January 22 – January 28, 2016

Challenges of being born a millennial. Continued struggles for Energy & Mining companies. Zika virus.

While these postings cover articles from Friday – Thursday, I would be remiss not to mention the Bank of Japan’s move to lower the interest rate on excess reserves from 0.1% to minus 0.1% today.  Inflation has yet to gain traction in Japan (note that Q4 2015 GDP growth in the U.S. came in at a lower than expected 0.7% today as well), and so the policy makers are stepping up efforts.  While the negative interest rates in Japan only apply to a portion of deposits, the key in this is that as Aaron Back of The Wall Street Journal points out in “Japan’s Negative-Rate Plunge More Like a Toe in the Water” is that this policy directive is modeled on the Swiss and it is likely that there is more to come.  The world is at a challenging crossroads, desperately seeking economic growth central banks are trying to do their part resulting in monetary stimulus measures just trying to get something going.  Note that US interest rates continue to drop (the 30-year fixed rate mortgage rate as reported by Freddie Mac came in at 3.79% yesterday down from over the 4% reached after policy rates were first raised) as investors expect US policy rates to stay unchanged or even to revert back to zero.  Good for asset owners, but all this uncertainty continues to prove challenging for employees.

This week there was a special feature in The Economist and the Financial Times did a good article on the challenges the current economic environment has had on millennials.  The brief from The Economist can be found in the Other Interesting Articles section below and I’ll go into Sarah O’Connor’s “Tragedy of the millennials is they are not entitled enough” in the Financial Times.  The other article I am going to cover is Christopher Adams, James Wilson, and Mark Vandevelde’s “Moody’s puts 175 energy and mining companies on downgrade watch” in the Financial Times that highlights the continued symptoms of the energy crunch.  Lastly, for those that haven’t been following the progress of the Zika virus, here are two good articles from The New York Times and The Washington Post to help you understand what’s going on and how quickly it’s spreading.  As a parent, this scares me… especially considering the “first case of the mosquito-borne virus in a birth on U.S. soil” was here in Honolulu.

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

Tragedy of the millennials is they are not entitled enough. Sarah O’Connor. Financial Times. 26 Jan. 2016.

Full disclosure, I like Sarah O’Connor am a millennial (granted, at the very front end of the generation).  Further, I always find it interesting when I hear or read ‘experts’ making statements that certain trends have changed forever because millennials have different tastes than their predecessors – millennials don’t want single family homes, they want to live in the city… millennials prefer flex work spaces rather than private offices… etc..   The thing is we’re not that different from those that have come before us.  Yes technology has enabled certain behaviors that our parents couldn’t tap into as easily, but bottom line, the reason certain buying and work habits haven’t taken hold yet is that the majority of millennials are 25 and for most of our working career the jobs economy has been shaky while asset prices have been shooting for the moon.  Buying habits have been simply delayed – maybe forever as some experts have stated, but not for reason of taste, rather out of a lack of ability.

From Ms. O’Connor, using the example of the U.K., but applicable in general.

The general consensus of millennials in the work place is that they “expect different things from employers than previous generations – rapid promotions, constant positive feedback, flatter corporate structures, a better work-life balance and a sense of purpose beyond profit. The press releases wrap up with a few quotes from experts urging companies to adapt to this new generation.”

“Most millennials – those born between the early 1980s and early 2000s – entered the labor force in the aftermath of a brutal downturn. It is almost a decade since the financial crisis, and global youth unemployment remains about 13%. Far from demanding that employers adjust to their needs, many young people have bent over backwards to persuade anyone to give them a foothold in the labor market.”

“While the income of the median UK household finally regained its pre-recession level last year, the income of the average 22-to-30 year old is still about 8% lower than in 2008.”

“…everyone should be rooting for the unlucky ones who had a tough start, since it will fall to them to pay for the pensions and healthcare of the generations ahead of them. This will be a heavy responsibility: the world has only three “super-aged” societies today (countries where more than one in five of the population is 65 or older) but by 2020 it will have 13. The more long–term the damage to young people’s careers, the less they will earn over their lifetimes and the less tax they will be able to pay.”

In regard to a speech by Minouche Shafik, a deputy governor at the Bank of England, “She was trying to figure out why wage growth is still so weak in Britain even though joblessness has fallen to pre-recession levels. This is a puzzle in the US and Japan too. Perhaps, she said, the crisis was so severe that it had a lasting effect on employees’ psyches and made them reluctant to push for pay rises or switch jobs in pursuit of higher salaries.

If this is true for the average worker, you can see why it might be particularly true for a young person who has never known a time when the economy seemed truly secure.”

Moody’s puts 175 energy and mining companies on downgrade watch. Christopher Adams, James Wilson, and Mark Vandevelde. 22 Jan. 2016.

While this article is from a week ago and oil prices have rebounded somewhat over the last week, the structural challenges remain.

“Several of the world’s biggest oil and gas groups – including Royal Dutch Shell, Total and Chesapeake Energy – are among 175 energy and mining companies at risk of rating downgrades following a collapse in crude and other commodities markets, Moody’s warned on Friday.”

“Moody’s has put on review for downgrades 69 US-based companies – including Schlumberger and Chesapeake.”

“Multi-notch downgrades are particularly likely among issuers whose activities are centered in North America, where natural gas prices have declined dramatically along with oil prices,” said the rating agency.”

“Moody’s notice for 120 energy companies and 55 miners is its largest single warning of potential corporate downgrades since the financial crisis.”

“China’s outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” said Moody’s.

This graph below is from a separate FT article, but it illustrates the rising stress in emerging market debt.

FT_Troubled EM Debt_1-25-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Saudi Arabia’s Secret Holdings of U.S. Debt Are Suddenly a Big Deal 1/21

Bloomberg – So Yes, the Oil Crash Looks a Lot Like Subprime 1/25

FT – The tiny shifts that can signal huge changes 1/21

FT – A history of betrayal that leads to Donald Trump 1/24

FT – Investors rush online to ditch stakes in China rural lenders 1/24

FT – Emerging markets’ stressed debt reaches record levels 1/24

FT – US junk-rated energy debt hits two-decade low 1/24

FT – Capital controls may be China’s only real option 1/25

FT – Currency risk matters for China’s property sector 1/25

FT – Pay attention to long-term debt cycle (Ray Dalio) 1/25

FT – China mouthpiece warns Soros against shorting renminbi 1/26

FT – South Korea export growth slows to trickle as China demand wanes 1/26

FT – China’s toughest test is within its walls 1/26

FT – Protectionism at play in Sharp takeover drama 1/26

NYT – African Economies, and Hopes for New Ear, Are Shaken by China 1/25

NYT – El Salvador’s Advice on Zika Virus: Don’t Have Babies 1/25

NYT – Inquiry in China Adds to Doubt Over Reliability of Its Economic Data 1/26

Vanity Fair – Hedge Funder John Paulson Puts Up His Own Fortune to Save His Firm 1/26

WSJ – What’s Wrong With The Producer-Price Index? Rent Is Too Damn High 1/14

WSJ – China Cinema Companies Produce Box-Office Hype 1/25

WSJ – Vacant Office Spaces Pile Up in Houston 1/26

WSJ – Tougher Times for Mall Owners 1/26

WSJ – China Sharpens Efforts to Halt Money Outflow 1/27

WSJ – Malaysia Antigraft Agency Asks for Review of Decision to Clear Najib Razak 1/27

WSJ – Heeding Softer Market, Extell Development Furnishes One57 Condo for Sale 1/28

 

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