Month: May 2016

May 27, 2016May 26, 2016

May 20 – May 26, 2016

Venezuela about to become a formal dictatorship. Container shipping industry going through one of its (if not the worst) downturns. A handful of US tech companies are flush with cash.

Headlines

Bloomberg – Venezuela’s Military Needs to Get Out of Business 5/6. “Venezuela has more than 4,000 generals, compared with fewer than 50 in 1993.”
WSJ – Chinese Investors Pour Money Into U.S. Property 5/25. “So far in 2016, Chinese companies have purchased or are buying 47 U.S. properties worth $9.3 billion, according to deal tracker Real Capital Analytics. That makes them the most active foreign buyers in the U.S., with more than double Canada’s $4.2 billion worth of deals.”

Briefs

The world is starving for yield products as Eric Platt of the Financial Times points out that foreign investors in particular have been interested in US bond funds.

“The plunge in yields on corporate and sovereign bonds in Europe and Asia – the value of bonds with a negative yield is nearly $10tn, according to Fitch – has sent investors racing into the US market.”
“The hunt for yield is very high.” – Bob Michele, chief investment officer at JPMorgan Asset Management
“The inflows have suppressed corporate borrowing costs at a time when new debt issuance is accelerating…”
“More than $900bn of corporate bonds have been sold in 2016, including $411bn in the US, according to Dealogic. Seven of the 20 largest bond offerings of the year have been completed this month alone.”

China knows it has a bad debt problem, and as such Don Weinland of the Financial Times highlighted the Country’s stepped up efforts to keep the problem from being debilitating.

“The latest figures for the loans-to-bonds swap, and the debt-to-equity swap initiated last year, show a subtle bailout is already under way.”
“Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.”
So far this year the number of swaps has hit $220bn at the end of April, up from approximately $120bn at the beginning of March, according to Wind Information.
“Up to Rmb1tn ($152bn) has also been approved for a debt-to-equity swap, which forces banks to write off bad debt in exchange for equity in ailing companies, according to Caixin, a respected business news website.”

Things are going downhill fast in Venezuela. This brief on how Venezuela has been selling gold reserves to meet debt obligations by Henry Sanderson and Andres Schipani of the Financial Times goes hand-in-hand with one of headlines and featured articles from this post.

“The Opec member’s gold reserves have dropped almost a third over the past year and it sold over 40 tones in February and March, according to IMF data. Gold now makes up almost 70% of the country’s total reserves, which fell to a low of $12.1bn last week.”
“The IMF forecasts the economy will shrink by 8% this year, and 4.5% in 2017, after a 5.7% contraction in 2015. Inflation is forecast to exceed 1,642% next year, fueled by printing money to fund a fiscal deficit estimated at about 17% of GDP.”
Remember that Venezuela has larger crude reserves than Saudi Arabia…

One of the articles from the print edition of the Economist this week profiled the rapid rise of the insurance industry in China and how the regulators are implementing measures to keep things from getting out of hand.
- “Assets managed by insurers have doubled in less than four years to 13.9 trillion yuan ($2.1 trillion). Their revenues from selling policies have accelerated, climbing 42% year-on-year in the first quarter of 2016. Most remarkable has been the increase in their workforce. Over the past six months alone, they have added 2m to their sales force. They now employ some 7.2m people, up 120% since the start of last year. Put another way, roughly one in every 50 workers in Chinese cities is selling insurance products.“
- “The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products.”
- In an effort to curb speculative behavior, regulators have “barred insurers from selling products with maturities of less than one year and began to phase out those with maturities of less than three years.”
- “The heyday of rapid expansion by opportunistic firms is over, predicts Lee Yuan Siong of Ping An Insurance, one of China’s biggest providers. ‘The government saw the danger early enough before it got out of control.’ If the new rules work, insurers will need to focus on persuading people to buy their policies for protection rather than as an investment. That is a safer bet, but a harder sell.”

Special Reports

FT – Hedge funds: Overpriced, underperforming – John Authers and Mary Childs 5/24

Graphics

Selfstorage.com – Inside America’s Gig Economy (and how to work it) – Alexander Harris 5/17

FT – Triple A quality fades as companies embrace debt 5/24

FT – US productivity slips for first time in three decades 5/25

Economist – Insurance in China: Safe or sorry? 5/21

Featured

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

Venezuela: Trouble on the streets – The country is poised between chaos and dictatorship. Economist. 21 May 2016.

