December 23 – December 29, 2016

A review – how India and Indonesia have gone about chasing tax revenue. Global bond sales hit a record in 2016 led by corporations. US housing gains highlight the growing economic divide.

First, Happy New Year!

Headlines

NYT – China’s ‘Godfather of Real Estate’ Pitches Reverse Mortgages to Skeptical Elders 12/26. With a pension system that is projected to have a $116tn deficit by 2050, some folks are proposing implementing reverse mortgages to ease the burden, though adoption of the program will require overcoming cultural norms.
FT – Japan ducks UN pension accounting rule to flatter its public debt 12/28. As Japan’s debt burden continues to climb, the country is going to adjust its books despite UN rules on accounting – it will be akin to “a company recording its assets in the annual report’s balance sheet, but burying the liabilities in the footnotes.”

Special Reports / Opinion Pieces

Briefs

Yuan Yang and Sherry Fei Ju of the Financial Times highlighted how China city governments have collided with Didi over migrant drivers.
- “China’s ride-sharing platforms face their biggest regulatory test so far after city governments in Beijing and Shanghai approved a policy of ‘local cars, local drivers’ on Wednesday.”
- “Migrants from rural China constitute the core of the workforce for not only car-hailing apps but some of the country’s largest internet groups including Alibaba and Meituan-Dianping, all of which rely on low-paid drivers and couriers.”
- “The regulations say you can be fined Rmb10,000 ($1,440) if you are discovered. But 99% of passengers don’t want us to be checked, or they wouldn’t be able to take taxis, so they won’t report us.” – Mr. Huang, a driver in Shanghai originally from Jiangsu
- “About 40% of Beijing’s and Shanghai’s combined 43m residents are from outside the city, according to the cities’ statistics bureaus.”
- “China has over 270m rural migrants who have moved to cities to seek a better livelihood. But they are kept under firm restrictions by China’s internal passport rules, the hukou system, under which people receive different benefits depending on whether they have an urban or rural registration and where they are registered.”
- So two things: 1) you have a huge section on the economy that operates at an equilibrium that requires subsidized labor and investor losses in order to provide products at a price point where consumers will pay for them, and 2) there are millions of people that are forced into a “second-class” citizenship (with rights similar to those of illegal immigrants in the US) by a registration system that seeks to control migration patterns. Think about it.
Tom Mitchell of the Financial Times covered how the lease renewals in Wenzhou have eased homeowner fears.
- “In an announcement at the weekend, the land ministry said that 20-year residential property leases in the eastern city of Wenzhou would be automatically extended without charge, ending speculations that homeowners would face steep renewal fees equivalent to one-third of their property’s value.”
- “Ever since Deng Xiaoping’s landmark economic reforms were introduced in the early 1980s, allowing people to buy land and property for the first time since the 1949 communist revolution, titles in the world’s most populous country have been limited by fixed-term leases.”
- Wenzhou was the first to the fixed-term leases to expire – clearly garnering national and global interest. Granted, the city is unusual with its 20-year leases versus the norm of 70-years; “the shorter leases were introduced in Wenzhou in the 1990s to make properties more affordable.”
- The bigger issue at hand is the moral hazard that it represents. Presumably buyers believed that the government would come to their rescue at the end of their lease terms – probably the punters selling the units assured the buyers of the same – and low and behold, they did. While the lease rollovers represent a huge revenue source for municipalities, actually letting market forces take hold would put many homeowners in dire straits when their leases expire. Further such a course of action would send shivers across the country when all property owners suddenly realize how precarious their land tenures are… which of course would limit property appreciation – likely to send it down meaningfully, and so on and so forth.
- To be sure the special case of Wenzhou “does not signal a final resolution of the issue.” The government is “studying a new law that would regulate lease renewals nationwide.”
Bruce Einhorn, Peter Pae, Jungah Lee, Kanga Kong, and Abhishek Vishnoi of Bloomberg Businessweek featured the current unrest in South Korea as the country seeks to rein in its corporate elite.
- The recent impeachment of South Korean President Park Geun-hye and the scandal surrounding it has brought to the surface the anger and frustration “of a population struggling with the transition to a slow-growth era.”
- “Economists expect South Korean gross domestic product this year to expand 2.7%, marking the first five-year period with growth below 3.5% since the 1950s. Manufacturers are suffering from the slowdown in China, South Korea’s top export market, and soft demand elsewhere. Export growth has declined in 21 of the past 23 months. Youth unemployment is 9.3%, in part because rigid labor laws discourage employers from hiring young graduates. ‘ Without some serious restructuring,’ says Emily Dabbs, an economist for Moody’s Analytics in Sydney, the outlook ‘is going to be quite weak.'”
- “Monthly household incomes for urban salary and wage earners grew 1.7% in the third quarter from a year earlier. As recently as 2012, income growth regularly topped 5%.”
- Worse, “many jobs are low-paying temporary positions without the insurance, pensions, and other benefits regular workers enjoy. Temporary employees, who make up one-third of the workforce, earn on average about 41% of what a full-fledged employee does.“
- “Since the end of military rule in the late 1980s, an unwritten social compact has allowed corruption among the political and corporate elite as long as ordinary Koreans enjoyed solid economic growth.”
- This story line is being played out all around the globe…

