Month: June 2016

June 17 – June 23, 2016

Eight massive shifts underway in energy. U.S. men of prime working age are dropping out of the labor force. Venezuela on the brink of social and economic collapse.



    • “Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby.”
    • Interestingly, “most of the buyers of the most expensive parcels are state-owned enterprises. A property subsidiary of China Gezhouba Group, a state-owned builder of power plants and dams, spent 3.3 billion yuan last month to buy the most expensive land, in terms of price per square meter, in Nanjing. Another state dam construction company, Power Construction Corp. of China, snapped up a piece of land in China’s bubbliest property market, the southern metropolis of Shenzhen, for 8.3 billion yuan.”
    • “The domestic bond market and growth in asset-backed securities have made financing easier for developers, causing companies to chase whatever assets they can. Continuing reforms of state-owned enterprises could also be a trigger, as these firms have incentives to inflate their balance sheets to gain clout in consolidation talks. For some which have already invested heavily in real estate, keeping land prices high makes sense.”
    • In 2015 a record 960m cubic meters of cargo passed through the canal, starting June 26 the canal will have capacity of 1.7 billion cubic meters of cargo annually.  “The biggest container ships that could use the old canal, known as Panamaxes, can carry around 5,000 TEUs (20-foot equivalent units, or a standard shipping container). Neo-Panamaxes that will squeeze through the new locks can carry around 13,000 TEUs. Although the world’s largest ships have space for nearly 20,000 TEUs, the majority of the global fleet will now fit through the canal.”
    • “America’s east-coast ports should get busier… And vessels carrying liquefied natural gas from America’s shale beds will be able to pass through the locks for the first time, heading to Asia. They are expected to account for 20% of cargo by volume by 2020.”
  • Anjani Trivedi of the Wall Street Journal drew attention to the potential credit black hole brewing in China.
    • “China’s M1 money supply, a measure of the most liquid assets in the banking system as cash and certain types of demand deposits, is growing at its fastest pace in six years. Meanwhile, M2 money supply, a broader gauge of liquidity including longer-term deposits, expanded at the slowest rate in a year. The ratio of these two rose to its highest since the data has been tracked.”
    • “One of the main sources of the rapid M1 growth is troubling: short-term, higher-yielding investments such as wealth-management products in the form of current deposits that now account for 95% of the growth of M1.”
  • Yukako Ono and Lucinda Elliott of the Financial Times reported on Nigeria’s recent decision to float its currency on Monday (June 20).
    • “Nigeria’s long-awaited flexible foreign exchange rate regime got off to an explosive start on Monday as the naira slid by as much as 27% to N254 to the US dollar.”
    • “The currency had been pegged at about N197 per dollar since March 2015. Nigeria, Africa’s biggest economy – where oil exports account for more than 90% of foreign revenue – did not follow other large oil exporting nations which began devaluing their currencies in 2014 as crude prices fell by more than half.”
    • “But short-term public finances are still in crisis. ‘Serious domestic reforms are needed that won’t be fixed by the exchange rate normalization,’ Mr. (John) Ashbourne (of Capital Economics) said. As a result of sabotage by resurgent militants in the oil-producing Niger delta, Nigeria has been losing about 700,000 barrels of oil a day. This, and the fall in oil prices since 2014, mean that the state is receiving a quarter or less of what it earned two years ago.”
    • As a follow up as of Thursday (6/23), the exchange rate was 283.50 Naira to $1 USD.
  • Patrick Jenkins of the Financial Times highlighted the slow moving financial crisis that is underfunded pensions.
    • “A recent report by Citigroup shone a light on just how big a nightmare is looming. It found most pension plans in the US and UK are underfunded, with an aggregate 18% deficit.”
    • “Government pension schemes are in an even worse state. Citi found the value of unfunded or underfunded liabilities for 20 OECD countries is $78tn – nearly double the $44tn published national debt number.”


WSJ – Why China’s Developers Can’t Stop Overpaying for Property – Jacky Wong 6/19

WSJ_Why China’s Developers Can’t Stop Overpaying for Property_6-19-16

WSJ – Credit Black Hole – Anjani Trivedi 6/20

WSJ_Chinese Cash Disappearing Down Credit Black Hole_6-20-16

FT – Nigeria’s currency tanks against dollar on float – Yukako Ono and Lucinda Elliott 6/20

FT_Nigerian naira falls_6-20-16


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

The World Nears Peak Fossil Fuels for Electricity. Tom Randall. Bloomberg. 12 Jun. 2016.

