather than added.

“Google’s Alphabet Inc. and Facebook Inc. had at the end of last year a total of 74,505 employees, about one-third fewer than Microsoft Corp. even though their combined stock-market value is twice as big. Photo-sharing service Instagram had 13 employees when it was acquired for $1 billion by Facebook in 2012.

“American tech workers are getting a smaller piece of the economic pie created from what they produce. As of 2014, employee compensation in computer and electronic-parts making was equal to 49% of the value of the industry’s output, down from 79% in 1999, according to the Commerce Department.”


“WhatsApp had more than 450 million users world-wide when Facebook bought the messaging service for $19 billion in 2014, turning founder Jan Koum into a billionaire several times over. At the time of the acquisition, WhatsApp had 55 employees.

“Economist call the phenomenon ‘skill-biased technical change.’ The spoils of growth go to those few people with skills and luck and who are best positioned to take advantage of new technology.”

“The five largest U.S.-based technology companies by stock market value-Apple, Alphabet, Microsoft, Facebook and Oracle Corp.-are worth a combined $1.8 trillion today. That is 80% more than the five largest tech companies in 2000.”

“Today’s five giants have 22% fewer workers than their predecessors, or a total of 434,505 as of last year, compared with 556,523 at Cisco Systems Inc., Intel, IBM, Oracle and Microsoft in 2000.”

“Harvard University economist David Deming estimates that the hollowing-out of work spread to programmers, librarians and engineers between 2000 and 2012. As much as $2 trillion worth of human economic activity could be automated away using existing technologies, such as Amazon’s robots, in coming years, consulting firm McKinsey & Co. estimates.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – China Property Bubble Could Cause $600 Billion in Bad Debts 10/6

FT – Italy’s 50-year bond – mind the valuation gap 10/6

FT – Renminbi eyes lows as China enjoys reserve currency status 10/9

FT – The Saudis’ strategic failure 10/9

FT – China approves controversial debt-for-equity program 10/10

FT – More millennials switch off social media 10/10

FT – Norway’s oil fund warns on lack of stock market listings 10/11

FT- China corporate raider’s wealth soars ninefold to $17bn 10/12

FT – Dividend or disaster? Nigeria grapples with demographic conundrum 10/12

NYT – Behind Duterte’s Bluster, a Philippine Shift Away From the U.S. 10/9

NYT – This City Is 78% Latino, and the Face of a New California 10/11

WSJ – Recession Odds: Fed Says Don’t Count On It 10/9

WSJ – WeWork Raises $260 Million, Capping Off $690 Million Funding Round 10/12


September 30 – October 6, 2016

Xi Jinping, the master politician. In the US oil and gas industry it’s about time for some more culling of the herd. Uber providing transportation solutions for US municipalities.



    • “Saudi Arabia has cut public sector bonuses and benefits for the first time since the collapse in oil prices, in a move that underlines the depth of the fiscal crisis facing the kingdom.”
    • “The new rules, which come into force next month, apply to all public sector workers, both Saudis and expats, as well as the military (except soldiers serving in Yemen).”
    • “If you were a white kid who went to work straight out of high school around 1975, you earned roughly $44,000 two decades later. BY 2014, on average, your pay had fallen to $32,000 a stunning 27% decline in real terms, after accounting for inflation.”
    • “College grads are doing okay. Across all age groups, income in this group rose from $77,209 in 1996 to $94,601 in 2014, a 22.5% increase. A college-educated worker who was 28 in 1996 and 46 in 2014 enjoyed a whopping 132.8% spike in pay. The only losers among college grads were those were those 57 or older in 2014. Their pay fell from somewhere between 13% and 28.5% between 1996 and 2014, but still leveled out at $83,000 or higher in 2014, well above the national average.”
    • Yahoo Finance_Wage and salary income chart_10-5-16
  • In a Financial Times guest correspondence piece, Steven Major (head of fixed-income research at HSBC) discussed why there is no game-changer that will end the bond bull market.
    • I’m going to keep this one real brief by just listing the major points.
    • “Backdrop favors a low real natural rate of interest”
    • “Deleveraging across public and private sectors has not started”
    • “Central banks continue to amass huge balance sheets”
    • “Connectivity between markets is increasing”
    • “We realize that all this makes pretty grim reading for those hoping for an improvement in the growth outlook and a return to ‘normal,’ whatever that is. But this is part of the problem. There is no shortage of hope that something will turn up and there is excessive vested interest in the higher yield view. Too much money is chasing too little return.”
  • The Financial Times Confidential Research division produced a report on how underground loans in China are defeating attempts to cool the housing market.
    • “Analysis by FT Confidential Research suggests that underground lenders have become an important source of funding for Chinese consumers struggling to make down payments on home purchases as real estate prices surge. Such lending may hamper attempts to cool down overheating top-tier housing markets.”
    • FT_Consumer loans from underground lenders in China_10-5-16
    • “Despite concerns at the central level about housing bubbles, the property market’s rising tide is lifting other economic boats, FTCR data show. Our proprietary surveys found positive sentiment in the freight sector and construction labor market, the indices for both of which hit 2016 highs, while households have not been in such good cheer for nearly two years.”
    • FT_Average house prices in Shanghai and Shenzhen_10-5-16
    • “Consumers appear to be responding to the wealth effect generated by rising house prices. Our monthly measure of consumer sentiment rose to its highest level since October 2014. Survey respondents reported strong improvements in their household financial situations, discretionary spending and views on the economy. Furthermore, the forward-looking components of our suite of monthly data suggest momentum is set to carry through to the end of 2016.”

Special Reports / Opinion Pieces


FT – Global economic growth ‘sliding back into the morass’ – Chris Giles 10/2

FT_Overall growth index_10-2-16

WSJ – A New Worry for Banks and the Economy – Aaron Back 10/3


Visual Capitalist – Black Swans: 9 Recent Events That Changed Finance Forever – Jeff Desjardins 10/5

Visual Capitalist_Black Swans_10-5-16

WSJ – Some Big U.S. Cities See Apartment Rents Fall for First Time in Years – Laura Kusisto 10/4

WSJ_Rental rates cooling off_10-4-16

FT – Perth’s slide highlights Australia commodity bust – Jamie Smyth 10/4

FT_Australian House price changes_10-4-16

FT – World debt hits $152tn record, says IMF – Claire Jones 10/5

FT_Global gross debt_10-5-16


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

Xi Jinping May Delay Picking China’s Next Leader, Stoking Speculation. Chris Buckley. New York Times. 4 Oct. 2016.

“The Chinese president, Xi Jinping, appears prepared to defy the Communist Party’s established script for transferring power and delay the designation of his successor until after a party congress next year, unsettling the party elite and stirring speculation that he wants to prolong his tenure.”

“The delay would buy Mr. Xi more time to promote and test favored candidates and prevent his influence from ebbing away to a leader-in-waiting, experts and political insiders said. But the price could be years of friction while a pack of aspiring cadres vie for the top job, as well as unnerving uncertainty over whether Mr. Xi wants to stay in power beyond the usual two terms as party leader.”

“The drama will probably begin in earnest this month, when the Central Committee, about 200 senior officials who sign off on major decisions, meets in Beijing. That meeting is likely to set in motion plans for the congress, which will meet in late 2017 to endorse a new top lineup.”

“While it is a given that the congress will back Mr. Xi for another five-year term as party leader, nearly everything else is up for grabs, giving Mr. Xi great sway to shape the new leadership.”

“Five of the seven members of the powerful Politburo Standing Committee must step down because of age, assuming the informal retirement age of 68 holds. That leaves only Mr. Xi, 63, and Mr. Li, 61, to return.”

US oil and gas pipeline industry ripe for consolidation. Ed Crooks. Financial Times. 4 Oct. 2016.

“Tim Schneider, analyst at Evercore ISI, argues that the North American pipeline industry is on the verge of a wave of consolidation like the one that swept through the large integrated oil companies in the late 1990s and early 2000s.”

“The US has about 140 Master Limited Partnerships: a tax-advantaged structure available to energy infrastructure businesses that is typically used by midstream operators. Mr. Schneider argues that only about half of those have a ‘right’ to exists. Many will have to sell themselves, dispose of assets to stay alive, or ‘simply disappear’, he says.”

