February 17 – February 23, 2017

US Baby Boomer generation making peace with less. Lots of US consumers are behind on their car payments. Banks are taking a step back from lending to the apartment market.

Headlines

FT – Norway plans shake-up of $900bn oil fund 2/16. The sovereign wealth fund of Norway – the largest in the world, “which already owns 1.3% of every listed company” – is planning on upping its allocation to equities to 70% from 60%.

FT – China bans coal imports from North Korea 2/18. Apparently North Korea finally crossed a line when it recently assassinated Kim Jong Nam (older brother of North Korean ruler Kim Jong Un) in Malaysia – who by the way was under Chinese protection.

WSJ – Chinese Bank Cleanup Plan Could Leave a Mess 2/20. The growth in the use of wealth-management products by Chinese banks continues to surge so the People’s Bank of China is seeking ways to bring the products on to bank balance sheets to get a better handle of the risk in the system.

Special Reports / Opinion Pieces

Briefs

Clifford Krauss of The New York Times highlighted that while Texas oil fields are rebounding from the price lull, jobs are being left behind.
- “Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30% of the total, while oil prices plummeted, at one point by as much as 70%. The job losses just in Texas, the most productive oil-producing state, totaled 98,000.”
- “Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning.”
- “And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10% from record levels.“
- “Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53.”
- “Pioneer Natural Resources, one of the most productive West Texas producers, has slashed the number of days to drill and complete wells so drastically that it has been able to cut costs by 25% in wells completed since early 2015. The typical rig that drilled eight to 12 wells a year just a few years ago now drills up to 16. Last year, the company added nearly 240 wells to its Permian Basin inventory without adding new employees.”
Gabriel Wildau of the Financial Times covered how the People’s Bank of China has launched a fresh new attack on shadow banking risk in the system.
- “China’s central bank has drafted new rules to tackle risks from shadow banking, in a tacit acknowledgment that a host of measures in recent years to control off balance sheet credit have failed to control its risks.”
- “New credit hit a record high in January, mostly due to lending by non-bank institutions. UBS estimates that China’s ratio of debt to gross domestic product hit 277% at the end of 2016, up 133 percentage points since the global financial crisis. Non-bank lending has grown the fastest.”
- “Chinese banks’ off balance sheet wealth management products (WMPs) exceeded Rmb26tn ($3.8tn) by the end of 2016, up 30% from a year earlier, compared with 10% growth for bank loans, the PBoC said. Non-bank financial institutions like trusts, securities brokerages and insurers package loans into investment products, which banks sell to clients as a high yield alternative to traditional savings deposits.”
- “The PBoC has circulated a draft policy framework in recent days that forbids off balance sheet WMPs from investing in illiquid loans known as ‘non-standard’ credit assets, Caixin, a respected financial news website, reported on Wednesday. ‘Standard’ assets refers to stocks, bonds and money market assets.”
- “The guidelines also seek to end the implicit guarantees associated with many WMPs… [and] also set uniform leverage ratios for structured WMPs…”
- “The rules also forbid WMPs from taking other WMPs as their underlying assets, a practice reminiscent of ‘synthetic’ collateralized debt obligations popular in the US before the 2008 financial crisis.”

Graphics

FT – It’s an issuer’s market in US corporate bonds – Stephen Foley 2/16

WSJ – Nascar, Once a Cultural Icon, Hits the Skids – Tripp Mickle and Valerie Bauerlein 2/21

WSJ – Daily Shot: Classic Rock Preferences Across America 2/20

WSJ – Daily Shot: US – Mortgage Origination By Credit Score 2/21

“Mortgage credit remains tight, with the borrowers’ median credit score still above 760.”

Economist – A new paper finds China more unequal than France but less so than America 2/16

WSJ – Daily Shot: U.S. Public Perception of crime rate 2/22

FT – Chinese province’s GDP fall hints at extent of past exaggeration – Yuan Yang 2/22

Featured

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

With $15 Left in the Bank, a Baby Boomer Makes Peace With Less. Timothy Martin. The Wall Street Journal. 16 Feb. 2017.

“People in the U.S. ages 65 to 74 hold more than five times the borrowing obligations Americans their age held two decades ago, according to an analysis of federal data by the Employee Benefit Research Institute, a nonpartisan, nonprofit policy researcher.”