Over the next month, expect Venezuela to become a dictatorship or the current regime will be overthrown.

Currently the government forces are blocking all routes to the National Electoral Council (CNE) to keep any opposition/protestor group from being able to submit a petition that would initiate a process to recall the embattled president (Nicolas Maduro) through a referendum.

“Almost 70% of Venezuelans want Mr. Maduro to leave office this year, according to a recent poll… Venezuela is suffering the world’s deepest recession.”

“After the May 18th protests he (Maduro) threatened to supersede the current economic state of emergency (announced five days earlier) with a ‘state of internal commotion'” which would give the government the “…ability to impose something closer to military rule across the country.”

“Mr. Maduro has already indicated that he will govern without regard to the National Assembly, which came under the control of the opposition after elections last December. ‘It is a matter of time before it disappears,’ he said blithely at a press conference on May 17th.”

The thing is that while opposition politicians are seeking to appeal to the military’s sense of deference to the constitution, Maduro and his predecessor Chavez make sure and made sure that the military is generously compensated while the rest of the country suffers.

“Venezuela’s neighbors are appalled by the prospect that the country might implode. They may not be able to stop it.”

Container shipping lines mired in crisis. Robert Wright. Financial Times. 19 May 2016.

“The industry (container shipping), a vital link in the world’s supply of manufactured goods, is suffering what could well turn out to be the deepest and longest downturn in its 60-year history.”

“Container shipping lines have made a series of investments in new, giant vessels, and this glut of capacity has sent freight rates tumbling. The Shanghai Containerized Freight Index – one of the few public sources of information on what lines are charging to ship a container – last month reached the lowest level since its inception in 1998.”

“Over the next few years, [container shipping is] a sector that’s going to really get slammed,” says Ron Widdows, a shipping consultant and former chief executive of Neptune Orient Lines, the Singapore-based line.”

Consolidation and cooperation (alliances) are common place as container lines are seeking to achieve better efficiencies to cut costs.

“This month, three Japanese lines – Mitsui OSK, K Line and NYK – outlined plans to form a new alliance with Hapag-Lloyd, South Korea’s Hanjin Shipping and Taiwan’s Yang Ming, to be known as The Alliance.”

“CMA CGM announced last month it was forming a new partnership, called the Ocean Alliance, with China Cosco, Taiwan’s Evergreen and Hong Kong’s Orient Overseas Container Line.”

This is all to compete against the P2 Alliance of the two largest container fleets of Maersk Line and Mediterranean Shipping Company.

“In the first quarter of 2016, Maersk generated $1,857 of revenue for each 40ft container it carried on its ships, 25% less than one year earlier, and $203 below the average cost of moving each box.”

US companies’ cash pile hits $1.7tn. Eric Platt. Financial Times. 20 May 2016.

“Apple, Microsoft, Alphabet, Cisco and Oracle had amassed $504bn of cash by the end of 2015, nearly a third of the total $1.7tn held on the balance sheets of US non-financial companies, according to a new report from rating agency Moody’s.”

“It is the first time the top five cash hoarders have been made up exclusively of tech groups, an industry that generates more of its sales abroad than any other sector and one that has been embroiled in tax disputes in both the US and Europe.”

“The ever increasing amount of cash also highlights how US boardrooms are reticent to invest in their businesses, choosing instead to increase dividends, in a sign of the continued anxiety that economic activity could still slow at home or in China.”

“Apple accounted for more than a tenth of the total cash reserves, holding $216bn, 93% of which is overseas.”

“But the rising cash piles mask a rapid increase in debt.”

“Total debts rose nearly $850bn last year to $6.6tn, a separate report from S&P showed, which put overall cash levels in the US at a slightly higher $1.8tn. While cash had increased by about $600bn over the past five years, obligations surged by $2.8tn.”

“While the top 25 cash hoarders hold cash in excess of their obligations, the cash-to-debt ratio fell to 12% for low-rated junk companies. In 2010, that figure stood above 20%.”

