Month: April 2017

April 15, 2017April 14, 2017

April 14, 2017

Finance

FT – Rise of private debt creates fears of a bubble – Robin Wigglesworth 4/13

“Banks have in recent years been forced to retrench their operations, tamed by financial crisis losses, bridled by shareholders and tethered by more onerous regulation. Lending to smaller and mid-sized companies has been one of the biggest victims, as banks have focused on servicing their blue-chip clients. But a swelling array of investors have stepped into the resulting breach.”
“But some industry insiders are beginning to worry that private debt is getting frothy, as billions of dollars roll into a once-niche market.”
“Private debt is a large and diverse ecosystem, made up of asset managers, private equity firms, pension funds, insurers, ‘business development companies‘ and hedge funds. The assets under management of private debt fund managers tracked by Preqin have increased fourfold over the past decade to $595bn at the end of last year, after another 131 funds raised $93bn in 2016. At the current growth rate, the data provider reckons the industry could reach $2.5tn in another decade — rivalling the private equity world.”
“The investor enthusiasm is palpable. More than 90% of investors polled by Preqin said their private debt returns met or exceeded their expectations, and 62% plan to increase their allocation over the long run. That made it a more popular asset class than more traditional alternative allocation stalwarts like real estate, infrastructure, natural resources and private equity.”
“But returns have been souring lately. Preqin’s latest median net internal rate of return — a popular industry measure of performance — for direct lending funds set up in 2010-14 has gradually dipped from 10.6% for the 2010 vintage, to 7.6% for 2014 vintage funds. One analyst says that while a private debt fund might reasonably expect to collect an interest rate of 10-12% five years ago, a similar loan would only pay 5% to 6% today, as a result of all the money gushing in.”
“The industry itself is becoming a little warier. Almost half of fund managers polled by Preqin said valuations were a big problem, with 31% citing deal flow and 27% highlighting fee pressure. On the other hand, only 3% due diligence on their lending was a ‘key challenge.'”
“It is too early to call time on the private debt binge. The economy is ticking along nicely, quelling any corporate distress, and the amount of money chasing potential borrowers will paper over many cracks. But when the business cycle inevitably at some point rolls over, many investors will discover that the interest rates they are now charging are inadequate compensation for the risks.”
“This is a story as old as capitalism itself. A promising new market proves phenomenally profitable, attracting more players and eventually some tourists. Returns are eroded, standards fall and eventually it ends in tears. Private debt has a vibrant future, but there will be some bumps along the way.”

China

Economist – A new mood of optimism infects investors in China’s banks 4/12

WSJ – China’s Trillion-Dollar Yuan Defense Puts Growth at Risk – Lingling Wei 4/13

“The greatest risk in 2017, is that China is forced to choose in favor of financial-system stability at the expense of exchange-rate stability.” – Gene Frieda, global strategist at Pacific Investment Management Co.

Germany

Economist – East Germany’s population is shrinking 4/15

“Despite an influx of 1.2m refugees over the past two years, Germany’s population faces near-irreversible decline. According to predictions from the UN in 2015, two in five Germans will be over 60 by 2050 and Europe’s oldest country will have shrunk to 75m from 82m. Since the 1970s, more Germans have been dying than are born. Fewer births and longer lives are a problem for most rich countries. But the consequences are more acute for Germany, where birth rates are lower than in Britain and France.”

North Korea

Bloomberg – China Warns of War Risk as Trump Rattles Saber at North Korea 4/14

“China warned that a war on the Korean Peninsula would have devastating consequences as the U.S. threatened military retaliation against North Korea if it proceeds with a nuclear test this weekend.”

Turkey

Economist – Turkey is sliding into dictatorship 4/15

April 14, 2017April 13, 2017

April 13, 2017

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics – The Influence of Affluence – Marc Faber 4/12

Markets / Economy

WSJ – Inflation Is Back, But Don’t Worry – Steven Russolillo 4/12

“Good news: Inflation just topped a key milestone. Even better news: It doesn’t look poised to zoom much higher from here.”

Real Estate

WSJ – Daily Shot: CME Random Length Lumber Futures 4/12

WSJ – Where High-End Renovations Cost $704,000 – Stefanos Chen 4/13

Environment

NYT – More Permafrost Than Thought May Be Lost as Planet Warms – Henry Fountain 4/11

South America

FT – Venezuela’s PDVSA makes $2.2bn bond payment – Andres Schipani 4/12

FT – Brazil makes big cut to rates as inflation falls close to target – Joe Leahy 4/12

“The cut, which accelerated an easing cycle that began in October, was the biggest since the global financial crisis in 2009, with the central bank reducing the benchmark Selic rate from 12.5% to 11.25%.”
“The fall in rates were possible because inflation had plummeted by half over the past six months to levels close to the center of the central bank’s target band of 4.5%, plus or minus 1.5% points.”

April 13, 2017April 12, 2017

April 12, 2017

Real Estate

WSJ – Teachers, Police Priced Out of America’s Big Metro Areas – Laura Kusisto 4/12

“Rising home prices are putting America’s largest metropolitan areas out of reach for teachers, police officers and other big slices of the U.S. workforce.”
“In all, teachers can afford less than 20% of the homes for sale in 11 of the 93 major U.S. metro areas studied.”
“The numbers underscore the challenges major metro regions face as home prices shoot beyond what workers in many industries can afford. It essentially leaves workers with a choice of leaving those areas or facing long commutes to work.”