“The way we get electricity is about to change dramatically, as the era of ever-expanding demand for fossil fuels comes to an end – in less than a decade. That’s according to a new forecast by Bloomberg New Energy Finance (BNEF) that plots out the global power markets for the next 25 years.”

“Call it peak fossil fuels, a turnabout that’s happening not because we’re running out of coal and gas, but because we’re finding cheaper alternatives. Demand is peaking ahead of schedule because electric cars and affordable battery storage for renewable power are arriving faster than expected, as are changes in China’s energy mix.”

The eight massive shifts underway:

  1. There Will Be No Golden Age of Gas
    • “The cost of wind and solar power are falling too quickly for gas ever to dominate on a global scale, according to BNEF.”
    • The peak year for coal, gas, and oil: 2025.

Bloomberg_Peak fossil fuels_6-12-16

  1. Renewables Attract $7.8 Trillion
    • “Humanity’s demand for electricity is still rising, and investments in fossil fuels will add up to $2.1 trillion through 2040. But that will be dwarfed by $7.8 trillion invested in renewables, including $3.4 trillion for solar, $3.1 trillion for wind, and $911 billion for hydro power.”
    • “But by 2027, something remarkable happens. At that point, building new wind farms and solar fields will often be cheaper than running the existing coal and gas generators.”
    • “By 2028, batteries will be as ubiquitous as rooftop solar is today.”

Bloomberg_Solar on the upswing_6-12-16

  1. Electric Cars Rescue Power Markets
    • “The adoption of electric cars will vary by country and continent, but overall they’ll add 8% to humanity’s total electricity use by 2040, BNEF found.”

Bloomberg_Electric cars go mainstream_6-12-16

  1. Batteries Join the Grid
    • “The scale-up of electric cars increases demand for renewable energy and drives down the cost of batteries. And as those costs fall, batteries can increasingly be used to store solar power.”

Bloomberg_Here come the batteries_6-12-16

  1. Solar and Wind Prices Plummet
    • “For every doubling in the world’s solar panels, costs fall by 26%, a number known as solar’s ‘learning rate.’ Solar is a technology, not a fuel, and as such it gets cheaper and more efficient over time. This is the formula that’s driving the energy revolution.”
    • “Wind-power prices are also falling fast – 19% for every doubling. Wind and solar will be the cheapest forms of producing electricity in most of the world by the 2030s, according to BNEF.”

Bloomberg_Beautiful math of solar power_6-12-16

  1. Capacity Factors Go Wild
    • The capacity factor (essentially the efficiency ratio) for renewable energy technologies is getting much better.
    • “Once a solar or wind project is built, the marginal cost of the electricity it produces is pretty much zero–free electricity–while coal and gas plants require more fuel for every new watt produced. If you’re a power company with a choice, you choose the free stuff every time.”

Bloomberg_Capacity factors getting better_6-12-16

  1. A New Polluter to Worry About
    • “China’s evolving economy and its massive shift from coal to renewables mean it will have the greatest reduction in carbon emissions of any country in the next 25 years, according to BNEF.”
    • But, “India’s electricity demand is expected to increase fourfold by 2040” and they have tons of coal which they intend to use.

Bloomberg_India the fastest-growing polluter_6-12-16

  1. The Transformation Continues
    • Unfortunately, the shift to renewables is not happening fast enough…

Bloomberg_Climate is still in trouble_6-12-16

US low-skill males drop out of jobs market. Sam Fleming. Financial Times. 20 Jun. 2016.

“Labor-force participation among men of prime working age has dropped by more in the US than in any other OECD country apart from Italy in the past quarter century.”

A recent report from the Council of Economic Advisers “shed light on one of the major concerns about America’s recovery: while unemployment has been falling, a large number of people have also been dropping out of the jobs market altogether.”

“Among so-called prime-aged men between the ages of 25 and 54, the participation rate fell more steeply than in all but one other country in the OECD from 1990 to 2014, the report found. It is now the third-lowest among 34 OECD nations.”