FT_North American pipeline M&A_10-4-16

“In 2014, there were 9,679 miles of crude oil pipeline completed in the US, according to IHS Markit, the research group. In 2017, it expects 4,175 miles of large projects to be completed, assuming Dakota Access (the contested 1,172 mile pipeline from the shale oilfields of North Dakota to Patoka, Illinois) goes ahead.”

FT_US crude oil pipeline additions_10-4-16

“Many MLPs, and some of the pipeline companies that are structured as regular corporations, have business models that depend on perpetual growth justifying continuing cash inflows.”

“Energy Transfer Partners, for example, in the first half of this year distributed $1.8bn to investors and spent $3.5bn on capital investment, but generated cash from operations of just $1.4bn. The numbers were made to add up by selling the Sunoco retail business to its affiliate Sunoco LP for $2.2bn, and by issuing units worth $1.1bn.”

In regard to the MLP industry, Tim Schneider put it this way “they are like cattle feeding at a trough. The weaker ones are going to get shoved aside.”

Uber offers subsidized rides in drive to solve US parking crisis. Leslie Hook. Financial Times. 5 Oct. 2016.

“In a first-of-its-kind of deal for Uber, Summit (New Jersey) has hired the company to provide free rides for commuters to and from its train station, starting this week. For the local authority, the six-month pilot helps solve its downtown parking crisis; for Uber, the deal is one it hopes to replicate across the country.”

“These transit deals could potentially give Uber access to a new revenue source, from transportation authorities, and access to new passengers. Just as importantly, Uber sees them as a means towards its ultimate goal: a world where shared autonomous cars are a primary mode of transportation and private vehicle ownership is no longer necessary.”

“The Summit deal focuses on what is known as the ‘last mile’ problem of getting commuters to and from rail stations, which researchers consider to be an ideal use case for ride-sharing.”

“Facing budget pressures, US cities are increasingly experimenting to see whether hiring Uber, or its smaller rival Lyft, can be a cheaper alternative to building parking garages or adding bus routes.”

“Last month, Boston announced a test program that subsidizes Uber and Lyft rides for disabled passengers, a faster option compared with the city’s door-to-door van service. Earlier this year, a county in Florida started providing free Uber rides at night for low-income passengers – a cheaper alternative to a night bus. Another city in Florida pays for all its residents to have discounted Uber rides, and Washington DC is even considering using Uber to help respond to non-emergency 911 calls.”

“In Summitt, Mayor Nora Radest said the city contacted Uber a year ago to talk about a deal because it was looking for an economical way to address its downtown parking shortage. Hiring Ubers for its commuters will cost about $167,000 a year, the city estimates, while building a parking garage would have cost more than $15m.”

“We are looking at this not as a transportation solution but as a parking solution. The goal is to get those 100 cars that sit in the commuter station all day, and get them out of there.” – Mayor Radest

Other Interesting Articles

Bloomberg Businessweek

The Economist

A Wealth of Common Sense – How Things Have Changed on Wall Street in the Last 50 Years 10/5

FT – Traditional banking is on borrowed time – so why invest? 9/29

FT – Yet more low but stable global economic growth is unsustainable (Mohamed El-Erain) 9/29

FT – China entertainment: Wanda-lust 9/30

FT – Mongolia request IMF loan 9/30

FT – Deutsche reawakens systemic fears amid talk of ‘Lehman moment’ 10/3

FT – IMF lowers growth forecast for US and other advanced economies 10/4

FT – Markets eye the taper but fear the tantrum 10/5

FT – Swiss suspect Ponzi scheme used to conceal 1MDB losses 10/5

FT – US banks roll out callable bonds to meet Fed debt rules 10/5

NYT – Developer That “Cracked the Code’ on Modular Building Exits the Business 10/5

NYT – Oil Glut? Here Comes Some More! 10/5


September 23 – September 29, 2016

Venezuela on the brink.

This post is number 52.  A full year down and I hope that you’ve found value in the Janus Observer.  Thank you for everyone that has been following this blog.    More to come.


J. Duff Janus



    • BlackBerry is dropping its hardware division and will focus on software and services.
    • “At its zenith in 2008, BlackBerry accounted for one in every five smartphones sold…”
    • FT_BlackBerry share price_9-28-16
    • “As sales soared, the company’s market value hit $80bn, compared with roughly $4bn today.”
    • Going forward the company is striking licensing deals in Indonesia to manufacture and promote its devices in the country – BlackBerry is pursuing a similar strategy in India and China.
    • FT_BlackBerry phone production_9-28-16
    • “At an annual $278.50 a square foot for prime office space, rental rates are on average nearly 80% higher in Hong Kong than in Manhattan, according to an annual ranking by property consultancy Knight Frank.”
    • “Chinese interest has pushed up Hong Kong building prices to the point that they are rarely attractive investment opportunities to other companies, said Denis Ma, head of research at Jones Lang LaSalle in Hong Kong.”
    • “The flurry of buying by mainland investors has pushed the yields, or the amount made on rents divided by the price of a building, down to 2.5% to 3% from 4% just four years ago, said Mr. Ma.”
    • WSJ_Chinese RE acquisitions_9-27-16
    • “Even as oil producers have planned $1 trillion worth of spending reductions between 2015-to-2020 – cutting staff, delaying projects, and squeezing contractors-they’ve continued to green-light new wells from the Norwegian Sea to Brazil, and from Uganda to the Gulf of Mexico. Those initiatives mean oil production will continue to grow, adding to the supply glut and putting downward pressure on prices.”
    • Bottom line: industry standardization and joint efforts in improving efficiency.
    • Bloomberg_Falling oil production costs_9-27-16
    • “At Statoil, the three wells drilled at its Snorre B platform cost an average 170 million kroner ($21 million) compared with about 490 million kroner for previous projects, according to the Stavanger, Norway-based company. That means oil obtained by the platform, which began pumping some 80,000 barrels a day, costs an average of $10 a barrel.”

Special Reports / Opinion Pieces


Visual Capitalist – UBS Global Real Estate Bubble Index – Jeff Desjardins 9/27

Visual Capitalist_UBS Global RE Bubble Index_9-27-16

FT – Rhode Island cuts its hedge fund program by two-thirds – Mary Childs 9/28

FT_Hedge fund investor flows_9-28-16


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

Venezuelan oil major’s debt swap: the beginning of the end? Robin Wigglesworth and Andres Schipani. Financial Times. 25 Sep. 2016.

“The head of Petroleos de Venezuela (PDVSA) last week unveiled plans to swap more than $7bn of bonds maturing next year with longer-dated debts due in 2020. To sweeten the deal for investors, PDVSA offered up its US subsidiary Citgo Petroleum as collateral.”

“S&P (the ratings agency) said it would constitute a default by PDVSA, and many analysts see the move as a curtain-raiser the move as a curtain-raiser for an inevitable restructuring of Venezuela’s national debts.”

“S&P last week lowered its grade on the affected bonds to triple-C, one of the lowest rungs possible, and said that if the swap goes through it would be considered a ‘distressed exchange’ and therefore a formal default. This would not directly affect the country’s creditworthiness, but S&P warned that a ‘sovereign default seems inevitable.'”

“PDVSA’s proposed debt swap is also complicated by the proposal to offer up to 50.1% of Citgo as security of bondholders who agree to the deal. Firstly, it is already the state oil company’s main ‘seizable’ asset in case of default; secondly, if it is fully pledged to underpin the bond swap then it would in practice deprive other bondholders of their main security.”

“Lawyers say this would therefore probably fall foul of the ‘negative pledge’ clause in PDVSA’s existing bonds. Tellingly, the 442 pages of documentation on the debt swap lists no law firms or investment banks involved.

“If the deal collapses, then it worsens Venezuela’s predicament. Absent a deal, the country and PDVSA will jointly have to come up with some $15bn over the next 14 months for debt repayments. Although the government does not guarantee PDVSA’s debts, some lawyers say that in practice it would be hard to disentangle a full default and restructuring of the oil company from its parent, the state.”