FT – Fears mount over US construction boom – Alistair Gray 4/11

“As concerns grow about a supply glut, financial watchdogs this month began scrutinizing how the largest lenders would cope with a property market crash.”
“Officials at the Federal Reserve ordered banks to set out how they would fare if commercial real estate (CRE) prices dropped 35% and rental apartment values collapsed by more.”
“While a simulated property downturn has long been part of banks’ annual ‘stress tests,’ the Fed has made CRE risks a bigger focus this year, reflecting increasing worries that bubbles are forming in parts of US real estate.”
“By the end of last year, US banks and other depository institutions had extended $2tn worth of CRE loans, a category that includes offices and retail space as well as ‘multifamily’ apartment buildings, according to data specialist CoStar. While the pace of expansion has slowed in recent months, balances are still up more than a third in just four years. Within the category, multifamily loans were especially fast-growing, rising 63%.”
“Bank funding has helped developers build roughly 1.5m apartments since 2011, according to Axiometrics.”
“As a result, the banking system has become more vulnerable to a market shock. The value of multifamily loans on lenders’ balance sheets now equates to about a quarter of commercial and savings bank capital of $1.6tn, the buffer against losses, according to CoStar.”
“Commercial property has caused big problems for banks before. A study by the Federal Deposit Insurance Corporation over 26 years found that lenders which specialize in the sector are more than twice as likely to collapse than the average community bank.”
“Building values have been rising for about eight years: CRE prices have more than doubled from a 2009 low to reach near-record highs, according to Green Street Advisors.”
“At the same time, property developers’ rental income has failed to keep up. This has pushed the so-called capitalization rate — a measure of returns — to the lowest level in 16 years.”
“Increases in prices would not be as problematic if rental income were rising commensurately ” – Eric Rosengren, head of the Boston Fed.
“In a sign of investors becoming more cautious, CRE prices have plateaued recently and edged down 0.5% last month.”
“Scrutiny from Washington watchdogs has already caused banks to pull back. CRE loans in New York shrank 17% last year to $82bn, according to CrediFi. New York Community Bancorp, the city’s largest CRE lender in 2015, shrank its loan balances by more than half.”
“With the regulatory spotlight still on the industry, banks are expected to remain cautious. A survey by the Fed of senior loan officers at US banks found that almost half expect to tighten apartment rental lending standards this year.”
“Regulators are right to be concerned, says Mr. [Chandler] Howard [CEO] of Liberty Bank. ‘When you add it all up — high concentrations, markets that have been appreciating fairly significantly, not a lot of cash invested by developers — it (the concern) is legitimate.'”

China

Visual Capitalist – Which States Get the Most Chinese Investment? – Jeff Desjardins 4/12

Economist – The hype about China’s newest city – S.R. 4/12

“Faced with overcrowding in Beijing, China plans to build an annex”

April 12, 2017April 11, 2017

April 11, 2017

Worthy Insights / Opinion Pieces / Advice

FT – When it comes to investing, human stupidity beats AI – Miles Johnson 4/10

“Since their inception, financial markets have been driven by greed and fear. No matter how advanced technology becomes, human nature isn’t changing. Or as billionaire Carl Icahn has put it: ‘Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.'”

Markets / Economy

WSJ – Daily Shot: BMI / Federal Reserve – US Credit Growth Drying Up 4/11

WSJ – Slowdown in Borrowing Defies Easy Explanation – Aaron Back 4/11

Real Estate

WSJ – Daily Shot: John Burns RE Consulting – US Single-Family Residential Permit Projections 4/11

WSJ – Daily Shot: John Burns RE Consulting – Growth Rate of US Resident Population Aged 20-64 4/11

WSJ – Daily Shot: John Burns RE Consulting – Multifamily Construction Activity 4/11

Asia – excluding China and Japan

FT – Former Philippine police officer reveals more of death squad role – Michael Peel and Grace Ramos 4/10

Australia

WSJ – Daily Shot: Moody’s – Australian House Price Increases 4/11

China

FT – Huishan Dairy defaults on loan as financial woes deepen – Jennifer Hughes, Tom Hancock, and Sherry Fei Ju 4/10

“China Huishan Dairy has defaulted on a $200m loan and had assets frozen in China in relation to another $79m debt, in a sign of the troubled dairy operator’s worsening problems.”
“Paul Gillis, an accounting expert at Peking University, said the company’s sudden share collapse ‘raises the question of why short-sellers are able to find these things, but auditors never seem to find them.'”

FT – Hong Kong’s Li & Fung faces dilemma of ‘innovate or die’ – Ben Bland 4/10

April 10, 2017

If you were to read only one thing…

The US college debt bubble is becoming dangerous. Rana Foroohar. Financial Times. 9 Apr. 2017.

“Rapid run-ups in debt are the single biggest predictor of market trouble. So it is worth noting that over the past 10 years the amount of student loan debt in the US has grown by 170%, to a whopping $1.4tn — more than car loans, or credit card debt. Indeed, as an expert at the Consumer Financial Protection Bureau recently pointed out to me, since 2008 we have basically swapped a housing debt bubble for a student loan bubble. No wonder NY Federal Reserve president Bill Dudley fretted last week that high levels of student debt and default are a ‘headwind to economic activity.'”

