Month: March 2017

March 24 – March 30, 2017

Shale markets to the financial markets – can I get some more money please… Slow housing recovery sapping GDP growth. China’s smartphone users flock to risky investments.


FT – Chile heads for first recession since 2009 3/23. The Chilean economy contracted 0.4% in the fourth quarter of 2016 and it is looking like there will be another contraction in the first quarter of 2017 due to a strike at Escondida (the world’s largest copper mine) which would put the country in a technical recession, it’s first since 2009.

WSJ – Former South Korean President Park Geun-hye Is Arrested in Corruption Probe 3/30. First she was impeached and now arrested…geez.

Special Reports / Opinion Pieces


  • Gloria Cheung and Don Weinland of the Financial Times highlighted recent restrictions by UnionPay barring Chinese from buying HK property with plastic.
    • “Chinese citizens have been barred from using their debit and credit cards to buy property in Hong Kong in the latest attempt by Beijing to curb capital flight.”
    • “The use of Chinese credit cards to pay for a portion of property transactions is widespread in Hong Kong. Willy Liu, chief executive of local real estate agent Ricacorp, said 15-20% of new property buyers were mainland Chinese. The majority use UnionPay (China’s sole clearing house for bank card transactions) cards to pay for 5% of the home price as a mortgage deposit in Hong Kong.”
    • “Most of those transactions are worth at least HK$500,000 ($64,371), Mr. Liu said, surpassing the $50,000 annual limit for personal foreign exchange imposed by China’s regulators.”
    • However, agents don’t expect the curbs to have much effect on Hong Kong property.
    • “UnionPay cards have been a common conduit for mainland Chinese to move cash offshore, and the company has sought to shutter those channels. In October, it said it had barred the use of its credit and debit cards to purchase investment-linked insurance products.”
    • “Investment-linked insurance products often have a cash value that allows customers to cash out after a set period. The business was viewed by Chinese regulators as a means of moving money offshore.”
    • “The insurance policies bought by Chinese customers last year were much larger than those bought by other customers. Average single-paid premiums for life and investment-linked policies bought by Chinese were HK$3.7m-HK$6.1m ($477,000-$786,000), Moody’s said in a report this year.”
  • David Blood of the Financial Times illustrated that fake news is shared as widely as the real thing.
    • “Nearly a quarter of web content shared on Twitter by users in the battleground state of Michigan during the final days of last year’s US election campaign was so-called fake news, according to a University of Oxford study.”
    • “Researchers at the Oxford Internet Institute (OII) also determined that these users shared approximately as many fake news items as ‘professional news’ over the same period.”
    • “The report, published on Monday, concludes that links to fake news stories accounted for 23% of the links tweeted by a sample of 140,000 Michigan-based users during the ten days up to November 11 last year.”
  • Bryan Harris and Kang Buseong of the Financial Times covered the how South Korea has joined the ranks of the world’s most polluted countries.
    • “South Korea has joined the ranks of the world’s most polluted countries, with air pollution in the first months of this year soaring to record levels.”
    • “Long associated with Asian capitals such as Beijing or Delhi, hazardous smog has for weeks blanketed Seoul – a city now appearing among the world’s three most polluted in daily rankings.”
    • “Already this year authorities in South Korea have issued 85 ultrafine dust (PM2.5) warnings, up more than 100% from the 41 advisories in the same period last year.”
    • “An OECD report found that up to 9m South Koreans could die prematurely by 2060 as a result of current levels of air pollution – the worst projection among members of the group of mainly rich countries.”
    • “Many in South Korea blame pollutants wafting in from China – but experts say much of the pollution is homegrown.”
    • “The South Korean environment ministry attributes up to 80% of the fine dust to overseas sources during periods of pronounced pollution.”
    • “But Prof. Kim (Kim Shin-do, a professor of environmental engineering at the University of Seoul) believes China is to blame for only 20% of South Korea’s fine dust. Environmental group Greenpeace puts the figure at 30%.”
    • “Much of the country’s pollutants come from vehicle emissions and construction or industrial sites. Power plants also play a crucial role – and energy officials are pushing to develop even more coal-powered capacity.”
  • Don Weinland and Javier Espinoza of the Financial Times highlighted the shock waves that have resulted in the global M&A world due to Chinese capital constraints.
    • “In the space of 12 months, China’s companies have gone from being the most prolific and sought after bidders in international dealmaking to some of the most unreliable and sometimes even unwelcome, according to senior bankers and lawyers.”
    • “The stark change reflects the regulatory crackdown in China on outbound transactions since the start of 2017, which has been part of a coordinated effort to stem the hundreds of billions of dollars in capital pouring out of the country.”
    • “In the first three months of the year, the value of announced outbound deals from China dropped sharply to $23.8bn, according to Thomson Reuters data, its lowest level since 2014.”
    • “In 2016, Chinese companies agreed [to] about $222bn worth of deals…”
    • Bottom line, the restrictions put in place by the State Administration of Foreign Exchange (SAFE) to limit acquisitions of non-core lines of business are working.
    • Granted, “groups with sizeable assets overseas, such as the airlines and hospitality conglomerate HNA Group, have continued to ink deals at a ravenous pace this year.”


FT – Struggling Sears signals decline of US malls – Gary Silverman, Lindsay Whipp and Joe Rennison 3/24

WSJ – Why China’s Latest Cash Crunch Is Scarier This Time – Anjani Trivedi 3/24

WSJ – Daily Shot: Insider Sentiment 3/26

Bloomberg – Manhattan Landlords Are Turning to Retailer Giveaways – Sarah Mulholland 3/28

WSJ – Daily Shot: Moody’s Investors Service – Plateauing US auto sales 3/27

WSJ – Daily Shot: BMO Wealth Management – World Housing Affordability 3/28

WSJ – Daily Shot: Moody’s – Share of property as a component of household wealth in China 3/29

WSJ – Daily Shot: Saudi Arabia Foreign Exchange Reserves 3/29


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

America’s shale firms don’t give a frack about financial returns. Schumpeter. The Economist. 25 Mar. 2017.

“Shale’s second coming is testament to Texan grit. But the industry’s never-say-die spirit may explain why it has done next to nothing about its dire finances. The business has burned up cash for 34 of the last 40 quarters, according to figures on the top 60 listed E&P (exploration and production) firms collected by Bloomberg, a data provider. With the exception of airlines, Chinese state enterprises and Silicon Valley unicorns-private firms valued at more than $1bn-shale firms are on an unparalleled money-losing streak. About $11bn was torched in the latest quarter, as capital expenditures exceeded cashflows. The cash-burn rate may well rise again this year.”

“Meanwhile, the prospect of rapidly rising production is rattling global energy markets.”

“When oil prices halved in just 16 weeks starting in late 2014, panic hit Texas, followed-for a while-by grim austerity. The number of drilling rigs in America dropped by 68% from peak to trough. Companies slashed investment. Over 100 firms went bankrupt, defaulting on at least $70bn of debt.”

But here we go again.

“The partial recovery in the oil price, which at one point fell as low as $26, is only one factor behind renewed enthusiasm for shale. Houston’s optimists also argue that the full geological potential of Texas’s Permian basin has only just become apparent. Some experts think it could in time produce more barrels each day than Saudi Arabia does.”

“But the fact that the industry makes huge accounting losses has not changed. It has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years. As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.”

Thing is E&P firms are rewarded for taking risks. “Not one of the ten biggest E&P firms, for example, puts significant emphasis in its pay scheme on how much return on capital it produces. Low interest rates make it easy for shale firms to borrow, and fee-hungry banks cheer on the spectacle. But the only way that this mania will end well is if oil prices rise sharply, bailing out the industry, or if E&P firms are bought by bigger energy firms. That is possible, but companies such as Exxon and Shell are too seasoned to pay a lot for small, unprofitable firms.”

Then there is the circular argument that they’ll produce their way out of the debt with higher production at higher or sustained prices – but the more they produce (particularly as the swing producer in a global context) the more likely it is that prices will fall.

“The oil bulls of Houston have yet to prove that they can pump oil and create value at the same time.”

Sluggish Housing Recovery Took $300 Billion Toll on U.S. Economy, Data Show. Laura Kusisto. The Wall Street Journal. 26 Mar. 2017.