“Paying it off won’t be easy. Median savings for U.S. households nearest retirement age has dropped 32% in the past decade to $14,500, according to an analysis of federal data by the Economic Policy Institute, a left-leaning think tank.”

“‘This is the first time where we have seen such a high degree of debt held by people at such a late stage of life,’ said Torsten Slok, chief international economist at Deutsche Bank AG.”

“As a result, many senior citizens will either have to work longer, move to less expensive places or pare back their spending – choices that economists say are likely to put a drag on the U.S. economy.”

“By the end of 2015, residents ages 66 to 70 had accumulated $99,700 in debt compared with $90,600 a decade before; 71- to 75-year-old residents had $73,400 versus $58,800 over the same period; and those ages 76 and older had $52,100 compared with $28,200, according to Equifax data.”

One million US consumers behind on car loan payments. Alistair Gray. Financial Times. 16 Feb. 2017.

“More than a million US consumers have fallen at least two months behind on car loan repayments as the delinquency rate reaches its highest level since 2009, in the latest sign of stress in the $1.1tn market.”

“The proportion of soured car loans showed a 13% increase to 1.44% in 2016, according to data published on Thursday by TransUnion, the US credit bureau with an anonymized database of 220m consumers.”

“Delinquencies on credit cards also rose by about the same amount over the period to 1.79% – the highest since 2011.”

“The rise in bad loans comes despite persistently low borrowing costs and unemployment levels – suggesting lenders may be letting consumers take on bigger debt burdens than they can handle. Lending to consumers with weak credit scores has been one of the fastest growing parts of the industry.”

“Separate figures published on Thursday by the New York Federal Reserve showed the total amount of debt held by American households rose last year at the fastest clip since 2007. Increases in all the main categories, from mortgages to student loans, pushed the total up $460bn over the year to $12.58tn – only 0.8% shy of the peak reached in the third quarter of 2008, the height of the financial crisis.”

Banks Retreat From Apartment Market. Laura Kusisto. The Wall Street Journal. 21 Feb. 2017.

“Swelling supplies of apartment units are prompting big banks to pull back from new projects, forcing developers to scramble for capital, in a sign that the U.S. apartment industry is headed for a downturn.”

“The apartment sector, which contributes some $284 billion to the economy annually, has been a winning bet for investors since the housing crash, as the economy recovered and more renters sought out units. Since 2010, average U.S. apartment rents have increased by 26%, according to data tracker MPF Research, a division of RealPage.”

“But fresh supply is beginning to overwhelm demand. More than 378,000 new apartments are expected to be completed in 2017, a 30-year high, according to real estate researcher Axiometrics Inc. In the fourth quarter of last year, 88,000 units were completed but only 50,000 of those were rented by tenants, according to MPF.”

“Now banks are in retreat, forcing developers to look to nontraditional lenders and seek more expensive types of financing to complete projects, said apartment executives, industry analysts, mortgage brokers and bankers.”

“In congressional testimony last week, Federal Reserve Chairwoman Janet Yellen noted that banks have started pulling back from making commercial real-estate loans, which could be a sign of ‘some reduction in appetite.'”

“While a couple of years ago most could get loans for about 65% of the cost to build a project, today they are getting closer to 55%” according to Peter Donovan, executive managing director of multifamily capital markets at real-estate brokerage CBRE.

As Donovan put it, “we’re certainly seeing the pullback. It was almost as if all the banks got the same memo.”

“Adding to the risk for developers: Even as loans get more expensive, rent growth is slowing. Last year, average U.S. apartment rents rose 3.8%, a significant drop from the recent high of 5.6% year-over-year growth posted in the third quarter of 2015, according to MPF.”

“Rents in major cities, such as San Francisco, New York, Houston and San Jose, Calif., all declined about 1% in 2016 from 2015 levels.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – A Billion Barrels of Bets Backing Stagnant Oil Price: Chart 2/20

Bloomberg – Why Trump’s Immigration Crackdown Could Sink U.S. Home Prices 2/22

Bloomberg – Saudi Arabia’s Oil Wealth Is About to Get a Reality Check 2/23

CNBC – Manhattan condo market cracking, developers roll out big incentives 2/17

FT – Hedgies hope insurers will rush in where others fear to tread 2/17

FT – ‘Aggressive’ vulture funds swoop in on Irish property 2/18

FT – China to slash drug distribution groups in price drive 2/19

FT – Foreign buyers fire up South Korea commercial property market 2/19