“In America, 44m people have student debt. Eight million of those borrowers are in default. That’s a default rate which is still higher than pre-crisis levels — unlike the default rate for mortgages, credit cards or even car loans.”

“Rising college education costs will not help shrink those numbers. While the headline consumer price index is 2.7%, between 2016 and 2017 published tuition and fee prices rose by 9% at four-year state institutions, and 13% at posher private colleges.”

“The average debt load individual graduates carry is up 70% over the past decade, to about $34,000.”

“Growing student debt has been linked to everything from decreased rates of first time home ownership, to higher rental prices, to lower purchases of white goods and all the things that people buy to fill homes. Indeed, given their debt loads, I wonder how much of the ‘rent not buy’ spending habits of Millennials are a matter of choice.”

“But there are even more worrisome links between high student debt loads and health issues like depression, and marital failures. The whole thing is compounded by the fact that a large chunk of those holding massive debt do not end up with degrees, having had to drop out from the stress of trying to study, work, and pay back massive loans at the same time. That means they will never even get the income boost that a college degree still provides — creating a snowball cycle of downward mobility in the country’s most vulnerable populations.”

“How did we get here?”

Essentially, “beleaguered governments are pushing more and more of the responsibility for the things that make a person middle class — education, healthcare and pension — on to individuals.”

“What are the fixes? For starters, we should look closely at the for-profit sector, where default rates are more than double those at average private colleges. These institutions receive federal subsidies but typically spend a minuscule part of their budgets on instruction; in the US, nearly 50% goes on marketing to new students. It looks all too much like an educational Ponzi scheme.”

“Transparency is also key — the student loan market as a whole is hopelessly opaque. In one recent US study, only a quarter of first year college students could predict their own debt load to within 10% of the correct amount. Truth in lending documents would help, as would loan counselling paid for by colleges. Sadly, the agency that is leading the fight on both — the CFPB — is under attack from Trump himself.”

“But the administration will not be able to hide from the student debt bubble. In an eerie echo of the housing crisis, debt is already flowing out of the private sector, and into the public. Before 2007, most student loans were underwritten by banks or other private sector financial institutions. Today, 90% of new loans originate with the Department of Education. Socialization of risk continues to be the way America deals with its debt bubbles. “

“Would that we considered making college free, as Bernie Sanders suggested. Even Mr. Dudley called this ‘a reasonable conversation.’ That way we could socialize the benefits of education too.”

More perspective: NYT – Loans ‘Designed to Fail’: States Say Navient Preyed on Students – Stacy Cowley and Jessica Silver-Greenberg 4/9

Worthy Insights / Opinion Pieces / Advice

NYT – The Gig Economy’s False Promise – The Editorial Board 4/10

“In reality, there is no utopia at companies like Uber, Lyft, Instacart and Handy, whose workers are often manipulated into working long hours for low wages while continually chasing the next ride or task. These companies have discovered they can harness advances in software and behavioral sciences to old-fashioned worker exploitation, according to a growing body of evidence, because employees lack the basic protections of American Law.”

WSJ – Should the Social Security Trust Fund Be Allowed to Invest in Stocks? – Alicia Munnell (Boston College) and Michael Tanner (Cato Institute) 4/9

In the argument for and against, “what the two sides generally do agree on is that the Social Security trust fund needs shoring up: According to a trustees’ report from last year, the fund is on track to run dry around the mid-2030s, at which point the program would be able to pay out only about 75% of promised benefits.”

Atlantic – What in the World Is Causing the Retail Meltdown of 2017? – Derek Thompson 4/10

“Finally, a brief prediction. One of the mistakes people make when thinking about the future is to think that they are watching the final act of the play. Mobile shopping might be the most transformative force in retail—today. But self-driving cars could change retail as much as smartphones.”
“Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas. CVS could have hundreds of self-driving minivans stocked with merchandise roving the suburbs all day and night, ready to be summoned to somebody’s home by smartphone. A new luxury-watch brand in 2025 might not spring for an Upper East Side storefront, but maybe its autonomous showroom vehicle could circle the neighborhood, waiting to be summoned to the doorstep of a tony apartment building. Autonomous retail will create new conveniences and traffic headaches, require new regulations, and inspire new business strategies that could take even more businesses out of commercial real estate. The future of retail could be even weirder yet.”