“The decline in homeownership rates to near 50-year lows is partly to blame for the U.S. economy’s sluggish recovery from the last recession, new data suggests.”

“If the home-building industry had returned to the long-term average level of construction, it would have added more than $300 billion to the economy last year, or a 1.8% boost to gross domestic product, according to a study expected to be released Monday by the Rosen Consulting Group, a real-estate consultant.”

“In 2016, total spending on housing declined to 15.6% of GDP, a broad measure of goods and services produced across the U.S., compared with a 60-year average of nearly 19%. The share of spending specifically lined to new-home construction and remodeling likewise declined to 3.6% of GDP, just over half its prerecession peak in 2005.”

“If you want to get the economy going, housing is typically the flywheel.” – Ken Rosen, chairman of Rosen Consulting and chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

“The homeownership rate stood at 63.7% in the fourth quarter of 2016, according to the U.S. Census Bureau. That was down from a high of 69.2% during the housing boom and below the 65% economist say is a normal level.”

“It is unlikely that easing credit alone would be enough to bring the share of households who own back up to historic norms. Even in hot markets where demand is strong despite tight credit standards, builders can’t construct enough homes to meet demand because of labor shortages and regulatory barriers, said Robert Dietz, chief economist at the National Association of Home Builders.”

“Tighter mortgage lending has led to sharp declines in default rates and helped produce a market in which price growth is linked to economic prosperity.”

“But some experts argue default rates are too low. Under typical conditions, similar to those in the early 2000s, about 12% of mortgages are at risk of default, but in the third quarter of 2016, just 5.1% of mortgages were at risk of default – a level that indicates that lenders aren’t making loans to thousands of people who pose little risk, according to the Urban Institute, a nonprofit think tank.”

“Mr. Rosen said many middle-class families have missed out on the appreciation that has occurred over the past five years because they haven’t been eligible for mortgages.”

“‘We’re being paternalistic in our regulatory environment and it’s forcing lower middle-class people…to rent,’ he said.”

Swipe by Swipe, Chinses Smartphone Users Flock to Risky Investments. James T. Areddy. The Wall Street Journal. 28 Mar. 2017.

“In China, about 700 million people carry a smartphone, and many of them are comfortable sending money from their screens through the world’s busiest mobile-payment networks. That has created a crowdfunding wave bigger than anywhere else, a real-time experiment in a type of online investing proponents have long pushed in the U.S.”

“A million companies in China have turned to the internet to raise money, hawking loosely regulated, often risky investments, according to one of the country’s largest online lenders.”

“Swipe by swipe, the online money supply is helping to democratize investing and loosen capital markets. It also is propping up indebted Chinese companies and inflating bubbles in asset types from bonds to plastic pellets. And it is shifting more of the risks from China’s corporate debt load onto consumers.”

“Chinese banks hold more than $20 trillion in deposits, with more than a third of the total from household savings. Online pitches…attracted roughly $200 billion in 2015 and even more last year, consulting firm McKinsey & Co. estimated.”

“In just one corner of the booming online finance sector, more than 5,700 firms are registered with the Association of Shanghai Internet Financial Industry, a quasigovernmental group, to match small lenders and borrowers.”

“In January and February, Chinese electronics maker Cosun Group failed to repay about $166 million in bonds sold through an online marketplace owned by Ant Financial Services Group. Ant is an affiliate of e-commerce giant Alibaba Group Holding Ltd and is valued by some analysts at more than $70 billion.”

“Last April, crying investors flocked to Shanghai Kuailu Investment Group to demand their money back after its 13 fundraising platforms halted redemptions for about 38,000 customers who invested more than $2 billion, according to company documents reviewed by The Wall Street Journal. It had invested in at least 20 feature films, one starring former boxer Mike Tyson.”

“The company’s owner has disappeared, and investors claim they haven’t been repaid.”

You can imagine that the government has a cautious eye on the sector; however, previously they were all for it – hence the rapid adoption.

“In a recent survey, about 70% of Chinese internet users said carrying cash is no longer a daily necessity. It is common for consumers to swipe from deal to deal on apps that advertise investment opportunities. The apps usually are connected to online payment services that supply the customer’s personal details and link to bank accounts.”

“The migration of investing onto mobile phones happened in a flash. After Alipay pioneered a way to pay for goods with mobile phones, entrepreneurs used Alipay to sell shares during the 2015 stock-market boom. Stocks crashed, but other investment options proliferated, including commodities trading and interest-bearing insurance products.”

As an aside “multiple financial firms accept nude photos of borrowers as collateral on loans to college students.”

“Online finance is part of China’s wider shadow-credit system, where borrowings totaled $9.22 trillion in 2016, equivalent to 90% of GDP, according to UBS Securities. The term shadow credit refers to lending outside the formal banking system and its regulations.”

“Many people in the industry say investors pay little attention to details, other than the advertised return. Their money often is supposed to be tied up for just days or weeks, giving investors more comfort about the risks.”

“While most borrowers have been able to repay, often with a new round of money borrowed from somewhere else, investors have suffered losses in the billions of dollars.”

As Andrew Collier, founder and managing director of research firm Orient Capital Research in Hong Kong puts it, investors “are handing over their cash to a small group of internet pioneers who are trying to find ways to lend it short-term.”

Buckle your seatbelts.

Other Interesting Articles

Bloomberg Businessweek

The Economist


Bloomberg – Deutsche Bank in Bind Over How to Modify $300 Million Trump Debt 3/27

Economist – Anti-corruption demonstrations sweep across Russia 3/27
FT – Emerging market government debt rush before US rates rise further 3/23

FT – Property developer Kaisa surges 70% after exiting two-year suspension 3/26

FT – Hedge fund closures hold nuggets for stock market investors 3/27

FT – US producers build up sales hedges as oil falls 3/27

the guardian – A world without retirement 3/29

Mauldin Economics: Outside the Box – Raoul Pal, Paying Attention 3/29

NYT – China’s New Limits on Money Outflows Hit a Would-Be Paradise 3/24

NYT – Amazon’s Ambitions Unboxed: Stores for Furniture, Appliances and More 3/25

WSJ – China Tanked Oil Once, It Can Do It Again 3/27

WSJ – Spoiled-Milk Lending Flows to a Chinese Insurance Giant 3/27

WSJ – China’s Booming Car Market Fueled by Credit 3/28


March 17 – March 23, 2017

In the markets, even more so than in life, confidence is key. The American retail apocalypse. China is stirring a hornet’s nest.


FT – S&P 500 posts steepest slide since October 3/21. The S&P 500 index finally broke its 109-day streak of not having a 1% drop in a trading day.

NYT – In Berlin, a Grass-Roots Fight Against Gentrification as Rents Soar 3/18. “Under pressure from a growing grass-roots movement, the city authorities have put into effect a slate of measures, including rent caps, a partial ban on vacation rentals, development-free zones and increased social housing subsidies.”

FT – Sovereign wealth funds move beyond trophy assets 3/19. No longer able to rely on the continuous cash flows of $100 a barrel oil, sovereign wealth funds have sharpened their pencils in their underwriting standards as they seek to generate higher investment returns for their citizens.

Yahoo Finance – Sears says there’s ‘substantial doubt’ it can stay in business 3/21. The company can sell its remaining key brands (Kenmore and Diehard); however, on an operating basis the company continues to lose cash.

Bloomberg – Record Number of Fund Managers Say U.S. Equities Are Overvalued 3/21. “Fund managers now say stocks are the most overvalued they have been in nearly 20 years, according to a survey done last week by Bank of America Merrill Lynch.”

