September 9 – September 15, 2016

It appears there is no “too big to fail” in South Korea. US inflation coming only from a few unproductive sectors. China’s credit hose targeted at housing.



    • “Yields on “junk”-rated euro-denominated debt hit a record low of 3.35% last week.”
    • “Traditional signals of risk aren’t as reliable as they might be in markets that have been so distorted by central-bank policies.”
    • “Take the developments in junk bonds. Ultralow yields and issuance of PIK (payment-in-kind) notes might usually suggest a market that is too bullish for its own good. Demand was so strong for Schaeffler’s (bearings maker) sale that it was able to sell 3.6 billion of debt in euros and dollars, versus an originally planned 2.5 billion; in the process it refinanced debt that carried rates ranging from 5.75% to 6.875% with notes paying from 2.75% to 4.75%. Moreover, it Ardagh’s (packaging group) case, some of the proceeds were used to pay a dividend to shareholders, another sign that borrowers have the upper hand.”
    • “Retail sales in Hong Kong fell by 10% in the first seven months of the year, compared with the same period in 2015, with purchases of jewelry and watches declining by 22%.”
    • “‘Our customer flow has dropped 60-70%’ since the peak of Chinese luxury spending in 2013, says manager (Kingdom Jewelry) Jacky Sze. ‘I don’t have much hope for the rest of this year, or next.'”
    • First there was the failed coup d’etat on President Recep Tayyip Erdogan, now there is the purge of detractors and then sum…
    • For those not familiar, the coup is being blamed on the Gulen community, aka the cemaat, an Islamist sect that promotes an interchange/dialogue with science.  The imam that founded the movement is Fethullah Gulen who now lives in Pennsylvania.
    • Over 100,000 Gulen sympathizers have been rounded up so far.
    • “According to one minister, the state has seized more than $4 billion-worth of Gulenist assets.”
    • And following on the maxim to ‘never waste a good crisis.’ President Erdogan is also targeting Kurdish minorities.
    • However, for a little bit of context, the “secular Turks (of which President Erdogan is one) have no love for the Gulenist, who targeted them in their own purges in the 2000s.”
  • Also in the Economist was a piece on how shipping profits are going overboard.
    • “Of the biggest 12 shipping companies that have published results for the past quarter, 11 have announced huge losses. Several weaker outfits are teetering on the edge of bankruptcy.”
    • “The industry could lose as much as $10 billion this year on revenues of $170 billion, reckons Drewry, a consultancy.”
    • Essentially, two primary forces are at play 1) world trade is down/slowing and many multinationals are creating manufacturing operations near their customers, and 2) there is overcapacity in the industry from the recent commodity boom.
    • As a result, “sending a container from Shanghai to Europe now costs half of what it did in 2014.”

Special Reports / Opinion Pieces

  • FT – The twisted logic of negative interest rates – John Kay 9/9
    • “All told, the primary effect of monetary policy since 2008 has been to transfer wealth to those who already hold long-term assets – both real and financial – from those who now never will. This week’s debt sale reinforces this. Henkel and Sanofi are not borrowing at negative interest rates to invest in new productive facilities. Both companies have large cash piles, and the cash generated from their operations far exceeds their investment needs.”
  • FT – Mongolia: Living from loan to loan – Lucy Hornby 9/12
    • “Mongolia was a darling among emerging markets during the commodities boom. Foreign miners flocked to exploit the mineral wealth under its grasslands and deserts, pushing up growth in gross domestic product by 17% in 2011. But after a debt-fueled spending spree at the peak of the cycle, the landlocked country is now one of the worst hit by the downturn.”
    • “Mongolia’s efforts to extricate itself highlight the dangers of the ‘resource curse’ – the notion that countries blessed with tremendous natural resources find themselves at the mercy of wealth-destroying boom-bust cycles.”


FT – Air pollution deaths cost global economy $5tn annually – Shawn Donnan 9/8

FT_Welfare losses from air pollution_9-8-16

Bloomberg – San Francisco Housing Frenzy Shifts Across the Bay to Oakland – Alison Vekshin 8/22

Bloomberg_Oakland in demand_8-22-16

WSJ – Paradise Lost: Why the Good Times Are Over for Global Bonds – Richard Barley 9/14


FT – Vantage to break famine for energy IPOs – Eric Platt and Ed Crooks 9/14

FT_Surge of equity sales by US oil and gas cos_9-14-16


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

Seoul signals tougher stance with Hanjin demise. Song Jung-a. Financial Times. 11 Sep. 2016.