Graphics

WSJ – Paying to Lend: The Negative-Yield Story of 2016 – Richard Barley 12/27

WSJ – The Mystery of Japan’s Stagnant Wages – Anjani Trivedi 12/27

WSJ – As Home Prices Rise, Flippers Make a Comeback – Kirsten Grind and Peter Rudegeair 12/28

WSJ – Daily Shot: FRED Declining US Homeownership Rate 12/28

WSJ – Daily Shot: FRED US Home price growth vs. Wage growth 12/28

Doesn’t help that rents and home prices are outpacing wage growth

WSJ – Daily Shot: FRED US Housing Cost Inflation 12/28

WSJ – Daily Shot: Prescription Drug Price Inflation 12/28

Another place inflation has been taking off

WSJ – Daily Shot: US Food Deflation 12/28

And a place where it is not

WSJ – Daily Shot: Declining Cost of Chinese Imports 12/28

WSJ – Daily Shot: Value of US Manufacturing Shipments 12/28

WSJ – Daily Shot: China Central Government Stimulus 12/28

As things are slowing down in China, the government has been stepping up its stimulus

WSJ – Daily Shot: China Private investment growth 12/28

While the private sector has been hitting the breaks

WSJ – Daily Shot: China 20yr Government Bond Yield 12/28

Doesn’t help that the cost of funds is jumping

WSJ – Daily Shot: China AA+ Corporate Bond Yield (Index) 12/28

WSJ – Daily Shot: Family Incomes spent on childcare 12/28

I can relate to this.

Comstock’s – California to Pay Billions More After CalPERS Cuts Assumed Rate – Romy Varghese 12/29

Bloomberg Businessweek – Mapping the Growth of Disability Claims in America – Brendan Greeley 12/16

Visual Capitalist – These 5 Big Companies Control the World’s Beer – Jeff Desjardins 8/4

Featured

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

How India and Indonesia are chasing tax revenue. Erwida Maulia and Kiran Sharma. Financial Times – Nikkei Asian Review. 25 Dec. 2016.

The Financial Times put together an interesting article on Indonesia’s and India’s efforts to increase their tax revenue base.

In Indonesia, they have “calculated that political stability and a dramatic drop in the tax rate could help to bring home an estimated 11,400tn rupiah ($851bn) parked overseas.”

To help repatriate this wealth, Indonesian President Joko Widodo has launched a massive tax amnesty campaign. “More than 10,000 people a day answered the president’s pitch in September: declare assets now and take advantage of a discounted tax rate – as little as 2% compared with 25% – and, in turn, be part of Indonesia’s future.”

The good news for some of this money is that “beyond the new low rates, the amnesty doesn’t require tax officials to trace the origins of the assets and it prohibits the disclosure of information, even to law enforcement.”

Granted, not everyone is happy about the repatriation. “The efforts to corral big assets unsettled Singapore, one of Asia’s leading financial centers, which is estimated to hold more than $200bn in assets for Indonesians. Account holders who notified financial institutions in Singapore that they would apply for the amnesty suddenly found the financial police involved. Singapore policy and the Monetary Authority of Singapore, the financial industry watchdog, had informed banks there to file suspicious transaction reports whenever anyone sought to participate in the amnesty.”

“According to financial sources, Singapore banks offered some of the wealthiest Indonesians better interest rates if they would declare but not repatriate their money.”