Special Reports / Opinion Pieces


  • Rosamond Hutt of the World Economic Forum illustrated that 92% of the world’s population is breathing unsafe air.
    • “An estimated 92% of the world’s population lives in areas where air pollution exceeds safety limits, according to the World Health Organization (WHO)…”
    • “Parts of Africa, Eastern Europe, India, China and the Middle East are the biggest regional danger spots. The WHO says almost all air pollution-related deaths (94%) occur in low-and middle-income countries.”
    • Image from WSJ – Daily Shot 3/20
  • Pilita Clark of the Financial Times highlighted the positive news that the sharp drop in US emissions kept global levels flat in 2016.
    • “Climate-warming emissions from burning fossil fuels have remained flat for a third year in a row in a development that suggests a shift to a greener global economy is happening faster than previously thought.”
    • “A striking drop in carbon pollution in the US, where emissions fell back to what they were in 1992, helped to keep global CO2 levels in 2016 virtually unchanged from the two previous years, the International Energy Agency said.”
    • “‘This is a very welcome development,’ said Fatih Birol, IEA executive director. ‘It appears we now have the first signs of an established trend of flat emissions as a result of natural gas replacing coal in major markets and renewables becoming more and more affordable.'”
    • “Mr. Birol said it was especially significant that emissions stayed flat during a period of sustained global economic growth, currently about 3% per annum.”
    • “Mr. Birol cautioned that it was still unclear whether global emissions had peaked after surging for much of the past 60 years. ‘I think it’s too soon to say [the levelling-off] is permanent but compared with two or three years ago I am much more optimistic,’ he said.”
  • Gabriel Wildau of the Financial Times covered the increase in measures by the Chinese governments seeking to slow the growing property bubble.
    • “Big Chinese cities (Beijing, Guangzhou, Zhengzhou, Changsha, and Shijiazhuang) have launched a new round of lending curbs and purchase restrictions in an effort to cool overheated property markets, as official media warn that some have veered towards a bubble.”
    • “At the conclusion of the annual session of China’s rubber-stamp parliament last week, the government pledged to ‘contain excessive home price rises in hot markets.'”
    • “Nationally, home prices were 11.8% higher in February than a year earlier, following 12.2% growth in January, according to Reuters’ calculations based on the government’s 70-city survey. But other indicators suggest that the previous round of property tightening measures, which began last autumn, has not had the desired impact.”
    • “Property investment grew at its fastest pace in two years in January and February at an annual rate of 8.9%, while sales accelerated to 25.1% growth in floor space terms.”
    • “‘There is no doubt that in some cities the property market’s ‘high fever’ hasn’t subsided, and there are even signs of an evolution towards a bubble,’ read a Monday analysis in Financial News, a newspaper owned by the People’s Bank of China, the central bank. ‘The hidden risks and potential damage cannot be ignored.'”
  • Aaron Back of The Wall Street Journal pointed out the negative trends in the auto lending business.
    • “The auto-finance sector has taken a bad turn. An investor update on Tuesday from auto lender Ally Financial, formerly the auto-lending arm of General Motors, added to building evidence that trend lines are negative in the industry. That ranges from rising defaults to falling used-car prices.”
    • “The National Automobile Dealers Association sparked concern last week with a report that its used-car price index fell by 8% from a year earlier in February to its lowest level since 2010. NADA cited several factors for the decline, including a higher supply of used cars hitting the market, better sales incentives for new vehicles and even a delay in the mailing of tax-refund checks.”


WSJ – Daily Shot: FRED – Multifamily Housing Permit Issuance 3/16

“Multifamily housing permits, while volatile, have stalled over the past couple of years. Part of the reason for the lack of growth has been a pullback in financing, as banks become uneasy with this space.”

WSJ – Daily Shot: FRED – Multifamily Housing Under Construction 3/16

However a lot of inventory is coming to market.

WSJ – Daily Shot: Cities with High percentage of Multifamily Housing Permits 3/16

WSJ – Daily Shot: Americans on Food Stamps 3/16

“It’s been almost a decade since the Great Recession but the number of Americans on food stamps remains elevated.”

WSJ – Daily Shot: US Per Capita Consumption of Soft Drinks 3/16

FT – China treads closer to a day of debt reckoning – Izabella Kaminska 3/16

WSJ – Daily Shot: Italian House Price Growth 3/17

Want to buy an Italian villa?

Bloomberg – Manhattan & Brooklyn Real Estate Hot Spots – Oshrat Carmiel 3/20

WSJ – Barriers to Trade Are Multiplying Fast – Anjani Trivedi 3/20

“Some 2,200 antitrade measures like higher tariffs, subsidies and requirements for governments to buy locally are now in place globally – fourfold increase since 2010 – according to the World Trade Organization. On a broader definition, governments have taken some 3,500 antitrade steps since the global financial crisis, many of which were supposed to be temporary, according to Global Trade Alert, an independent initiative that monitors trade policies.”

WSJ – Daily Shot: US Household debt to disposable income 3/21

eia – Record precipitation, snowpack in California expected to increase hydro generation in 2017 – 3/22

Credit Suisse – The Incredible Shrinking Universe of Stocks – Michael Mauboussin, Dan Callahan, Darius Majd 3/22

FT – Debt piles add to risk for China’s property groups – Yuan Yang and Jennifer Hughes 3/22


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

America’s Confidence Economy. Mohamed A. El-Erian. Project Syndicate. 20 Mar. 2017.

Life – the confidence game.

“Financial markets seem convinced that the recent surge in business and consumer confidence in the US economy will soon be reflected in ‘hard’ data, such as GDP growth, business investment, consumption, and wages. But economists and policymakers are not so sure. Whether their doubts are vindicated will matter for both the United States and the world economy.”

“Donald Trump’s election as US president has triggered a surge in positive economic sentiment, because he pledged that his administration would aggressively pursue the policy trifecta of deregulation, tax cuts and reform, and infrastructure construction. Republican majorities in both houses of Congress reinforced the positive sentiment, as they signaled that Trump would not face the kind of paralyzing gridlock that Barack Obama confronted for most of his presidency.”

“The surge in business and consumer sentiment reflects an assumption that is deeply rooted in the American psyche: that deregulation and tax cuts always unleash transformative pro-growth entrepreneurship. (To some outside the US, it is an assumption that sometimes looks a lot like blind faith.)”

“In his groundbreaking General Theory of Employment, Interest, and Money, John Maynard Keynes referred to ‘animal spirits’ as ‘the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism, rather than mathematical expectations, whether moral or hedonistic or economic.'”

“But sentiment is not always an accurate gauge of actual economic developments and prospects.”

“So far, the exuberant reaction of markets to Trump’s victory – all US stock indices have reached multiple record highs – has not been reflected in ‘hard data.’ Moreover, economic forecasters have made only modest upward revisions to their growth projections.”

“It is not surprising that equity investors have responded to the surge in animal spirits by attempting to run ahead of a possible uptick in economic performance. After all, they are in the business of anticipating developments in the real economy and the corporate sector. In any case, they believe that they can quickly reverse their portfolio positions should their expectations change.”

“That is not that case for companies investing in new plants and equipment, which are less likely to change their behavior until announcements begin to be translated into real policies.”

“It is in this context that the economy awaits a solid timeline for policy announcements to evolve into detailed design and durable implementation.”

“If improved confidence in the US economy does not translate into stronger hard data, unmet expectations for economic growth and corporate earnings could cause financial-market sentiment to slump, fueling market volatility and driving down asset prices. In such a scenario, the US engine could sputter, causing the entire global economy to suffer, especially if these economic challenges prompt the Trump administration to implement protectionist measures.”

“The US is on relatively strong footing to achieve higher economic growth. Indeed, by animating the economy’s animal spirits, the Trump administration has laid the groundwork for the private sector to do a lot of the heavy lifting. But there is more to do. Unless the Trump administration can work well with a cooperative Congress to translate market-motivating intentions into well-calibrated actions soon, the lagging hard data risks dragging down confidence, creating headwinds that extend well beyond financial volatility.”

The retail apocalypse has officially descended on America. Hayley Peterson. Business Insider. 21 Mar. 2017.

“Thousands of mall-based stores are shutting down in what’s fast becoming one of the biggest waves of retail closures in decades.”

“More than 3,500 stores are expected to close in the next couple of months.”

“Some retailers are exiting the brick-and-mortar business altogether and trying to shift to an all-online model.”

“For example, Bebe is closing all its stores – about 170 – to focus on increasing its online sales, according to a Bloomberg report. The Limited also recently shut down all of its stores, but it still sells merchandise online.”

“Others, such as Sears and JCPenney, are aggressively paring down their store counts to unload unprofitable locations and try to staunch losses.”

“Sears is shutting down about 10% of its Sears and Kmart locations [not to mention their very existence as a ‘going concern’ is at stake], or 150 stores, and JCPenney is shutting down about 14% of its locations, or 138 stores.”

“According to many analysts, the retail apocalypse has been a long time coming in the US, where stores per capita far outnumber that of any other country.”

“The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next two countries with the most retail space per capita, according to a Morningstar report from October.”