“The country’s reserves are ‘critically low’ at $11.9bn, S&P notes, down from $16bn at the start of the year. And most of the reserves are in gold, which are hard to liquidate in a hurry without crashing prices.”
Other Interesting Articles

The Economist

Bloomberg – Blackstone’s Top Dealmaker Says Now Is The Most Difficult Period He’s Ever Experienced 9/27

Contra Corner – Dangerous Bubbles in Plain Site 9/27

Economist – Italy’s constitutional referendum 9/28

FT – China’s economic fate rests on its housing market 9/22

FT – How to value (worthless) Venezuelan oil bonds 9/23

FT – Wounds from the 2008 financial crisis are still bleeding 9/23

FT – Perry Capital to shut down after 28 years 9/26

FT – InterContinental drops on Airbnb fears 9/26

FT – China cities move to halt housing market frenzy 9/26

FT – Stretching the truth in Chinese literature 9/26
FT – How would a Fed rate hike affect consumers? 9/27

FT – Evergrande: never more 9/27

FT – Deutsche Bank and Twitter are lost in the past 9/28

FT – How the BlackBerry phone era came to an end 9/28

NYT – An Online Education Breakthrough? A Master’s Degree for a Mere $7,000 9/28

WSJ – The Looming Storm in Insurance 9/23

WSJ – Another $10 Billion Hong Kong Stock Market Mystery 9/26

WSJ – Chinese Insurers’ Short-Term Strategy Is Getting Old 9/28

September 16 – September 22, 2016

Chinese corporate debt…geez…Someone’s going to have to take a haircut. US pension crisis.



    • A recent study that was published in Environmental Research Letters, a top academic journal, indicated that the “toxic haze that spread across Southeast Asia from Indonesia forest fires last year caused the deaths of about 100,000 people across the region.”
    • “The death toll was concentrated in Indonesia, which had about 92,000 excess deaths from persistent haze that choked the region between July and October, according to researchers at Harvard and Columbia.”
    • “What the BIS (Bank for International Settlements) terms the country’s ‘credit gap’ is now three times higher than the typical danger level, the research shows.”
    • “The BIS rates a reading above 10% as cause for concern; China’s gap hit 30.1% in March.”
    • FT_China 'credit gap'_9-18-16
    • “The International Monetary Fund estimated in June that Chinese companies that had borrowed a collective $1.3tn did not have enough earnings before interest, taxes, depreciation and amortization to meet interest payments.”
    • “China first breached the 10% threshold in 2009 and has not yet experienced a crisis. Many analysts believe that the country’s low level of foreign currency debt and its government-controlled banking system make crisis less likely.”
    • “China Debt Default? To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled “China: Solving the debt problem” that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017.”
    • ValueWalk_China Leverage Ratio_9-14-16
  • Hudson Lockett of the Financial Times illustrated the scale of potential shadow finance losses that lurk in China.
    • “Losses from bad debt in China’s shadow financing sector could amount to 3.7% of GDP, according to a new analysis of off-the-books lending and investment.”
    • “The new report from CLSA also estimates shadow financing in China grew to Rmb54tn ($8.1tn) by the end of 2015 – equivalent to 79% of gross domestic product, with 64% of the total originating at or relating to mainland banks.”
    • “The firm also reiterated its May estimate for Chinese banks’ non-performing loan ratio of 15%, or Rmb11.4tn, assuming the same recovery ratio of 40%, which would entail potential losses of 10% of GDP. The total losses when combined with those from bad debt in shadow financing would come to 13.7% of GDP.”
    • FT_China full financing_9-19-16
  • Takashi Nakamichi and Rachel Rosenthal of the Wall Street Journal discussed the Bank of Japan’s recent bond-rate target in its policy revamp.
    • “The Japanese central bank, which has struggled for nearly two decades to bring about steady inflation, said Wednesday it wants to keep the yield on 10-year Japanese government bonds at zero, and will adjust the pace of its bond buying as needed to achieve that.”
    • “The long-term-rate target, the first in the BOJ’s century long history, challenged conventional wisdom that rates in the huge government-bond market are ultimately set by market forces and can’t be fully controlled by an official entity. Central banks are usually assumed to have much more control over short-term rates, and many around the world target rates for debt with a term of less than a year.”
    • “One worry: ‘In theory, they could be forced to buy an unlimited amount of bonds,’ said Marcel Thieliant, Japan economist at research firm Capital Economics in Singapore.”
    • “Mr. Kuroda called the new policy a ‘reinforcement’ of easing. The BOJ also took the unexpected step of saying it would aim for inflation to exceed 2% instead of merely hitting it, a nod to calls from some U.S. economists for a higher target.”
  • Peter Wells of the Financial Times highlighted that the universe of negative-yielding sovereign debt just fell to $10.9tn.
    • “The universe of negative-yielding sovereign debt fell to $10.9tn as of September 12, a drop of $1tn since June 27 largely due to yields on some longer-dated maturities moving back into positive territory, according to a new report from Fitch Ratings.”
    • “Of the countries afflicted by negative yields, Switzerland has 95% of its outstanding debt trading with a yield below zero.”
    • “Fitch also calculates that as a result of low and negative yields, investment income for sovereign investors globally are ‘prospectively earning nearly $500 billion less annually in investment income than they would have earned with yields available in 2011.’ The investment-grade sovereign debt market is $38bn.”
    • FT_Negative-yielding sovereign debt_9-21-16

Special Reports / Opinion Pieces


WSJ – Japan’s Central Bank Splits Over Easing Program – Takashi Nakamichi 9/15


Bloomberg – Money Is Pouring Into Property Deals Banks Won’t Touch – Sarah Mulholland and Heather Perlberg 9/18

Bloomberg_Nonbank RE lending_9-18-16

Economist – Chinese investment: A sponge wrung dry 9/17

Economist_China fixed asset investment_9-17-16

WSJ – China Capital Outflows Bubbles Below the Surface – Anjani Trivedi 9/20


FT – Bond bubble brings with it an odor of rotting fish – Robin Wigglesworth 9/20

FT_Government bond yields_9-20-16

Bloomberg – Not for Sale: The Best Land in America 9/8

Bloomberg_Ability to buy house lots not so good_9-8-16

FT – China local governments revive off-budget fiscal stimulus – Gabriel Wildau 9/20

FT_China off-budget Local gov't debt_9-20-16


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

Who’s next? The science of Chinese corporate defaults. James Kynge. Financial Times. 18 Sep. 2016.

A total of 41 default cases have hit China’s domestic debt markets in the year to mid-September, more than the previous two years combined, according to Wind Information, a Shanghai-based financial data company. Some 70% of defaults by end-July were by state-owned enterprises, according to IHS, a consultancy.”

“The big picture behind China’s local government debt problem is stark. The liabilities of well over 100,000 companies problem is stark. The liabilities of well over 100,000 companies owned by local governments across the country grew at an average annual rate of 14.1% from 2012 to 2015 to reach Rmb35.4tn ($5.3tn), according to Moody’s research.”

FT_China locally owned SOE debts_9-18-16

“These are treated as contingent liabilities – or potential liabilities – because although local governments do not guarantee the debts of their corporate subsidiaries, they nevertheless are responsible for generating local economic growth, employment and public services so they would be loath to let an important contributor to such goals go under.”

“But in recent years, some local governments have built up such hefty debt burdens that even if they would like to bail out an important local employer, they may not be able to. Total direct local government debt, according to Moody’s, was Rmb16tn in 2015. Thus direct and contingent liabilities come to Rmb51tn – more than the GDPs of Japan and Germany combined.”

FT_China locally owned SOE debts balances_9-18-16

As to which companies to let default… “Nicholas Zhu, vice-president at Moody’s, describes a clear hierarchy of debt vulnerability. The most likely to default would be lossmaking, indebted companies owned by lower-tier governments – at the prefectural, city or county level – that have little revenue and large debts. The problem, however, with lower-tier administrations is that they often publish sparse statistics, so it is difficult to know the true state of their financial health.”

Nomura First Major Bank To Predict China Default Calculates Total debt to GDP at 309%; BIS Sounds The Alarm. Mark Melin. ValueWalk. 18 Sep. 2016.