Markets / Economy

FT – Gundlach: appetite for reflation trade will wane further – Eric Platt 4/10

“Jeff Gundlach (chief executive of DoubleLine Capital – which manages $105bn on behalf of its clients), the influential bond investor, has warned that appetite for the so-called relation trade will evaporate further in coming months as expectations for an acceleration in US economic growth and inflation are tempered.”
Not all that surprising really, and if you’re in the market for a mortgage there should be some relief in pricing (there already has been so far this year). Then the article goes on to say: “the yield on the 10-year Treasury bond will not be back up to 3% this year, a level he had previously said would spell the end of the bull market. DoubleLine’s founder told investors he believed it would head higher over a longer period and could reach 6% in four or five years.”
Come again… please elaborate. No really, the article doesn’t elaborate or link to any reports by Gundlach. Talk about burying the lead.
Consider the implications on home pricing if 10-year rates are at 6%. They’re currently at around 4.10% on a 30-year fixed, so about 260bp (basis points) or 2.6% points higher than 10-year rates which are around 2.4%. To translate, if you have a $400,000 mortgage (arbitrary number) you’d be looking at a monthly payment of $1,932.79 at today’s rate. That same mortgage amount if 30-year fixed rate mortgages hold a similar spread when the 10-year treasury is at 6% would be $3,104.05. A 60.60% increase in the monthly mortgage amount or $14,055.12 additional after tax dollars each year. Or if you could only afford the $1,932.79 monthly payment, then you would only be able to take on a $249,067 mortgage. Presumably that would hurt your purchasing power.
Alternatively, consider commercial real estate. If the 10-year moved to 6% in four or five years, what should you be putting in your models for an exit cap rate? Currently the commercial property loans average about 150bp over the 10-year for the primary categories-office, retail, multifamily, and industrial-according to interest rate surveys from Trepp. Hence, you can buy a going-in cap rate of 5% and have a little spread of 1.10% (110bp) over the cost of your debt. Fortunately for the last 30 or so years you could model a lower exit cap rate – really accounting for a large part of many investors returns. Consider if you had to add 350bp to your exit cap rate…
Again to translate. Today the idea of purchasing a property that generates $100,000 in triple net (NNN) income-net of all expenses, property taxes, etc.-at a 5% cap rate would imply that you’d be willing to pay $2,000,000 for the property. Okay. What happens if cap rates adjust to maintain a similar spread over the 10-year treasury if it moves to 6%? Then for the same income you’d want a 8.6% cap or would be willing to pay $1,162,791. A 41.86% drop in value.
Well, the counter argument would be that the economy would have to be cranking along pretty well for the 10-year Treasury rate to move to 6%. Then some of the effects of the above would be neutralized by increasing incomes, increases in spending, and so on. However, note that rent from tenants are contracted and increase in defined amounts – so in this case, they’d probably get the better of the landlords – unless there are generous percentage rent terms…
Don’t expect this to be a smooth transition, and real estate is not the only industry that relies on a lot of debt capital – think energy…

On the other hand: NYT – The Economy May Be Stuck in a Near-Zero World – Justin Wolfers 4/7
- “A new study suggests that near-zero interest rates – accompanied by a lackluster recovery – may become a common occurrence.”
- In which case, buy real estate and other similar risk assets!

Bloomberg – There’s a Big Reason Volatility Might Be Coming Back – Alex Harris 4/8

WSJ – Nothing to Fear but the Lack of Fear in Markets – Steven Russolillo 4/9

Energy

FT – Energy shifts to a buyers’ market – Nick Butler 4/9

“Markets have a tendency to swing from side to side. There are times when suppliers can name their prices and times when the advantage is against them. We are the cusp of a major change after half a century of producer control. For the companies involved and their investors this is a hard moment. Some will see it as a cyclical move that will be reversed as demand increases. That is a very risky investment strategy. The better approach for both companies and investors is to assume that we are experiencing a structural shift and that to thrive those involved in the sector must adapt their business model and their investment strategy to a new reality.”

Australia

Rational Radical – Housing bubble is now official, commence arse-covering (panic)! – Matt Ellis 4/7

China

FT – China markets regulator: ‘iron cockerels’ to be dealt with harshly – Hudson Lockett and Jennifer Hughes 4/9

FT – HNA’s buying spree surpasses $40bn with CWT deal – Don Weinland, Arash Massoudi, and James Fontanella-Khan 4/9

“China’s HNA Group, the small domestic airline operator turned ultra-acquisitive conglomerate, has now struck more than $40bn of deals in little more than two years after announcing plans to buy Singapore logistics provider CWT.”
“However, the activity has confounded veteran bankers and China watchers alike, who have raised concerns over its rapid expansion and also questioned its sources of capital for the deals, many of which are done through affiliates. Moreover, the pace of HNA’s foreign dealmaking has quickened in spite of a Chinese clampdown on the flow of capital out of the country since November.”

April 10, 2017April 10, 2017

April 9, 2017

Perspective

Economist – Free exchange: How Chavez and Maduro have impoverished Venezuela 4/6

“It is hard to convey the severity of Venezuela’s unfolding crisis. Its extent is astounding: the economy shrank by 10% last year, and will be 23% smaller than in 2013 by the end of this year, according to IMF forecasts. Inflation may exceed 1,600% this year. The human details are more poignant: over the past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg (19.18lbs) per person, because of a scarcity of food. No war, foreign or civil, is to blame for this catastrophe. Venezuela did this to itself.”

“Fifty years ago, Venezuela was an example to the rest of Latin America, a relatively stable democracy and not much poorer than Britain.”

“Venezuela’s economy is built on oil – its leaders boast it has the world’s largest proven reserves – and it is tempting blame fickle crude prices for its woes. Oil accounts for more than 90% of Venezuelan exports. It helps to fund the government budget and provides the foreign exchange that the country needs to import consumer goods. Nearly everything of consequence in the economy, from toilet paper to trousers, is imported from abroad.”

“As oil prices soared in the 2000s, Venezuela found itself awash in cash. In 2014 the boom ended.” So the new president, Nicolas Maduro, could either let the bolivar float and depreciate in a meaningful way causing imports to jump in price – likely a very unpopular move – or fix the exchange rate, cross his fingers and try to keep market distortions from becoming overwhelming.

“Economic dependence on oil is always fraught. Soaring oil prices place upward pressure on the exchange rate, leaving other, non-oil industries at a competitive disadvantage. That deepens an oil-exporting economy’s dependence on crude, worsening the pain when prices eventually fall.”

