Month: May 2017

May 30, 2017

Markets / Economy

FT – US banks pull back from $1.2tn car loans market – Ben McLannahan 5/29

  • “Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter, according to the New York Federal Reserve, up almost 70% from a trough in 2010.”
  • “But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercials banks in at least six years.”


Science – Goodbye smokestacks: Startup invents zero-emission fossil fuel power – Robert Service 5/24


NYT – In China, Umbrellas and Basketballs Join the Sharing Economy – Amy Qin 5/28

  • “Behind China’s sharing boom is a surplus of money and – some critics say – a shortage of good ideas. Venture capital firms in China invested $31 billion in 2016, up nearly one-fifth from the previous year, according to a recent KPMG report. Much of that has gone to sharing companies, as some big-money winners and a thriving start-up scene draw investors from home and abroad.”

FT – Sharing economy takes mercantile twist in China – Louise Lucas 5/28

  • “The sharing economy is taking off in China, where you can rent anything from basketballs to apartments, umbrellas to songs.”
  • “But it has taken a mercantile twist in the officially Communist country, with venture capital rather than citizens taking the spoils.”
  • “The big prize for these companies is not a slice of transaction revenues but data. Goods rented out many times provide troves of statistics on usage habits. Data can also be used for credit scoring systems: fail repeatedly to return an umbrella, and your credit score will go down.”

May 29, 2017

Worthy Insights / Opinion Pieces / Advice

Value Walk – Paul Singer Warns Of A World At Risk – Mark Melin 5/27

  • “When the average investor looks at the world, all they see is a placid market where asset prices rise in value regardless of the harrowing market event. North Korea increasingly provokes its Asian neighbors and defies US President Donald Trump, the markets move higher. After moving higher on hopes of a Trump legislative agenda, when such hopes are dashed, stocks dash higher. When in Europe for G20 and G7 meetings, Trump hints he may not support Article 7 of the NATO Treaty that calls for defense of allied nations during attack, the market breaks into new highs. What’s next? The Iranians launching a nuclear attack on their neighbors lifting the S&P 500 past the 3000 level?”

FT – Is China’s economy turning Japanese? – Leo Lewis, Tom Mitchell and Yuan Yang 5/28

Markets / Economy

Business Insider – Iconic hedge fund manager Seth Klarman says investors are missing huge risks – Rachael Levy 5/26

  • “When share prices are low, as they were in the fall of 2008 into early 2009, actual risk is usually quite muted while perception of risk is very high. By contrast, when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”


FT – Saudi Arabia and Russia stuck in unlikely oil alliance – Anjli Raval and David Sheppard 5/26

  • “Saudi Arabia and Russia are essentially now co-pilots of this operation and they’ve made it clear there will be no going back to chasing market share.” – Helima Croft, RBC Capital Markets


Investment News – Report predicts $400 trillion retirement savings gap by 2050 – Bloomberg News 5/26

  • “Longer life spans and disappointing investment returns will help create a $400 trillion retirement-savings shortfall in about three decades, a figure more than five times the size of the global economy, according to a World Economic Forum report.”


WSJ – Canada’s Banks Can’t Dodge Housing Risks Forever – Aaron Back 5/25


FT – China arrests 44 over $140m online scam – Alice Woodhouse 5/26

  • “Chinese police said they have dismantled a nationwide scam that tricked 93,000 people into investing capital to unfreeze assets taken overseas by the Nationalist government in 1949.”

FT – Regulator urges China banks to save ailing companies – Gabriel Wildau 5/25

  • “The bank regulator in a rust-belt Chinese province has urged regional lenders to roll over maturing loans to struggling coal and steel companies, a policy that cuts against the Communist party’s pledge to shut down ‘zombie’ enterprises.”

May 26, 2017

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – Boom! There Goes Your Pension! – Anthony Isola 5/25

Real Estate

WSJ – Daily Shot: Total Employees at US Department Stores 5/24

WSJ – Daily Shot: Total Employees at US Nonstore Retailers 5/24

Note that the difference between the two is not one-for-one.