“Nomura, which estimates China’s total debt – government and corporate debt – is Rmb211.8 trillion or 309% of GDP. The vast majority of this debt is corporate, which from a leverage perspective looks better. Non-financial sector accounted for Rmb158.5tn (231% of GDP, up by 92pp from 2007) and the financial sector for Rmb53.3tn (78% of GDP, up by 49pp).”

ValueWalk_China total debt-to-GDP_9-18-16

“The debt is up nearly 141% since 2007, which leads Nomura to conclude “a rising default rate is inevitable.”

ValueWalk_China debt-to-GDP options_9-18-16

“What this all means is that interest rates are likely to head near zero – the place at which such defaults can find their most advantageous environments. And of course, when interest rates fall, so, too, does the currency values. In the end, it is likely to become one big mess that might have global implications.”

ValueWalk_China debt warning signs_9-18-16

US building up to pension crisis. Robin Wigglesworth and Barney Jopson. Financial Times. 20 Sep. 2016.

“The number are severe. According to the National Institute on Retirement Security, nearly 40m working-age households – 45% of the total – had no retirement savings whatsoever in 2013, whether an employer-sponsored 401(k) plan or an individual retirement account (IRA).”

“If you look for the black hole in the pension system, this is it. And these are the most vulnerable people in society.” – David Hunt, chief executive of PGIM, Prudential Financial’s asset management arm.

“Indeed, while younger people are less likely to have some sort of a retirement nest egg than older Americans, the biggest factor is income. Households with a retirement account have a median income of $86,235, while those without one have a median income of $35,509, according to the NIRS.”

FT_US retirement savings by age_9-20-16

“We have a crisis unfolding here. We’re asking people to set aside precious resources they don’t have… For millions and millions of Americans, the only thing they’ll have is Social Security.” – Russ Kamp, a pensions consultant

Social Security “together with the Supplemental Security Income program account for over 90% of the income for the bottom quarter of retirees, according to the NIRS.”

FT_US household retirement savings_9-20-16

“But Social Security’s future is as uncertain as it is politically divisive. When it was set up, retirees would only have to be supported for less than 13 years on average. These days the average American can expect to draw Social Security for almost two decades, and unlike traditional public sector pension plans, it operates on a pay-as-you-go basis.”

“Citi estimated earlier this year that the unfunded liabilities were over $10tn.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Civil Beat – Kirstin Downey: Here’s What Hawaii’s Housing Crisis Looks Like 9/22

Contra Corner – Another Way of Looking at Household Income Shows Virtually No Gain 9/22

FT- Libor as a real alternative with money market rates at 2009 level 9/18

FT – China’s addiction to debt threatens the economy 9/19

FT – Monte dei Paschi shares drop below 20 cents as recapitalization stalls 9/20

InvestmentNews – Top hedge fund (Robert Citrone) forecasts biggest market correction since 2008 9/21

NYT – A Trump Empire Built on Inside Connections and $885 Million in Tax Breaks 9/17

WSJ – The Market Gets Caught in a Squeeze Play 9/18

WSJ – Why Global Rule Makers See Risks in European Banks 9/19

WSJ – The China Box-Office Boom That Wasn’t 9/20

WSJ – Bank of Japan Makes Yield Curve Maneuvers in the Dark 9/21


September 9 – September 15, 2016

It appears there is no “too big to fail” in South Korea. US inflation coming only from a few unproductive sectors. China’s credit hose targeted at housing.



    • “Yields on “junk”-rated euro-denominated debt hit a record low of 3.35% last week.”
    • “Traditional signals of risk aren’t as reliable as they might be in markets that have been so distorted by central-bank policies.”
    • “Take the developments in junk bonds. Ultralow yields and issuance of PIK (payment-in-kind) notes might usually suggest a market that is too bullish for its own good. Demand was so strong for Schaeffler’s (bearings maker) sale that it was able to sell 3.6 billion of debt in euros and dollars, versus an originally planned 2.5 billion; in the process it refinanced debt that carried rates ranging from 5.75% to 6.875% with notes paying from 2.75% to 4.75%. Moreover, it Ardagh’s (packaging group) case, some of the proceeds were used to pay a dividend to shareholders, another sign that borrowers have the upper hand.”
    • “Retail sales in Hong Kong fell by 10% in the first seven months of the year, compared with the same period in 2015, with purchases of jewelry and watches declining by 22%.”
    • “‘Our customer flow has dropped 60-70%’ since the peak of Chinese luxury spending in 2013, says manager (Kingdom Jewelry) Jacky Sze. ‘I don’t have much hope for the rest of this year, or next.'”
    • First there was the failed coup d’etat on President Recep Tayyip Erdogan, now there is the purge of detractors and then sum…
    • For those not familiar, the coup is being blamed on the Gulen community, aka the cemaat, an Islamist sect that promotes an interchange/dialogue with science.  The imam that founded the movement is Fethullah Gulen who now lives in Pennsylvania.
    • Over 100,000 Gulen sympathizers have been rounded up so far.
    • “According to one minister, the state has seized more than $4 billion-worth of Gulenist assets.”
    • And following on the maxim to ‘never waste a good crisis.’ President Erdogan is also targeting Kurdish minorities.
    • However, for a little bit of context, the “secular Turks (of which President Erdogan is one) have no love for the Gulenist, who targeted them in their own purges in the 2000s.”
  • Also in the Economist was a piece on how shipping profits are going overboard.
    • “Of the biggest 12 shipping companies that have published results for the past quarter, 11 have announced huge losses. Several weaker outfits are teetering on the edge of bankruptcy.”
    • “The industry could lose as much as $10 billion this year on revenues of $170 billion, reckons Drewry, a consultancy.”
    • Essentially, two primary forces are at play 1) world trade is down/slowing and many multinationals are creating manufacturing operations near their customers, and 2) there is overcapacity in the industry from the recent commodity boom.
    • As a result, “sending a container from Shanghai to Europe now costs half of what it did in 2014.”

Special Reports / Opinion Pieces

  • FT – The twisted logic of negative interest rates – John Kay 9/9
    • “All told, the primary effect of monetary policy since 2008 has been to transfer wealth to those who already hold long-term assets – both real and financial – from those who now never will. This week’s debt sale reinforces this. Henkel and Sanofi are not borrowing at negative interest rates to invest in new productive facilities. Both companies have large cash piles, and the cash generated from their operations far exceeds their investment needs.”
  • FT – Mongolia: Living from loan to loan – Lucy Hornby 9/12
    • “Mongolia was a darling among emerging markets during the commodities boom. Foreign miners flocked to exploit the mineral wealth under its grasslands and deserts, pushing up growth in gross domestic product by 17% in 2011. But after a debt-fueled spending spree at the peak of the cycle, the landlocked country is now one of the worst hit by the downturn.”
    • “Mongolia’s efforts to extricate itself highlight the dangers of the ‘resource curse’ – the notion that countries blessed with tremendous natural resources find themselves at the mercy of wealth-destroying boom-bust cycles.”


FT – Air pollution deaths cost global economy $5tn annually – Shawn Donnan 9/8

FT_Welfare losses from air pollution_9-8-16

Bloomberg – San Francisco Housing Frenzy Shifts Across the Bay to Oakland – Alison Vekshin 8/22

Bloomberg_Oakland in demand_8-22-16

WSJ – Paradise Lost: Why the Good Times Are Over for Global Bonds – Richard Barley 9/14


FT – Vantage to break famine for energy IPOs – Eric Platt and Ed Crooks 9/14

FT_Surge of equity sales by US oil and gas cos_9-14-16


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

Seoul signals tougher stance with Hanjin demise. Song Jung-a. Financial Times. 11 Sep. 2016.

“Hanjin’s move to seek bankruptcy protection last month was the first time a big container shipping line had done so for 30 years, and it caught out many in the industry. As recently as a couple of months ago, shipping executives considered the failure of Hanjin Shipping – the world’s seventh-largest container line and South Korea’s largest – unthinkable.”

“Hanjin Shipping and its rival Hyundai Merchant Marine handled the bulk of South Korea’s exports, which account for more than half of the country’s $1.4tn economy.”