“‘Companies aren’t exactly flush with cash,’ S&P analyst Andrew Chung added. ‘As the credit cycle ages, rates rise and macroeconomic growth slows, that’s when companies in the bottom 99% who levered up [could have] funding issues.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Murder most foul: When periods of economic growth come to an end, old age is rarely to blame

Bloomberg – Sugar Is So Scarce in Venezuela That Coca-Cola Will Stop Production 5/23

FT – Elizabeth Warren slams Uber and Lyft 5/19

FT – China reopens securitized bad-debt market 5/19

FT – Hanergy founder resigns one year after stock plunge 5/20

FT – Liquid alternative mutual funds leave investors disappointed 5/22

FT – Negative interest rates fuel record Japan share buybacks 5/23

FT – Triple A quality fades as companies embrace debt 5/24

FT – Regulators accuse Swiss bank BSI over 1MDB scandal 5/24

FT – Investing in China debt? Do not forget to factor in the politics 5/24

FT – US fracking bust sparks surge in car debt 5/24

FT – Olivier Blanchard and Adam Posen believe a recovery is on track 5/25

FT – Viacom’s battle is a warning to Silicon Valley 5/25

May 20, 2016May 20, 2016

May 13 – May 19, 2016

Remember, crises end (oil prices most likely won’t stay low forever).

Headlines

WSJ – Apple Takes Billion Dollar Detour to Fix Troubles in China 5/13. Apple uses one of its $233bn in cash and the like to take a stake in loss making Didi Chuxing, the synergies appear limited, except Apple could use some politically powerful friends in China.
FT – Hong Kong’s GDP unexpectedly shrinks in Q1 5/12. GDP fell by 0.4% in Q4 2015 when it was expected to grow by 0.1% – Hong Kong is feeling the effects of a slowdown in mainland China.
Yahoo Finance – El-Erain: The economy is approaching a ‘pivot’ point 5/17. “So the reason why this road ends is that there’s a limit to how much growth finance can deliver.”
NYT – China Quietly Targets U.S. Tech Companies in Security Reviews 5/16. “Ultimately, the reviews could be used to block products without explanation or to extract trade secrets in exchange for market access.”
WSJ – A Battle Brews Over Negative Rates on Mortgages 5/15. As rates continue to fall in Europe, banks and consumers are fighting over whether or not banks owe interest to borrowers on variable rate loans.

Briefs

As Adam Samson pointed out in the Financial Times, the flattening of the yield curve has people worrying about recession risk again (this was before the Fed gave a firm reminder to the markets that a June rate hike is on the table).

“The flattening in the yield curve suggests longer-term borrowing costs are moving closer to shorter-term costs, and signals investor concerns about the longer-term outlook for the economy.”
“And then of course there is the matter of historic precedence: The 83-month economic expansion (assuming the economy expanded in April and May) is the fourth longest on record going back to 1857, data from the US National Bureau of Economic Research show. It is also far longer than the median 30 month expansion over the same period.”

Simeon Kerr of the Financial Times covered that Saudi Arabia just had its credit rating downgraded by Moody’s.

Moody’s downgraded its rating for Saudi Arabia one notch from Aa3 to A1. It’s the first rating downgrade by the company since it began rating the kingdom two decades ago. The new rating puts Saudi Arabia’s credit on par with Japan.
Standard & Poor’s and Fitch have already made similar moves.
“Bankers believe the kingdom is likely to start issuing international bonds this year, after agreeing to a $10bn loan with lenders, as it seeks to slow a sharp fall in its foreign reserves to $576bn. Moody’s forecasts reserves declining to $460bn by 2019.”
“Total external debt is expected to rise to 30% of GDP by 2018 and to about 40% by the end of the decade, Moody’s estimated.”

According to Yuan Yang of the Wall Street Journal, it appears that Beijing is clamping down on Chinese buying US property.