The report found that “this fall in the prime-age male labor force participation rate, from a peak of 98% in 1954 to 88% today, is particularly troubling since workers at this age are at their most productive.”

“The analysis shows that participation rates have diverged sharply between people who have a college degree or more, and those who do not. In 1964, some 98% of prime-age, college-educated men participated in the workforce, compared with 97% of those with a high-school degree or less. By 2015, the rate for college-educated men had slipped to 94%, while that for those with a high-school degree or less had plunged to 83%.”

FT_Prime-age male labor force participation_6-20-16

Further, “more than a third of those prime-aged men who are outside the workforce are living in poverty, suggesting their decision to drop out is not a choice they made because they had other sources of income.”

Is Venezuela close to boiling point? Pan Kwan Yuk. Financial Times. 21 Jun. 2016.

You’ll note this week that there is a lot of coverage on this topic from the NYT piece about Venezuelans ransacking stores for basic goods, to the Bloomberg Businessweek article on how weak government structures fall apart when climate stresses get added to the mix, to the Financial Times article on how Chinese government officials have been meeting with the opposition politicians in Caracas to ensure that their loans will eventually be paid.  Bottom line, things are coming apart at the seams.

“Venezuela is on the brink of economic and social collapse. There is a high chance of a sovereign default and a removal of the president over the next eighteen months.” – Capital Economics

“The worst part of this story is that Venezuela hasn’t hit bottom yet – the only light at the end of this tunnel seems to be from another of a series of oncoming locomotives.” – Russ Dallen, managing partner at Caracas Capital Markets

“The violent food riots that have swept the country are but the latest sign that things in Venezuela might have reached a boiling point. The collapse in the bolivar “fuerte” – or strong bolivar – which is trading close to 1,100 per dollar in the black market – is another. To put this in perspective, the country’s biggest banknote – the 100 bolivar – is now worth just a mere 9 US cents.”

FT_Collapse of the bolivar_6-21-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Nigeria changes course with painful devaluation 6/16

FT – Whatever happened to the China crisis? 6/19

FT – Perverse incentives lie behind Microsoft’s LinkedIn purchase 6/19

FT – Egyptians rush to invest in property to counter the pound’s slide 6/19

FT – Hedge funds seek long term money for distressed debt wagers 6/20

FT – Central banks’ front-loading leaves modest pickings for investors 6/20

FT- Chinese banks brace for storm in face of shadow finance calm 6/20

FT – The corn shortage that Brazil really can’t afford 6/21

FT – China bankruptcies surge as government targets zombie enterprises 6/22

Investment News – Allianz’ Mohamed El-Erian sees ‘common element’ between Brexit vote, negative rates, strange politics and Fed policy 6/20

MarketWatch – A storm is brewing in the real-estate market, Pimco warns 6/20

Vanity Fair – Leaked Documents Reveal How Much Uber Drivers Really Make 6/23

WSJ – Apartment Boom Needs Cooling-Off Period 6/16

WSJ – China’s Short-Term Lending Boom Won’t End Well 6/16

WSJ – Losers Abound in $7 Billion Chinese Takeover Scuffle 6/20

WSJ – Rents Are Booming, But for How Long? 6/21

Yahoo Finance – Jim Chanos shreds ‘shameful’ Tesla-SolarCity deal 6/22


June 10 – June 16, 2016

The shipping world is about to change with the opening of new Panama Canal locks. U.S. shale reserves: now you see me, now you don’t.



