Month: July 2016

July 22 – July 28, 2016

How much spare crude oil is there – hard to tell.  Nontraded REIT sales struggling.  There are a lot of dangers lurking in the Chinese P2P market, but the yield is just SO GOOD…

Headlines

Briefs

    • Chinese wealth management products are looking a lot like the junk bonds used for corporate raiding in the late 1980s rather than the traditional insurance policies they are supposed to be.
    • “China’s insurance regulator has warned against insurers becoming ‘automatic teller machines’ for activist shareholders, in a veiled reference to the battle for control of China Vanke, China’s largest residential developer, by insurance conglomerate Baoneng Group.”
    • “We will let those that truly want to do insurance come and do insurance and absolutely not allow companies to become financing platforms and ‘ATMs’ for large shareholders.” – Xiang Junbo, chairman of the China Insurance Regulatory Commission
    • “There are major regulatory gaps that need to be addressed. These ‘universal’ products have absolutely nothing to do with insurance. Some of them are very risky, but commercial banks are distributing them, and people trust the banks.” – senior financial regulator
    • With Puerto Rico facing approximately a $2bn interest and principal payments due on its general obligation bonds on July 1 and not being able to make the payments, the U.S. Congress recently passed a law that was meant to give Puerto Rico a temporary reprieve from “legal sanctions by creditors so it could restructure its obligations in an orderly way, and to maintain essential services.”
    • Well, Puerto Rico took this reprieve to pay about half of the amounts due, only they chose to whom went the payments.  “Puerto Rico did not pay any interest or principal on the most senior, or general obligation bonds, but did make payments on more junior bonds. The government also paid its employees’ pension funds $170m more than what was required for this year, despite the pensions supposedly being legally subordinated to bondholders.”
    • The thing is that US Treasury officials advised on some of this reprioritization… you can see the dangerous precedence this sets for municipal bonds…
    • “The bonds on which interest payments were made on July 1, such as the Puerto Rico convention center district and the Puerto Rico Highways and Transportation Authority, are disproportionately owned by bondholders on the island. Supposedly more-sophisticated mainland US investors had avoided these lower ranked issues on the misinformed premise that financial and legal analysis should outweigh political calculation.”
  • The Buttonwood column of The Economist highlighted a rather large potential problem the world is facing: the vanishing of working age adults
    • “The world is about to experience something not seen since the Black Death in the 14th century-lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.”
    • “The big question is whether economic growth and rising debt levels go hand-in-hand, or whether the former can continue without the latter. If it can’t, the future can be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labor-force participation among older workers.”
  • Christian Shepherd of the Financial Times covered that China is now enforcing its ban on original news reporting.
    • “A spokesman for Beijing Cyber Administration confirmed that state press reports that said conducting original reporting was a gross violation of the regulations (rule in place since 2005) and brought about ‘extremely nasty effects.’ The reports also said that the companies had been given a fixed period to ‘rectify’ the offending sites.”
    • “The trigger for the shutdown, according to media analysts, was coverage of flooding in northern China which – according to the official count – has left 130 dead and racked up damages of more than Rmb16bn ($2.4bn) in Hebei province alone.”
    • “The government does not want these platforms to provide their own news. They are only allowed to forward reports by outlets like Xinhua and the People’s Daily.” – Qiao Mu, a journalism professor in Beijing.

Special Reports

Graphics

FT – Renminbi drops to sixth in international payment ranking 7/20

FT_Top currencies for global payments_7-20-16

FT – Tough outlook for Hong Kong property – 7/21

FT_Tough outlook for Hong Kong property_7-21-16

Visual Capitalist – The Illusion of Choice in Consumer Brands – 7/21

Visual Capitalist_The illusion of choice in consumer brands_7-21-16

Bloomberg – Relief for Renters Will Prolong Fed’s Wait to Hit Inflation Goal 7/24

Bloomberg_Rising MF Supply_7-24-16

The Daily Shot 7/25

Daily Shot_Norway's Oil fund flows_7-25-16

FT – Landscape shifts for pipeline operators – Ed Crooks 7/24

FT_US Pipeline companies flow of funds_7-24-16

Economist – Buttonwood – Vanishing workers: Can the debt-fueled model of growth cope with ageing population? 7/23

Economist_Buttonwood - who will fill the jobs_7-23-16

WSJ – Why Pensions’ Last Defense Is Eroding – Timothy W. Martin 7/25

WSJ_Waning gains in public pensions_7-25-16

Economist – The Big Mac index: Patty-purchasing parity 7/23

Economist_Big Mac Index_7-23-16

Featured

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

How Much Oil Is in Storage Globally? Take a Guess. Dan Strumpf and Nicole Friedman. Wall Street Journal. 24 Jul. 2016.

“The historic fall in oil prices has created a pileup of inventories, much of it stashed in tanks in the U.S. and other industrialized countries that are committed to disclosing the latest tally, but millions of barrels of oil are flowing to locations outside the scope of industry trackers.”

“At the beginning of July, 23 supertankers capable of holding 43 million barrels of oil were anchored for a month or more in the Singapore straits, according to Thomson Reuters’s vessel-tracking service, up from 15 ships at the start of the year. If they were full, it would be enough to meet the U.S.’s oil needs for more than two days.”

WSJ_Counting Crude Oil_7-24-16

“‘OPEC has stopped being a swing supplier,” said Antoine Halff, director of the oil market program at Columbia University’s Center on Global Energy Policy. ‘Given the uncertainty about whether shale-oil production in the U.S. can take the role of swing supplier, it falls on stocks’ to replace lost barrels in the case of a supply disruption.”

“Uncertainty around storage was highlighted after attacks on Nigerian oil facilities in May and June. Following the assaults, some analysts forecast that Nigerian output would fall, which helped push oil prices above $50 a barrel. But shipping data showed Nigerian exports holding steady above 1.5 million barrels a day, according to data provider Windward.”

“Where did the exports come from?”