“In recent years a tide of Chinese money has hit global property markets, with buyers from the country now the largest single group of foreign investors in residential property in the US, UK and Australia.”
“But after inflows of $110bn into US real estate between 2010 and 2015, investment in residential American property is expected to drop in the next two years, according to the report by the US-based Asia Society and the Rosen Consulting Group.”
Bottom line, “…China is still in foreign exchange preservation mode, and is going with a tooth comb through capital outflows.” – Frederic Neumann, co-head of Asian Economic Research at HSBC

James Kynge of the Financial Times called attention to the perhaps unknown reality that China has become the global leader in financing developing economies.
- “Two Chinese policy banks – the China Development Bank (CDB) and the Export-Import Bank of China – had outstanding loans to overseas borrowers amounting to an estimated $684bn at the end of 2014, just short of the $700bn owed to the six western-backed multilateral development institutions.”
- “In terms of individual lending institutions, the CDB has overtaken the World Bank as the world’s biggest provider of international development finance with estimated outstanding overseas assets of $375bn at the end of 2014.”
Time to safeguard your hard currency in Zimbabwe again as the Economist reports.
- “Zimbabwe finally tamed inflation in 2009, when it abandoned the Zim dollar and started using American dollars and other foreign currencies instead. (It converted bank balances to US dollars at a rate of $1 for every 35 quadrillion Zim dollars.)”
- Well, “this time it insists it is not bringing back the reviled ‘new’ Zim dollar, but is printing notes that are ‘backed’ by some $200m that Zimbabwe has borrowed from the African Export-Import Bank.”
- Clearly to the government doesn’t want a run on the banks, so “banks have had to restrict dollar withdrawals, in some cases to as little as $20 a day. The last bout of hyperinflation wiped out savers and pensioners. Savers are braced to be robbed again.”

Special Reports

FT – Brazil: Tales of everyday agony – Joe Leahy and Samantha Pearson 5/15

Graphics

FT – Global equities suffer investor flight – Eric Platt 5/13

FT – Crude soothsayers should recall cautionary tale of ‘Peak Oil’ – John Authers 5/13

Reformed Broker – Global Ageing Stats Will Blow Your Mind – Josh Brown 5/15

FT – Chinese credit growth slows as leadership warns of over-leverage – Yuan Yang and Gabriel Wildau 5/13

FT – China becomes global leader in development finance – James Kynge 5/17

Featured

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

Crude soothsayers should recall cautionary tale of ‘Peak Oil’. John Authers. Financial Times. 13 May 2016.

Take caution when adjusting your narratives to fit the facts. Just because oil is low today, that doesn’t mean that they will remain so forever. Of the interesting narratives in the zeitgeist about the future of oil is the one posited by geopolitical strategist and former diplomat Peter Zeihan.

“He suggests that oil will cease to be a global market. The US has achieved self-sufficiency in oil, which means that it does not have to be dragged into the next conflict in the oil producing regions. The availability of shale will put a ceiling on oil prices, not far above their current level.”

“Elsewhere, this will drive the incentive for conflict, as oil producers are hurting and fighting for market share. As conflicts resume – whether between Iran and Saudi Arabia, or between Russia and its neighbors – supply will grow erratic, leading to price spikes. Without US intervention to stop prices rising, the rest of the world could see more expensive oil.”

“The ripples would be global. Mr. Zeihan pointed out that China, Japan, Taiwan and South Korea, all dependent on oil imports, are geographically far removed from any oilfields. They risk being drawn into conflict with each other, as they compete to send navies to escort tankers all the way home.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Burbank Sees U.S. Recession, China Devaluation Within Year 5/10

Bloomberg – U.S. Discloses Saudi Holdings of Treasuries for First Time 5/16

FT – Demise of Brazilian leftism will reverberate across the Americas 5/12

FT – Apple invests $1bn in China Uber rival Didi Chuxing 5/13

FT – Deflation – the elephant on your smartphone 5/13

FT – A billion prices can’t be wrong 5/13

FT – GAAP’s never been holy writ – just ask Silicon Valley 5/13

FT – Goldman Sachs emerges as growing natural gas player 5/15

FT – ‘China’s Future’, by David Shambaugh 5/15

FT – Brent crude extends rally to near $50 on supply fears 5/16

FT – Buyout firms’ secondary market is of prime concern 5/16

FT – Dell bonds draw $85bn in investor orders 5/17

FT – Nigeria under fire for not tying fuel price and currency reform 5/17

WSJ – Retail Troubles: It Isn’t Just About Amazon 5/13

WSJ – Amazon to Expand Private-Label Offerings – From Food to Diapers 5/15

WSJ – Flood of Foreign Cash Flattens Yield Curve 5/17

May 13, 2016May 13, 2016

May 6 – May 12, 2016

China’s coming debt bust.