Economist – The markets frustrate OPEC’s efforts to push up oil prices 5/18


WSJ – Where the China Credit Crunch Could Really Bite – Nathaniel Taplin 5/25

  • “The downgrade of China by credit-rating firm Moody’s has highlighted the rising risks the government faces from so-called contingent liabilities: poisonous loans to deadbeat state-owned companies that Beijing may eventually need to absorb, potentially by recapitalizing the country’s major banks.”
  • “What Moody’s didn’t explain is that this absorption of hidden liabilities is already under way. Central to the story is what has happened to local-government finances in China in the past two years.”
  • “In early 2015, investment levels in China—still so crucial to the country’s growth—were in a tailspin. One main reason was a double whammy for city governments, normally big drivers of capital spending. Falling land sales, around a third of local revenue, were pummeling budgets just as Beijing had rammed through tough restrictions on cities’ dodgy off-balance-sheet fundraising.”
  • “By March 2015, it was obvious that the clampdown had gone too far. In a policy U-turn, Beijing greenlighted a massive refinancing program for troubled local governments, and the struggling industrial companies they owned, allowing them to directly issue bonds in large amounts for the first time. By doing so, though, Beijing was also implicitly recognizing its ultimate responsibility for these debts.”
  • “The result was a stunning expansion of formal government debt in China as corporate liabilities were refinanced wholesale through provincial bonds: government-bond debt, which had been running around 15% of gross domestic product since the 2008 global financial crisis, nearly doubled to 28% in just two years. As provincial-debt issuance rose from negligible levels in 2014 to a monthly peak of more than one trillion yuan ($140 billion) in April 2016, overall investment in the economy also stabilized.”
  • For now, be mindful.

NYT – China’s Addiction to Debt Now Threatens Its Growth – Keith Bradsher 5/24

  • This article is a good source to give someone an overview of the situation leading up to the Moody’s downgrade; however, since I’ve covered that, I want to point to the coverage on Foresea Life Insurance in this article. By the way, its founder is the fourth wealthiest person in China.
  • “’China’s recent economic growth trajectory has been accompanied by a buildup of imbalances and vulnerabilities that poses risks to its basic economic and financial stability,’ Andrew Fennell, the director of Asian sovereign debt ratings at Fitch Ratings, said.”
  • “Foresea is an extreme example of the manic speculation that hangs over the entire system.”
  • The insurer collected just $40 million in premiums in its first year after it was started five years ago. Last year, the company collected $14.6 billion.
  • “Foresea started to run into problems late last year. Its founder and controlling shareholder, Yao Zhenhua, made a hostile bid for Vanke, one of the country’s largest real estate buyers, with plans to fund the deal in large part with insurance premiums.”
  • “Zhou Xiaochuan, the governor of the central bank, said the same month: ‘Every enterprise, especially those with too high a rate of leverage, should be controlled.’”
  • “Foresea was among the first to be pinched.”
  • “The China Insurance Regulatory Commission in December banned Foresea from offering new products, contending that the company was essentially selling high-yield debt even though it had permission to issue relatively low-risk life insurance. Two months later, the regulator accused the company of misleading authorities.”
  • “’The fact that Foresea Life made up and provided fake material is clear,’ the commission said. ‘It is a serious circumstance that should be punished according to the law.'”
  • “The moves have spooked customers. Revenues from newly issued policies plummeted 99.8% in the first quarter from the same period last year, to just $11.4 million. Investors also became wary, demanding their money back.”

May 25, 2017

If you were to read only one thing…

WSJ – China’s Downgrade: It’s Not Just About the Government – Anjani Trivedi 5/24

  • “In a sign of the times, Moody’s has cut China’s credit rating for the first time in nearly three decades. Investors in China Inc. and its banks should heed the warning.”
  • “China’s sovereign rating is important because it helps other bond issuers in the country get a credit rating higher than they might otherwise be afforded.”
  • “Take China’s banks, for example. Moody’s gives the broader sector a baseline credit assessment of Baa3 based on indicators like loan-to-deposit ratios and counterparty risk. But because the government owns much of the banking system and—it is assumed—would provide it with support in a crisis, banks are in practice able to issue debt at higher ratings. Bank of China, one of the country’s big four banks, has a base rating of Baa2, but any debt it issues is rated at A1, four notches higher.”
  • “With a regulatory crackdown in force, Chinese companies and banks have been struggling with rising funding costs in home markets. They have also been hopping between onshore and offshore markets to issue debt wherever it is cheaper. The move by Moody’s may now make it more expensive to issue debt abroad as well. While the pain for China’s government from the downgrade is manageable, it could prove painful for the country’s debt-addicted bond issuers.”