So what to do?

“When times are good, some use inflows of hard currency to build up foreign-exchange reserves, which can be drawn down later to cover foreign-currency obligations and import bills; Saudi Arabia holds reserves worth more than $500bn, for example. Others use oil profits to fill sovereign-wealth funds, which invest in a diversified portfolio in order to reduce the economy’s long-run exposure to petroleum. Norway’s fund, which is intended to help pay for state pensions, is worth nearly $900bn.”

“Chavez had the good fortune to take office at the tail end of a two-decade swoon in oil prices, and to preside over a price surge. The money that came to Chavez, he spent. From 2000 to 2013, spending as a share of GDP rose from 28% to 40%: a much bigger rise than in Latin America’s other large economies. Spending crowded out growth in foreign-exchange reserves. In 2000 Venezuela had enough reserves to cover more than seven months of imports; that dropped to under three months by 2013 (over the same period Russia’s reserves grew from five months of import cover to ten, and Saudi Arabia’s from four months to 37).”

“Why did Chavez not leave Venezuela better prepared for the inevitable crash?… During his rule, Chavez increased public spending on social programs and expanded subsidies for food and energy. Venezuelans felt the results, in higher incomes and improved standards of living. Chavez delivered, for a time.”

“Yet this narrative was false… In his careless economic management, he undercut the oil wealth that funded Venezuelan socialism. His assaults on private firms left the country short of the expertise and capital needed to develop its resources. In recent years it has produced less oil than China and a quarter of the output of Saudi Arabia. Venezuela ate its seed corn despite record harvests.”

“Venezuela was once the envy of Latin America, until a long stagnation in living standards brought a populist strongman to power. But popularity is hard to maintain. The greater the desperation of the populist, the greater the willingness to accept long-run risks in exchange for short-run pay-offs. Whether or not the populists survives to see it, the day of reckoning eventually arrives. And it is always the people that suffer most.”

Markets / Economy

Bloomberg Businessweek – Lies, Damn Lies, and Financial Statistics – Peter Coy 4/6

“Most of us have a vague sense that we’re being ripped off by investment firms that charge hefty fees while producing results that are no better than you’d get throwing darts at a page of stock listings. It’s troubling nonetheless to find out we’re correct. And it’s important to understand the mechanics of what has gone wrong.”
“Harvey’s term for torturing the data until it confesses is ‘p-hacking,’ a reference to the p-value, a measure of statistical significance.”

Economist – Eyes bigger than their wallets: Consumers and firms see a Trump boom. Most forecasters do not 4/6

“Economic indicators have rarely sent such mixed signals.”

NYT – Boom or Bust: Stark Partisan Divide on How Consumers View Economy – Nelson Schwartz 4/8

“We’ve never recorded this before, the partisan divide has never had as large an impact on consumers’ economic expectations.” – Richard Curtin, director of the University of Michigan’s monthly survey of consumer sentiment.

Real Estate

Bloomberg Businessweek – Toronto Bidding Wars So Fierce Homebuyers Skip Inspections – Kim Chipman 4/3

“Toronto’s housing boom is eclipsing those in San Francisco and Vancouver. Buyers are feeling the pressure.”

Economist – Aparkalypse now: The perilous politics of parking 4/6

“The average car moves just 5% of the time. To improve cities, focus on the other 95%.”
“One study of Washington, DC, found that the availability of free parking is associated with a 97% chance somebody will drive to work alone. Generous parking requirements create asphalt deserts, sapping cities of vigor and beauty. The money and land wasted on car parks make life costlier for everyone, even those who do not drive.”

Finance

Economist – Consumer loans: Payday lending is declining 4/8

“Roughly 2.5m American households, about one in 50, use payday loans each year, according to government statistics. The typical loan is $350, lasts two weeks, and costs $15 for each $100 borrowed.”
Yet due to government regulation “payday-loan volumes have fallen by 18% since 2014; revenues have dropped by 30%. During the first nine months of 2016, lenders shut more than 500 stores and total employment in the industry fell by 3,600, or 3.5%.”

Environment

WSJ – Rainy Days Are Here Again: California Governor Declares Drought Over – Jim Carlton 4/7

NYT – Rising Waters Threaten China’s Rising Cities – Michael Kimmelman 4/7

Health / Medicine

Bloomberg Businessweek – Just How Much Is a Medical Miracle Worth? – Caroline Chen 4/6

“Years of costly treatments could give way to pricier one-shot cures like Spark Therapeutics’ blindness drug. But insurers aren’t ready.”

China

Value Walk – China Debt Problem Is Massive At $35 Trillion, On Par With Greece – Mark Melin 4/8

“China is the key to the world economy, a Macquarie Research report points out.”
“China is like the Greek god of Atlas, Macquarie analysts Victor Shvets and Chetan Seth write, saying the Asian nation is ‘what stands between relative normality and [the] sky falling and crushing global economy.”
“China is responsible for 27% of global investment and nearly 66% of global credit creation, and the world is ‘addicted’ to Chinese money. Shvets and Seth think the ‘key’ to the reflation trade is found in China’s stimulus, which drove real estate and industrial development. This, in turn, drove commodity prices significantly higher.”
“‘Unlike Western economies that are ‘twisting themselves into pretzels’ trying to present various QE policies as something other than monetization while attempting to portray their fiscal policies as being responsible, China does not need to pretend,’ Shvets and Seth point out. In other words, they can be ‘credibly irresponsible,’ to use a Paul Krugman term, while maintaining a 300% debt to GDP level.”