It’s a short one this week – traveling with the family. Enjoy!

Headlines

FT – Chinese retail investors throw global commodities into a tailspin 5/6. Without a better outlet, money from Chinese retail investors has found its way to the commodity markets.
FT – Canada’s wildfires could blaze for months 5/8. So far more than 1,500 square km have been consumed and the fire is at the footsteps of neighboring province, Saskatchewan.
NYT – Anger Overflows in Nigeria as Economy Dives 5/9. The country is reaching a boiling point.
FT – China party mouthpiece echoes Soros’ debt fears 5/10. Basically an unnamed ‘authoritative’ figure within the country acknowledged that the country’s debt levels pose a systemic risk.
NYT – Brazil’s Senate Votes to Begin Impeachment Trial of Dilma Rousseff 5/12. VP Michel Temer will take charge now while the trial gets underway.

Briefs

Adding to this week’s feature is Ben Bennett’s piece in the Financial Times basically saying that by pushing out the problem (China’s growing debt imbalance), it will only make the remedy worse.
- “Estimating the amount of debt that needs to be written off by China is not an exact science. It boils down to how much excess capacity has been built with little chance of making an economic return. Julien Garran at MacroStrategy estimates there has been around $8tn of excess fixed capital formation in China since 2008, which, assuming that 60% turn into non-performing loans and a 40% recovery rate, suggests losses of $3tn. This is about 30% of Chinese GDP. Autonomous Research gets to a similarly large number by looking at losses realized by other countries following their own credit bubbles. This far outstrips the loss-absorbing capacity of the financial system, and would therefore require significant state support to resolve.”
Shifting our attention further West (if the reference point is China), Anna Andrianova and Andrey Biryukov of Bloomberg highlight that Russia is grappling with deflation as its economic sickness gets worse.
- “Russia’s longest recession in two decades has obliterated consumer demand. Price growth has slowed for a seventh month. Goldman Sachs predicts Russia’s annual inflation, now 7.3%, will slip below 6% in the third quarter and finish the year at 4.5%. In March of last year inflation was 16.9%. It’s enough for Bank of America to warn that the country faces a ‘sharply rising’ risk of deflation.”
- “After President Vladimir Putin came to power in 2000, the poverty level fell until 2014, when oil prices collapsed. Now millions are sinking into poverty and wages are rising minimally.”
- “Savings rose to 14.1% of disposable income last year, up from 5.4% in 2008, according to the Federal State Statistics Service.”
- “Poor demographics add another wrinkle. The working-age population has shrunk by 5 million since its peak in 2006 and will continue to contract, cutting Russia’s potential economic growth to near zero in 2016-2017, according to BofA economists.”
Back to the U.S., Sam Fleming and Shawn Donnan point out in the Financial Times that the middle class in most US cities have taken a financial hit so far this century.
- “The research on urban centers that are home to three-quarters of the US population shows that median household incomes, adjusted for the cost of living in the area, grew in just 39 out of 229 metro areas between 1999 and 2014.”

Graphics

FT – The biggest problem with China’s latest credit boom, charted 5/4

FT – China companies borrow to repay debts in latest credit binge – James Kynge 5/9

Economist – Shadow banks: Dark and stormy

FT – EM millennials out-earn their elders 5/11

FT – Air pollution hits ‘catastrophic’ levels 5/11

Featured

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

The coming debt bust: It is a question of when, not if, real trouble will hit in China. Economist. 7 May 2016.

“The country’s debt has increased just as quickly over the past two years as in the two years after the 2008 crunch. It’s debt-to-GDP ratio has soared from 150% to nearly 260% over a decade, the kind of surge that is usually followed by a financial bust or an abrupt slowdown.”

“China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis.”

“It is true that China has been fastidious in capping its external liabilities (it is a net creditor)… But the damage from a big Chinese credit blow-up would still be immense. China is the world’s second-biggest economy; its banking sector is the biggest, with assets equivalent to 40% of global GDP.“

“Optimists have drawn comfort from two ideas. First, over three-plus decades of reform, China’s officials have consistently shown that once they have identified problems, they had the will and skill to fix them. Second, control of the financial system – the state owns the major banks and most of the biggest debtors – gave them time to clean things up.”