“Until now, Seoul has spent decades keeping lossmaking companies afloat with cheap state loans. In the case of its embattled shipbuilders, it has injected billions of dollars, despite next to no progress in turning them around.”

“How Seoul ultimately handles Hanjin Shipping’s collapse will set the tone for future restructuring of Korea Inc.”

“Many of the country’s smokestack industries – including steel, chemicals and construction – are similarly suffering from overcapacity.”

“The government has set up the principle that it will no longer support ailing companies with taxpayers’ money just because they are too big.” – Yoo Il-ho, South Korea’s finance minister

Alphaville – Least productive sectors only thing keeping inflation going. Matthew C. Klein. Financial Times. 12 Sep. 2016.

Since 1990 “…the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88% of the total rise in the price level boils down to four sectors of the US economy.”

1) Healthcare services, 2) Housing, 3) Education, and 4) Prescription drugs

FT_Where all the inflation came from_9-12-16

“In January 1990, those four product categories only accounted for 30% of the money spent on consumption by the average American.”

And within education the main culprit has been the textbook.  Akin to prescription drugs, supply in both industries is tightly controlled by regulation.

“By contrast, thanks to astounding technological innovation, television prices have plunged at an average rate of 12% each year since 1990 and computer prices have fallen more than 18% per year.”

“In general, the prices of durable goods are about a third lower now than in 1990, while the prices of nondurable goods excluding commodity products (food, drinks, and fuel, which tend to rise at the same rate as the broader price level over time) and excluding prescription drugs, have also fallen, albeit not by as much. Inflation outside of healthcare and education has generally been modest, with the notable exception of a few small professional services such as tax preparation, lawyers, and funeral homes.”

China’s Credit Fire Hose Floods Housing Market. Anjani Trivedi. Wall Street Journal. 15 Sep. 2016.

“More than 70% of new loans in August were to households, much of that in the form of mortgages, going by historical averages, a remarkable shifting of the fire hose of credit. It also helps explain why China’s property market has raced higher despite broader economic worries.”

“China’s stock of mortgages stood at 16.9 trillion yuan ($2.5 trillion) as of June 30. Almost a quarter of that was built up in just the past year, according to ANZ. Mortgage loans outstanding now account for 18% of total loans, the highest since at least 2008.”


“Local regulators are imposing clampdowns on mortgage lending and property speculation in the hottest cities such as Shanghai and Shenzhen. They are right to do so, as this leg of China’s multi-decade property bubble is clearly being fueled by leverage in a way that it wasn’t in the past.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – How Big Sugar Enlisted Harvard Scientist to Influence How We Eat – in 1965 9/12

Bloomberg – What’s Wrong With America’s Dream of City Living 9/14

Economist – Why does Thailand keep changing its constitution? 9/12

FT – When will the ECB run out of bonds to buy? 9/8

FT – China infrastructure investment model under fire 9/10

FT – Twitter and tech: hardly working 9/11

FT – What investors should know about R star 9/11

FT – Oil market braces for Kashagan field’s October debut 9/12

FT – The Swiss and negative rates: how is the experiment going? 9/12

FT – Philippines pivots away from the US 9/13

FT – Japan opens door to temporary foreign workers 9/13

FT – Manias make markets dance to a different tune 9/13

FT – Mythbusting Uber’s valuation 9/13

FT – China retail: shops will drop 9/14

Trepp – Non-Traded REITs on slowest capital-raising pace in 12 years 9/9

WSJ – Bank of Japan Has Enlarged Target in Corporate Bonds 9/12

Yahoo Finance – The internet is creating a demographic ‘seismic shift’ that is too big to ignore 9/12

Yahoo Finance – Billionaire Paul Singer warns of the ‘biggest bubble in the world’ 9/13


September 2 – September 8, 2016

Whoa, that’s a lot of corporate debt… So, who is going to pay for China’s corporate debt balance? High Yield Bond Market decoupling from reality.



    • “The ‘Japanization’ of the global economy marked by transition to low growth and low inflation has started to attract investor attention as a phenomenon in recent years. There has been scarcely any nominal GDP growth over the past 20 years in the Japanese economy.” – Daiju Aoki, analyst at UBS Japan
    • “Demographics are triggering the lack of GDP growth. As a society ages, its population becomes more dependent on government services and less productive in terms of generating goods and services.”
    • Japan’s peak worker to dependent ratio was in 1990.
    • ValueWalk_UBS working-age population ratio_9-2-16
    • “Mr. Kuroda, governor of the BoJ since 2013, claimed the central bank’s policies ‘have contributed significantly to the positive turnaround in Japan’s economy’ and said there was no chance of reducing the level of monetary accommodation.”
    • “‘It is often argued that there is a limit to monetary easing but I do not share such a view,’ Mr. Kuroda told an audience in Tokyo. He said there was ample room for the BoJ to buy more government bonds, to cut interest rates further, or to buy other assets such as corporate bonds, equity and real estate funds.”
    • “Yet despite the high level of monetary stimulus, the latest date show a 0.4% fall in the consumer price index compared with a year ago, and a slowdown in inflation even excluding volatile food and energy prices.”
    • FT_Japan core inflation rate_9-4-16
    • “Mr. Kuroda argued that the failure to hit 2% inflation so far is because of three shocks: falling oil prices since summer 2014, weakness in demand after raising Japan’s consumption tax in April 2014, and a slowdown in emerging markets from summer 2015.”
    • “Given that, said Mr. Kuroda, ‘it is imperative for the Bank firmly to maintain its commitment to achieving the price stability target of 2% at the earliest possible time.”
    • “Please don’t buy so many bonds, Mr. Central Banker. It is rapidly becoming a case of ‘too much of a good thing’.” – Hans Lorenzen, credit strategist at Citi Research
    • FT_Citi - Central bank balance sheets_9-5-16
    • Private investors are being crowed out…
    • FT_Citi - Private investors being crowded out_9-5-16
    • And markets are being driven by macroeconomic policies more and more…
    • FT_Citi - Macro driven markets_9-5-16
  • Brian Blackstone and Tom Fairless of the Wall Street Journal posed the question: Could the European Central Bank start buying stocks?
    • As the European Central Bank (ECB) is running up against its self-imposed limits on how much of a country’s debt it can hold and since there simply aren’t enough bonds they can buy that qualify under their guidelines, the ECB is contemplating buying European equities.
    • “Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.”
    • The Bank of Japan holds ¥10.182 trillion (approx. $98 billion) of “individual stocks and exchange-traded funds as of Aug. 20, in terms of book value.”
    • Though “economists have been split over the costs and benefits. Some say that Japan’s capital market can no longer accurately price the value of stocks; too much BOJ money has flown into some specific companies. Others say it has helped prop up share prices, thus producing ‘wealth effects’ to help the economy fight deflation.”
    • Interesting times.
    • “Since Hanjin Shipping Co. of South Korea filed for bankruptcy protection there last week, dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world because of uncertainty about who would pay docking fees, container-storage and unloading bills. Some of those ships have been seized by the company’s creditors.”
    • According to Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen, “43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.”
    • WSJ_Hanjin shipping containers_9-7-16
    • All told about $14 billion worth of cargo is stranded at sea with the crews running short on rations…

Special Reports / Opinion Pieces


Fidelity – Five scenarios for stocks – Jurrien Timmer 8/25

Fidelity_Five scenarios for stocks_8-25-16

FT – Emerging markets on track to set sovereign debt record – Elaine Moore 9/4

FT_Emerging market sovereign bond issuance_9-4-16

FT – Brazil hopes gambling will reverse its fortunes – Samantha Pearson 9/5

FT_Gambling losses per resident_9-5-16

WSJ – Now Companies Are Getting Paid to Borrow – Christopher Whittall 9/6

WSJ_European investment grade corporate debt_9-6-16

FT – Why emerging market bonds are not the answer for the yield-starved – Jonathan Wheatley 9/6

FT_Emerging market sovereign debt yields_9-6-16

FT_Amount of tradable external debt_9-6-16

FT – Inflation-linked gilt returns have gone through the roof – Joel Lewin 9/6

FT_Inflation-linked gilt returns_9-6-16

FT – Three things that could derail the eurozone’s recovery – Mehreen Khan 9/7

FT_Probability of US recession_9-7-16


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

China: the former EM darling. James Kynge. Financial Times. 1 Sep. 2016.