    • “About 40 trillion yen ($365 billion) in cash has piled up in homes across Japan, according to a Dai-ichi Life Research Institute estimate – equivalent to about 8% of GDP.”
    • “What it means for 40 trillion yen to be sleeping under mattresses is that the deflationary mindset is deeply rooted, and Japanese have become hypersensitive to risk.” – Hideo Kumano, chief economist at Dai-ichi Life
    • This of course has been a boon to safe manufacturers, with “sales of safes in March were up 86% from a year earlier, the highest level ever, according to government data.”
    • “The People’s Bank of China has spent about $473bn in foreign exchange reserves since it surprised global markets last August by changing the way it sets its daily guidance rate for the currency, according to Financial Times estimates based on official data.”
    • As a central bank official so aptly put it “the most important factor is confidence, both globally and within China. The cost of intervention in terms of reserves has been high but this policy can’t be evaluated just in terms of numbers. Once confidence is lost it can’t be easily restored. Then a lot of bad things can happen.”
  • Shawn Donnan and Tom Mitchell of the Financial Times highlighted how concern over China’s corporate debt balances is spreading, even to the likes of the IMF.
    • “China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned.”
    • “Mr. Lipton (David Lipton – the IMF’s number 2) highlighted the state-owned enterprises, which he said were responsible for 55% of the corporate debt pile despite representing 22% of economic output and which ‘are essentially on life support.'”
    • “While concluding the issue is ‘manageable’, he warned that a recent IMF estimate that put the potential losses for China’s banks from bad corporate loans at 7% of GDP was a conservative estimate that excluded exposures in the ‘shadow banking’ sector.”
  • With declining investment yields the world over and an abundance of negative government debt, Attracta Mooney of the Financial Times points to how sovereign wealth funds have been piling into real estate to boost returns.  As an aside, Yahoo Finance drew attention to a recent Urban Land Institute PricewaterhouseCoopers survey that indicated that many U.S. real estate pros are not as enthusiastic about U.S. property as their foreign counterparts.
    • “State-backed investment vehicles, which are used by countries either to save for a rainy day or to provide money for future generations, increased their allocations to property by 29% last year, according to research looking at 77 sovereign funds with $8tn in assets.”
    • “The push into property comes as interest rates have reached record lows, forcing investors into alternative asset classes in the search for better returns.”
    • “Sovereign wealth funds posted average returns of 4.1% last year, despite having a combined target of 5.9%, according to Invesco, the asset manager that carried out the research.”
    • “The study did not provide a breakdown of returns by asset class, but Norway’s fund said in March it had achieved 10% returns from its investments in property last year. Fixed income, in contrast, returned just 0.3%.”
    • On an allocation basis, there is plenty of room for increased real estate commitments “property still accounts for a tiny proportion of sovereign funds’ portfolios: 6.5% last year, up from 4.1% in 2014, according to Invesco.”
  • Data is data. Sometimes it’s good and other times not so much. Further, interpretation varies and can be misleading as the Economist points out in why the weak jobs report belies the resilience of the American economy.
    • Despite the weak jobs report, things aren’t that bad in America. “Personal consumption, adjusted for inflation, is up by 3% in the past year, having surged in April.”
    • The University of Michigan’s consumer-confidence index has been exceeding the average held during the 2003-2007 boom. “According to a recent Fed survey, 69% of Americans say they are ‘doing okay’ or ‘living comfortably’, up from 62% in 2013.”

Special Reports


FT – Stocks under pressure as bond yields rise 6/10

FT_JGB 10 year yield_6-10-16

FT – China spent $470bn to maintain confidence in renminbi – Gabriel Wildau and Tom Mitchell 6/12

FT_China spent $470bn to maintain confidence in renminbi_6-12-16

Mauldin Economics – Hot Summer Economic Weirdness – John Mauldin 6/11

Mauldin Economics_Race to Negative Bond Yields_6-11-16

WSJ – German Benchmark Bond Yield Dips Below Zero 6/14

WSJ_German 10-year bund drops below zero_6-14-16

The Big Picture – Foreigners selling US equities at record pace – Torsten Slok 6/15

Big Picture_Foreigners losing confidence in US equities_6-15-16

WSJ – China’s Suddenly Shrinking Corporate Bond Market 6/15

WSJ_China’s Suddenly Shrinking Corporate Bond Market_6-15-16

Visual Capitalist – The Shift to a Cashless Society is Snowballing – Jeff Desjardins 5/17

Visual Capitalist_Going Cashless Around the World_5-17-16

Bloomberg – China Dumping More Than Treasuries as U.S. Stocks Join Fire Sale 6/15

Bloomberg_China dumping US Stocks_6-15-16


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

Panama Canal, the Reboot. Alex Nussbaum, Naureen Malik, and Christopher Cannon. Bloomberg. 2 Jun. 2016.

“Nine years of construction work, at a cost of more than $5 billion, have equipped the Panama Canal with a third set of locks and deeper navigation channels, improvements that will double its capacity. When the new locks slide open for the first time in late June, the reverberations will be felt at Asian gas terminals, on Great Plains farms, and in ports from Long Beach, Calif., to Santiago, Chile.”