“In China, another storage mystery is unfolding. Government data show oil imports rising at a faster rate than refiners are processing it. The figures suggest the country has built a surplus 160 million barrels during the first half of the year, enough to meet its oil needs for about two weeks.”

“Analysts believe those barrels have gone to commercial tanks or to government-owned strategic reserves.”

“The distinction is critical. If most of the oil has gone to strategic reserves, demand could shrink once the tanks reach capacity, which some analysts say could happen this year.”

Nontraded REIT sales fall off a cliff as industry struggles to adapt. Bruce Kelly. InvestmentNews. 24 Jul. 2016.

“Over the first five months of the year, sales of full-commission REITs, which typically carry a 7% payout to the adviser and 3% commission to the broker-dealer the adviser works for, have dropped a staggering 70.5% when compared with the same period a year earlier, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”

“Their recent sharp drop in sales is part of a longer cycle. The amount of equity raised, or total sales of nontraded REITs, has been sinking by about $5 billion a year since 2013, when sales hit a high watermark of nearly $20 billion.”

As a result, independent broker-dealer company commissions are down in tandem.  “Industry bellwether LPL Financial said in its first-quarter earnings release that commission revenue from alternative investments, the lion’s share of which comes from nontraded REITs, was just $7.8 million, a staggering decline of 86.7% when compared with the first quarter of 2015.”

IN_Nontraded REIT sales fall off a cliff as industry struggles to adapt_7-24-16

Four key factors have hit the industry.  The blowup of Nicholas Schorsch’s REIT empire, recent FBI raids of United Development Funding (after hedge fund manager Kyle Bass called the company a Ponzi scheme), the Financial Industry Regulatory Authority Inc. rule 15-02, and the new DOL fiduciary rule.

  • The first two basically have brought the public and regulatory spot light to the industry and has shown the light on the less savory parts of the industry and its excessively high fees.
  • Finra rule 15-02 basically have caused an increase in transparency in the fees that the industry charges, now making them more accurately reflected on account statements.
  • And the DOL fiduciary rule “which will be phased in starting April, requires advisers to select investments for retirement accounts that are in the client’s best interest. Investments with high commission structures might not pass that test.” However, this rule also has a flip side, nontraded REITs may now be placed in retirement accounts (also as of April thanks to a Dept. of Labor ruling).

IN_Public Non-Listed REIT Fundraising since 2013_7-24-16

On the plus side, the industry is changing. New T shares are meant to reduce upfront commissions while spreading them over time (still high commissions) and larger financial institutions like Blackstone Group and Cantor Fitzgerald & Co. are looking at getting into the industry.  Hence references are made to the evolution of the mutual fund industry that also started out with high commission structures.

As Allan Swaringen, CEO of Jones Lang LaSalle Income Property Trust, put it “nontraded REITs have lived almost exclusively across independent broker-dealer channels. I don’t think that’s a model that will be successful going forward. It has to be sold by a variety of advisers.”

IN_2015 Top RE Sponsors_7-24-16

Chinese P2Ps plagued by flaky guarantees (fintech blog). Gabriel Wildau. Financial Times. 25 Jul. 2016.

“‘It’s just too easy to attract investment. That’s why it draws so many scammers,’ says Michael Zhang, chairman of Beijing-based Puhui Finance, a large P2P platform with a clean reputation.”

FT_Chines P2P plagued by flaky guarantees_7-25-16

“Beyond the problem of outright fraud is the thornier issue of raising risk awareness in a culture where debt investments are traditionally seen as carrying an implicit guarantee from issuers who are mainly state-owned institutions.”

FT_Chines P2P growth_7-25-16

“Dianrong.com, one of China’s largest P2P platforms, investment products carry a label that says ‘multiple guarantees.’ While the Chinese term used – baozhang – is distinct from the word for legally binding guarantees, it still translates as ‘guarantee’ or ‘safeguard.’ Many platforms now divert a portion of borrower interest payments into a ‘reserve fund’ used to protect investors from defaults, an arrangement that looks a lot like bank capital.”

“Soul Htite, the co-founder of Dianrong.com who previously co-founded US-based Lending Club, says that in an investing culture where defaults are rare, Chinese investors tend to choose products purely based on yield.”

“In the US we have a very good history of investing and people understand risk. (But) one problem we had in the first couple of years with Chinese investors is, we noticed that when you listed all the loans – this one yields 8% and another one yields 14% – people put all their money on the 14%. And we explained, ‘It’s not guaranteed, it might default.’ Still they put their money there. So that’s when we started forcing diversification on them.” – Soul Htite

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Gasoline Prices Around the World: The Real Cost of Filling Up 7/18

Business Insider – Hong Kong is ‘stuck between a rock and a hard place’ 7/23

FT – Brazil sees strong demand for bonds as market rallies 7/22

FT – Moscow’s building boom belies recession 7/22

FT – Thermal coal bears gripped by Chinese capacity squeeze 7/24

FT – Balance of power tilts from fossil fuels to renewable energy 7/25

FT – Chinese default exposes creditor anger at political interference 7/26

FT – Fossil fuels have had an aeon’s head start 7/26

NYT – Justice Dept. Rejects Account of How Malaysia’s Leader Acquired Millions 7/22

NYT – Uncle Sam Wants You – Or at Least Your Genetic and Lifestyle Information 7/23

NYT – Delusions of Chaos (Paul Krugman) 7/25

July 15 – July 21, 2016

Helicopter money coming to Japan? GMO on EU immigration and the Brexit. Hong Kong and China at a cross road.  ECB coming up against its quantitative easing boundaries.