FT – A warning on Trump’s budget – Lawrence Summers 5/23

  • “The Trump team prides itself on its business background. This error is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenues while failing to account for the fact that the investments would actually cost some money to make. The revenue generated by the investments might exceed their cost (though the same is almost never true of tax cuts), but that does not change the fact that the investment has a cost that must be included in the accounting.”

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics | Thoughts from the Frontline – The Great Reset: How Should We Then Invest? 5/22

  • “That the world is awash in debt is not exactly news. As of 2014, total global debt had risen to $199 trillion, growing some $57 trillion in just the previous seven years, about $8 trillion a year. The McKinsey Institute chart below shows 22 advanced and 25 developing countries that make up the bulk of the world economy. The chart illustrates how the debt is split among household, corporate, government, and financial sectors:”
  • “Since that 2014 report was published, global debt rose by $17 trillion through 3Q 2016. In fact, in the first nine months of 2016 global debt rose $11 trillion! After averaging a little over $8 trillion from 2007 through 2014, global debt growth is now accelerating. Global debt-to-GDP is now 325%, though it varies sharply by region and country.”
  • “More worrisome is that interest rates are slowly rising pretty much everywhere, so debt-servicing costs are rising, too.”
  • “The Congressional Budget Office estimates that every percentage point hike in rates will cost $1.6 trillion over the next ten years! And that’s without adding to the debt itself every year, by running budget deficits.”
  • “It is not just the US that faces a serious debt problem. Global GDP is roughly $80 trillion. If interest rates were to rise just 1% on our global debt, an additional $2 trillion of that GDP would go to pay that debt increase, or about 1.5% of global GDP. As we have discussed many times, debt is a limiting factor on future growth. Debt is future consumption brought forward. Repaying that debt requires either reduced future consumption or some kind of debt liquidation – those are the only choices.”
  • And then there are the unfunded liabilities…
  • “A Citibank report shows that the OECD countries face $78 trillion in unfunded pension liabilities. That is at least 50% more than their total GDP. Pension obligations are growing faster than GDP in most of those countries, if not all. Those are obligations on top of their total debt.”

Real Estate

NYT – Malaysian Money. Opulent Ideas. But Now, for Park Lane, a Forced Sale. – Charles Bagli 5/23

Health / Medicine

Economist – Fentanyl is the next wave of America’s opioid crisis 5/20

  • “Fentanyl is particularly attractive to criminals. Because it is so potent, with only 2mg of the stuff – enough to cause an overdose, it is easy to hide in letters and small packages that are sent by post. The rewards are enormous: 1kg of fentanyl costs around $4,000 to buy from China and yields profits of $1.6m on the streets. By contrast, 1kg of heroin costs around $6,000 but is worth a few hundred thousand dollars.”

Asia – excluding China and Japan

Economist – Malaysia’s system of racial preferences should be scrapped 5/18

  • “Income-based benefits would work much better.”


Bloomberg – China Whacks Another Mole With Developers’ Dollar Bonds in Focus – Carrie Hong, Lianting Tu, and Molly Wei 5/18

  • “After China’s tightening financial conditions made it harder to sell debt at home, the country’s junk-rated issuers dived into the offshore market, selling record dollar debt.”
  • “Now, regulators seem to be cutting off that channel as well, in another case of officials moving to quell risks that keep cropping up in China’s patchwork financial system. Applications for new offshore bond deals by Chinese real-estate companies and vehicles set up by local authorities haven’t received approvals from China’s National Development and Reform Commission since April, according to bankers familiar with the matter.”
  • “One major potential problem with those issuers: they lack natural sources of dollar revenue to use for servicing dollar debt. That didn’t stop developers selling $10.6 billion dollars of notes offshore last quarter, the most on record according to Bloomberg-compiled data. The offerings slowed in the second quarter, to $1.7 billion so far.”
  • “‘The main driver behind this move is to tighten the property market, as recent data shows housing inflation remains resilient,’ said Claire Huang, greater China economist at Societe Generale SA in Hong Kong. ‘In a broader context, the authorities — emboldened by positive economic growth momentum — look determined to see regulatory tightening through,’ she said.”