“Hanjin’s move to seek bankruptcy protection last month was the first time a big container shipping line had done so for 30 years, and it caught out many in the industry. As recently as a couple of months ago, shipping executives considered the failure of Hanjin Shipping – the world’s seventh-largest container line and South Korea’s largest – unthinkable.”

“Hanjin Shipping and its rival Hyundai Merchant Marine handled the bulk of South Korea’s exports, which account for more than half of the country’s $1.4tn economy.”

“Until now, Seoul has spent decades keeping lossmaking companies afloat with cheap state loans. In the case of its embattled shipbuilders, it has injected billions of dollars, despite next to no progress in turning them around.”

“How Seoul ultimately handles Hanjin Shipping’s collapse will set the tone for future restructuring of Korea Inc.”

“Many of the country’s smokestack industries – including steel, chemicals and construction – are similarly suffering from overcapacity.”

“The government has set up the principle that it will no longer support ailing companies with taxpayers’ money just because they are too big.” – Yoo Il-ho, South Korea’s finance minister

Alphaville – Least productive sectors only thing keeping inflation going. Matthew C. Klein. Financial Times. 12 Sep. 2016.

Since 1990 “…the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88% of the total rise in the price level boils down to four sectors of the US economy.”

1) Healthcare services, 2) Housing, 3) Education, and 4) Prescription drugs

FT_Where all the inflation came from_9-12-16

“In January 1990, those four product categories only accounted for 30% of the money spent on consumption by the average American.”

And within education the main culprit has been the textbook.  Akin to prescription drugs, supply in both industries is tightly controlled by regulation.

“By contrast, thanks to astounding technological innovation, television prices have plunged at an average rate of 12% each year since 1990 and computer prices have fallen more than 18% per year.”

“In general, the prices of durable goods are about a third lower now than in 1990, while the prices of nondurable goods excluding commodity products (food, drinks, and fuel, which tend to rise at the same rate as the broader price level over time) and excluding prescription drugs, have also fallen, albeit not by as much. Inflation outside of healthcare and education has generally been modest, with the notable exception of a few small professional services such as tax preparation, lawyers, and funeral homes.”

China’s Credit Fire Hose Floods Housing Market. Anjani Trivedi. Wall Street Journal. 15 Sep. 2016.

“More than 70% of new loans in August were to households, much of that in the form of mortgages, going by historical averages, a remarkable shifting of the fire hose of credit. It also helps explain why China’s property market has raced higher despite broader economic worries.”

“China’s stock of mortgages stood at 16.9 trillion yuan ($2.5 trillion) as of June 30. Almost a quarter of that was built up in just the past year, according to ANZ. Mortgage loans outstanding now account for 18% of total loans, the highest since at least 2008.”


“Local regulators are imposing clampdowns on mortgage lending and property speculation in the hottest cities such as Shanghai and Shenzhen. They are right to do so, as this leg of China’s multi-decade property bubble is clearly being fueled by leverage in a way that it wasn’t in the past.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – How Big Sugar Enlisted Harvard Scientist to Influence How We Eat – in 1965 9/12

Bloomberg – What’s Wrong With America’s Dream of City Living 9/14

Economist – Why does Thailand keep changing its constitution? 9/12

FT – When will the ECB run out of bonds to buy? 9/8

FT – China infrastructure investment model under fire 9/10

FT – Twitter and tech: hardly working 9/11

FT – What investors should know about R star 9/11

FT – Oil market braces for Kashagan field’s October debut 9/12

FT – The Swiss and negative rates: how is the experiment going? 9/12

FT – Philippines pivots away from the US 9/13

FT – Japan opens door to temporary foreign workers 9/13

FT – Manias make markets dance to a different tune 9/13

FT – Mythbusting Uber’s valuation 9/13

FT – China retail: shops will drop 9/14

Trepp – Non-Traded REITs on slowest capital-raising pace in 12 years 9/9

WSJ – Bank of Japan Has Enlarged Target in Corporate Bonds 9/12

Yahoo Finance – The internet is creating a demographic ‘seismic shift’ that is too big to ignore 9/12

Yahoo Finance – Billionaire Paul Singer warns of the ‘biggest bubble in the world’ 9/13


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