Headlines

Briefs

    • China’s 2nd quarter gross domestic product came in at 6.7%, which is 10 basis points higher than forecast; however, the concern is where that growth has come from.
    • “Figures from the People’s Bank of China the same day showed that money supply growth was faster than expected, reaching levels last seen post 2008. New loans also rose by over $200bn, more than $50bn higher than economists’ estimates.”
    • Bottom line, “the reversion to state-led growth is unsustainable. Should China continue to shun reforms in favor of a quick fix, the short-term benefits of stabilized growth will be outweighed by the cost of persistent imbalances.”
    • The World Federation of Advertisers “estimates that between 10 and 30% of online advertising slots are never seen by consumers because of fraud, and forecasts that marketers could lose as much as $50bn a year by 2025 unless they take radical action. At that scale, the fraud would rank as one of the biggest sources of funds for criminal networks, even approaching the size of the market for some illegal drugs.”
    • “Global spending on online advertising has almost doubled in the past four years – reaching $159bn in 2015, according to research group eMarketer. This money underpins the internet economy and supports trillions of dollars of equity in media and technology.”
    • “Google, the biggest player in the online ad industry, generated revenues of $67bn from it last year.”
    • Bottom line, digital ad platforms and major buyers of online ads are emphatically building methods to track and prevent fraud and where they can and to the event that they can’t expect the federal government to step in.
  • Mark Heschmeyer of CoStar reported on Simon, WP Glimcher turning over the keys on two malls to their respective lenders.
    • Goes to show that just because a company is worth several billion dollars, doesn’t mean they pay back all their debts.
    • “While the overall retail property sector appears to be strengthening, a handful of loans for lower-quality shopping centers and malls financed at the height of the previous CRE cycle are coming due now and proving to be a thorn in the side of publicly traded REITs.”
    • “Simon Property Group and WP Glimcher both turned malls back over to the lenders this week, and Kimco Realty Corp. disclosed that it doesn’t expect one of its joint venture-owned malls will be able to refinance a loan set to come due this fall.”
    • “All three of the malls involved in the foreclosure actions were last financed in 2006 and securitized in mortgage backed bond conduits.”
    • As the saying goes, don’t hate the player, hate the game.

Special Reports

Graphics

FT – Do sovereign credit ratings still matter? 7/14

FT_Decline of AAA rating countries_7-14-16

FT_Declining government yields_7-14-16

FT – US oil rig count rises for third-straight week 7/15

FT_US oil rig count_7-15-16

FT – Auto sales and the oil price: the Great Unwinding continues beyondbrics – Paul Hodges 7/18

FT_Energy consumption in the US_7-18-16

Temporary work – How the 2% lives: Temping is on the increase, affecting temps and staff workers alike

Economist_US temporary employment_7-16-16

FT – Independent Chinese PMI gauge suspended indefinitely – Hudson Lockett 7/20

FT_China Minxin PMI vs official_7-20-16

Featured

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

Japan flirts with helicopter money. Gavyn Davies. Financial Times. 17 Jul. 2016.

“Whether or not they choose to admit it the Abe government is on the verge of becoming the first government of a major developed economy to monetize its government debt on a permanent basis since 1945.”

“There are many ways of defining helicopter money, but the essential feature is that it involves an increase in the budget deficit which is financed by a permanent increase in the central bank’s monetary base, not by the issuance of government debt.”

“This is different from quantitative easing, since QE involves the ‘temporary’ purchase of government debt, which is subsequently sold back into the market, at least in theory. And QE does not necessarily need to involve any increase in the budget deficit…”

While “the direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act.” It looks like the government is coming up with a work-a-round.

One method proposed is the issuance of perpetual bonds “…which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.”

Thing is, that “there is no doubt that the BoJ is now monetizing much of the increase in government debt needed to fund ¥10 trillion fiscal stimulus planned by the government. Since the market fully expects the BoJ’s debt purchases to be permanent, it is helicopter money by any other name.”

Why do this when the labor market is at close to full employment?  Basically the inflation expectations in Japan are REALLY low and the BoJ is seeking to reduce its vulnerability to “…any new deflationary shock, from China for example.”

The key point that helicopter money will confer is that debt sustainability (which is why the sales tax increases have been/are being implemented) is not the priority. Rather that Japan will live with whatever debt level it takes to achieve inflation.

“The key problem is that it might restore inflation far too well. It is very difficult to calibrate the amount of helicopter money that is needed to hit the inflation target.”

Expect the delicate dance to continue, which may fail to get Japan out of its deflationary rut.

Immigration and Brexit. Jeremy Grantham. GMO. Jul. 2016.

While this is piece is a commentary on immigration and the Brexit, I think it does a good job of presenting the scale of the immigration challenge that the EU is facing.  I will only highlight two specific items (the full commentary is a good read) for brevity.  1) Grantham’s stance on the markets “despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break…” and 2) some of his thoughts on immigration to the EU.

“The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.”

“They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.”

“This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.”

“For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population of 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman). Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.”

“I wrote two years ago that this immigration pressure would stress Europe and that the first victim would be Western Europe’s liberal traditions. Well, this is happening in real time as they say, far faster than I expected. It will only get worse as hundreds of thousands of refugees becomes millions.”

Hong Kong: One country, two economies. Ben Bland. Financial Times. 19 Jul. 2016.

Integration of Hong Kong with the Chinese mainland continues to be a delicate issue that is being stressed by a slowdown in the Chinese economy.

As Lily Lo, an economist at DBS, a Singaporean bank, put it “Hong Kong is really dependent on China and external trade. The Chinese economy is slowing down and this is a structural slowdown so we don’t think there will be a V-shaped recovery any time soon. There’s no quick fix.”

Further, as China has opened its economy more and more, Hong Kong is no longer the only or primary route to do business with China.  “Its container port, which was the world’s busiest in the 2000s, has fallen to fifth place, overtaken by Shanghai, Shenzhen and Ningbo.”

“Mr. Tsang (John Tsang, the financial secretary of Hong Kong) and Li Ka-shing, the billionaire whose interests in Hong Kong stretch from ports to property and retail to telecoms, have both warned that the economic outlook is worse than that faced during the Sars epidemic in 2003, which killed 299 people and prompted the last sharp slowdown.”

“Chow Tai Fook, the biggest jeweler in the world by market capitalization, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualized basis by 22% in the three months to the end of June.”

FT_Hong Kong retail sales_7-19-16 

“Yu Kam-hung, managing director of investment properties at CBRE, an estate agent, predicts that prices could fall up to 10% over the next year, and they are already 10 to 15% off their peak of 18 months ago.”