May 24, 2017

If you were to read only one thing…

WSJ – Why Millennials Are (Partly) to Blame for the Housing Shortage – Laura Kusisto 5/22

  • “For decades during the late-20th century, suburbs were the place to build, as urban cores suffered from high crime, poor schools and stagnant or shrinking populations.”
  • “But preferences have changed among young people, many of whom want to live closer to transit, restaurants and their workplaces. The share of young, educated people living in the urban core of Washington, D.C., for example, increased 8.6 percentage points between 2000 and 2014, according to Jed Kolko, chief economist at job-search site Indeed and senior fellow at the Terner Center for Housing Innovation at the University of California, Berkeley. Portland, Ore., and Chicago each saw increases of 6.4 percentage points.”
  • “As builders have shifted focus toward trendier urban markets and away from cheaper suburbs, they have produced less housing overall than they otherwise might have. While starter-home construction has bounced back in recent months, it remains far from reversing this long-term trend.”
  • “At the same time, high land costs in central cities have pushed developers to focus on higher-end housing geared toward high earners instead of younger people just starting out.”
  • “The shift helps explain one of the most vexing aspects of the housing recovery: New homes are getting more expensive and yet there are fewer of them being built than in past cycles.”
  • “While new home sales within 5 miles of the centers of 10 of the country’s priciest and most densely populated metropolitan areas have surpassed levels from 2000, they remain more than 50% below where they were in 2000 when you go more than 10 miles out. The year 2000 is often used as a benchmark for a normal market, before the boom and bust of the mid-2000s.”
  • “The takeaway, Mr. Romem (chief economist at BuildZoom) says, is that pricey cities need to loosen land-use restrictions in core areas where there is more demand. Allowing for more high-rise condo buildings would make it economical to produce starter homes in these areas as well.”
  • “’Do you care about preserving things the way they are, so that only wealthy people can continue buying in, or do you want to [encourage more density], so that housing is more affordable for everyone?’ he asked.”


WSJ – Brazilian Bribery Allegations Escalate Clash Between Government, Business 5/21

WSJ – Daily Shot: JBS Payments to Government Officials in Brazil 5/22

  • Seriously?

Real Estate

WSJ – Blackstone is Taking Over Mom-and-Pop Real-Estate Investing – Peter Grant 5/23

  • “Blackstone in January launched its first nontraded real-estate investment trust, a vehicle marketed to small investors as a way to participate in the commercial real-estate industry without the volatility of a traded REIT. Such vehicles have faced mounting criticism in recent years over high fees, poor disclosure and other problems.”
  • “Yet as of April, Blackstone Real Estate Income Trust Inc. had raised $755.4 million, about 41% of all the funds the entire industry raised in 2017, far more than any competitor, according to Robert A. Stanger & Co., an investment bank that specializes in nontraded REITs.”
  • “Blackstone also has become a closely watched agent for change in an industry that is trying to move away from a past that is tangled up in scandal and regulatory criticism. Like many of the new breed of nontraded REITs, Blackstone’s vehicle is structured to align the interests of investors and management better than those of the past.”
  • “The alignment between REIT managers and investors is critical today as the eight-year bull market in the commercial real-estate industry shows signs of slowing, critics say. Mistakes on reading markets could trigger losses, especially if values start to decline.”
  • “Some traditional nontraded REITs were criticized because managers wouldn’t be penalized for making bad investment decisions. That isn’t the case with the Blackstone REIT.”
  • “’If things don’t go well, Blackstone won’t make as much,’ said Phil Owens, managing director of Green Street Advisors’ consulting unit. ‘If things go really well, they make more.'”
  • “Green Street has been a critic of nontraded REITs for their high fees, weak disclosure and lack of alignment. Mr. Owens said the Blackstone structure represents ‘a big shift’.”
  • “But Mr. Owens stopped short of backing away from Green Street’s longstanding position that investors are better off buying traded REITs, which are listed on public stock exchanges, than nontraded ones. Green Street has calculated the overhead of the Blackstone REIT will be about twice as much as a ‘large, blue-chip publicly traded REIT’ if it performs as expected.”
  • “Until recently, nontraded REITs were popular because of the high dividends they paid when interest rates were near historic lows. Mostly sold by financial advisers, the vehicles raised $19.6 billion in 2013 and $15.6 billion in 2014, according to Stanger.”
  • “But the industry drew criticism for upfront fees that could run as high as 15%.”
  • “In all, the entire nontraded REIT industry has raised only $1.8 billion in 2017 as of the end of April, about the same as the first four months of 2016, the worst fundraising year since 2002, when the industry was in its early stages, according to Stanger.”
  • “Some other nontraded REIT sponsors say they aren’t worried about the new 800-pound competitor. They acknowledge the fundraising climate is tough these days. But they blame it primarily on their sales forces reacting to Finra rules and the proposed Labor Department regulations.”
  • “’It’s not Blackstone that’s impacting it,’ said Jeff Hanson, chief executive of American Healthcare Investors, which has raised more than $6 billion in equity for four nontraded REITs. Mr. Hanson predicted that Blackstone entering the business will be ‘a good thing over time’ for the industry.”