“Both these sources of comfort are fading away. This is a government not so much guiding events as struggling to keep up with them. In the past year alone, China has spent nearly $200 billion to prop up the stock market; $65 billion of bank loans have gone bad; financial frauds have cost investors at least $20 billion; and $600 billion of capital has left the country. To help pump up growth, officials have inflated a property bubble. Debt is still expanding twice as fast as the economy.”

Further, “despite repeated efforts to restrain them, loosely regulated forms of lending are growing quickly: such “shadow assets” have increased by more than 30% annually over the past three years.”

The risks are first “higher-than-expected losses for the banks. Hungry for profits in a slowing economy, plenty of Chinese banks have mis-categorized risky loans as investments to dodge scrutiny and lessen capital requirements. These shadow loans were worth roughly 16% of standard loans in mid-2015, up from just 4% in 2012. The second risk is liquidity. The banks have become ever more reliant on ‘wealth management products,’ whereby they pay higher rates for what are, in effect, short-term deposits and put them into longer-term assets. For years China restricted bank loans to less than 75% of their deposit base, ensuring that they had plenty of cash in reserve. Now the real level is nearing 100%, a threshold where a sudden shortage in funding – the classic precursor to a banking crises – is well within the realm of possibility. Midsized banks have been the most active in expanding; they are the place to look for sudden trouble.”

“…it is too late for China to avoid pain. The task now is to avert something far worse.”

Other Interesting Articles

Bloomberg Businessweek

The Bank of Japan Buys Blue Chips

The Economist

Bloomberg – Manhattan’s Latest Tower Heats Up Hudson Yards Race for Tenants 5/9

FT – MetLife takes axe to hedge fund portfolio 5/5

FT – Alarm bells ring over negative interest rates 5/5

FT – Buffett and Bogle unite against hedge funds 5/7

FT – The real cost of big tech’s accounting games 5/8

FT – PwC to deploy drone army 5/8

FT – Alarm grows as investors get bulk of listed groups’ profits 5/9

FT – China capital outflows persist despite FX reserves rebound 5/9

FT – Rosneft head: Opec no longer united organization 5/10

FT – China insurance regulator sends inspectors to Anbang 5/11

FT – Linn Energy files for bankruptcy protection 5/11

FT – Macy’s joins American retail descent into the doldrums 5/11

FT – Grantham on the paradigm shift that never was 5/11

FT – Abu Dhabi raises stakes in 1MDB dispute with $1.2bn demand 5/11

WSJ – Stuck at Zero: The Long-Term Challenge for Investors 5/6

WSJ – Opportunity to Squeeze More From China’s Biggest Mall Developer 5/9

WSJ – What a China U-Turn Would Mean for Global Growth 5/10

WSJ – Luxury Condo Boom Is Ending in Manhattan 5/10

WSJ – Mall Landlords Go for Novelty in China 5/10

WSJ – Malaysian Leader Najib’s Stepson Allegedly Funded U.S. Property Deals With 1MDB Money 5/12

May 6, 2016May 6, 2016

April 29 – May 5, 2016

Beware of ‘investments’ being peddled by Chinese banks. China no longer getting the same bang for the buck. Industry concentration tends to result less money going to employees.

Headlines

FT – Will duration risk rear its head for bond investors? 4/28. “The duration on the Barclays global aggregate bond index hit a record high of 6.8 years this month. At the same time, the yield on the index has crumbled to 1.44% from 4.24% a decade ago.
NYT – China Lending Inflates Real Estate, Stocks, Even Egg Futures 5/1. Bottom line, money finds a home.
FT – Puerto Rico suffers most significant default in debt crisis 5/2. Puerto Rico just declared a moratorium on the Government Development Bank obligations, next up general obligation bond payment due July 1, will they make it?
NYT – American Pharoah Is Already a Champion at the Stud Life, Too 5/3. Some of you may recall the Bloomberg article about the concerns and hope about American Pharoah’s next act, well turns out he’s doing just fine.

Briefs

Lucy Hornby of the Financial Times drew attention to the reality that not all Chinese provinces are posting growth, in fact some are experiencing outright decline.