Of course all of this is not good for the malls. The immediate outcome of closed stores is the drop in rental income; however, when the anchors (i.e. Sears and JCPenney) close, co-tenancy clauses can be triggered – basically enabling other tenants to leave. Further, the queue of suitable replacement tenants isn’t as long as it used to be. So, some malls (particularly the C- and D-rated ones) are on the path to closure.

Regardless, don’t interpret this to be the apocalypse that the title describes – there is still a need for retailers.

China stokes grievance against Seoul at its peril. FT View. Financial Times. 22 Mar. 2017.

“Faced with the menace of a nuclear-armed Pyongyang, Seoul has allowed the US to deploy its Terminal High Altitude Area Defense (Thaad) missile shield on its soil. China claims the weapons system’s radar will enable the US to see deep into Chinese territory, thereby tilting the strategic balance in the region and undermining Beijing’s own military capabilities.”

“This is certainly part of the rationale behind Washington’s plan to deploy the shield. The US is essentially telling Beijing that it is fed up with China’s lack of action in reining in its client state. If Beijing does not want Thaad to be deployed then it should do more to curb provocative aggression by North Korea.”

“Instead, the Communist Party has blanketed Chinese state media with anti-Korean vitriol, harassed South Korean businesses, stopped Chinese tourists from travelling to Korea and even allowed schoolchildren to be indoctrinated through mass rallies and boycotts of Korean products.”

“Korean supermarket chain Lotte, which provided some land for the deployment of Thaad, has borne the brunt of the Chinese attacks. As many as 87 of its 99 stores in China have been temporarily or permanently closed, including many that have been targeted for spurious ‘fire safety’ violations. This behavior may violate World Trade Organization rules. Seoul has already requested that the WTO looks into China’s actions.”

“The Chinsese government has tried to distance itself from the protests against South Korea by arguing that they are simply a reflection of public opinion. But all forms of public protest in China are effectively banned, except those that happen to rail against the latest foreign enemy that party leaders are annoyed at.”

Careful instigating a mob.

Other Interesting Articles

Bloomberg Businessweek

The Economist


Bloomberg – PBOC Said to Inject Funds After Missed Interbank Payments 3/21

Bloomberg – Ray Dalio Says Populism May Be a Bigger Deal Than Monetary and Fiscal Policy 3/22

FT – A blind spot masks the danger signs in finance 3/16

FT – Swift severs remaining North Korean links to global banking 3/16

FT – Surge of foreign buying builds case for China bond index inclusion 3/17

FT – Capital Group takes on the passive investors 3/20

FT – Investors grow more adventurous in their search for income 3/20

FT – Chinese cinemas punished for box office fraud 3/23

Guardian – Has the tech bubble peaked? Signs that the startup boom may be fizzling 3/17

Knowledge@Wharton – The Economic Toll of High Suicide Rates in Japan and South Korea 3/20

NYT – While Scolding Trump, Mexico Seeks to Curtail Citizens’ Rights 3/16

NYT – How ‘Consumer Relief’ After Mortgage Crisis Can Enrich Big Banks 3/17

NYT – Gripes About Obamacare Aside, Health Insurers Are in a Profit Spiral 3/18

NYT – Arctic’s Winter Sea Ice Drops to Its Lowest Recorded Level 3/22

WP – Secret Service asked for $60 million extra for Trump-era travel and protection, documents show 3/22

WSJ – Bond-Yield Rebound Poses a Threat to Stock Rally 3/19

WSJ – With the World’s Most Billionaires, China Has Its Own Populism Problem 3/20

WSJ – Cities Restore Lost Streets, Local Charm After Razing Failed Malls 3/20

WSJ – Blackstone Looks to Cash Out of European Warehouse Platform 3/21

WSJ – Tax Overhaul Threatens Affordable-Housing Deals 3/21

WSJ – Jared Kushner’s White House Role Complicates Skyscraper Deal 3/21

WSJ – Used-Car Prices Put Auto Finance in a Pickle 3/21



March 10 – March 16, 2017

Toronto housing market – heads up, your peak has been called. Sometimes money just needs a home (in a foreign country).

First, Happy St. Patrick’s Day!  


FT – China tries to restrict access to foreign children’s books 3/10. Hearts and minds.

Bloomberg – Saudi Arabia Says It Has Reversed a Third of Its Production Cuts 3/14. The Kingdom is losing patience with the free loaders.

WSJ – Home Builder Confidence Jumps to Highest Since 2005 3/15. Just like that…

Special Reports / Opinion Pieces


  • The team at the Economist put together an interesting article on whether Venezuela’s dictatorship will survive?
    • “Venezuelans are suffering privation previously unheard of in what was once South America’s richest country. According to a study by three universities, 82% of households now live in poverty. That compares with 48% in 1998, when Chavez came to power. The rise in poverty follows Venezuela’s biggest-ever oil windfall. Of the $1tn the regime received in oil revenue, perhaps a quarter was stolen by insiders, according to the International Crisis Group, a think-tank. Infant mortality is rising, and Venezuelans are needlessly dying because of the shortage of medicines. Those who can, leave; perhaps 2m Venezuelans now live abroad.”
    • “To remain in power, Mr. Maduro’s state-socialist regime is extinguishing democracy.”
    • “His new hardline vice-president, Tareck El Aissami, heads a ‘national anti-coup command.'”
  • Jeevan Vasagar and Gabriel Wildau of the Financial Times covered the hiccup (China capital controls) in the large real estate development project named Forest City at the edge of Malaysia next to Singapore.
    • Resulting from capital controls in China, Chinese property developer “Country Garden has closed its showrooms in mainland China for its flagship $100bn Forest City development” at the southern tip of Malaysia.
    • The project which is scheduled to have its first move-ins next year, is projected to take two decades to develop and will house 700,000 people. The hiccup is that mainland Chinese have accounted for 70% of the buyers to-date.
    • To give a sense of the marketing message, “above the main reception desk [in Shanghai], the project appealed directly to investors looking to move money abroad with the slogan, ‘Preferred selection for overseas asset allocation. Forest City, adjacent to Singapore.'”
    • Bottom line, “capital control measures appear to be having an impact. Outbound foreign direct investment from China tumbled by 36% in January, including an 84% decline in outbound real estate investment by companies.”
  • Alistair Gray and Robin Wigglesworth of the Financial Times highlighted the delicate path the Fed walks in regard to mortgage-backed bonds.
    • “Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing program, but have so far provided few details.”
    • “Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”
    • “The Fed unveiled its mortgage-backed assets scheme at the height of the crisis in November 2008 and began the purchases soon after. Its MBS holdings have since swelled to account for almost a fifth of the entire $8.9tn market. Every month the central bank still buys billions of dollars worth of MBS as it reinvests the proceeds of maturing securities.”
    • Michael Fratantoni, chief economist of the Mortgage Bankers Association expects “all things being equal, just the removal of the ongoing purchases would push up mortgage rates relative to Treasury yields by at least 10 basis points.”
    • It is to be seen how the Fed unwinds itself and how the markets react – get ready.
  • Sarah Mulholland of Bloomberg covered a recent interview with billionaire real estate investor Richard LeFrak and his position that NYC apartment rents need to drop as much as 15%.
    • “Apartment rents in cities such as New York and San Francisco will need to fall as much as 15% for a glut of high-end developments to be absorbed, according to billionaire real estate investor Richard LeFrak.”
    • “New York landlords are already feeling the pinch as renters take advantage of a flood of new buildings to negotiate concessions and price cuts. Rents fell last month for Manhattan apartments of all sizes, the first across-the-board decline in at least four years, as property owners compromised to keep units from going empty.”


MarketWatch – The No. 1 stock of the bull market… and 39 others that soared 1,000% – Sue Chang 3/11

WSJ – Daily Shot: Bespoke Investment – S&P 500 Trading Days Since Last 1%+ Decline – 3/13

WSJ – Daily Shot: Natixis – China vs Europe Credit Expansion 2005 – 2016 – 3/13

NYT – The Fed’s Era of Easy Money Is Ending – Neil Irwin 3/13

WSJ – Asset Manager Deal Wave Has Just Begun – Aaron Back 3/14

WSJ – Daily Shot: The falling cost of US shale production 3/14

WSJ – Daily Shot: Pension Partners – Global Central Bank Policy Rates 3/15

WSJ – Daily Shot: National Association of Home Builders Optimism Index 3/15

Metrocosm – The Global Extremes of Population Density – Max Galka 7/22/15

  • “Only 5% of the world’s population lives in the entire blue region. For comparison, the same number of people live in the small red region.”

