March 5 – March 10, 2016

Chinese exports plunge – and a glimpse of China in 2025.  $5 trillion of negative-yielding Japanese debt, but that’s only part of the problem.  Midstream energy companies feeling a bit exposed.

Three articles that stood out this week are 1) Shawn Donnan, Chris Giles, and Gabriel Wildau’s “IMF issues warning on global growth as China exports plunge” in the Financial Times, which goes hand-in-hand with a special report that Daniel Rohr did for Morningstar “What Will China Look Like in 2025?”, 2) Kevin Buckland, Masaki Kondo, and Shigeki Nozawa’s “The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles” in Bloomberg, and related to this article is a bomb-shell of a report by Kevin Wilson of Blue Water Capital, “Japanese Policy Failure Means Disaster For Us All” that was featured in Mauldin Economics, and 3) is piece by Gregory Meyer “Pipeline investors shaken by bankruptcy ruling” in the Financial Times that points to a major concern for the mid-stream energy companies.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • Bottom line, the State Administration of Foreign Exchange (SAFE) has asked banks to reduce foreign currency transactions – verbally of course.  As Jean Francois Harvey, global managing partner at Hong Kong law firm Harvey Law Corp, puts it “There appears to be a real crackdown on money flowing out of China. Even normal business transactions which are ongoing are getting delayed.”
    • Seriously… somebody has a sick sense of humor.

Interesting graphics:

From the Wall Street Journal, U.S. real estate has become quite a bit more expensive for foreign buyers.

WSJ_Change in US home prices for foreign buyers_3-8-16

From Barry Ritholtz’s The Big Picture blog.

Ritholtz_Negative European Govt Bonds_3-10-16

From the Economist, bad things tend to happen when debt to GDP levels get too high.

Economist_Credit as % of GDP_3-10-16

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

IMF issues warning on global growth as China exports plunge.  Shawn Donnan, Chris Giles, and Gabriel Wildau. Financial Times. 8 Mar. 2016.

“The world faces a growing ‘risk of economic derailment’ and needs immediate action to boost demand, the International Monetary Fund warned on Tuesday as new figures pointed to the worst monthly collapse in Chinese exports since 2009.”

“Among the ‘most disconcerting’ signs of trouble in the world economy, he said, were ‘a sharp retrenchment in global capital and trade flows’ over the past year.”

The news that triggered this article was that “In dollar terms China’s exports fell 25.4% in February from a year earlier, the worst one-month decline since early 2009 and down from a 11.2% drop in January.”

The IMF has “already said it is likely to lower its 3.4% growth forecast for this year when it issues its next round of predictions in April.”

However, not all economists feel so downtrodden. Olivier Blanchard, former chief economist of the IMF, and his colleagues at the Peterson Institute of International Economics say that Fears on global downturn are overdone.

Though, here is a link to a Morningstar report by Daniel Rohr’s Morningstar’s on What Will China Look Like in 2025?  A very timely report that is worth the read.  Here is a little teaser.

“The country’s working-age population will shrink by 43 million by 2030, by which time China will have more seniors than the European Union, Japan, and the United States combined.”

 

The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles. Kevin Buckland, Masaki Kondo, and Shigeki Nozawa. Bloomberg. 7 Mar. 2016.

“The amount of Japanese government bonds in the market offering negative yields has doubled this year to more than 600 trillion yen ($5.3 trillion) and that’s a major headache for the finance industry.”

According to the Bank for International Settlements, “the experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are… Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”

FT_Japanese 30-year bond yield_3-8-16

And the bombshell of a report by Kevin Wilson of Blue Water Capital, Japanese Policy Failure Means Disaster For Us All…  This article was originally published in Seeking Alpha and does an excellent job at highlighting the precariousness of the Japanese economy and does so with many illustrative charts. I recommend reading the whole thing, but here are some of the highlights.

“…it seems to me that the Japanese economy, as noted years ago by author John Mauldin, is ‘a fly in search of a windshield.'”

“It was already evident that there was a problem with Abenomics even before the NIRP decision. The velocity of money has continued to fall, inflation has stayed stubbornly low or negative, household incomes were declining rather than rising, household spending declined sharply as the tax increases from Abenomics kicked in, and as a result, consumer confidence in Japan has been negative for years on end.”

Japanese Velocity of Money_Q3 2015

Japanese v US HH Incomes_March 2016

Due the hording of cash and bonds “…for Japanese investors, the total return on the JGB 30-year bond has beaten that from the MSCI Global Equity Index over the last 15 years.”