Bloomberg_Panama Canal, the reboot_6-2-16

Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven. Asjylyn Loder. Bloomberg. 14 Jun. 2016.

“Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues, it was worth almost $15 billion at its 2012 peak.”

“Then came the bust. Almost half of Ultra’s reserves were erased from its books this year. The company filed for bankruptcy on April 29 owing $3.9 billion.”

“Proven reserves – gas and oil resources that are among the best measure of a company’s ability to reward its shareholders and repay its debts – are disappearing across the shale patch. This year, 59 U.S. oil and gas companies deleted the equivalent of 9.2 billion barrels, more than 20% of their inventories, according to data compiled by Bloomberg.  It’s by far the largest amount since 2009, when the Securities and Exchange Commission tweaked a rule to make it easier for producers to claim wells that wouldn’t be drilled for years.”

For reference, after the 2009 rule change “reserves surged 67%” in the following five years based on the 53 companies with records that far back.  “Almost half the gains came from wells that existed only on paper.”

“Drillers face pressure to keep reserves growing. For many, the size of their credit line is tied to the measure.” Thing is that “there are two ways to increase reserves: buy more or find more.  Fracking made it easier to do the latter, and the industry lobbied the SEC to count more undeveloped acreage as proved reserves…”

“The SEC agreed, with two key limits. First, the wells must be profitable to drill at a price set by an SEC formula. The companies got a temporary reprieve for 2014 because the SEC number was about $95 a barrel even though crude had plummeted to less than $50 by the time results were reported in early 2015.”

“That advantage has disappeared.”

“The SEC also requires that undeveloped wells be drilled within five years of being added to a company’s books.”

Other Interesting Articles

The Economist

Bloomberg – Earth’s Heat Extends Unprecedented Streak of Shattered Records 6/16

FT – Nigerian economy drops further into freefall 6/8

FT – Chinese tourists search far and wide for Japan’s rare whiskies 6/9

FT – The hedge fund fee structure consumes 80% of alpha 6/11

FT – Why hasn’t the productivity crisis caused a bear market (yet)? 6/12

FT – Tax rises on foreign homebuyers in Australia 6/13

FT – Japanese government bond yields fall to fresh lows 6/13

FT – MSCI A-shares denial sends Beijing clear message 6/15

FT – Gold is no safe port in this storm 6/15

FT – Uber points to profits in all developed markets 6/16

Herald News – Wood tower at the University of British Columbia a game-changer for construction 6/14

NYT – A Russian Cybersleuth Battles the ‘Dark Ages’ of the Internet 6/10

NYT – At the Birthplace of a Graft Scandal, Brazil’s Crisis Is on Full Display 6/10

NYT – The Overinflated Fear of Being Priced Out of Housing (Robert Shiller) 6/10

REBusiness Online – French Billionaire Buys Manhattan Office, Retail Building from Thor Equities for $525M ($5,250 PSF) 6/13

WSJ – These Chinese Developers Shed Property in Name Only 6/10

WSJ – China’s Banks: How Fixing Problems Can Make Them Worse 6/10

WSJ – China Economy: That Sputtering Sound Returns 6/13

WSJ – MSCI and China: Why There’s No Fear of Missing Out 6/15

Yahoo Finance – Real estate pros see recession by 2017, survey shows 6/16

June 3 – June 9, 2016

The volume of Chinese wealth-management products is becoming unwieldy. Banks have had enough of this negative interest rate nonsense.



    • “China today boasts roughly five workers for every retiree. By 2040, this highly desirable ratio will have collapsed to about 1.6 to 1.”
    • “At the same time, the number of Chinese older than 65 is expected to rise from roughly 100 million in 2005 to more than 329 million in 2050 – more than the combined populations of Germany, Japan, France, and Britain.”
    • “With the number of working-age Chinese men already declining – China’s working-age population shrank by 4.87 million people last year – labor is in short supply.”
    • “By hastening and amplifying the effects of this decline, the one-child policy is likely to go down as one of history’s great blunders.”
    • “As a result, by 2020, China is projected to have 30 million more bachelors than single women of similar age.”
    • “By the end of the century, China’s population is projected to dip below 1 billion for the first time since 1980. At the same time, America’s population is expected to hit 450 million.”
    • A May 26 auction of non-performing loans (NPLs) was met with tepid reception and was primarily an event of banks shuffling bad debt between each other.
    • Thing is, if this strategy doesn’t catch on with private sector investors, “a failure to purge lenders of their NPLs may fuel expectations for a government-led bailout, which Standard Chartered Plc estimates could cost as much as $1.5 trillion.”
    • According to Bloomberg Intelligence, “China has about $2.4 trillion of corporate debt at risk of default.”
    • Hopefully the debt products being sold become more transparent and easier to asses from a risk perspective so that the private sector can reasonably jump in.