Then of course it doesn’t help that “there is a deep-seated animosity to (Chinese) mainlanders in Hong Kong. So why would they want to go somewhere they are not welcome when there are so many other choices.” – Shaun Rein, China Market Research in Shanghai

ECB faces QE dilemma after Brexit vote. Claire Jones and Elaine Moore. Financial Times. 20 Jul. 2016.

It wasn’t long after the Brexit referendum vote that government bond yields in the safest markets dropped even further (see graphic on Sovereign credit ratings above).  Problem is that the current structure in place within the European Central Bank (ECB) is reaching its limits.

Currently the ECB is buying €80bn a month in European member country debt to stimulate the overall European economy (aka Quantitative Easing or QE).

Well, “under current rules, the scale of purchases under QE match the size of a member state’s economy, meaning that Germany’s Bundesbank must buy around €10bn of government debt each month – more than any other central bank in the region.”

“But because of the recent bond market shifts, more than 50% of German bonds previously eligible for QE have now become too expensive for the Bundesbank to purchase, yielding less than the ECB’s self-imposed floor of minus 0.4%, according to data from Bank of America Merrill Lynch.”

FT_ECB looking for more bond options_7-20-16

So, now the ECB is essentially faced with three primary options (there are other options – see “Five ways to change the rules within the article).

  1. Scrap the minus 0.4% floor. The “economists at Goldman Sachs calculate (this) would buy the ECB the most time, enabling the Bundesbank to keep buying for up to another 18 months.”
    • “The option, however, would expose the eurozone’s central banks to heavy losses, which they have until now avoided because the minus 0.4% floor mirrors the ECB’s deposit rate charged on banks’ reserves.”
  1. “Scrap the rule that bond purchases match the size of a member states’ economy.”
    • “But such a shift would open the way to buying more bonds from the most indebted countries, and would so be the most controversial of the fixes. Nowhere would it attract more criticism in Germany, where the change would be viewed as a bailout by the back door for profligate member states.”
  1. End QE.

Don’t know if the EU or the world is ready for that.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Blackstone Said to Plan Invitation Homes IPO for First Half 2017 7/17

CoStar – Internet Commerce Drives Strongest Surge in Demand for US Industrial Space Since 2001 7/20

FT – The chronic spin that blights China’s economy 7/14

FT – New wealth management products power Anbang and rivals 7/17

FT – Major cities drive China property price gains 7/17

FT – Trump leads the west’s flight from dignity 7/17

FT – Apple Watch sales fall 55% as consumers mark time on category 7/21

InvestmentNews – REIT with a twist – and a high commission – is new darling of independent brokers-dealers 7/14

NYT – The Risk of Building on Real Estate Funds’ Profitable Past 7/15

NYT – Why Land and Homes Actually Tend to Be Disappointing Investments 7/15

NYT – Vast Purge in Turkey as Thousands Are Detained in Post-Coup Backlash 7/18

WSJ – Surprise: The Economy Is Looking Much Better 7/14

WSJ – China Economy Tilts Further in Wrong Direction 7/15

WSJ – Japan and Helicopter Money: Fan Blades Aren’t Turning Just Yet 7/17

WSJ – Big Chinese Developers Push Into Hong Kong Market 7/19

July 08 – July 14, 2016

AR Global REITs paying out more than they make by a wide margin. Commercial property prices vulnerable to bank regulatory pressures. 

Headlines

Briefs

  • The Economist covered why the IMF (or anyone else for that matter) should no throw Zimbabwe a financial lifeline.
    • “Right now we literally have nothing.” – Patrick Chinamasa, Zimbabwe Finance Minister 
    • This isn’t the first time. “In 2009 Mr. (Robert) Mugabe’s (President) inept and murderous regime printed so much money that inflation topped 500 billion per cent at its peak.”  The government eventually had to dollarize the economy which worked to stabilize the country in tandem with the opposition government party gaining some seats to check Mugabe.
    • “But then Mr. Mugabe’s cronies rigged elections in 2013 and took back full control of the country. They celebrated by doubling the size of the civil service. After three years of misrule and dazzling corruption, the treasury is bare again.” 
    • Now the country is seeking $1 billion to pay off arrears amounts owed to the World Bank.  But “by Mr. Mugabe’s own admission, $15 billion has been stolen from the country’s diamond mines in the past seven years.” The culprits according to Global Witness, a watchdog, are the party elite…
  • In this week’s Economist there is a special report on Chinese Society. Among the articles was an interesting piece on how now those that emigrate from China are the wealthiest and brightest.   
    • “The extraordinary outflow of people from China is one of the most striking trends of recent decades. Since the country started opening up in 1978, around 10m Chinese have moved abroad, according to Wang Huiyao of the Centre for China and Globalization, a think-tank in Beijing. Only India and Russia have a larger diaspora, both built up over a much longer period.”
    • “Since 2001 well over 1m Chinese have become citizens of other countries, most often America.”
    • How, well mostly through school. “Studying abroad has become an ambition for the masses: 57% of Chinese parents would send their child overseas to study if the family had the means, according to the Shanghai Academy of Social Sciences.”
    • Bottom line, “China has long been a land of emigration, establishing small outposts of its people in almost every country in the world. Their main motive was to escape poverty. But those now bowing out are among China’s richest and most skilled. It is a profound indictment of their country that being able to leave it is such a strong sign of success.”
  • Eliot Brown of The Wall Street Journal pointed the spot light on WeWork’s competitive position in light of its rich valuation.
    • Talk about a trend, “throughout the U.S., the number of co-working spaces rose to nearly 3,000 in 2015 from about 250 in 2010 (which is also when WeWork opened its first location in Manhattan), said Steve King, a researcher who studies co-working at small-business-focused data firm Emergent Research.” 
    • “The market’s rapid growth underscores a big challenge for WeWork: low barriers to entry. Competition can come from anyone who has a lease and the money to set up offices.”
    • Will WeWork’s brand and network win out or will have they to erode margins to maintain/grow market share? Either way, their private “$16 billion (valuation) is greater than all but two publicly traded office landlords, despite controlling a fraction of their square footage.”
  • Michael Mackenzie of the Financial Times provided some interest perspective on the current stock and bond environment as both reach new highs.  
    • For some perspective, “it has taken the S&P 14 months to reach a peak of 2,168. The  nominal gain since the market ascended to 2,130 back in May 2015 is a paltry 1.7%. Including dividends, the performance improves to about 3.6%.”
    • “A fresh market peak tends to signal one of two outcomes: the start of an extended breakout for prices such as investors enjoyed during 2013, or a topping-out process that ultimately defines the end of a bull run as seen in 2000 and 2007.”
    • “The bottom line for investors is that both US equities and bonds – corporate bonds have not missed out on the sovereign rally – trade at expensive levels and face a reckoning of epic proportions at some juncture.”
    • “However, unlike Japan and Europe – where negative yields dominate and equity markets remain well under water for the year – the US remains an outlier, or what some traders are saying: ‘The only game in town.'”
    • “Plenty of juice remains in US bond yields that can be squeezed a lot lower from their present levels, helping drive equity prices higher.”