“For most of the last 15 years, China was a darling for emerging market investors as its demand for commodities lifted the economic fortunes of countries in Latin America, Africa and Asia. But now, as China struggles with the hangover from its debt-fueled boom, fund managers are increasingly shunning Asia’s giant.”

“The main deterrent is China’s corporate debt. Although this issue has been well-flagged in recent years, disquiet over its size and sustainability is deepening. A recent report by S&P Global Ratings, the rating agency, estimates that China’s total outstanding corporate debt in 2015 was $17.8tn, or 171% of GDP, making China’s corporate debt mountain by far the world’s largest in both absolute and relative terms.”

“Not only is the ratio of Chinese company debt to GDP more than double that in the US and eurozone, it is projected to grow far more quickly as an increasing number of heavily-indebted corporations ramp up their borrowing simply to repay debts that are coming due. By 2020, China’s outstanding corporate debt will be $32.6tn, while its share of global company borrowings will have risen to 43% from 35% last year, according to S&P estimates.”

FT_Chinese companies carry the riskiest debt load_9-1-16

“The S&P report estimates that $13.4tn, or nearly half, of total credit demand in China by 2020 will be for refinancing purposes.”

FT_Chinese company debt_9-1-16

While there are many differences of opinion as to how this shakes out, with either a major meltdown or some internal growing pains (and everything in between), we shall see.  Either way, keep an eye on this one.

Does It Matter If China Cleans Up Its Banks? Michael Pettis. Mauldin Economics. 31 Aug. 2016.

This article really follows the one above and I highly recommend reading the whole thing.

Let me try and paraphrase: imagine you’re a new company and you want to take on debt to help you grow the business. Okay, sounds good and it works.  The additional debt allows you to buy assets that help you to become more productive and hence grow sales/profits faster than the amount of debt and its associated servicing costs.  Boom, you’re a hero and making lots of money.

So you do this some more and some more and some more. Eventually, your rate of productivity slows for every piece of debt you take on.  Oh and did I mention that because you’ve been rolling over the debt to really juice growth, now your debt balance is quite a bit bigger than your total sales.

Fortunately, your cost of debt is low and you can keep on operating, but your lender is no longer willing to extend you credit, so you start talking to your suppliers to provide you with “credit-like” loans – meaning, hey why don’t you front me some money to buy more products from you and I’ll pay you back once I sell the goods to my customers.

Okay, this keeps on working, but eventually you’re running out of good options so you start looking for your highest possible rate of return projects regardless of the risk… ‘Come on lucky number 7.’

Oh and as to the debt, well, you’ve accumulated so much of it that it has become the lender’s problem and it’s such a big problem that it’s also their depositors’ problem (your mom and pop savers).

So what do you do and who is going to take the ‘haircut’…

The High Yield Bond Market Has Never Been This Decoupled From Reality. Tyler Durden (alias). Zero Hedge. 3 Sep. 2016.

From JPMorgan’s Peter Acciavatti: “Recovery rates in 2016 are extremely low… for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%… As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%.”

Zero Hedge_JPM - High-yield bond recovery rate_9-3-16

From Edward Altman of NYU’s Stern School of Business: “Our approach to recovery rates is not centered on sectors. What we’ve looked at carefully over 25 years is the correlation between default rates and recovery rates. As you would expect, when the former rise to high or above-average levels, you always observe the latter dropping to below-average levels. This strong inverse relationship is as much a function of supply and demand as it is of company fundamentals. So if we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default.”

Zero Hedge_High Yield Recovery Rate and Pricing_9-3-16

“In the 30-year life of the so-called junk bond market, the chasm between reality and central-planner-created markets has never been wider.”

Bottom line, despite being able to collect less and less on defaulting debt (meaning you would ordinarily be less eager to buy more high yield debt or at least want greater compensation for the risk), pricing for high yield debt continues to rise…

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Another Sign Manhattan Real Estate Is Feeling the Pain 8/31

Bloomberg – Saudi Arabia Said to Weigh Canceling $20 Billion of Projects 9/6

CoStar – Blackstone’s New Non-Traded REIT Begins Selling Shares 9/7

Economist – That 2008 comparison (again) 9/6

FT – Pension solution lies in long-term thinking 8/30

FT – HK property developer hangs hopes on art market 9/3

FT – Shanghai divorces highlight China’s property conundrum 9/4

FT – Why negative interest rates sometimes succeed 9/5

FT – Bank of Japan: great expectations 9/5

FT – Analysts laud ‘remarkable’ pick-up in emerging markets 9/5

FT – China banks shed staff and slash pay in cost-cutting drive 9/6

FT – Rocket’s writedown raises red flags 9/6

InvestmentNews – Ex-CFO at REIT formerly controlled by Nicholas Schorsch indicted 9/8

NYT – Sonia Sotomayor and Elena Kagan Muse Over a Cookie-Cutter Supreme Court 9/5

NYT – Subprime Lender, Busy at State Level, Avoids Federal Scrutiny 9/6

WSJ – Bank of Japan’s New Unease With Negative Rates 9/5

WSJ – The Problem With Dividend Stocks 9/5

WSJ – Why Chinese Bank Stocks Can’t Fly Too High 9/6

WSJ – How China Insurance Crackdown Could Rain on Deal-Making Parade 9/7

WSJ – Europe’s Bond Market: Even Further Through the Looking Glass 9/7

WSJ – Goldman Sachs Has Started Giving Away Its Most Valuable Software 9/7


August 26 – September 1, 2016

A novel way of paying off debt – issue more of it, the savings are already accruing. It’s official, Nigeria is in a recession.



    • “Stock valuations rise and fall, but when an important factor driving market performance is mathematically unsustainable, it is worth a closer look.” Specifically corporate dividends.
    • “Aswath Damodaran, a professor at New York University’s Stern School of Business, sees this as the market’s biggest risk. Mr. Damodaran, who is considered an authority on valuation, says S&P 500 companies through the first two quarters of the year collectively returned 112% of their earnings through buybacks and dividends. That is the highest since 2008 and well above the 82% average over the past 15 years, he said in a blog post last week.”
    • “Mr. Damodaran, who likes to be provocative, says with rates this low, traditional valuation metrics are distorted. Instead, the inability of companies to keep paying off their investors will cause the next downturn. ‘This is the weakest link in this market,’ Mr. Damodaran said in an interview. ‘We know cash flows will go down. What we don’t know is what the market is pricing in.'”
    • WSJ_S&P 500 corporate dividends_8-28-16
    • “The rise of third-party mobile payments in China at the expense of credit and debit cards is threatening commercial banks’ access to the customer data viewed as crucial to newly emerging financial and consumer business models.”
    • Further UnionPay, the state-owned settlement network, and other rank and file banks are missing out on the merchant fees that these third-party platforms are redirecting.
    • “The move by more Chinese consumers to switch from swiping plastic cards to scanning QR codes with mobile wallet apps knocked $20bn from banks’ fee income in 2015, according to Kapronasia, a Shanghai-based fintech consultancy.”
    • While the fees hurt, the key is that third-party payment providers are “depriving lenders of valuable data on consumption patterns.”
    • FT_China payments moving online_8-28-16
    • China’s big-state lenders are making a shift in their lending portfolios from commercial loans to property.  “China Construction Bank (CCB) this week reported residential mortgage lending rose almost 30% in the first half of this year compared with the same period last year. Meanwhile corporate lending fell 2%. At Bank of China, mortgages rose by more than a quarter.”
    • “On the face of it, banks are moving away from risky lending. That helps their capital cushions because for every loan extended to a company, banks assign a 100% risk-weight. For residential mortgages, banks only have to set aside half that.”
    • Of course, it helps that residential prices are rising; however, “lending into the property market would make more sense if the mortgage loans weren’t going bad so fast. At CCB, while mortgage nonperforming loans accounted for only 6% of total NPLs, they rose 67% on the year compared with 26% for all loans. And that’s with prices rising nationally, and rising sharply in the biggest cities.”
  • Leo Lewis and Lucy Colback of the Financial Times covered an interesting development in how the Bank of Japan is distorting the Japanese stock indices through their massive fund flows.
    • “From July 29, when the Bank of Japan said it would nearly double its annual purchases of exchange traded funds from ¥3.3tn ($32bn) to ¥6tn, brokers in Tokyo have been selling stocks with a simple, unsettling message.”
    • “In an equity market where the central bank is the biggest whale, and where the government in various forms has become the biggest shareholder in a quarter of First Section Tokyo stocks, it’s time to buy the fund flows, not the fundamentals.”
    • FT_Stocks with highest indirect ownership by BoJ_8-30-16
    • “Goldman Sachs estimates that the doubling in BoJ buying coupled with the skew towards Nikkei weighting means that the central bank will own at least one-tenth of the equity in 32 companies by this time next year, up from five currently.”
    • “The BoJ, according to its current schedule, must buy an average of ¥70bn worth of ETFs every three trading days throughout the year.”
    • Helicopter money…