“The economy in China’s industrial province of Liaoning contracted in the first quarter, making it the first region to register negative growth in seven years as a severe downturn in energy and heavy industry sectors hits hard in the country’s north-east.”
“China’s national growth clocked in at an annual rate of 6.7% in the first quarter, but that headline figure masks sharp discrepancies between provinces reliant on heavy industry, mining or oil, and the southern and eastern regions with more diversified economies.”
“Chinese newspaper 21st Century Business Herald reported this week that Liaoning would book a 1.3% contraction in real GDP for the quarter…”

Daniel Thomas of the Financial Times covered that Global smartphone sales fell for the first time. It was bound to happen eventually.
- “Global smartphone shipments fell for the first time as “iPhone fatigue” dragged down sales for Apple’s once-unstoppable franchise amid a general weakening in the market for new devices.”
- “After close to a decade of stellar growth, analysts say a tipping point in the smartphone market has been reached as most people already have a phone, phablet or tablet device.”
- “Apple popularized the smartphone market with the launch of the first iPhone in 2007. The US group said this week that it had suffered a 16% fall in unit sales in the first quarter and warned that the next quarter could be even worse…”
- “Apple was not totally to blame, however, as global smartphone shipments fell 3% in the first quarter of 2016 to 334.6m, down from 345m units in the same quarter of 2015. The quarter was the ‘first time ever since the modern smartphone market began in 1996 that global shipments have shrunk on an annualized basis.'”
- “As the China market matures, the appetite for smartphones has slowed dramatically as the explosion of uptake has passed its peak.” – IDC, a research firm.
For those of us in Hawaii, we’re quite familiar with the concept of leasehold property, and generally if you can avoid it for your primary residence you do. Well in China all residential property is leasehold and some of those lease terms are rolling over in short order. Lucy Hornby of the Financial Times discusses the angst this is causing.
- “The simmering issue of property rights in China has burst into the open with the upcoming expiry of residential leases in several wealthy cities and a contentious plan to charge homeowners to renew them.”
- When the Communist party entered into power in 1949 property ownership was abolished only to be renewed via a mixed bag of leasehold rights in the 1980s and 1990s. Now these rights are “…in the spotlight with the upcoming expiry of 20-year residential land use rights in Wenzhou in eastern China… Leases granted in the 1990s will also soon come due in Shenzhen and other coastal cities, although the more common tenure of 70 years means most of the current generation of urban homeowners will hand the problem on to their heirs.”
- “Wenzhou has asked homeowners to pay up to a third of their homes’ value to renew their rights, according to a city government document, sparking an outcry across China. The Property Law of 2007 says land-use rights can be renewed but does not specify the criteria for doing so.”
- “Many Chinese bought their homes under the expectations that the long leases would be transformed into full ownership.”
Enough with all this bad news. No really, as Lingling Wei reports in the Wall Street Journal, China is pressing Economists to brighten their outlooks.
- “Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with the government’s upbeat statements, according to government officials and economic commentators with knowledge of the matter.”
- As Scott Kennedy, a deputy director at the Center for Strategic and International Studies (a Washington think tank), puts it “vigorous debate among economists and public confidence in this conversation is critical if China is to successfully navigate the choppy economic waters. If the party and government only want to hear good news, then they’d be better off hearing nothing because the value of the words would be less than zero.”
- “While restrictions on foreign media have always been tight, they are becoming tighter, with a growing list of foreign publications having their websites blocked from view within China, including The Wall Street Journal.”

Special Reports

FT – China’s robot revolution – Ben Bland 4/28
FT – Rise of the robots is sparking an investment boom – Richard Waters and Tim Bradshaw 5/2
Mauldin Economics – Where’s the Beef? “Lies, Damned Lies, and Statistics” – Rob Arnott and Lillian Wu 5/4
Washington Post – America’s great housing divide: Are you a winner or loser? 4/28
- Interesting interactive graphic to see how much home values have changed in your neighborhood since 2004.

Graphics

FT – Will duration risk rear its head for bond investors? 4/28

FT – Rise of the robots is sparking an investment boom – Richard Waters and Tim Bradshaw 5/2

FT – US producers Ultra and Midstates fall victim to low oil price 5/3

Featured

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

Chinese banks disguise risky loans as ‘investments’. Yuan Yang and Gabriel Wildau. Financial Times. 28 Apr. 2016.