Special Reports

  • Mauldin Economics – When the Future Becomes Today – John Mauldin 7/10
    • “Right now the problem is that monetary policy is carrying a load it was not designed to bear. Strong central bank action during the crisis was necessary and appropriate, says the BIS report, but the extended wind-down hasn’t served the desired goals. This protracted reliance on extraordinary monetary policy carries the risk of causing the rest of us to lose faith in the policymakers.”

Graphics

WSJ – The Big-Bank Bloodbath: Losses Near Half a Trillion Dollars 7/6

WSJ_Big bank losses_7-6-16

FT – Beijing warns neighbors after South China Sea ruling 7/12

FT_South China Sea Territorial Claims_7-12-16

Economist – Keeping up with the Wangs

Economist_Gini Coefficient - 7-9-16

Economist – China’s debt: Coming clean

Economist_Non-financial sector debt_7-9-16

FT – US shale is lowest-cost oil prospect 7/12

FT_Oil exploration costs_7-12-16

Economist – The long march abroad: China’s brightest and wealthiest are leaving the country in droves 7/9

Economist_China - making for the exit_7-9-16

Featured

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

Dividend cuts possible at AR Global REITs, analysts say. Bruce Kelly. Investment News. 11 Jul. 2016.

Nicholas Schorsch again…

“Investors in a number of AR Global-sponsored real estate investment trusts face the potential danger of a cut in distributions, according to industry analysts and consultants.”

“The culprit is a REIT cash flow metric known as MFFO – or modified funds from operations, or cash flow – at seven AR Global REITs that in the first quarter of 2016 failed to match or exceed their distributions by wide margins.”

Exsqueeze me… what did you say?

Basically “it is typical for nontraded REITs to overpay distributions to investors in their initial stages while the companies buy properties, find tenants and negotiate leases. Over time, however, REITs cash flow and distributions – or dividends – should match up, or investors will see the value of the REIT erode.”

Nontraded REITs also use the lure of 6% to 7% initial annual distribution rates as a marketing tool for advisers to hook clients.”

“This is what I call sucker yield. It’s the chase for yield that leads investors to impulsively react to dividend quantity over dividend quality. When a company is paying dividends beyond its earning power, it is eroding capital.” – Brad Thomas, editor of Forbes Real Estate Investor newsletter.

Fishy.

“Meanwhile, the AR Global REITs, which control more than $10 billion in real estate assets, are continuing the process of seeking to merge with each other under the roofs of two AR Global REITs that have unusual 20-year management contracts, according to REIT executives.”

Doesn’t seem to be in the best interest of the investors…

“Five of the AR Global REITs in the quarter that ended in March had dividends that far exceed cash flow, while two REITs, American Realty Capital Global Trust II Inc. and American Realty Capital New York City REIT Inc., had negative cash flow.”

“American Finance Trust has $2.2 billion in total assets, and its “payout ratio,” or dividend divided by its MFFO, was 149.4% during the first quarter of the year, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”

“According to Stanger, other AR Global REITs with high payout ratios are: the $2.4 billion, American Realty Capital Hospitality Trust Inc., at 280.8%; the $2.3 billion Healthcare Trust Inc., at 185.9%; Realty Finance Trust Inc., a mortgage REIT with $1.3 billion in assets, at 176.5%; and American Realty Capital Healthcare Trust III, Inc., with just $144 million in assets, at 183.5%.”

“The AR Global REITs are ‘paying out a lot more than they’re earning,’ said Kevin Gannon, managing director at Stanger. ‘At the end of the day you have to address what those companies are going to do dividend wise, relative to what they’re earning. At present, the payout ratios are not sustainable. The REITs have to acquire more assets with decent yields or cut the distributions.'”

Regulator sounds new alert on banks’ property lending. Alistair Gray. Financial Times. 11 Jul. 2016.

“A top US regulator (Thomas Curry, comptroller of the currency) has sounded a new alert over banks’ commercial real estate lending, adding to concerns that bubbles may be forming in parts of the country’s property market.”

“CRE (commercial real estate) loans originated by banks in the first quarter leapt by 44% from the same period in 2015, according to Morgan Stanley. Banks’ share of CRE originations has risen from just over a third in 2014 to more than half in the first quarter of 2016 – a record.”

“Mr. Curry suggested CRE was of even greater concern to regulators than both car loans – an area into which some banks have expanded aggressively – and lending to already-indebted companies.”

“Our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices.” – Thomas Curry

Mr. Curry “singled out small banks. More than 180 institutions, he added, had more than doubled their CRE portfolios within the past three years.”

“While two-fifths of banks with more than $20bn in assets said lending standards for apartment blocks had ‘tightened somewhat,’ for instance, only one-fifth of smaller banks said they had.”

“Banks have pushed into CRE as other lenders – notably capital market investors – have retreated from the market. Issuance of commercial mortgage-backed securities has dropped to four-year lows.”