JGB 30y Bond vs MSCI Equities_March 2016

“Demand for cash in Japan, always relatively high, has increased since the NIRP decision, according to Naohiko Baba, Tomohiro Ota, and Yuriko Tanaka at Goldman Sachs. They not that demand for cash is now very sensitive to interest rates, even to the point that cash and deposits are nearly perfect substitutes.  Since deposit rates are so low now, there is little penalty or downside in holding cash. Not coincidentally, sales of household safes for storing (hoarding) cash have soared in Japan since the NIRP decision.”

“Hoarding is about the worst consumer outcome one can imagine, relative to the ultimate success or failure of Abenomics… The number of banknotes in circulation in Japan is extremely high relative to GDP and to other national economies, such as those of the USA, Switzerland, the eurozone, Denmark, and Sweden.”

Bloomberg_Japanese 10,000 Yen notes in circulation_March 2016

“Virtually every aspect of Abenomics is now in failure mode, and since the reform part of the package has never been enacted, it is unlikely that the government can regroup in a meaningful way under present conditions.”

Look at this demographic projection…

Japanese Demographic Chart_March 2016

 

Pipeline investors shaken by bankruptcy ruling. Gregory Meyer. Financial Times. 8 Mar. 2016.

“A judge has allowed a US oil and gas company to abandon pipeline contracts while in bankruptcy, in a first-of-its-kind decision that has rattled investors in energy infrastructure.

Sabine Oil & Gas, a shale energy producer under Chapter 11 bankruptcy protection, sought permission to break contracts with two pipeline companies so it could pursue better deals and save as much as $115m.”

“The decision has important implications for the midstream energy sector, which gathers, processes, transports and stores oil and gas. Income-hungry investors had flocked to midstream companies on the belief that their generous payouts were backed by long-term, immutable contracts with customers.”

The mantra has been over the past year or so as oil prices have plummeted, that ‘we’re fine, oil is still flowing through our pipes.’ We’ll just ask retail landlords across the country how that’s going with the whole Radio Shack, Blockbuster, Sports Authority, etc. lease.

“Haynes and Boone, a law firm, said 48 North American oil and gas producers filed for bankruptcy in 2015 and more will follow this year.”

Now expect more mid-stream companies (think MLPs) to be at risk.

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

Bloomberg – Blackstone’s Gray Sees Lower Real Estate Returns as CMBS Falters 3/4

Bloomberg View – Falling Earnings, Recession Warning 3/9

Bloomberg – Manhattan Luxury Rents Slide as Condo Buyers Seek Tenants 3/10

CFO – $300B Capex Lost in Recession Goes Unreplaced 3/9

FT – Macau’s annual GDP contracts by 14.4% in 4Q 3/2

FT – Commodity prices signal market bottom 3/4

FT – US high yield: back in the game 3/6

FT – Hong Kong and China ‘heading for bigger showdown’ 3/6

FT – Wall St in for a hawkish Fed surprise – Goldman 3/7

FT – Goldman Sachs says commodity rally is unlikely to last 3/8

FT – Long-term Japanese yields set new record lows 3/8

FT – Has the cold US-Sino trade war just got piping hot? 3/8

FT – Bombed pipeline to hit Nigeria oil output 3/8

FT – Re-assessing the classic risk-return trade off 3/8

FT – Moody’s to withdraw from Russian domestic market 3/9

FT – UL MLPs: courting disaster 3/9

FT – China provinces rail against Beijing plan to tackle overcapacity 3/10

FT – US Treasury market shows signs of stress 3/10

Mauldin Economics – The Roots of Trump’s Strength (George Friedman) 3/7

Nikkei Asian Review – China-related bankruptcies spike in Japan 3/5

NYT – Brazil’s Lula Detained in Corruption Probe; Rousseff Objects 3/4

NYT – In New Economic Plan, China Bets That Hard Choices Can Be Avoided 3/5

Project Syndicate – Is the Perfect Storm Over for Markets? (Mohamed A. El-Erian) 3/9

Value Walk – BDC Losses, MLPs and REITs – Slow Motion Melt (David von Leib) 3/10

WSJ – China’s Falling Reserves Catch a Break 3/7

WSJ – Shopping-Center REITs Are on Many Investors’ Lists 3/8

WSJ – What’s Twitter Worth? It’s Complicated 3/8

WSJ – Foreign Buyers Are Pulling Back, Realtors Say 3/8

WSJ – WeWork Targets Asia as Valuation Hits $16 Billion 3/10

WSJ – ECB Cuts Rates and Expands Stimulus – Recap 3/10

WSJ – The Most Expensive Cities in the World to Live 3/10

Special Reports

 

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