FT – Chinese private equity: look elsewhere – Lex 3/15


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

Toronto’s Housing Bubble Has 24 Months to Live: BMO. Daniel Tencer. Huffington Post Canada. 13 Mar. 2017.

“Desperate homebuyers, take a two-year breather. Housing speculators, take warning.”

“Toronto’s house-price juggernaut is two years away from the sort of peak it reached in 1989, when a housing bubble burst in the city, BMO Economics says.”

“‘At the rate we’re now going with 20% year-on-year price increases, assuming stable mortgage rates and continued income growth, we’ll be at 1989 valuation levels in about 24 months,’ senior economist Robert Kavcic wrote in a note last week.”

Presumably that would imply that Toronto will get there faster if mortgage rates rise and income growth slows/flatlines.

“Toronto’s average house price jumped 27.7% in February from a year earlier, to $859,186. Single-family homes soared to $1.57 million on average, a jump of nearly 30% in a year.”

“The 1989 housing market peak led to a seven-year period of house price declines in Toronto, with prices falling 39% from their 1989 peak by 1996.”

“The most common explanation given by real estate industry insiders for Toronto’s rising house prices is that there is a shortage of housing supply in the quickly-growing city. That’s the argument used by the Ontario Real Estate Association to call for looser density requirements and looser restrictions on urban sprawl.”

However, looser restrictions won’t relieve pressure in the short-term. At this point “house prices are being driven upwards not by a real shortage but by ‘powerful expectational dynamics’ – the belief that prices will continue rising, causing people to rush buying homes.”

Animal spirits…

Searching for sanctuary – Foreign buyers push up global house prices. Economist. 11 Mar. 2017.

One of the offshoots of globalization is that while capital flows generally where it will attain its best return, it also flows to where it feels safe.

“In some places, foreign investment has led to a construction boom. In Miami apartments are being built in numbers not seen since the financial crisis, financed in part by Venezuelan money. Australia lets foreigners invest only in new-build properties, and they do: 26,000 new flats are due on the market in Sydney and Melbourne over the next 18 months. In London 45,000 homes have been built since 2014 – the highest rate in ten years – but locals grumble many are pads for footloose foreigners.”

“In many of these countries affordability looks stretched. The Economist gauges house prices against two measures: rents and income. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable. By these measures house prices in Australia, Canada and New Zealand look high. In America as a whole, housing is fairly valued, but in San Francisco and Seattle it is 20% overpriced.”

“Haven investors may disregard affordability measures. Property can either be a bolthole [place where you can escape to and hide] or earn an income; in many supply-constrained cities its value may rise rapidly; even if not, the risks may be lower than at home… A study in 2016 found that increased political risk in places such as Greece and Syria explained 8% of the variation in London’s house prices since 1998.”

“Policymakers may well scratch their heads [and they do]. It is difficult both to make housing more affordable for a country’s own citizens and to encourage foreigners to buy. Britain has in fact tried to curb foreign enthusiasm with higher taxes, and by publishing a registry of 100,000 British homes owned by foreign companies – a potential embarrassment for some.”

“But unintended consequences lurk. After a 15% levy on purchases from abroad was introduced in the Canadian city of Vancouver last August, the number of foreign buyers dropped by 80%. That helped dampen house-price inflation there but pushed up demand in nearby Victoria. It also deterred highly skilled immigrants. The levy will soon be amended to exclude foreigners on skilled-work visas.”

At times it can be hard to understand how property markets can continue to rise despite a seeming lack of buyers at price points necessary to bring new product to market. Bottom line, people have different motivations for the things they do and spend their money on (even if it means losing some of it).

Other Interesting Articles

Bloomberg Businessweek

The Economist


FT – Cheesegrater price expected to spur City of London property sales 3/12

FT – Investors switch tack on distressed Europe debt 3/13

FT – Clampdown puts brakes on Chinese house price boom 3/13

FT – China real estate investment grows at fastest pace in 2 years 3/13

Huff Post (Canada) – Realtor Promises ‘Goldmine’ In Listing Proving Toronto’s Gone Nuts 3/8

Investment News – Investors accuse Nicholas Schorsch of plundering RCAP for own gain 3/10

NYT – After $225 Billion in Deals Last Year, China Reins In Overseas Investment 3/12

NYT – Kushners, Trump In-Laws, Weigh $400 Million Deal With Chinese Firm 3/14

NYT – China Pushes Legal Overhaul That Would Bolster State Power 3/15

WSJ – Hoteliers Cast Airbnb as Fast-Growing Professional Rival 3/9

WSJ – Chinese Banks’ Latest Funding Trick Gets Scrutiny It Deserves 3/13

WSJ – A Split Decision for Neiman Marcus Debt Holders 3/14

WSJ – China’s Amazing Disappearing, Reappearing Infrastructure 3/14

WSJ – As Retailers Go Silent, Big Data Fills the Void 3/15

WSJ – Housing Market Madness: Denver is Now a Worse Deal Than San Francisco For Tech Workers 3/16



March 3 – March 9, 2017

In the UK the economy has grown but wages have declined. Does your bond index have Chinese bonds – it will soon. The Puerto Rican teacher’s pension ponzi scheme (really several US states and cities aren’t far away from a similar situation).


WSJ – Macau Casinos Face Impending Shuffling of Decks 3/2. Two of the six casino operators will see their gambling concessions expire in 2020 and the other four in 2022. At that time expect the cost-of-doing business to increase enormously, the public tender to go to mainland Chinese companies (as opposed to foreigners), or the number of concessions to increase – either way, competition will be fierce.

NYT – Sweden Reinstates Conscription, With an Eye on Russia 3/2. Abolished in 2010, Sweden is reinstating the draft starting next year.

FT – Wealth of China’s richest 200 lawmakers tops $500bn 3/2. “According to Hurun data, the 200 richest members of the National People’s Congress and Chinese People’s Political Consultative Congress, an advisory body, have combined fortunes worth nearly Rmb3.5tn ($507bn). The wealth of the 100 richest lawmakers soared over the past four years to Rmb3tn, up from Rmb1.64tn in 2013.”

FT – US and North Korea on collision course, says China 3/7. The U.S. has sent its THAAD missile defense system to South Korea in light of increasing aggression from North Korea – despite concern from China.

Bloomberg – L.A. Voters Reject Measure AIDS Group Backed, Developers Opposed 3/8. LA voters rejected ballot Measure S that sought to put a two-year moratorium on development in LA.

Economist – The Iraqi army is on the brink of defeating Islamic State 3/8. “But the government must move fast if it is not to squander its victory.”

Bloomberg – Manhattan Rents Fall for Every Apartment Size, Even Studios 3/9. “Apartments available for rent at the end of February totaled 6,872, a jump of almost 12% from a year earlier. The number of new leases fell 28% last month to 3,634, while the median monthly rent for units of all sizes slipped 0.9% to $3,350.”