WSJ – Daily Shot: eia – OPEC Net Oil Export Revenues 5/22

FT – Oil majors seek survival in transition to low-carbon world – Andrew Ward 5/22

  • “’In our 109-year history, it is unlikely that there has ever been as much change as there is now,’ Carl-Henric Svanberg, chairman of BP, told shareholders at the UK group’s annual meeting last week, acknowledging that over the next 20 years ‘consumption of oil will slow and eventually peak’.”
  • “For all the looming risks, fossil fuels still dominate the global energy landscape. Oil, gas and coal together account for 86% of energy used for transport, heat and power worldwide. The questions for companies and investors across the sector are how fast will this change and what should they do to prepare?”
  • “Deep disruption is already being felt in the power sector. The electricity generated from renewables, excluding hydro, doubled globally between 2010 and 2015 as political efforts to tackle climate change intensified and the cost of wind and solar plummeted. Today, renewables account for an average 23% of global power output. Denmark has breezy days when all its power comes from wind and Germany hit a record 85% share from renewables one day last month.”


WSJ – Only Robots Can Tally What The Largest U.S. Pension Fund Pays In Fees – Heather Gillers and Dawn Lim 5/22

  • “If you’re using software to deal with the complexity in your portfolio maybe you should simplify your portfolio first.” – Marc Levine, Chair – Illinois State Board of Investment


WSJ – Daily Shot: Wolf Street – Delinquencies of Agricultural Loans 5/22

WSJ – Daily Shot: CBOT Wheat 5/22


FT – MSCI to make decision on China A-share inclusion on June 20 – Pan Kwan Yuk 5/22

  • “Mark your calendars China watchers.”
  • “MSCI will on June 20 announce whether it would finally include China’s domestic A-shares in its global indices.”
  • MSCI has declined to do so on three previous occasions. Now may be the time.

FT – China’s environmental clean-up to have big impact on industry – Alan Clark 5/22

  • “…environmental sustainability is rapidly moving up the agenda for Xi Jinping, the president, as he flexes his political muscles and consolidates his leadership of China.”
  • “The country’s moves to protect the environment and avoid pollution-related social unrest represent a radical shift in Chinese policy. Just eight years ago, China viewed climate change initiatives as a western conspiracy to limit China’s rapid growth.”
  • “In the aluminum-producing, coal-consuming provinces around Beijing, Henan, Shanxi and Shandong, around 30 per cent of aluminum smelting capacity could potentially be closed between November and March every year, in an effort to reduce thick smog like that seen in the first weeks of 2017.”
  • “There is also talk of an envisaged 30% cut to alumina production in the same provinces, reducing supply of the key raw material required to produce aluminum.”
  • “While tighter regulations governing environmental protection and energy consumption were issued two years ago by the Chinese government, this year many more smelters are being threatened with the off button. The Chinese government’s new Air Pollution Prevention and Control Action Plan is aimed at offsetting the extra pollution created by the use of indoor heating during the winter heating months.”
  • “It should be acknowledged that China has been successful in cutting the use of coal, which currently provides around 70% of the country’s electricity. Coal consumption has dropped in each of the last three years and fell 4.7% last year alone.”

Other Links

Reuters – Uber inadvertently underpaid New York City drivers for over two years 5/23

May 23, 2017


FT – Elliott makes distressed debt hires in expectation of downturn – Lindsay Fortado 5/17

  • “In a letter to investors earlier this month, explaining why they were opening to new capital, Mr. Singer said he believes ‘that there has never been a larger (and more undeserved) spirit of financial market complacency in our experience.'”

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – This Is Your Brain On Annuities – Anthony Isola 5/22

  • Max out your work-sponsored plans and IRA contributions before you even think about annuities.

FT – How the great bull run can have a constructive end – Mohamed El-Erian 5/21


BloombergBusinessweek – Waze Wants to Help You Hitch a Ride – Adam Satariano and Mark Bergen 5/18

  • “The traffic app tries its hand at carpooling.”