Special Reports / Opinion Pieces


FT – Puerto Rico: An island’s exodus –  Eric Platt 8/25

FT_Puerto Rico's exodus_8-25-16

Visual Capitalist – Which Countries Are Damaged Most by Low Oil Prices? – Jeff Desjardins 8/26

Visual Capitalist_Which countries hurt the most by low oil prices_8-26-16

WSJ – Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants 8/29

WSJ_Food price deflation_8-29-16

WSJ – China’s Private Investment Crash May Be Mirage, but Pain Is Still Real 8/28

WSJ_China fixed-asset investment_8-28-16

Visual Capitalist – Do Newly Built Skyscrapers Signal The Top of the Stock Market? – Jeff Desjardins 8/29

Visual Capitalist_Skyscraper curse_8-29-16


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

Falling bond yields save taxpayers $500bn. Eric Platt. Financial Times. 31 Aug. 2016.

“The collapse in sovereign bond yields has saved taxpayers more than $500bn in annual interest expenses, allowing countries to rein in budget deficits and continue government-backed programs that would have otherwise been shelved, according to a new report.”

As of the end of last week there was $13.2tn of debt with negative yields.

“Japan, France, Germany and Switzerland are now paid to issue short-dated sovereign bonds.”

“Benefits have effectively been transferred from global investors to sovereign issuers, as sovereign borrowing costs have dropped. Should rates remain low for an extended period, it would likely erode earnings power for many large investment institutions and pension funds.” – Robert Grossman, analyst with Fitch, a rating agency

The median 10-year government bond now yields 1.17%, down from 3.87% five years ago. Japan has saved more than $95bn a year as a result of the decline in rates, while the US, UK and Germany collectively pay $104bn less annually, the study estimates.”

“Central banks have cut interest rates more than 670 times since Lehman Brothers filed for bankruptcy in 2008, or roughly one reduction every three trading days of the year, according to JPMorgan.”

FT_Central bank stimulus weighs on sovereign bond yields_8-31-16

Nigeria falls into recession as economy shrinks in second quarter. Maggie Fick. Financial Times. 31 Aug. 2016.

Nigeria has slipped into recession for the first time in more than two decades as growth in Africa’s top oil producer shrank for the second consecutive quarter.”

“The economy contracted 2.1% in the three months to the end of June, worse than analysts expected, while inflation hit a 11-year high of 17.1%, underlining the depth of the west African nation’s crisis.”

“Nigeria, which depends on petrodollars for 70% of state revenues and 90% of export earnings, has been battered by the slump in oil prices. The economy shrank 0.4% in the first three months of the year and the International Monetary Fund is forecasting that growth in 2016 will contract 1.8%.”

“The central bank increased the main interest rate by 200 basis points last month in an attempt to combat inflation, but it rose for the ninth consecutive month in July.”

“The continent’s most populous nation was one of the world’s fastest growing economies during the oil boom, but Mr. Buhari (President Muhammadu Buhari) said this month that Nigeria ‘suddenly appears to be a poor country.'”

FT_Nigeria GDP growth_8-31-16

It’s currency is having difficulties as well, “in the official market, the naira is trading below N300 to the dollar, having lost more than 40% of its value since its peg was lifted in June (to ease the country’s quickly depleting reserves of hard currency), but on the black market the currency is far weaker – it has been trading at below N400 to the dollar this week.”

FT_Nigerian Naira currency to the USD_8-31-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – J.C. Penny Aims to Be King of the Mall as Rivals Retreat 8/25

CoStar – Disparity in Mall Values Driven by Powerful Combination of Forces 8/31

Economist – Grim employment prospects for young people around the world 8/26

FT – How the super-rich are making their homes ‘invisible’ 8/24

FT – Chinese banks braced over industrial restructuring 8/28

FT – Mexico spends $1bn to lock in oil export prices for 2017 8/29

FT – Apple’s EU tax dispute explained 8/29

FT – DBS sells $750m in cocos at record-low yield 8/30

FT – Chinese future looms for Hong Kong’s real estate sector 8/30

FT – China turns away from the market 8/31

Inhabitat – The world’s tallest timber building was just topped off ahead of schedule 8/26

National Real Estate Investor – 2016 Could Signal a Cyclical Peak in Commercial Construction 8/25

NYT – Today’s Inequality Could Easily Become Tomorrow’s Catastrophe 8/26

NYT – Crackdown on For-Profit Colleges May Free Students and Trap Taxpayers 8/28

Zero Hedge – “I’ve Never Seen Anything Like This Before” – The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing 8/28

WSJ – Which State Is a Big Renewable Energy Pioneer? Texas 8/29

WSJ – Housing Market: Why Millennials Are Getting Priced Out 8/29

WSJ – What Happens When a Central Bank Buys Property Stocks 8/30

WSJ – Shopping Malls’ New Product: Fun 8/30

WSJ – Chinese Cash Pours Into U.S. Real Estate 8/30

WSJ – Emerging Markets: Catch the Yield Where You Can 8/31

WSJ – Birth of the Index Mutual Fund: ‘Bogle’s Folly’ Turns 40 8/31


August 19 – August 25, 2016

It’s getting hot out there. When picking your emerging market investments, be mindful of its exposure.