Special Reports


FT – Argentina set to tumble 22 places on global wealth list – Steve Johnson 5/27

FT_Latin America GDP growth_5-27-16


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

Long Shadow Hangs Over China’s Banks. Anjani Trivedi. Wall Street Journal. 6 Jun. 2016.

“The growth of off-balance sheet WMPs (Wealth Management Products) is exploding, with issuance rising 7.3 trillion yuan ($1.1 trillion) last year, up nearly three-quarters from the previous year, according to Charlene Chu of Autonomous Research. That is equivalent to nearly 40% of China’s 19 trillion yuan credit growth in 2015, including debt issuance under a local government bond-swap program. And while customers are told most WMPs aren’t principal guaranteed, that distinction may be shaky in China’s financial system rich with moral hazard.”

While this isn’t the first time that debt issuance has surged from WMPs; however, “the structures this time around are increasingly complex. Investors in China’s interbank market – including banks – took up almost a third of WMP buying last year, up from 2% the previous year. Most of that is from WMPs essentially buying other WMPs, creating an opaque layering of obligations, Ms. Chu said, echoing the collateralized debt obligations made famous during the U.S. housing bust.”

“Then there is duration risk. Over three quarters of these investment products mature within six months, putting constant repayment pressure on banks. To meet these products’ yield demands, WMPs have been heavy buyers in China’s rip-roaring bond market. A sustained reversal of the bond market could trigger pain on WMPs.”

WSJ_Growth of WMPs in China_6-6-16

Negative rates stir bank mutiny. James Shotter and Claire Jones. Financial Times. 8 Jun. 2016.

“Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies, with one big German group going so far as to weigh storing excess deposits in vaults.”

“The central bank policies have hit bank profitability in both regions and German banks have been vocal in criticizing Mario Draghi, European Central Bank president, accusing him of punishing savers and undermining their business models. The policy cost German banks 248m last year, according to the Bundesbank.”

“Japanese banks have been more muted but Bank of Tokyo Mitsubishi UEJ has become the first leading lender to break ranks, confirming it is considering giving up its primary dealership status for sales of Japanese government bonds.”

“The more central banks think that they can violate the zero-bound, the more likely it is that banks will look at ways to limit their costs. And that means they will hold more cash if they can find efficient means to do so.” – Adalbert Winkler, professor at the Frankfurt School of Finance and Management.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – WeWork to Halt Hiring, Make Major Cuts to Staff 6/6

FT – Crisis-era tremors shake property funds 6/2

FT – Emerging markets to slow as convergence theory takes hold 6/2

FT – The period of maximum danger for bond investors is yet to come 6/6

FT – Saudi Arabia considers income tax for foreign residents 6/7

FT – Bank of Korea unexpectedly cuts rates to 1.25% 6/8

FT – Bill Gross warns over $10tn negative-yield bond pile 6/9

NYT – Toxic Fish in Vietnam Idle a Local Industry and Challenge the State 6/8

WSJ – Bank loans: Why it Feels Like 2008 All Over Again in Asia 6/6

WSJ – How to Time a Chinese Banking Tipping Point (2019) 6/7

WSJ – China’s Property Prices Rebound, but Stocks Tell Another Story 6/7

WSJ – Rock-Bottom Bond Yields in Europe Hit All-Time Lows 6/8

WSJ – REIT Surprise: How Real Estate Crushed the Stock Pickers 6/8

Yahoo Finance – JPMorgan: The odds of a recession starting in 12 months has hit a high 6/3

May 27 – June 2, 2016

Loans taken out by commodity rich countries in the good old days to be paid back in oil have become a major liability. The financial outlook for Chinese firms isn’t looking so good. Negative yields on corporate bonds – hey, it’s better than what you can get for the government stuff.