Special Reports / Opinion Pieces


  • Cat Rutter Pooley and Attracta Mooney of the Financial Times highlighted that US pension funds have halved their private equity allocations.
    • “Big US investors have halved their allocations to private equity this year. It is the first sign that pension funds are concerned investment returns will suffer as buyout houses struggle to deploy record levels of cash.”
    • “Pension funds and other institutional investors gave $3.2bn to private equity funds in January and February compared with $8.9bn announced during the same period last year, according to data from MandateWire, the FT news service that collected the figures.”
    • Why… “investors are now worried about lower returns and difficulties exiting their investment in the future, as the number of initial public offerings decreases.” Further, “there are also concerns that the private equity market has become overcrowded, with buyout companies struggling to find suitable businesses to back.”
    • “According to a report from Pitchbook, the data provider, the level of cash, so-called dry powder, that private equity companies have to invest hit a record high of $754bn in 2016.”
    • “More than 80% of the capital raised by private equity companies in 2015 has yet to be deployed, said Pitchbook.”
  • Gabriel Wildau of the Financial Times covered the milestone that China has overtaken the eurozone as the world’s biggest banking system.
    • “China’s banking system has surpassed that of the eurozone to become the world’s largest by assets, a sign both of the country’s increased influence in world finance and its reliance on debt to drive growth since the global financial crisis.”
    • “While China’s gross domestic product surpassed the EU’s economic bloc in 2011 at market exchange rates, its banking system did not take over the top spot until the end of 2016, Financial Times analysis shows.”
    • “Chinese bank assets hit $33bn at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn for Japan. The value of China’s banking system is more than 3.1 times the size of the country’s annual economic output, compared with 2.8 times for the eurozone and its banks.”
    • As Esward Prasad, former China head at the International Monetary Fund and an economist at Cornell University, “the massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks.”
  • Bloomberg News illustrated that capital controls have triggered a backlash amongst China’s corporate titans resulting from scrapped deals.
    • “Chinese corporate chiefs are turning vocal critics of the nation’s capital controls as the pile of scrapped deals grows.”
    • “The complaints reflect a tumble in foreign deals, with the $19 billion of acquisitions abroad announced by Chinese companies so far this year amounting to a 74% drop from a year ago, according to data compiled by Bloomberg.”
    • “China’s leadership faces a balancing act in trying to stoke domestic companies’ influence on the international stage while avoiding the kind of bad investments that Japanese firms became famous for in the 1980s. The more immediate concern has been record outflows of capital that have only diminished in recent months after a steady tightening in oversight of and limits on cross-border transactions.”
  • Justin Lahart of The Wall Street Journal discussed a taxing problem for investors
    • “A corporate tax cut could provide a big boost to companies’ profits. The boost might not be quite as big, or come as soon, as investors think, though.”
    • “Yes, the U.S. corporate tax rate, at 35%, is among the world’s highest. President Donald Trump and the Republican-led Congress aim to change that. Mr. Trump has proposed dropping it to 15%, while the plan that House Republicans drew up last June would lower it to 20%.”
    • “So by how much would a tax cut juice corporate profits? The first thing to recognize is that few large public companies pay the statutory rate. By Goldman Sach’s reckoning, the effective tax rate for companies in the S&P 500 – which includes not just federal, but also state and local taxes – is 28%. Under the House plan, Goldman figures it would drop to 24%, boosting after-tax earnings by about 10%.”
    • “That could make the stock market look significantly less rich. The S&P 500 now trades at about 18 times analysts’ expected earnings for 2016, according to FactSet. Raise earnings by 10% and that price / earnings ratio slips to a more reasonable but still expensive 16.4.”
    • However, “a lower corporate tax rate also might convince some companies to reassess their use of tax havens, notes Tax Policy Center co-director Eric Toder. Any profits they direct toward the U.S. would then be subjected to a higher tax rate (20% is low, but Bermuda’s 0% is lower), raising their tax rate. Thus, the effective rate might not fall as much as advertised.”
    • Bottom line, “stock prices are supposed to be a reflection of expected future earnings. If investors are expecting too much from a corporate tax cut, and expect it to come too early, then prices will have to come down.”
  • Ben McLannahan and Barney Jopson of the Financial Times highlighted that over the past election cycle Wall Street spent a record $2bn on US election influence.
    • “Wall Street spent a record $2bn on lobbying and campaign contributions during the last US election cycle, according to a new survey, as big banks, hedge funds and other financial institutions stepped up efforts to reshape rules to their advantage.”
    • “Contributions of $1.1bn in the two years ended December 2016, combined with payments to lobbyists of $898m, meant that spending by Wall Street topped $2bn, about 25% higher than the previous high in 2007-2008.”
    • “The election contributions went to both presidential campaigns and congressional races, with donors sticking to the common practice of spreading their largesse across both parties.”
    • “The sums do not include so-called ‘dark money,’ or support to non-profits which do not have to disclose their donors. Nor do they include spending on research or policy staff who are not registered as lobbyists.”
    • “The financial sector is by far the largest source of campaign contributions to federal candidates and parties and ranks as the third-largest spender on lobbying, according to the survey [done by Americans for Financial Reform, a left-leaning coalition of consumer, labor and community groups], which was based on data collected by the Center for Responsive Politics. Insurers (excluding health insurers) were the biggest spenders during the last cycle, with $224m, followed by securities and investment ($192m) and real estate ($183m).”
    • Lisa Donner, executive director of Americans for Financial Reform, “noted that there were few outright victories for Wall Street in recent years, as lobbyists sought to roll back Dodd-Frank reforms. One example was a battle in December 2014 which allowed the big banks to continue to fund derivatives trades using federally-insured deposits.”
    • “But she said that much of the lobbying had succeeded in ‘slowing or weakening’ proposed reforms. Rules on curbing incentive pay, for example, have yet to see the light of day, even though such measures appear to have broad support among voters.”
    • “‘That is really what the money story is about; we end up with outcomes that are not what people voted for,’ said Ms. Donner.”


WSJ – Daily Shot: Statista – Tech IPO performance 3/2

WSJ – Daily Shot: Reliance on Undocumented Labor 3/2

WSJ – Daily Shot: Migrant Hosting and Sending Countries 3/2

WSJ – China Shifts Stance, Letting Dying Firms Go Bankrupt – Chuin-Wei Yap 3/3

WSJ – Daily Shot: Goldman Sachs – US Auto Inventory 3/5

Bloomberg – Saudi Arabia Still Bears Brunt of Oil Cuts as OPEC Output Drops – Angelina Rascouet and Julian Lee 3/2

NYT – ‘Superstar Firms’ May Have Shrunk Workers’ Share of Income – Patricia Cohen 3/8

WSJ – Americans Are Richer Than Ever, But They Don’t Feel That Way – Steven Russolillo 3/8


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

How wages fell in the UK while the economy grew. Valentina Romei. Financial Times. 2 Mar. 2017.

“Between 2007 and 2015, the UK was the only big advanced economy in which wages contracted while the economy expanded. In most other countries, including France and Germany, both the economy and wages have grown.”

“Britain’s GDP went back to pre-crisis levels in the third quarter of 2013 and it is now nearly 10% larger than in the second quarter of 2008. Yet in 2014 wages were almost 10% lower than seven years before. During the same period, salaries in France and Germany grew 7%.”

“Only the US and Canada have greater flexibility in labor market regulation than the UK, according to the OECD. Thanks to a more flexible job market, people were able to find jobs quicker than in other countries. Employment expanded by 2.4% in the six years to 2013, while in France there was no job expansion and the EU as a whole experienced job losses.”

What gives…

“After the crisis, labor supply increased, but these ‘unusual increases in labor supply’ were absorbed by the market, writes the OECD in its latest country survey. Pension reform and other policies contributed to the increase in supply with a rising number of older workers and incentives to work rather than live off benefits. Meanwhile ‘sustained inflows of well-educated immigrants have boosted the working-age population,’ says the OECD.”

“Such employment expansion coincided with the loss of labor bargaining power due to the risk of unemployment and ‘slack’ remaining higher than pre-crisis levels. Unemployment, underemployment and involuntary part-time working, for example, were far above their levels in 2008. Coupled with low and falling levels of unionization, employment growth came at the expense of a fall in real wages.”

While the economy is close to full employment, instead of tight labor conditions pushing up wages, there is enough slack and labor demand that wages are soft.

Unfortunately, “inflation is likely to squeeze real wages in the next couple of years just as it did after the crisis.” Rather than higher prices for goods and services feeding into higher profits and higher wages, productivity growth has languished, so people are dealing with lower living standards.

“Between 2007 and 2015 the UK had one of the highest inflation rates among big advanced economies, largely because of high energy prices and the depreciation of the pound. Consumer prices expanded at an annual rate of over 5% at their peak in September 2011, well above the rate of expansion of nominal earnings.”

Further “employment growth was driven largely by self-employment and part-timers, while the number of full-time jobs shrank. ‘The rapid rises in employment over the past few years have been made up by a larger than usual share of low-skilled jobs which tend to be lower paid,’ say Capital Economics.”

China’s Massive Bond Market Coming to Index Near You. Anjani Trivedi. The Wall Street Journal. 7 Mar. 2017.

“China’s bond-market dreams could finally be coming true. But global investors should tread with care.”