“In a report published separately on Monday, Morgan Stanley warned of the risk that commercial property prices would decline if regulatory pressures caused banks to pull back from CRE.

“A withdrawal by banks would have a knock-on impact on commercial mortgage-backed securities, more of which could default, Morgan Stanley added.”

“The report said the retail sector was especially vulnerable. ‘We are already seeing increased defaults on loans secured by shopping malls, which is a trend we expect to continue.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Global Cloud Coverage Shifting in Ominous Sign of Climate Change 7/11

Bloomberg – Pimco Loads Up on Treasuries; Gundlach, Gross Voice Caution 7/12

Bloomberg – The Housing Market Is Waving a Red Flag 7/14

FT – Negative interest rates: a remarkable financial moment 7/7

FT – Rare governance and takeover battle breaks out in China 7/10

FT – Strong performance of real estate suggests top for the sector 7/12

FT – Bank of Tokyo quits as primary dealer for Japanese government bonds 7/13

Miami Herald – Many boomers in denial over problems they face growing old in suburbs 7/11

NYT – What the Seesaw Jobs Numbers Are Really Telling Us 7/8

NYT – Can We Ignore the Alarm Bells the Bond Market Is Ringing 7/11

NYT – China Pledged to Curb Coal Plants. Greenpeace Says It’s Still Adding Them 7/13

Project Syndicate – The Promise of Regrexit (George Soros) 7/8

Reuters – China’s Wanda shows interest in Viacom’s Paramount 7/13

Vanity Fair – Trouble is Brewing on Billionaires’ Row 7/13

WSJ – China’s Outlfows Aren’t Over 7/7

WSJ – Coming to Terms with Low Bond Yields 7/7

WSJ – The Most Hated Bull Market Keeps Chugging Along 7/11

WSJ – Buybacks Pump Up Stock Rally 7/12

 

July 1 – July 7, 2016

The bad debt in Italian banks is looking like a BIG problem. The world has become more reliant on Middle Eastern oil. Not looking so rosy for hedge fund reinsurers.

Headlines

Briefs

    • As yields the world over drop “the effective yield on 7-to-10 year investment-grade corporates was 3.19%, according to Bank of America Merrill Lynch.” But relative to everything else, that’s really quite attractive.
    • “Indeed, in the universe of investment-grade debt, U.S. corporate bonds are close to the only game in town for investors looking for any yield. BofA Merrill Lynch credit strategist Hans Mikkelsen calculates that U.S. corporate bonds account for around 12% of all investment-grade debt outstanding world-wide yet they now represent about 33% of investment-grade yield income. Put otherwise, U.S. corporate bonds generate one out of every three dollars paid out by the entire universe of investment-grade debt.
    • “Almost 87% of Japanese government bond yields are now below zero.”
    • “Unlike other major central banks, the BOJ is a buyer at almost any price and mainly purchases government bonds, which represent almost two-thirds of negative-yielding global sovereign debt globally.”
    • “Further buying will only push yields lower. Cutting back, while helpful in the short- to medium-term, means that the BOJ has to find other Japanese securities. But, unlike Europe or the U.S., asset-backed securities and corporate bonds are hardly an option because of their relatively small market sizes.”
    • For reference, “the BOJ now holds almost 30% of its government’s bonds.”
  • Rich Miller and Steve Matthews of Bloomberg called attention to the challenge that Janet Yellen faces in regard to setting rates when the US economy is running short of labor.
    • “Seven years into the economic expansion, the U.S. is showing signs it’s running short of job seekers qualified to fill openings. The shortfall, which has been evident for some time for highly skilled workers, is spreading to workers with less education as unemployment falls further.”
    • “We are now close to eliminating the slack that has weighed on the labor market since the recession.” – Janet Yellen, Federal Reserve Chair on June 6
    • “At 4.7% in May, the jobless rate is around the level that most Fed policymakers consider to be full employment.”
  • Central Banks are putting a squeeze on the bond market according to Min Zeng and Christopher Whittall of the Wall Street Journal.
    • “A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower.”
    • “Central banks themselves are having trouble finding all the bonds they need. The ECB, for example, can’t buy bonds with a yield lower than its deposit rate of minus -0.4%. As of July 1, 58% of German bonds eligible for ECB purchases traded below that level, according to Frederik Ducrozet, a senior economist at Pictet Wealth Management.”

Special Reports

Graphics

FT – Government bond yields fall to fresh record lows led by UK Gilts 7/1

FT_UK 10 year gilt yield_7-1-16

FT_US 10 yr treasury yield_7-1-16

WSJ – Debt for Cheap: U.S. Companies Can Profit from Sinking Rates – Justin Lahart 7/1

WSJ_Debt for Cheap, U.S. Companies Can Profit from Sinking Rates_7-1-16

The Big Picture – China spends more on economic infrastructure annually than North America and Western Europe combined 7/4

The Big Picture_China economic infrastructure spending_7-4-16

FT – Bad-debt warnings triggers fresh fears for Italian banks 7/4

FT_Italian banks bad debt fears_7-4-16

Visual Capitalist – This Map Shows the Average Income of the Top 1% by Location 7/6

Visual Capitalist_Avg income of top 1%_7-6-16

WSJ – Central Bank Buying Puts Squeeze on Bond Market – 7/6

WSJ_Central bank holdings of govt bonds_7-6-16

Featured

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

Bad Debt Piled in Italian Banks Looms as Next Crisis. Giovanni Legorano. Wall Street Journal. 4 Jul. 2016.

In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”

“Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.”

According to Lorenzo Codogno, former director general at the Italian Treasury, “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

“The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.”

“…impaired loans at Italian banks now exceed 360 billion – quadruple the 2008 level – and they continue to rise.”

“Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25% – implying an additional 40 billion in write-downs.”

“One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.”