    • “A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker”
    • “8,000 units are under construction and nine towers were completed since the end of 2013.”
    • “Condo purchases from January through April slid 25% from a year earlier, while the average price fell 6% on a per-square-foot basis, CraneSpotters data show.”
    • “The concern is we’re in a price-discovery phase, and the prices people are trying to get for their condos is a lot higher than the market will bear. That may signal a coming price correction.” – Andrew Stearns, founder of, a provider of residential mortgages for foreign nationals.
  • So what do you do if you’re a pension fund (or an individual investor for that matter) that ‘needs’ to achieve a certain rate of return (if you don’t want to save more or increase your unfunded liabilities)… as Timothy Martin in the Wall Street Journal points out, you pile on the risk and cross your fingers.
    • “What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.”
    • “In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates Inc., which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%.”
    • Brazil’s economy contracted 5.4% year-over-year leading economists to “say the once high-flying emerging market is suffering a deep recession that is starting to show characteristics of a depression.”
    • “GDP contracted for the fifth straight quarter in the three months to March and has declined or been virtually flat in eight of the past 10 quarters.”
    • “Goldman Sachs economist Alberto Ramos said a depression was defined as a recession that lasts eight or more straight quarters in which there is a decline in real GDP of 10% or more.”  Well, according to Ramos, “Brazil’s recession has been running for two years and has reduced the size of the economy to the level of late 2010 with a decline in real per capita GDP of 9%.”
    • Thing is it won’t be easy to turn this ship around.  “Marcos Casarin of Oxford Economics predicted it would take 10 years for Brazil to recover the level of per capita GDP of 2013.”  That’s even taking into consideration the government’s new economic team that has decent credibility.
    • Hopefully the Summer Olympics help… ole, ole, ole, ole…

Special Reports


Bloomberg – Miami’s Condo Frenzy Ends With Inventory Piling Up in New Towers – Prashant Gopal 5/26

Bloomberg_Downtown Miami Condo Boom cooled_5-26-16

FT – Big oil groups raise net debt by a third to cope with low prices – Ed Crooks 5/29

FT_Big oil, bigger borrowing_5-29-16

FT_Net debts of largest US and Euro oil cos_5-29-16

WSJ – Pension Funds Pile on Risk Just to Get a Reasonable Return – Timothy Martin 5/31

WSJ_Rolling the dice on investment returns_5-31-16

FT – China – FTCR Underground Lending Index falls after credit boom 5/31

FT_China Underground Lending Index_5-31-16

FT – Earnings fall betrays shaky state of China’s economy – Yusho Cho and Kenji Kawase 5/31

FT_Chinese profits down_5-31-16

FT – Brazil’s GDP reveals depths of recession – Joe Leahy and Samantha Pearson 6/1

FT_Brazil's economy in crisis mode_6-1-16


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

Debt repayments in crude cripple poorer oil producers. Libby George and Dmitry Zhdannikov. Reuters. 24 May 2016.

“Poorer oil-producing countries which took out loans to be repaid in oil when the price was higher are having to send three times as much to respect repayment schedules now prices have fallen.”

“Angola, Africa’s largest oil producer has borrowed as much as $25 billion from China since 2010, including about $5 billion last December, forcing its state oil firm to channel almost is entire oil output toward debt repayments this year.”

“This year Angola, Nigeria, Iraq, Venezuela and Kurdistan are due to repay a total of between $30 billion and $50 billion with oil…”

“Repaying $50 billion required only slightly over 1 million barrels per day (bpd) of oil exports when it was trading at $120 per barrel but with prices of around $40, the same repayment would require exports of over 3 million bpd.”

“All of those oil nations – Angola, Nigeria, Venezuela – have taken money for survival but haven’t got any money left for investments. That is very damaging to their long-term growth prospects. People tend to look at current production volumes but if you have committed your entire production to China or other buyers under loans – then you cannot invest to keep growing and won’t benefit from higher prices in the future.” – Amrita Sen from Energy Aspects, a think-tank.

“China has also become Venezuela’s top financier via an oil-for-loans program which since 2007 has funneled $50 billion into Venezuelan coffers in exchange for repayment in crude and fuel, including a $5 billion deal last September.”

