May 13 – May 19, 2016 – the janus observer

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