August 26 – September 1, 2016 – the janus observer

A novel way of paying off debt – issue more of it, the savings are already accruing. It’s official, Nigeria is in a recession.

Headlines

WSJ – Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants 8/29. “The U.S. is on track this year to post the longest stretch of falling food prices in more than 50 years…”
Visual Capitalist – Interactive: What Futuristic Tech Will You See In Your Lifetime? 8/30. This is fun.
WSJ – Google Takes on Uber With New Ride-Share Service 8/30. Things are about to get a little less chummy in the Bay Area.
NYT – Dilma Rousseff Is Ousted as Brazil’s President in Impeachment Vote 8/31. It’s official, Rousseff is no longer President of Brazil following a 61 to 20 vote by the Senate that convicted Ms. Rousseff on charges of manipulating the federal budget.
NYT – Scheduled Flights to Cuba From U.S. Begin Again, Now With Jet Engines 8/31. Regular air service from the U.S. into Cuba just resumed after a more than 50 year hiatus.

Briefs

Steven Russolillo of the Wall Street Journal points to why math doesn’t work for current stock market valuations.

“Stock valuations rise and fall, but when an important factor driving market performance is mathematically unsustainable, it is worth a closer look.” Specifically corporate dividends.
“Aswath Damodaran, a professor at New York University’s Stern School of Business, sees this as the market’s biggest risk. Mr. Damodaran, who is considered an authority on valuation, says S&P 500 companies through the first two quarters of the year collectively returned 112% of their earnings through buybacks and dividends. That is the highest since 2008 and well above the 82% average over the past 15 years, he said in a blog post last week.”
“Mr. Damodaran, who likes to be provocative, says with rates this low, traditional valuation metrics are distorted. Instead, the inability of companies to keep paying off their investors will cause the next downturn. ‘This is the weakest link in this market,’ Mr. Damodaran said in an interview. ‘We know cash flows will go down. What we don’t know is what the market is pricing in.'”

Gabriel Wildau of the Financial Times highlighted the growing schism between mobile payment providers and the big banks in China – big data.

“The rise of third-party mobile payments in China at the expense of credit and debit cards is threatening commercial banks’ access to the customer data viewed as crucial to newly emerging financial and consumer business models.”
Further UnionPay, the state-owned settlement network, and other rank and file banks are missing out on the merchant fees that these third-party platforms are redirecting.
“The move by more Chinese consumers to switch from swiping plastic cards to scanning QR codes with mobile wallet apps knocked $20bn from banks’ fee income in 2015, according to Kapronasia, a Shanghai-based fintech consultancy.”
While the fees hurt, the key is that third-party payment providers are “depriving lenders of valuable data on consumption patterns.”

Anjani Trivedi of the Wall Street Journal drew attention to why Chinese banks portfolio shift to more property isn’t necessarily all hunky dory.

China’s big-state lenders are making a shift in their lending portfolios from commercial loans to property. “China Construction Bank (CCB) this week reported residential mortgage lending rose almost 30% in the first half of this year compared with the same period last year. Meanwhile corporate lending fell 2%. At Bank of China, mortgages rose by more than a quarter.”
“On the face of it, banks are moving away from risky lending. That helps their capital cushions because for every loan extended to a company, banks assign a 100% risk-weight. For residential mortgages, banks only have to set aside half that.”
Of course, it helps that residential prices are rising; however, “lending into the property market would make more sense if the mortgage loans weren’t going bad so fast. At CCB, while mortgage nonperforming loans accounted for only 6% of total NPLs, they rose 67% on the year compared with 26% for all loans. And that’s with prices rising nationally, and rising sharply in the biggest cities.”

Leo Lewis and Lucy Colback of the Financial Times covered an interesting development in how the Bank of Japan is distorting the Japanese stock indices through their massive fund flows.
- “From July 29, when the Bank of Japan said it would nearly double its annual purchases of exchange traded funds from ¥3.3tn ($32bn) to ¥6tn, brokers in Tokyo have been selling stocks with a simple, unsettling message.”
- “In an equity market where the central bank is the biggest whale, and where the government in various forms has become the biggest shareholder in a quarter of First Section Tokyo stocks, it’s time to buy the fund flows, not the fundamentals.”
- “Goldman Sachs estimates that the doubling in BoJ buying coupled with the skew towards Nikkei weighting means that the central bank will own at least one-tenth of the equity in 32 companies by this time next year, up from five currently.”
- “The BoJ, according to its current schedule, must buy an average of ¥70bn worth of ETFs every three trading days throughout the year.”
- Helicopter money…

Special Reports / Opinion Pieces

Graphics

FT – Puerto Rico: An island’s exodus – Eric Platt 8/25

Visual Capitalist – Which Countries Are Damaged Most by Low Oil Prices? – Jeff Desjardins 8/26

WSJ – Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants 8/29

WSJ – China’s Private Investment Crash May Be Mirage, but Pain Is Still Real 8/28

Visual Capitalist – Do Newly Built Skyscrapers Signal The Top of the Stock Market? – Jeff Desjardins 8/29

Featured

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

Falling bond yields save taxpayers $500bn. Eric Platt. Financial Times. 31 Aug. 2016.

“The collapse in sovereign bond yields has saved taxpayers more than $500bn in annual interest expenses, allowing countries to rein in budget deficits and continue government-backed programs that would have otherwise been shelved, according to a new report.”

As of the end of last week there was $13.2tn of debt with negative yields.

“Japan, France, Germany and Switzerland are now paid to issue short-dated sovereign bonds.”

“Benefits have effectively been transferred from global investors to sovereign issuers, as sovereign borrowing costs have dropped. Should rates remain low for an extended period, it would likely erode earnings power for many large investment institutions and pension funds.” – Robert Grossman, analyst with Fitch, a rating agency

“The median 10-year government bond now yields 1.17%, down from 3.87% five years ago. Japan has saved more than $95bn a year as a result of the decline in rates, while the US, UK and Germany collectively pay $104bn less annually, the study estimates.”

“Central banks have cut interest rates more than 670 times since Lehman Brothers filed for bankruptcy in 2008, or roughly one reduction every three trading days of the year, according to JPMorgan.”

Nigeria falls into recession as economy shrinks in second quarter. Maggie Fick. Financial Times. 31 Aug. 2016.

“Nigeria has slipped into recession for the first time in more than two decades as growth in Africa’s top oil producer shrank for the second consecutive quarter.”

“The economy contracted 2.1% in the three months to the end of June, worse than analysts expected, while inflation hit a 11-year high of 17.1%, underlining the depth of the west African nation’s crisis.”

“Nigeria, which depends on petrodollars for 70% of state revenues and 90% of export earnings, has been battered by the slump in oil prices. The economy shrank 0.4% in the first three months of the year and the International Monetary Fund is forecasting that growth in 2016 will contract 1.8%.”

“The central bank increased the main interest rate by 200 basis points last month in an attempt to combat inflation, but it rose for the ninth consecutive month in July.”

“The continent’s most populous nation was one of the world’s fastest growing economies during the oil boom, but Mr. Buhari (President Muhammadu Buhari) said this month that Nigeria ‘suddenly appears to be a poor country.'”

It’s currency is having difficulties as well, “in the official market, the naira is trading below N300 to the dollar, having lost more than 40% of its value since its peg was lifted in June (to ease the country’s quickly depleting reserves of hard currency), but on the black market the currency is far weaker – it has been trading at below N400 to the dollar this week.”