“Citigroup announced Tuesday that mainland Chinese bonds were eligible for inclusion in its widely followed indexes of investment-grade bonds. Once included, most passive investors could end up holding Chinese bonds in some way in their portfolios. Citi says the entry will be staggered over three months given the overall Chinese market’s $9 trillion size.”

“Index inclusion is big business – and isn’t a sleep subject. Opening the world up to China, also opens the world up to a host of risks that investors haven’t quite figured out how to price.”

“Even though Beijing is seemingly freeing up its bond markets, repatriating funds remains an issue. A recently introduced currency-hedging tool helps, but details are still fuzzy. And the risk of sudden capital controls perpetually looms.”

“For China, this could mean much needed inflows into its financial markets to counter the billions of monthly outflows. Around $2 trillion of assets under management track Citi’s World Government Bond Index. That could mean inflows of up to $120 billion if China has a 5% to 6% weight, according to Goldman Sachs. ETF’s like Tokyo-listed Listed Index Fund also track the Citi World Government Gond Index as do some BlackRock government bond funds.”

To be fair, it’s hard not to include bonds from the world’s second largest economy.

“There are fundamental issues to contend with especially the market’s lack of discernment between safe and risky bonds as reflected in narrow credit spreads. Foreign presence is unlikely to instill such discipline anytime soon.”

“Concerns around a host of trading technicalities abound…. Along with adding China to its main indexes, Citi has created two new ones that cap exposure, perhaps a hint that for many, China’s inclusion is too soon.”

“Ready or not, China’s bond market is joining an important club.”

The Chinese government, but more importantly, Chinese corporates will be able to pass on their debt risks to foreign investors and the sheer mechanics of indexes create a relatively indiscriminate buyer… the proverbial can continues to be kicked down the road.

In Puerto Rico, Teachers’ Pension Fund Works Like a Ponzi Scheme. Mary Williams Walsh. The New York Times. 8 Mar. 2017.

“Puerto Rico, where the money to pay teachers’ pensions is expected to run out next year, has become a particularly extreme example of a problem facing states including Illinois, New Jersey and Pennsylvania: As teachers’ pension costs keep rising, young teachers are being squeezed – sometimes hard. One study found that more than three-fourths of all American teachers hired at age 25 will end up paying more into pension plans than they ever get back.”

“‘I think they’re really being taken advantage of,’ said Richard W. Johnson of the Urban Institute, a co-author of the research. ‘What’s so tragic about this is, often the new hires aren’t aware that they’re getting such a bad deal.'”

“The problem is magnified by the fact that the Puerto Rico teachers union – like many teachers and police unions around the country – opted out of Social Security long ago, hoping it could save both workers and the government money by not paying Social Security taxes.”

Conceptually, “pension funds are supposed to be giant, largely self-sustaining pools of money, contributed by taxpayers and often workers, that earn investment income. Over time, the money is supposed to grow enough to pay retirees. Knowing this, teachers might reasonably expect to get a pension worth more than what they invested.”

However, in Puerto Rico “the pension funds are so short of cash that money contributed by working teachers basically flows straight out to retirees. None of Puerto Rico’s current teachers can expect to get their money back, because the fund is due to run out of money in 2018, long before they retire.”

“That is, essentially, a Ponzi scheme. But this structure is legal in Puerto Rico because of a complicated series of changes in the law brought about in recent years by the island’s financial crisis.”

Back to pension programs in general, “benefits are typically backloaded. This means that teachers build up their benefits very slowly in their early years – even as they make big contributions – then speed up in middle age and earn the biggest part just before they retire.”

“But because of high turnover and other factors, relatively few teachers reach the sweet spot where they earn a pension larger than their contributions. Most change jobs or move away first, leaving behind money that subsidizes the pensions of the relative few who teach for decades.”

Regardless, pension stress resulting from largess promised in good times and a lower investment return world have led to major cuts to younger teachers in the system. “In Illinois, for example, Mr. Johnson of the Urban Institute found that a teacher hired at age 25 who worked for 35 years could earn a pension worth $1.3 million – as long as that teacher had been hired before 2011. If hired after 2011, the same teacher would earn a pension worth only $609,000, even though both groups contribute 8.4% of every paycheck.”

“‘Overall, 84% of all newly hired teachers lose money’ in Illinois, Mr. Johnson said.”

Further, eight states (Delaware, Hawaii, Illinois, Maryland, New York, North Carolina, Pennsylvania, and West Virginia) recently doubled their vesting periods (“the time a teacher must work before vesting, or earning a nonforfeitable right to a pension”) to 10 years. “That is more than three times the maximum allowed for companies.” On top of that, “three of every 10 new teachers will quit in five years or less.” Basically free money for these pension programs.

“Martin F. Lueken of EdChoice, formerly the Friedman Foundation for Educational Choice, looked at the largest school districts in each state and found three where, because of cost-cutting, newer teachers might work their whole careers without ever earning a pension worth the value of their contributions: Boston, Chicago and the northern suburbs of Minneapolis.”

For more see: NYT – The State of State Teachers’ Pension Plans – Karl Russell and Mary Williams Walsh 3/6

Other Interesting Articles

Bloomberg Businessweek

The Economist


Bloomberg – These Economies Are Getting More Miserable This Year 3/2

Bloomberg – Shale Billionaire Hamm Says Industry Binge Can ‘Kill’ Oil Market 3/8

FT – India optimistic of being coal-free by 2050 2/12

FT – Investors place derivate bet against US shopping centers 3/2

FT – Japan returns to inflation for first time since 2015 3/3

FT – Jack Bogle: ETFs have beaten hedge funds 3/4

FT – China warns on hidden local government debt risks 3/5

FT – China defense budget tops Rmb1tn for first time 3/5

FT – Macau’s regional challengers up their casino game 3/5

FT – European businesses attack China high-tech push 3/6

FT – Germany’s trade surplus sparks concern at home and abroad 3/6

FT – Norway’s $905bn oil fund flexes its shareholder muscles 3/7

FT – Global investors return to China’s bad debt market 3/7

GlobeSt – Wave of Apt. Deliveries Will Crest In 2017 3/2

NYT – Here’s the Reality About Illegal Immigrants in the United States 3/6

WSJ – Disturbing New Facts About American Capitalism – Jason Zweig 3/3

WSJ – What GM Is Paying for European Exit 3/6

WSJ – Charity Officials Are Increasingly Receiving Million-Dollar Paydays 3/6

WSJ – Short Sellers Target Mall REITs 3/7

WSJ – Miami Condo Market Cools, but a Big Project Gets Financings 3/7

WSJ – Renovate America, One of America’s Fastest-Growing Lenders, Didn’t Disclose It Made Payments to Some Borrowers 3/8

WSJ – New Force on Wall Street: The ‘Family Office’ 3/8


February 24 – March 2, 2017

The insurance industry in China has been good business – too good. What is the magic number for China’s foreign exchange reserves? What gives – why haven’t the share buybacks by US corporates juiced returns (passive investing)?


FT – Samsung heir Lee Jae-yong charged with bribery 2/28. Lee Jae-young is actually looking at jail time.

FT – China capital crackdown threatens wave of overseas buyouts 2/27. Dalian Wanda’s $1bn acquisition of Dick Clark Productions is in question even though the argument can be made that it is strategic to its cinema business (AMC, Carmike Cinemas, Odeon & UCI theatres, Legendary Entertainment) and even though it is being made by one of China’s most connected and richest individuals.

WSJ – London’s ‘Cheesegrater’ Sold to Chinese Firm for $1.4 Billion 3/1. Hong Kong property tycoon Cheung Chung Kiu’s CC Land Holdings just stumped £1.15bn up for the Leadenhall Building in London – recently appraised at £915m at the end of September. Well, the office yields in London at around 4.6% are near double the 2.6% in Hong Kong and the yuan is up 12% on sterling since the Brexit vote.

Special Reports / Opinion Pieces


  • Robin Harding and Elaine Moore of the Financial Times covered that the Bank of Japan has telegraphed to the world that it plans to keep buying bonds to keep yields at 0%.
    • “The Bank of Japan published detailed schedules of planned asset purchases for the first time on Tuesday as it seeks to prove its commitment to a zero per cent cap on 10-year government bond yields.”
    • “Japan’s central bank said it will buy a minimum of ¥1.375tn and a maximum of ¥2.175tn of government bonds during March, giving a series of dates and estimated sizes for its planned bond auctions at different maturities.”
    • “The BoJ gave a strong hint that its announcement is meant to signal a minimum plan for purchases, rather than a maximum, saying it ‘may increase the frequency as needed.'”
    • “Japan’s 10-year yield is currently trading at 0.04%, having reached 0.11% at one point earlier this month before the BoJ stepped in and offered to buy in unlimited quantity to prevent it from rising any higher.”
    • Bottom line, the BoJ is all-in on maintaining 0% yields and the market can be assured of that.


