January 29 – February 4, 2016 – the janus observer

Stagnant wages. Debt stress. Oh Venezuela.

Three key articles that stand out this week are 1) Patrick Gillespie’s “Wages fell in 80 of 100 biggest U.S. cities during recovery” in CNN Money, 2) Sally Bakewell’s “The $29 Trillion Corporate Debt Hangover That Could Spark a Recession” in Bloomberg, which goes hand-in-hand with Peter Eavis’ “Toxic Loans Around the World Weigh on Global Growth” in The New York Times, and 3) Ricardo Hausmann’s “It could be too late to avoid catastrophe in Venezuela” in the Financial Times.

Other items that are worth a mention:

Evergrande Real Estate is asking its bond holders to relax its borrowing limits despite the reality that it is paying out increasing dividends to its shareholders all the while having “reported negative operating cash flows over the past five years.”
ChemChina is acquiring Syngenta for $34bn should the authorities agree; it will be largest outbound acquisition by a Chinese company, but more importantly it appears to me that this will become a key method for wealthy Chinese to get around tightening capital controls for getting money out of China.
The liquid natural gas market should brace itself for a price war now that U.S. producers are sending their first shipments of LNG to Europe, Russia will be damn sure to make it unprofitable for U.S. companies like the Saudi’s have been doing to the Shale gas providers. Not so good for Cheniere…

Because I forgot to mention this last week, in case you were wondering, Malaysian Prime Minister Najib Razak was cleared by the newly appointed Attorney General (the last one was sacked) for the $680 million that was found deposited into his personal bank accounts. All a big misunderstanding. The money was a personal donation by the Saudi royal family and all but $61 million has been returned. Well the Swiss authorities are calling BS and have “found ‘serious indications’ that about $4bn was misappropriated” from Malaysia through the 1MDB investment fund.

Interesting graphics:

From Bloomberg Graphics, passive investment managers winning at the expense of active managers.

From the Financial Times, US junk debt yields rated triple C and lower have jumped.

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

Wages fell in 80 of 100 biggest U.S. cities during recovery. Patrick Gillespie. CNN Money. 28 Jan. 2016.

This article really speaks to why for most people in the U.S. it does not feel that the economy is on firmer footing or is growing for that matter. Bottom line, wages in most cities have not recovered in most cities and especially for minorities.

“American cities powered the U.S. economy out of the recession and into its recovery. Out of America’s 100 largest metro areas, almost each one improved on some measure of economic growth, employment, productivity or average wealth per person. The one red flag: wages.”

“Median wages declined in 80 of those cities between 2009 and 2014, according to a new study released Thursday by the Brookings Institution. The wage declines were more pronounced among minorities than whites. Also, the wage gapes widened between races in cities with economies that ranked high overall.”

“Only eight cities out of the largest 100 saw median wages and employment rates rise while its poverty rate fell.”

“Denver, San Jose, Calif., Provo, Utah and Charleston, S.C. are among those few metro areas that saw economic inequality decrease overall… However, the median wages of white workers in Provo rose about 2% between 2009 and 2014. And the paychecks of black workers declined by nearly 20% in that time period.”

“Wage growth has been largely absent during the U.S. economic recovery, and it’s a big reason why many middle class Americans feel they haven’t benefited. Only in recent months has wage growth started to move in the right direction nationally.”

The $29 Trillion Corporate Debt Hangover That Could Spark a Recession. Sally Bakewell. Bloomberg. 28 Jan. 2016.

“There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.”

“Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.“

“While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too… Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years.”

“Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009.”

“Much of the cheap credit accumulated by companies was spent on a $3.8 trillion M&A binge, and to fund share buybacks and dividend payments. While that tends to push up share prices in the short term, bond investors would rather see that money spent on strengthening the business in the long term.”

But… “S&P’s global credit market outlook is stable and analysts estimate earnings will recover this year. Investment-grade firms have accumulated record amounts of cash, which will insulate them from market turbulence, according to a report from Citigroup Inc. this month.”

“At about 3%, overall borrowing costs for companies around the world remain below the average of 4.5% in the preceding two decades even as spreads have widened.”

“As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysis.”

A somewhat more pessimistic outlook on this…

Toxic Loans Around the World Weigh on Global Growth. Peter Eavis. The New York Times. 3 Feb. 2016.

“Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.”

“Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.”

“In Europe, analysts say bad loans total more than $1 trillion.”

Bad loans are on the rise in the energy and commodities sectors, in Brazil and elsewhere…

“If you have a boom and then a bust, you create economic losses. You can hope the losses one day turn into profits, but if they don’t, they are a drag on the economy.” – Alberto Gallo, head of global macro credit research at the Royal Bank of Scotland.

“China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.”

According to Chu, “the world has never seen credit growth of this magnitude over such a short time. We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

“Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22% of the Chinese financial system’s loans and assets will be ‘nonperforming.’ In dollar terms, that works out to $6.6 trillion of troubled loans and assets.”

Ms. Chu “estimates that the bad loans could lead to $4.4 trillion of actual losses.”

It could be too late to avoid catastrophe in Venezuela. Ricardo Hausmann. Financial Times. 3 Feb. 2016.

For those that haven’t been following the falling knife that Venezuela has become…

“Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”

“Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugh Chavez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111.”

“The year 2015 was an annus horribilis in Venezuela with a 10% decline in gross domestic product, following a 4% fall in 2014. Inflation reached over 200%. The fiscal deficit ballooned to 20% of GDP.”

“In the free market, the bolivar has lost 92% of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered.”

“As bad as these numbers are, 2016 looks dramatically worse.”

President Nicolas Maduro is at odds with the National Assembly (opposition candidates were recently elected despite the government controlling the media and many opposition members having been locked up as a matter of practice since Chavez and his successor have been in power) “…the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.“

“The fallout for Venezuela’s neighbors and the global economy will be substantial… Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.

Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable.”

While the IMF was set up to help avoid situations like this, Venezuela “has not let the IMF in (the country) since 2004.”

Other Interesting Articles

Bloomberg Businessweek

The Economist