    • The nontraded REIT industry is having a hard look at itself.  Inland is eliminating its transaction fees and new entrant to the sector – but definitely not to institutional real estate investment – Blackstone Group has not committed to a specific yield – the primary attribute for selling these investments.
    • The thing is “Cap rates, a key valuation measure for real estate, have decreased dramatically since the credit crisis, while valuations of quality properties have increased. That means commercial real estate is simply too pricey to generate the promised returns (generally 6-7%) brokers need to pitch nontraded REITs to clients.”
    • “The math of these programs is much more challenging today. Cap rates are lower and I think the dividend yields have to come down. The publicly traded REIT market is paying a 3.5% dividend yield, on average.” – Allan Swaringen, president and CEO of JLL Income Property Trust
    • And with a lower fee structure I might add…
    • One thing to be mindful of in investing in nontraded REITs are their dividend coverage ratios.  “That ratio, a REIT’s cash flow versus its dividend, or distribution, is one of the most important metrics for investing in nontraded REITs, which often resort to returning investor cash to pay for or cover the 6% or 7% dividend. Any return of investor money diminishes the REIT’s ability to perform in the long term.”
    • Bottom line, “nontraded REIT sponsors and advisers who sell them can say au revoir to the product’s most important marketing component: the promise of generating annual returns of 6% or 7% to yield-starved investors.”
    • “Trends that slammed profit in the first quarter – a stronger yen, negative interest rates and slumping China growth – haven’t reversed. At stake is a second straight year of earnings decline that could buy Prime Minister Shinzo Abe’s push for companies to boost capital spending and raise wages to spur economic growth.”
    • “With negative interest rates grinding away bank profits and a stronger yen bearing down on carmakers, aggregate operating income plummeted 17% in the June quarter, the biggest quarterly decline since 2011. That’s the year an earthquake in Fukushima and subsequent tsunami caused the yen to gain and stocks to drop.”
    • Bloomberg_Japan Inc profit slump_8-21-16
    • Airbnb has changed the short-term rental business in a big way. The company “now operates in 34,000 cities around the world and was recently valued by investors at $25.5 billion.”
    • On top of that, Airbnb has created an ecosystem of other companies that help landlords rent, maintain, and operate their units…
    • Well one of the recent companies created, Host Compliance, is the ‘tit for tat.’  Rather than assist people to attain the most out of their Airbnb listings, the company actually is set up to help cities and municipalities in the policing of their short-term rental regulations by sifting through the vast amount of listings data and providing reports on violations.
    • No surprise, most governments are overwhelmed and not truly set up to properly track abuses to their rules, hence they’re always playing catch up to tech innovators.  I suppose it won’t be long that other tech innovators will pop up to “check-in” on other tech disrupters…
  • Eliot Brown of the Wall Street Journal focused his spot light on the real estate market of San Francisco and the effects of the surging tech market.
    • As the tech industry continues to boom, its companies continue to crowd out other businesses from San Francisco’s office market, ultimately reducing the city’s “economic diversity, giving it an enormous concentration in an industry that is particularly prone to economic swings.”
    • “Tech companies now occupy more than 29% of the city’s occupied office space, according to real-estate-services firm CBRE Group Inc. That is roughly double what the industry occupied in 2010 as well as the height of the dot-com bubble in 2001, CBRE said.”
    • “What’s more, the bulk of those occupying that office space are startups or those that recently went public, typically unprofitable companies that are considered some of the most volatile.”
    • “Looming in the minds of many in San Francisco is the city’s experience after the dot-com bust of 2001. Even though the tech sector was centered more in Silicon Valley to the south, the local economy was pummeled. Office vacancies soared above 20% from less than 4%, according to Cushman & Wakefield.”
  • Gabriel Wildau of the Financial Times reports that it was only a matter of time that Chinese regulators would tighten the noose on the P2P market.
    • China has just formalized new regulations for the Peer-to-Peer (P2P) market in the country. “Regulators and courts have previously issued many of the prohibitions contained in the latest rules in different forms, but the latest regulations mark the first comprehensive framework for regulating P2P lenders in China.”
    • “The rules, issued on Wednesday, forbid online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. They ban P2P platforms from securitizing assets or offering debt transfer mechanisms that mimic securitization. Companies are prohibited from using P2P platforms to finance their own projects.”
    • “Their fundamental nature is information intermediation, not credit intermediation.” – banking regulator
    • “Outstanding loans from 2,349 P2P platforms totaled Rmb621bn by the end of June, the banking regulator said in a statement on Wednesday. But an additional 1,778 ‘problem platforms’ have also been established, equal to 43% of all platforms.”
    • “The latest rules also prohibit P2P groups from operating ‘fund pools’ in which investor funds are not matched with specific loan assets. The banking regulator noted that ‘Ponzi schemes’ – in which inflows from new investors are used to finance payouts on maturing obligations – have been a problem for the industry.”

Special Reports


CBO – Trends in Family Wealth, 1989 to 2013 8/18

CBO_Trends in Family Wealth_8-18-16

FT – Pensions: Low yields, high stress – John Authers and Robin Wigglesworth 8/22

FT_Pension liabilities growing faster than assets_8-22-16

FT – US charitable foundations hit by plunging returns 8/23

FT_US charitable foundations investment returns struggle_8-23-16


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

Think It’s Hot Now? Just Wait. Heidi Cullen. New York Times. 20 Aug. 2016.

“July wasn’t just hot – it was the hottest month ever recorded, according to NASA. And this year is likely to be the hottest year on record.”

“Fourteen of the 15 hottest years have occurred since 2000…”

NYT_Heat Map of US - 1991-2010_8-20-16

NYT_Heat Map of US - 2060_8-20-16

NYT_Heat Map of US - 2100_8-20-16

NYT_Number of Days over 95 degrees_8-20-16

Silver lining…good for solar.

As China nears exhaustion investors must look elsewhere. James Kynge. Financial Times. 24 Aug. 2016.

As yield is vanishing from developed world economies – there is $13tn in negative-yielding debt outstanding at the moment – emerging market economies have seen a lot of interest of late… however, try to see it in context.

“The drive behind this intense demand for EM has nothing to do with EM. The one thing that emerging markets have that everyone wants right now is not raw materials or cheap labor, it’s yield. When you have negative interest rates in Europe and Japan, and zero rates everywhere else, the politics and economics of these countries becomes irrelevant.” – Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch

“Thus, emerging markets are flattered by a perception they are the least bad option for investors.”

However, investors need to be wary of the exposure that many EMs have to China.

China is having ever greater difficulty in producing economic growth – at least of the levels of the past few decades (which is to be expected).  “Before the global financial crisis in 2008, China needed just over one dollar of credit to deliver one dollar of gross domestic product growth, the ratio is now six to one, according to Morgan Stanley.”

“Although the economy is said to be growing at 6.7%, investment growth by private companies slowed to 2% in July, demonstrating that the most potent force in the Chinese economy sees scant hope of a return.”

“Scarcity of opportunity amid an abundance of growth defines China’s enervated state. So generous have banks, capital markets and shadow financial institutions been to virtually anyone who wishes to borrow that almost every industry is in a state of oversupply, slashing profits.”

“Standard & Poor’s, the credit rating agency, is the latest to raise the alarm. The anemic profits of Chinese companies is likely to intensify their need to borrow more merely to repay maturing debts, helping to drive global corporate debt levels to worrying levels by 2020.”

“Corporate debt is set to expand by half to $75tn over the next five years, according to S&P. China’s share of this debt is likely to rise to 43% in 2020 from 35% in 2015, the rating agency said, largely through companies borrowing to repay debts that are coming due.”

Bottom line, don’t throw out your fundamental analysis models just yet…

Other Interesting Articles

The Economist

Bloomberg – Why It’s So Hard to Build Affordable Housing: It’s Not Affordable 7/26

FT – We must protect shareholders from executive wrongdoing 8/18

FT – Retailers reveal why US earnings season was fundamentally weak 8/18

FT – Paul Singer says bond market is ‘broken’ 8/18

FT – Venezuela’s problems can no longer be ignored 8/18

FT – Is greed good? No, it’s seriously bad for your wealth 8/19

FT – Hackers expose holes in road for smarter cars 8/19

FT – Oil company dividends: flare-up ahead 8/21

FT – #fintech Sidelining the mobsters in China 8/22

FT – Forget Fed rate calls – be ready for the return of inflation 8/22

FT – China close to launching credit default swap market 8/22

FT – Mongolia tightens belt as debt payments loom 8/24

FT – The canary in the coal mine for China’s currency 8/24

IPE – Redemption requests begin to build among core US property funds 8/24

National Real Estate Investor – Drop in 10-year Treasury Gives Real Estate Pricing a Lift 8/24

NYT – Chilling Tale in Duterte’s Drug War: Father and Son Killed in Police Custody 8/19

NYT – More of Kremlin’s Opponents Are Ending Up Dead 8/20

NYT – The Housing Market Is Finally Starting to Look Healthy 8/23

WSJ – Chinese Bank Shows How To Move Risks Around 8/19

WSJ – One Policy to Rule Them All: Why Central Bank Divergence Is So Slow 8/22

WSJ – China’s Online Lenders Face Peer-to-Peer Pressure 8/25

WSJ – What to Learn From the ECB’s Great European Corporate Bond Squeeze 8/25


August 12 – August 18, 2016

Coming to a bank near you – fees on big deposits



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

Special Reports


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

FT_Negative rates in Europe_8-16-16

FT_How to store the cash_8-16-16

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

Economist_US purchasing power by state_8-13-16

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

Bloomberg_Norway SWF flows_8-17-16

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

Economist_World's most liveable cities_8-18-16


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

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

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

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

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

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

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

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

Other Interesting Articles

The Economist

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

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

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

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

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

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

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

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

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

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

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

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

FT – South Korea in show of power as tensions rise with North 8/18

GlobeSt.com – SL Green Sells Stake In Midtown South Office Tower 8/11

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

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

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

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