April 8, 2017April 7, 2017

April 7, 2017

Okay, I’m prototyping here. Bottom line it’s finally gotten through my thick skull that assembling a weeks worth of content and putting it out there once-a-week is a LOT to consume all-at-once. So I’m going to try a new angle here. I’m not going to post every day – rather almost every day.

I will post when there is content I think is worthy of posting – also conditioned on when I come across it (sometimes I just don’t get around to it – day job you know).

Some days will be light and others heavy.

Some posts will include a summary like those found in the Featured or Briefs section and at other times there will only be links. Additionally I’ll sort the links now by categories and will post graphics within those categories as well.

Hopefully this makes the experience better for you and for me.

If you disagree, let me know.

Cheers,
Duff

Markets

WSJ – Not a Dot-Com Bubbles, Not 2007, but a Nasty Mix of Both – James Mackintosh 4/6

“There is so much more debt than usual being piled up by companies outside the finance sector.”

Sovereign Wealth Funds

FT – Norway’s oil fund wants CEO incentive plans scrapped – Richard Milne 4/6

“Norway’s $910bn oil fund, which on average owns 1.3% of every listed company in the world, will start pressing companies to end such incentives [long-term incentive plans] and instead force chief executives to own substantial stakes in their companies for periods of at least five and preferably 10 years. It will also urge boards to name a ceiling for possible pay.”

Asia – excluding China and Japan

NYT – Duterte Orders Military to Parts of South China Sea Claimed by Philippines – Felipe Villamor 4/6

“We tried to be friends with everybody, but we have to maintain our jurisdiction now, at least the areas under our control.” – President Rodrigo Duterte

Britain

Economist – The EU27 and the Brexit negotiations – Data Team 4/5

China

FT – Beijing plan to transform village into tech city sparks property frenzy – Charles Clover and Sherry Fei Ju 4/6

China has decided to make a new economic zone in the Hebei province outside of Beijing to be named Xiongan New Area.

Europe

FT – Spain: Boom to bust and back again – Tobias Buck 4/6

“The economy is finally set to return to its pre-crisis level. But have the reforms come at too high a price?”

South America

NYT – Mud Erased a Village in Peru, a Sign of Larger Perils in South America – Nicholas Casey and Andrea Zarate 4/6

Other Links

April 7, 2017April 6, 2017

March 31 – April 6, 2017

Increases in 401(k) leakage do not bode well for US retirements. Australian house price bubble. The hard facts about coal.

Headlines

NYT – Venezuela Muzzles Legislature, Moving Closer to One-Man Rule 3/30. It’s been a few decades since a Latin American country has regressed into a dictatorship.

Bloomberg – Venezuelan Top Court Reverses Shock Ruling on Congress Authority 4/1. Well then they reversed the ruling “… after the nation’s top prosecutor, a Maduro ally, labeled the Supreme Court’s March 29 move unconstitutional.” There may be hope for Venezuela yet.

Reuters – Venezuela money supply up 200 percent in year, fastest rise on record 4/3. When coupled with declining output of goods and service, it means inflation – for “contrast, the United States’ money supply was up 6.4% in the same period.”

NYT – Within Hours, Plans for a Quiet Corner of China Send Home Prices Soaring 4/3. And just like that the county of Xiongxian was anointed.

FT – Businesses stirred by new Indian alcohol curbs 4/3. The Supreme Court in India just banned alcohol sales within 500m of a national highway causing a vast number of business establishments (hotels, restaurants, bars, etc.) to reel.

FT – Xi’s crackdown on corruption is a boon to corporate China 4/3. The corruption crackdown is working and companies are finding that they are having to set aside less to cover the vig.