WSJ – Daily Shot: US Total Oil Exports 2/23


WSJ – Daily Shot: China – WMP Product Investment Categories 2/23

  • “…Pressure on corporate bonds poses risks to Wealth Management Products (WMPs). One could argue that these offerings are a form of Ponzi scheme because when investors redeem their holdings, managers rely on other money to come into the product. If more people redeem than invest, the managers will be forced to liquidate and it’s not clear there will be enough to repay the last guys out.”


WSJ – Daily Shot: Chinese Bank WMP Deposit Percentage 2/23


WSJ – Daily Shot: FRED – US Home Price Index v Avg. Hourly Earnings 2/23


Economist – Longevity in rich countries – The Data Team 2/23


Visual Capitalist – Millionaire Migrants: Countries That Rich People Are Flocking To – Jeff Desjardins 2/24


WSJ – Daily Shot: Snap Value Progression 3/1


WSJ – Daily Shot: Maptitude – Largest coffee chains by US County 3/1



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

China bans fourth richest man from insurance sector for 10 years. Gabriel Wildau. Financial Times. 24 Feb. 2017.

“China’s fourth richest man [Yao Zhenhua, chairman of Baoneng Group] has been banned from the country’s insurance industry for 10 years, in the most aggressive move yet by regulators to tame borrowing and hostile corporate takeovers by insurers.”

“Much of the funding for Baoneng’s…investments came from investments gathered by its life insurance unit, Foresea Life Insurance, which Mr Yao also chairs.”

“Foresea quickly scaled the premium rankings of China’s life insurance industry by selling so-called ‘universal insurance’ products, which are essentially wealth management vehicles with a small protection component.”

“Insurers are able to offer higher yields than those available on comparable vehicles from banks and other fund managers because they have the freedom to invest in a wider range of assets. Anbang Insurance Group has also relied on sales of universal insurance products to fund a high-profile global shopping spree.”

“But analysts have warned against the strategy. Such products essentially force insurers to seek out risky, high-yielding assets in order to meet future payouts. Analysts are also concerned by a liquidity risk when short-duration products are matched to long-term illiquid assets such as real estate or large equity stakes.”

“Rarely seen in public, Mr Yao was China’s fourth richest man in 2016 with a fortune of $17bn, up more than ninefold from a year earlier, according to the Hurun Report. Local media say he started as a vegetable seller before making his first fortune as a property developer in the freewheeling city of Shenzhen in the 1990s.”

Previously, the China Insurance Regulatory Commission chairman Xiang Junbo had “warned that insurers cannot be ‘ATM machines’ for corporate raiders.”

“Mr Xiang also promised on Wednesday to curb ‘aggressive’ pricing and ‘unreasonably’ high returns on some insurance products. He said insurers should not interfere with the management of listed companies. Instead, the industry should focus on its core function of providing risk protection.”

China curbs capital outflows to keep renminbi stable. James Kynge. Financial Times. 28 Feb. 2017.

“China successfully curbed the flow of money cascading out of the country in January following the imposition of administrative controls, raising the potential for Beijing to prevail in its efforts to keep the renminbi stable against the US dollar this year, analyst said.”

“In January, capital outflows fell to $30bn from $55bn in December, according to estimates by Goldman Sachs, an investment bank.”

“This represented a considerable reduction on the monthly average in a country that has experienced a leakage of $1.2tn between August 2015 and January this year, yielding a monthly average of $71bn.”


“‘Given the still-large size of China’s reserves, this pace of outflows in unlikely to stop the central bank from pursuing its current exchange-rate policy, which can be sustained for another couple of years,’ said Long Chen, analyst at Gavekal Dragonomics, a research company.”

The reasons for the slow down are varied; however, where there is disagreement is on what would be considered a sufficient amount of foreign exchange reserves.

“China’s foreign exchange reserves fell $12bn in January to below the psychologically important $3tn level to $2.99tn, representing almost a $1tn reduction from its level of July 2014.”

“The issue of China’s reserves adequacy has arisen from applying the International Monetary Fund’s new reserve metric to the country.”

“Under this calculation, the proposed minimum reserves for China is $2.7tn…”

“But Brad Setser, senior fellow at the Council on Foreign Relations (CFR), a New York-based think-tank, said that China had ample room to defend its currency.”

“‘The world would be in a better place if there was a broad recognition that China can burn through another $1tn in reserves and, with $2tn still in reserves, be above nearly all metrics of reserve adequacy,’ Mr. Setser wrote in a CFR blog.”

“Jeremy Stevens, Asia economist at Standard Bank, holds a similar view. ‘It seems fair to argue that in terms of foreign exchange reserves, somewhere between $1.56tn and $2.2tn would be adequate for China’s working capital,’ he said.”

It is to be seen what China itself considers the ‘right’ amount of reserves. Regardless, part of the capital curbs have been aimed at encouraging more discretion by Chinese investors and companies in their foreign acquisitions.

“Pan Gongsheng, head of SAFE [State Administration of Foreign Exchange], was quoted as telling a Chinese newspaper this month that some overseas acquisitions by Chinese companies had been carried out with a ‘strong element of blindness.'”


US share buybacks punch below their weight. Robin Wigglesworth. Financial Times. 1 Mar. 2017.

In questioning whether corporate share buybacks have been on the whole a net positive, there has been a host of views presented. The concerns being that buybacks are short-sighted, returning cash to shareholders rather than pursuing growth initiatives. The implication being that these companies don’t have sufficient growth opportunities. However, in some cases companies simply have too much cash and recognize that they would do their owners a disservice by holding on to all of it.

“But perhaps the most notable thing about the buyback spree – more than $2tn of shares have been purchased in the past five years – is how it has arguably provided only a modest boost to equity prices, at least compared to the scale of the purchases.”

“Indeed, the share price performance of the most generous and consistent buyback companies paint a surprisingly muddied picture.”


“The S&P 500 Buybacks Index has rallied 96% over the past five years, outpacing the broader market’s 73% gain since. This is an outperformance of 2.8% annually. However, next to the sheer scale of the buybacks – the estimated $2tn spent is equal to a tenth of the S&P 500’s current value – it has underwhelmed.”

“Worse, the Nasdaq Buybacks index has even underperformed the broader Nasdaq Composite gauge over the past five years, with the former rising 86.3% and the latter by 90.3% – an annualized undershooting of 1.3%.”

“Goldman Sachs’s chief US equity strategist David Kostin has calculated that buybacks have been the single biggest source of demand for US stocks since the financial crisis, providing a vital pillar of demand at a time when domestic pension funds and foreign investors have largely been selling.”

“For example, last year overseas investors and US pension funds respectively offloaded $148bn and $127bn of American stocks. But US companies snapped up a record $644bn of their own shares, Goldman estimates.”

Further, “Goldman Sachs earlier this year [2017] lifted its forecast for S&P 500 share repurchases from an already lofty $780bn to $800bn.”

So why the muddied outcome… Charles Cara, head of quantitative strategy at Absolute Strategy Research has an “…intriguing reason for what he calls the ‘buyback anomaly’ of share repurchases not proving as big an uplift as the sheer volume would suggest: the rise of passive investing.”

“Passive investment vehicles do not react to share price moves. As equity prices move so do their index weights by an equal amount, provided that the share count remains constant. In other words, if Apple’s shares rise by $10, then an exchange-traded fund need do nothing, as its existing holdings of Apple stock obviously rises by the same amount.”

“Buybacks reduce the numbers of outstanding shares. If those shares rise as a result of the buyback, then an ETF or index-tracking fund – which do not sell to companies buying back their stocks – will find itself overweight compared to its benchmark, and will be forced to sell some of the shares and buy the rest of the stock market to rebalance.”

As Mr. Cara puts it, “buybacks are a prop to the whole stock market, but have a subdued impact on individual stocks because there is a countervailing force from passive investors.”

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