“As of December 19, 141tn rupiah had been committed for repatriation, just 14% of the target. The number of participants declaring assets, though, has been far more encouraging. From July to mid-December, there were 508,000 participants and a total of 4,035tn rupiah of assets declared, equal to 30% of the country’s gross domestic product.”

“While Indonesia has pursued a single, clear and well-publicized program to find hidden assets, India has launched a multi-faceted assault to find revenue in a country where only 1% of the 1.25bn population pays income tax.”

“It has made for a tumultuous year for nearly every Indian household.”

“From June to September, the government embarked on a much-publicized program for people to self-declare secret assets. The first such tax amnesty in nearly 20 years drew in a disappointing 673bn rupees ($9.93bn) from 71,726 people. Soon after, Modi (Prime Minister Narendra Modi) authorized raids of high-net-worth individual’s homes and offices.”

And then “November 8 was the game-changer. From midnight, the government declared a withdrawal of high-denomination notes, sucking out 86% of the currency in circulation by value from a predominantly cash economy. People were given until December 30 to deposit the banned notes into their bank accounts.”

The affects are still being felt, especially as new notes have been slow in their roll out. “Former Prime Minister Manmohan Singh, an economist, said the national income could decline by 2%.”

Hopefully it was worth it.

Bottom line, “sophisticated investors and wealthy families will always be searching for privacy and confidence in how their money is secured and governments will be hard pressed to keep pace. ‘Thinking of Indonesia in 1998 or India’s latest currency reforms gives you a good idea as to why people in these two countries want a safe place for their money,’ said Jason Sharman, professor of governance and public policy at Griffith University in Australia. ‘Offshore is often told as a story of greed, which it often is, but it’s even more a story of fear. Often justified fear.'”

Corporates lead surge to record $6.6tn debt issuance. Eric Platt. Financial Times. 27 Dec. 2016.

“The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.”

“Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.”

“While US government bond yields touched their low in July, the prospect of Mr Trump cutting taxes and injecting fiscal stimulus has accelerated a move higher in interest rates that some investors fear will make debt burdens harder to bear in 2017.”

“After touching a record low of 1.32% in July, the yield on the 10-year US Treasury – an important benchmark for corporate borrowing costs – has surged more than a percentage point to 2.57%.”

“With the universe of negative-yielding bonds touching almost $14tn at one point, money managers were willing to stomach lower returns. The year’s debt sales were buoyed by China and Japan-based issuers, up 23% and 30% respectively, from a year earlier.”

“Investors say they expect 2016 is likely to prove a high-water mark for debt issuance in this cycle, with the Fed forecast to raise rates further and question marks growing over the future of bond-buying programs from the BoJ and the ECB.”

Housing Gains Highlight Economic Divide. Laura Kusisto. Wall Street Journal. 27 Dec. 2016.

“The volatile housing market of the past 15 years is widening the divide between pricey urban and coastal areas and more affordable inland regions, creating large swaths of winners and losers based largely on geography.”

While the S&P CoreLogic Case-Shiller National Home Price Index is up 5.6% in the last twelve months through October, however, “adjusted for inflation, prices are still roughly 15% below the peak.”

“Much of the spoils have been concentrated on the high end. A study by Weiss Analytics, a housing-data firm, found homes in ZIP Codes where the median value is $500,000 to $1 million are now worth 103% more than they were 16 years ago, before a boom in the mid-2000s was followed by the worst housing crash since the Great Depression. Home prices in those areas have shot up 39% since the bust.”

“In ZIP Codes where the median home was worth $100,000 to $150,000, prices have risen 16% since the trough of the market and are now worth 24% more than they were in 2000.”

Adding a political lens to this, “in counties that voted for Mr. Trump, home prices have been largely flat for the past 15 years, according to a county-by-county analysis of home values and voting patterns by real-estate tracker Zillow.”

“In January 2000, just before the housing market’s boom-bust cycle began, homes in counties that voted for Mrs. Clinton in 2016 were worth $36,000 more than those in the counties that voted for Mr. Trump, according to the Zillow analysis. Today, the gap stands at almost $97,000.”

“The difference is even starker in counties that changed how they voted in this election. In counties that swung for Mrs. Clinton, homes are worth about $147,000 more than homes in counties that swung for Trump.”

Other Interesting Articles

Bloomberg Businessweek

The Economist