Special Reports / Opinion Pieces

Briefs

Yuan Yang and Xinning Liu the Financial Times highlighted Didi Chuxing’s existential crisis in China.
- “Didi Chuxing may have defeated Uber, but China’s dominant ride-hailing platform is no match for the country’s local governments after being forced to gut its urban fleet to comply with regulations.”
- “Didi is the world’s fourth-biggest private tech group with a $34bn valuation last September. It has raised more than $10bn from investors including Apple, who invested $1bn in the company last year.”
- But… there is the issue of recent regulation from Beijing and Shanghai: “local cars, local drivers.” Issue is that the majority of Didi’s drivers and especially the vast majority of its low paid drivers were migrants.
- We’ve seen the model. Didi and Uber rely on marginalizing it’s drivers or losing its investor’s money, hence the push for autonomous cars to reduce its labor costs.
- As the company put it “because our transportation capacity has been reduced recently, there may be some impact…on the chances of successfully hailing a ride and on waiting times, which Didi apologizes for.”
- “Shaun Rein of China Market Research Group said: ‘The new measures have a serious impact on Didi’s business. It threatens their ability to grow because it’s hard to find drivers.'”
- Hence, “in February Didi announced it was moving into high-end car-hailing services, a consequence of losing its pricing advantage against taxis.”
- “Analysts say that the company has no choice but to go upmarket and look for other sources of growth.”
- And of course, they have to be mindful that other cities are likely to implement similar regulations.
- “Didi’s new direction is also likely to bring it into closer co-operation with the traditional taxi companies it once competed with, and even take it back to its roots as a taxi-hiring platform.”
The team at the Economist covered the global shortage in one commodity that most rarely think of – sand.
- “India’s ‘sand mafia’ is doing a roaring trade. The Times of India estimates that the illicit market for sand is worth around 150bn rupees ($2.3bn) a year; at one site in Tamil Nadu alone, 50,000 lorryloads [truck loads] are mined every day and smuggled to nearby states. Gangs around the country frequently turn to violence as they vie to continue cashing in on a building boom.”
- “Most of the modern global economy depends on sand. Most of it pours into the construction industry, where it is used to make concrete and asphalt. A smaller quantity of fine-grade sand is used to produce glass and electronics, and, particularly in America, to extract oil from shale in the fracking industry. No wonder, then, that sand and gravel are the most extracted materials in the world. A 2014 report by the United Nations Environmental Program (UNEP) estimates they account for up to 85% by weight of everything mined globally each year.”
- “…Of the 13.7bn tons of sand mined worldwide for construction last year, 70% was used in Asia. Half was used in China alone, where the government estimates that it built 32.3m houses and 4.5m km (2.8m miles) of road between 2011 and 2015.”
- “Sand often makes up the very ground that is built on, too. By virtue of dumping vast quantities of sand into the sea, Singapore is now over 20% larger than it was when it became independent in 1965.”
- Thing is “sand may appear plentiful, but is in fact become scarce. Not all types are useful: desert sand is too fine for most commercial purposes (Qatar is a big importer and the Burj Khalifa skyscraper in Dubai was built using Australian imports). Reserves also need to be located near construction sites; as transportation costs are high compared with the price…”
- “Substitutes for sand do exist. Mud can be used for reclamation, straw and wood to build houses, and crushed rock to make concrete. Asphalt and concrete can be recycled. Production processes will shift towards these alternatives as the price of sand rises…”
- Further, select countries are seeking to do their part. “Reduced demand from Singapore might discourage illegal mining in nearby countries. Rising prices will eventually force developing-country builders to explore alternatives to sand. But without better law enforcement, high sand prices also make illicit mining more lucrative. Despite the damaging consequences, the sand mafia will continue raking it in for a while.”

Graphics

WSJ – Daily Shot: Employment in video-tape and DVD rental stores 3/30

Pew Research – Key findings about Puerto Rico – Jens Manuel Krogstad, Kelsey Jo Starr and Aleksandra Sandstrom 3/29

WSJ – Fed Sees Car Trouble Down South – Aaron Back 3/30

FT – Low oil price and currency controls hit Nigeria hard – Siona Jenkins 3/31

WSJ – Daily Shot: FRED – Loans and Leases, All Commercial Banks 4/2

Slowing credit growth in the U.S.

WSJ – Daily Shot: FRED – Commercial and Industrial Loans 4/2

WSJ – Daily Shot: FRED – Consumer Loans – Other and Automobile Loans 4/2

WSJ – Daily Shot: FRED – Real Estate Loans, All Commercial Banks 4/2

WSJ – Daily Shot: Vox – US Opioid Usage 4/2

WSJ – Daily Shot: Vox – US Opioid Prescription per capita 4/2

Visual Capitalist – How Much State Debt Rests on Your Shoulders? – Jeff Desjardins 4/3

WSJ – Daily Shot: John Burns Real Estate Consulting – US Annual Medical Costs 4/3

WSJ – Daily Shot: NY Fed – US Consumer Debt 4/3

WSJ – Daily Shot: NY Fed – US Consumer Debt by Age of Borrower 4/3

WSJ – Daily Shot: China Credit Boom 4/3

Featured

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

The Rising Retirement Perils of 401(k) ‘Leakage.’ Anne Tergesen. The Wall Street Journal. 2 Apr. 2017.

“American companies are trying to stop employees from raiding their 401(k)s, in an attempt to ensure that older workers can afford to retire and make room for younger, less-expensive hires.”

“Tapping or pocketing retirement funds early, known in the industry as leakage, threatens to reduce the wealth in U.S. retirement accounts by about 25% when the lost annual savings are compounded over 30 years, according to an analysis by economists at Boston College’s Center for Retirement Research.”

“‘Employers have done a lot to encourage people to save in 401(k) plans, such as automatically enrolling them. But there is a growing recognition that if the money isn’t staying in the system, the objective of helping employees reach their retirement goals isn’t being met,’ says Lori Lucas, defined-contribution practice leader at investment-consulting firm Callan Associates Inc.”

“Employees who grew accustomed to borrowing from their 401(k)s during the recession are tempted by the rising balances in these types of plans, which currently hold $7 trillion, up from $4.2 trillion in 2009, experts say.”

Further, when employees change jobs there is the temptation not to rollover their 401(k) balances.

“On average, about 30% to 40% of people leaving jobs to elect to cash out their accounts and pay taxes and often penalties rather than leave the money or transfer it to another tax-advantaged retirement plan, according to recordkeepers and economists.”

“Most plans also allow people to pull out their savings-after paying taxes and typically a penalty-for reasons including buying a home, preventing foreclosure, and paying medical bills and college expenses, something relatively few participants do annually. These are known as hardship distributions and the employee must demonstrate an ‘immediate and heavy financial need,’ according to the Internal Revenue Service.”