“There is an epidemic, and Italy is the patient that is sickest… if we don’t stop the epidemic, it will become everybody’s problem… The shock of Brexit has created a sense of urgency.” – Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry

However, European officials are loath to let the Italians use the Brexit as an impetus to gain permission to bend the rules of the banking regime that were only just established at great pains.  The Italians though are concerned “about the 187 billion of bank bonds in the hands of retail investors that would be wiped out by a bank resolution under the EU banking rules.”

IEA warns of ever-growing reliance on Middle Eastern oil supplies. Anjli Raval and David Sheppard. Financial Times. 6 Jul. 2016.

“The world risks becoming ever more reliant on Middle Eastern oil as lower prices derail efforts by governments to curb demand, the west’s leading energy body has warned.”

“Middle Eastern producers, such as Saudi Arabia and Iraq, now have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.”

“Demand for their crude has surged amid a collapse in oil prices over the past two years that has cut output from higher-cost producers such as the US, Canada and Brazil.”

“Middle Eastern producers now make up 34% of global output, pumping 31m barrels a day, according to IEA data. This is the highest proportion since 1975 when it hit 36%. In 1985, when North Sea production accelerated, their share fell to as little as 19%.”

Further, the adoption of more fuel efficient vehicles has slowed since the cost of gas has come down significantly. “In the US, more than two-and-a-half times as many sport utility vehicles were being bought compared with standard cars.” – Fatih Birol, executive director of the International Energy Agency.

“Even more concerning for policymakers is China, where more than four times as many SUVs were bought, suggesting the country’s rapidly growing car culture has adopted America’s taste for larger more fuel-hungry cars.”

“Lower oil prices are proving to be bad news for efficiency improvements.” – Fatih Birol

Bottom line, “‘the Middle East is reminding us that they are the largest source of low-cost oil,’ said Mr. Birol. He said the region was expected to meet three-quarters of demand growth over the next two decades.”

“Mr. Birol said policymakers needed to impose stricter fuel efficiency targets to reduce demand, arguing it was not feasible in a world market to completely sever reliance on Middle Eastern oil.”

“US oil production will increase, but it is still an oil importer and will be for some time.” – Birol

S&P sounds alarm on hedge fund reinsurers. Alistair Gray and Miles Johnson. Financial Times. 6 Jul. 2016.

“So-called hedge fund reinsurers (HFRs) have failed to make a profit from providing reinsurance cover for more than four years, according to Standard & Poor’s.”

“S&P found that HFRs had performed considerably worse than traditional reinsurers, which have complained that the entry of new money into their sector has driven profitability down for all.”

“Conventional reinsurers tend to invest their income in conservative assets such as corporate bonds, since they do not know in advance how much they will need to pay out in claims.”

“In contrast, HFRs pursue what S&P described as ‘meaningfully risker’ investment strategies. Their assets are managed by their affiliated hedge funds. Allocations vary but include exposure to speculative-grade leveraged loans, private equity and short positions.”

“So-called combined ratio for the HFRs – claims paid and expenses incurred as a proportion of premium income 0 has been above 100 in every year since 2012, meaning a loss from underwriting.”

“Last year the ratio came in at 110.2%, compared with a profitmaking 88.6% for their conventional reinsurance peers.”

“S&P said the HFRs’ investment performance had also been ‘rough’. Overall net investment income dropped 63% from 2014 to $247m last year.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – SMU, Yale Endowments Unload Real Estate Assets Due to Cooling Markets 7/1

Bloomberg – Blackstone Tenants Get a Shot at Buying Their Rental Houses 7/4

Bloomberg – Treasuries Deliver $700 Billion Windfall to World Safety Seekers 7/6

CNBC – This private equity giant wants to give landlords millions – here’s how 6/30

FT – Mexico raises interest rates to shore up peso 6/30

FT – Zenefits agrees to halve its valuation to $2bn 6/30

FT – Puerto Rico declares moratorium on debt payments 6/30

FT – Cash-starved Zimbabwe closes in on IMF deal to clear debts 7/6

MarketWatch – This economist thinks China is headed for a 1929-style depression 7/1

NYT – Italy’s Plan for Banks Could Roil Europe 7/6

Vanity Fair – Are We At The Start Of  A Tech World War? 7/6

Wharton – The Case for ‘Regrexit’: Why Britain Won’t Really Leave the EU 6/30

WSJ – Manhattan Apartment Sales Sputter 6/29

WSJ – Why Vanke Sank After Its Wake-Up Call 7/4

WSJ – Foreign Interest in U.S. Homes Cools 7/6

 

June 24 – June 30, 2016

Japanese banks wary of property risks. Negative-yielding sovereign debt jumps to $11.7tn.

This week all the media outlets were blanketed with coverage on the Brexit and of course the synopsis varied from catastrophe (a lot of money was lost in the equity markets around the world immediately – which have already made up a lot of lost ground), to concern over the survival of the European Union, to a general ‘meh.’  Remember, the world moves on.  Importantly, Britain is still part of the EU. No one has triggered Article 50 of the Lisbon Treaty yet and even when Britain does trigger the article, there is a two-year exit process with the EU.  As such, some even think that Britain may not eventually leave.  So for now as the Brits like to say, keep calm and carry on.