“While details of the loans have not been made public, analysts from Barclays estimate Caracas owes $7 billion to Beijing this year and needs nearly 800,000 bpd to meet payments, up from 230,000 bpd when oil traded at $100 per barrel.”

“Iraq is trying to renegotiate contracts for investment and development of new oil fields that it has with companies including Exxon, Shell and Lukoil. It was supposed to repay the companies $23 billion this year with oil but is now arguing that it will only have enough crude to repay $9 billion.”

“In contrast, OPEC’s Gulf Arab members – Saudi Arabia, the United Arab Emirates, Kuwait and Qatar – have very few joint ventures with oil companies, do not have pre-payment deals with China and do not need to borrow from trading houses.”

“It may ultimately be mounting supply disruptions in stressed states, rather than collective cartel action, that causes an accelerated market rebalancing.” – Helima Croft, head of commodity strategy at RBC Capital

Chinese firms’ financial outlook worsens at record rate. James Kynge. Financial Times. 26 May 2016.

“The share of rated issuers in China with a negative outlook bias…has increased to a record high of 69%,” according to a Moody’s report authored by Michael Taylor, Moody’s chief credit officer for the Asia Pacific region, and colleagues. This proportion was up from 15.7% at the end of last year and 33.3% at the end of March this year.”

“The previous peak proportion of rated Chinese debt issuers with a “negative outlook bias” was 45.5%, a level hit in May 2009 as the Chinese economy suffered in the aftermath of the financial crisis.”

FT_Negative ratings basis for Chinese issuers_5-26-16

“But, in spite of the growing worries, Moody’s said in its report that China had the capacity to avoid a financial unravelling.”

As to the reasons for the spike in the negative outlook, 1) the amount of capital now required to generate growth, 2) increasing debt levels, and 3) returns on assets are on the decline.

“In 2014, 6.3 units of capital investment were required to generate a unit of growth, the highest level since the 2008 crisis and far above the pre-crisis 2.9 times seen in 2007.”

FT_Declining productivity for capital investment in China_5-26-16

In regard to debt, “the rising interest burden from elevated debt levels could eventually crowd out productive investment, reducing the economy’s long-run growth potential” according to the Moody’s report.

As to returns on assets, “overall state-owned enterprises (SoE) returns on assets slipped to 2.9% in 2015 from a post-crisis high of 5.9% hit in 2010.”

FT_Declining profit margins for Chines cos_5-26-16

Corporate bonds join negative yield club. Eric Platt and Gavin Jackson. Financial Times. 2 Jun. 2016.

“More than $36bn of corporate bonds with a short-term maturity currently trade with a sub-zero yield…”

“The yield on a host of short-term paper sold by groups including Johnson & Johnson, General Electric, LVMH Moet Hennessy Louis Vuitton and Philip Morris now trade below zero in the secondary market. While no corporate bond has yet been sold with a negative yield, recent debt offerings from French pharmaceuticals market Sanofi and consumer goods conglomerate Unilever were issued as zero coupon securities.”

“Separate data tracked by Tradeweb put the value of negative yielding corporate bonds at $380bn – a figure that includes euro denominated bonds maturing in the next year that are not captured by some of the main index providers. The total sum could be greater when counting bonds issued in Swiss franc or Japanese yen, data provider Markit noted.”

As Iain Stealey, a portfolio manager with JPMorgan Asset Management so aptly put it “as bonds get to a shorter and shorter maturity, you’ll see more trade with a negative yield. Everything is relative and zero is not the lower bound anymore.

“As a dealer, you are happy to bid through zero because you know the ECB (European Central Bank) will keep buying.” – Barnaby Martin, head of European credit strategy at Bank of America Merrill Lynch

Bottom line, “the central bank has said it will be permissible for it to purchase investment grade corporate bonds so long as they yield more than the ECB’s deposit rate of minus 0.4%.”

“Companies have sought to take advantage of the drop in borrowing costs. More than $1tn of corporate debt has been issued globally since the year began, the fourth consecutive year bond sales crossed that threshold by the start of June, according to Dealogic.”

“Maybe a highly-rated company can issue a two or three year bond with a zero coupon, but if they can issue a 10-year bond with a 1% coupon, that might be a better long-term relative value.” – Marc Fratepietro, head of Americas investment grade debt capital markets at Deutsche Bank

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