“Employees can also generally choose to borrow up to half of their 401(k) balance or $50,000, whichever is less, without having to state a reason. According to the Employee Benefit Research Institute, a nonprofit research group, 87% of participants are in plans that let them take 401(k) loans.”

“About a fifth of 401(k) participants with access to 401(k) loans take them, according to the Investment Company Institute, a mutual-fund industry trade group. While most 401(k) borrowers repay themselves with interest, about 10% default on about $5 billion a year, says Olivia Mitchell, an economist at the University of Pennsylvania’s Wharton School.”

“‘4019(k) plan leakage amounts to a worryingly large sum of money that threatens to undermine retirement security,’ says Jake Spiegel, senior research analyst at research firm Morningstar Inc. His calculations show that employees pulled $68 billion from their 401(k) accounts taking loans and cashing out when changing jobs in 2013, up from $36 billion they withdrew in 2004.”

Fears of bubble as Australian house prices surge. Jamie Smyth. Financial Times. 2 Apr. 2017.

“Australia’s house prices are rising at their fastest pace in seven years, igniting fears of an emerging property bubble and prompting regulators to crack down on risky bank lending.”

“New figures on Monday show residential property prices have increased 12.9% in the past 12 months, with prices in Sydney surging 18.9% – the fastest rate of growth in almost 15 years.”

“House prices in Sydney have more than doubled since the financial crisis hit in January 2009 while prices in Melbourne are up 92.4%. This has occurred despite sluggish consumer price inflation, tepid rates of business investment and economic growth.”

“Surging house prices are a concern for global regulators as they seek to prevent the asset price bubbles in an ear of ultra-low interest rates ushered in by the financial crisis in 2008. Regulators in Australia, Ireland, New Zealand and a host of other countries have introduced macroprudential rules in a bid to slow house price inflation.”

“In 2014 Australian regulators placed a 10% limit on growth in new lending to investors, a move that initially slowed bank lending to the buy-to-let sector. But a recent increase in lending to investors prompted regulators on Friday to issue new rules limiting the flow of ‘interest only’ mortgage lending by banks to 30% of new loans issued.”

“About 40% of new mortgages are issued on ‘interest only’ terms, under which borrowers do not have to pay back the principal of the loan for a specific period.”

“The regulator also placed limits on the volume of ‘interest only’ lending at loan-to-value ratios above 80% and flagged closer scrutiny of lending at loan-to-value ratios above 90%.”

More importantly, economists are pointing to the Australian tax system that needs some reform. Specifically “Australia’s system of ‘negative gearing’ provides investors with a tax break allowing them to claim as losses the financing and other costs of their rental properties against other income. The tax break has become so popular that 15% of the electorate have become buy-to-let investors.”

“Investor loans make up just over one-third of the A$1.49tn (US$1.13tn) residential property market, according to Australia’s prudential regulator.”

Reminds of me of the U.S. tax system before the Tax Reform Act of 1986 – when professionals of all sorts would invest in real estate simply for the sake of the tax write-off. If the property made money or went up, all the better. Easy to see how valuations can become disconnected from their fundamentals.
Alternative truths and some hard facts about coal. Nick Butler. Financial Times. 2 Apr. 2017.

The facts:

“The share of electricity production in the UK accounted for by coal fell to just 3.5% in the third quarter of 2016.”
“Worldwide, the number of new coal-fired power stations starting construction fell by over 60% in 2016.”
“Over-supply has pushed thermal coal prices down to half the level reached in 2010.”

At the same time

“Some 42,000MW of new coal-fired generating capacity was brought on stream in China last year and Beijing announced that coal consumption was set to rise by 19% over the next five years, despite rapid growth in the use of renewable sources.”
“In spite of extensive subsidies for renewables, 40% of electricity in Germany last year came from coal, leading to an increase in carbon emissions in 2016.”
“Across the world 50% of aluminum, 70% of steel and 40% of electricity are produced from coal.”

In the UK, regulation is systematically phasing out coal energy. In Germany, there is enough political support from the Social Democratic party to keep coal use going.

“In the US, the main threat to coal is not environmental regulation but price competition from low-cost natural gas. Coal is the principal victim of the shale gas revolution and the revival of the shale industry will intensify that competitive challenge over the next decade.”

“China is the world’s largest user of coal (burning more than 50% of the global total) and is pursuing a serious policy of encouraging renewables and setting a ceiling on coal demand growth.”

“The biggest challenge and the most important factor in the global coal market is India.” While the country is serious about renewable energy initiatives, the country wants economic growth. “The problem is that to grow, it needs the cheapest possible form of power on a large scale and for the moment that is coal. Nuclear, solar and wind will all contribute but coal is the pre-eminent source of supply and Indian imports will shape the world market.”

“Coal is plentiful and cheap and will be made cheaper still if US producers, under pressure from gas in their domestic market, export more.”

“Until the new sources of energy supply can beat the current low prices coal will remain the leading source of heat and power and will meet something like a third of the world’s energy needs. The proportion burnt in high efficiency, low emission plants will rise but that will remain a fraction of the total for the foreseeable future, not least because coal users cannot afford the upgrades necessary. Coal is the energy source of choice, through necessity, of the poorer half of the world.”

“Times may be tough for the industry, and the continued use of coal in sub-critical technology may be bad for the environment, but like it or not coal is not in free fall.”

Other Interesting Articles

Bloomberg Businessweek