Headlines

Briefs

    • “Moody’s Investors Service is predicting that China’s property markets are facing a double-whammy of growing margin pressures for developers and tapering growth in home sales nationwide.”
    • “The rapid growth in land costs will raise the developers’ capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate.” – Dylan Yeo, Moody’s analyst
    • “The report from Moody’s follows a note from S&P Global Ratings last week reiterating expectations for growing bond defaults onshore in China, with those for property developers forecast to have the biggest potential impact.”
    • “Between 2005 and 2015 the world’s cities swelled by about 750m people, according to the UN. More than four-fifths of that growth was in Africa and Asia; specifically, on the fringes of African and Asian cities. With few exceptions, cities are growing faster in size than in population. Lagos, the capital of Nigeria, is typical: it doubled in population between 1990 and 2010 but tripled in area. In short, almost all urban growth is sprawl.”
    • “London took two millennia to grow from fewer than 30,000 people to almost 10m; Shenzhen in China managed that within three decades. And most African and Asian cities are growing more chaotically.”
    • “Like it or not, this is how the great cities of the 21st century are taking shape.”
    • “Shlomo Angel of New York University has studied seven African cities in detail: Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos, and Luanda. He calculates that only 16% of the land in new residential areas developed since 1990 has been set aside for roads – about half as much as planners think necessary. And 44% of those roads are less than four meters wide.”
  • Laura Kusisto of the Wall Street Journal highlighted that yes, today’s renters really are worse off than their parents.
    • “Inflation-adjusted rents have risen by 64% since 1960, but real household incomes only increased by 18% during that same time period, according to an analysis of U.S. Census data released by Apartment List, a rental listing website.”
    • “Renters fared the worst during the decade between 2000 and 2010, when inflation-adjusted household incomes fell by 9%, while rents rose by 18%, according to Apartment List.”
    • In regard to inflation “…housing still largely relies on U.S. labor and materials (and zoning restrictions), making it one of the few essentials that haven’t become cheaper with globalization.”
  • Claire Jones and James Shotter of the Financial Times reported on the IMF’s recent opinion that Germany do more to reform its banks.
    • “The International Monetary Fund has warned that ultra-low interest rates pose a threat to the profitability of Germany’s 13tn financial sector, as it steps up its call for the country’s banks and insurance groups to restructure.”
    • “The IMF has supported the ECB’s aggressive monetary easing and indicated that the onus was on German banks and their regulators and supervisors to reform.”
    • “Given its high share of savings and co-operative banks – whose business revolves around taking deposits from and making loans to local communities – the German banking system is highly dependent on interest rates.”
    • “A study by BaFin, the German financial watchdog, and the Bundesbank last year found that Germany’s 1,500 small and midsized banks expected profits to fall by an aggregate of 25% by 2019, mainly owing to the collapse in net interest income. The study projected that if rates fell a further 100 basis points, lenders’ profits would plunge at least 60% by the same date.”

Special Reports

Graphics

FT – Fed on alert for US economic recoil – Sam Fleming 6/24

FT_Fed funds futures curve_6-24-16

FT – Unicorns: Between myth and reality – Richard Waters and Leslie Hook 6/27

FT_Venture capital invested in US_6-27-16

Bloomberg – San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs – Alison Vekshin 6/28

Bloomberg_San Francisco Office Vacancies rise_6-28-16

Economist – Foreign direct investment 6/25

Economist_Foreign direct investment_6-25-16

WSJ – Today’s Renters Really Are Worse Off Than Their Parents – Laura Kusisto 6/29

WSJ_Today’s Renters Really Are Worse Off Than Their Parents_6-29-16

Featured

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

Overheating Risk Makes Japanese Banks Wary of Property Lending. Tesun Oh Katsuyo Kuwako. Bloomberg. 27 Jun. 2016.

“Japanese banks are reining in their exposure to the property market on concern the central bank’s negative-rate policy is fueling overheating.”

“We’re watching the market carefully because we get a strong sense that the market is being pushed up mainly by a lot of lending.” – Michiya Fujii, head of the real estate finance department, Tokyo Star Bank, Ltd.

“Lending to the real estate sector rose to a record high in March, exceeding levels during Japan’s asset bubble in the late-1980s, according to Bank of Japan data.”

Bloomberg_Japanese real estate bank loans_6-27-16

When you look at the options for income investors you can understand why. “While the average expected yield for central Tokyo office property fell to 3.7% in the first quarter, its lowest since at least mid-2007, that is still 82 times the 0.045% yield an investor can earn from buying 20-year government debt. Ten-year yields have dropped 10 basis points this month to minus 0.22%.”

“Considering the downside risks, this is not a time when we can aggressively lend. What’s important is, when the time comes and the market turns, how much durability we’ve built into the portfolio.” – Katsumi Taniguchi, head of the planning team of the real estate finance department at Sumitomo Mitsui Trust

Additionally, while rates are low real estate investment trusts and large developers are taking advantage of the opportunity to lower their borrowing costs.  “Nippon Building Fund Inc., Japan’s largest REIT, sold 30-year debt this month at a coupon of 1%, while the largest developer Mitsubishi Estate Co. issued 40-year bonds at 0.789%.”

Negative-yield government debt surges $1.3tn to $11.7tn Adam Samson. Financial Times. 30 Jun. 2016.

“The universe of negative-yielding government debt has increased by more than $1tn in the last month to reach a high of almost $12tn in one of the most tangible results of Britain’s decision to leave the EU.”

“Low sovereign bond yields reflect gloomy economic outlooks and expectations of central bank stimulus. In turn a record $11.7tn of global sovereign debt has now entered sub-zero territory – an increase of $1.3tn since the end of May, according to data released by Fitch Ratings.”

FT_Gobal negative yielding sovereign debt rises to $11.7tn_6-30-16

“You have to look at the response by central banks after the Brexit shock. You’re seeing a ubiquitous tilt toward easing among G4 central banks (Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England).” – Ben Mandel, a global strategist at JPMorgan Chase

Because of this, “futures markets suggest investors saw a roughly 75% chance that the Federal Reserve will not raise interest rates over the next 12 months.”

FT_Government debt yields under pressure_6-30-16

Other Interesting Articles

The Economist

Bloomberg – China’s Idled Wind Farms May Spell Trouble for Renewable Energy 6/28

Economist – Why Brexit is grim news for the world economy 6/24

FT – The perfect financial crime 6/25

FT – South Korea plans stimulus boost in wake of Brexit 6/27

FT – Broad, deep and brutal – Asia’s Brexit reaction 6/29

FT – Brazilian bankruptcies create opportunities for debt investors 6/29

Project Syndicate – Brexit and the Future of Europe (George Soros) 6/25

Reuters – Post-Brexit global equity loss of over $2 trillion worst ever: S&P 6/26

The New Yorker – Why Brexit Might Not Happen at All 6/27

WSJ – Shareholder Fight Puts China’s Market Resolve on the Line 6/28