“Chinese banks are using complex financial engineering to disguise risky loans as ‘investments,’ rendering traditional risk metrics such as non-performing loan ratios virtually useless.”

“Analyst say most of these assets are in effect loans but are structured to appear as holdings of investment products issued by a third party. Such financial alchemy allows banks to evade regulations designed to limit risk.”

“Banks are required to set aside fewer provisions against ‘investment’ assets than traditional loans.”

“Because the investments are not classified as loans, defaults are not reflected in these banks’ non-performing loan ratio. Many analysts believe China’s official NPL ratio of 1.67% is all but irrelevant in assessing banks’ overall asset quality.”

“Fitch, the rating agency, believes this practice, also known as channel lending is used to provide credit to the likes of ‘cash-strapped property developers and local governments’ that cannot obtain formal loans.”

“Now that overcapacity sectors such as steel and cement are facing restrictions on formal borrowing, channel lending could become even more important to zombie companies.”

“Banks classify the assets they hold in these third parties as ‘investment receivables’ or ‘debt receivables,’ not loans.”

“Shadow lending in debt receivables increased 63% to Rmb14tn ($2.16tn) last year, according to an analysis of 103 Chinese banks by Wigram Capital Advisors, equivalent to 16.5% of the formal loan book.”

“Aggressive balance sheet expansion by midsized lenders has also increased their systemic importance to China’s overall banking system. The big four’s share of total banking assets has fallen from 51% in 2009 to 38% at the end of 2015, according to Wigram’s calculations.”

China’s fizz goes flat, even with far bigger credit stimuli. James Kynge. Financial Times. 4 May 2016.

Bottom line: “money is losing the power to energize important economic muscles. Asset prices in the all-important property market – which drove China’s recovery from the 2008 financial crisis – are now so high relative to household incomes that it is hard to envisage another sustained rally.”

“On average, it would take 25 years, 33 years, 36 years and 19 years of household income in Beijing, Shanghai, Shenzhen and Guangzhou respectively for a family to buy a 90 sq m (969 sq ft) apartment, according to calculations by Mizuho Securities in Hong Kong. By contrast, London house prices are 9.2 times average earnings for first-time buyers, according to Nationwide data.”

“The International Monetary Fund estimates that $1.3tn in corporate debt – or almost one in six of the business loans on Chinese banks’ books – was owed by companies that brought in less in revenues than they owed in interest payments.”

“So unleashing a new tide of credit to ease debt problems is ‘like smoking opium to look healthy,’ said Professor Li Weisen of Fudan University, according to the South China Morning Post.”

“China expanded total domestic credit by Rmb12tn, or 34% of gross domestic product, in the year to November 2009 – significantly less than the Rmb27.9tn, or 40% of GDP, in the year to February this year, according to Bernstein Research.”

“But while the 2009 stimulus reinvigorated growth from 6.1% in the first quarter to a full-year GDP growth rate of 9.2%, the flood of credit seen in the year to February has been accompanied by a gentle decline in GDP headline numbers.”

Rising Profits Don’t Lift Workers’ Boats. Peter Coy. Bloomberg. 5 May 2016.

“Big business is getting bigger, and workers’ slice of the economic pie is getting smaller. Those trends have bred resentment toward large corporations. Now research shows a surprisingly tight link between the two phenomena: The share of the pie that goes to workers has been shrinking most in precisely those industries where ownership is becoming more concentrated.”

“Increasing industry concentration ‘may explain one of the transcendent issues confronting the U.S. economy,” namely labor’s declining share and profits’ rising share of the value a company creates, Michael Feroli, the chief U.S. economist at JPMorgan Chase, wrote in an April 25 research note.”

As an explanation of the trend, “Feroli says, is that industries with more concentrated ownership can charge higher prices. They pay out their extra profits to shareholders, or to the government in taxes, but not to workers.”

“One hopeful sign for workers: The share of national income going to wages and salaries has rebounded since 2012, erasing about 30% of its post-1997 decline.”

Other Interesting Articles

Bloomberg Businessweek

The Economist