Sovereign Wealth Funds

FT – Money flowing into sovereign wealth funds declines to $7.4tn – Attracta Mooney 5/21

  • “Sovereign wealth funds are feeling the strain from lower oil prices and government raids on rainy-day funds, with the amount of money managed by state-backed investment vehicles falling slightly to $7.4tn.”
  • “Between March 2015 and March 2017, the collective assets overseen by SWFs — which often owe their origins to money generated from a country’s excess oil revenues — decreased 0.5%. That compares with the 14% increase in the two years to March 2015, according to the Sovereign Wealth Fund Institute, a research organization.”
  • “The fall in assets has raised concerns that state funds will withdraw more money from external investment managers, which have already suffered several years of redemptions from these large investors.”
  • “The oil price has more than halved since its 2014 high of about $115 a barrel, to less than $50 a barrel now, forcing governments to pull money from SWFs to prop up their economies.”
  • “In the two years to the end of 2016, SWFs withdrew at least $85bn from investment houses, according to figures from eVestment, the data provider.”
  • “The assets of Saudi Arabia’s Sama Foreign Holdings fund, the world’s fifth-largest SWF, fell 14% to $514bn in the year to March 2017, while assets at Russia’s reserve fund tumbled by two-thirds to $16.2bn, according to SWFI.”
  • “Assets also fell at China’s Safe vehicle and Azerbaijan’s state oil fund, while the amount of money managed by the Abu Dhabi Investment Authority and the Kuwait Investment Authority, the third- and fourth-largest SWFs, were flat over the past year, SWFI estimated.”
  • “Asset managers including Aberdeen, BlackRock, Franklin Templeton and Invesco were among those who are thought to have suffered large outflows from SWFs, particularly in 2015 and 2016.”
  • “According to SWFI, the assets managed by state-backed vehicles that owe their origin to oil and gas fell 1.5% over the past two years, compared with growth of about 0.7% for non-oil or gas-related funds.”
  • “Sven Behrendt, managing director of GeoEconomica, the consultancy, said: ‘The price of oil has been the largest driver for asset growth across the sovereign fund industry. Since oil has come down, asset growth has shrunk.’”
  • “SWFs have been forced to increase their allocations to riskier investments in an attempt to improve returns and increase assets. The SWFI data show that the value of assets invested in infrastructure, property and private equity grew rapidly over the past two years, while assets invested in fixed income fell.”
  • “He added that many SWFs were set up with the assumption that their financial returns would complement and eventually replace oil revenues as a significant source of funding.
  • “’This is a crucial moment for sovereign wealth funds, in particular oil-based ones,’ he said. ‘With the oil price lower, the question that will be asked of sovereign asset managers is to make good on that promise [to replace oil revenues].'”


FT – China looks to capture millions of tons of CO2 – Emily Feng 5/21

  • “China is planning to capture millions of tons of carbon dioxide generated by its energy and steel plants for use in extracting crude oil from the country’s increasingly barren oilfields.”

May 19, 2017

If you were to read only one thing…

FT – Chinese insurer warns of defaults as ban on new products bites – Gabriel Wildau and Nan Ma 5/17

  • “One of China’s largest insurers has warned of mass defaults and social unrest unless the regulator lifts a ban on its issuance of new products, the latest sign of stress in the industry caused by a crackdown on financial risk.”
  • “In a letter to China’s insurance regulator seen by the Financial Times, Foresea Life Insurance warns that the company expects Rmb60bn ($8.7bn) in redemptions this year and might be unable to meet payouts unless it is able to sell new products.” 
  • “In December, the China Insurance Regulatory Commission banned Foresea for three months from applying to sell new products. In February, the agency banned Foresea chairman Yao Zhenhua, China’s fourth-richest man, from the industry for 10 years.”
  • “Foresea is a unit of Baoneng Group, a property and financial conglomerate that Mr Yao also chairs. Baoneng made headlines last year by attempting a hostile takeover of China Vanke, one of China’s largest residential developers.” 
  • “Baoneng has used the sale of so-called ‘universal insurance’ products to finance its stake in Vanke and other listed companies. Such policies are, essentially, investment vehicles offering high yields and guaranteed payouts on maturities. Distributed through banks, they bear little resemblance to traditional insurance, which pays out only in the event of a risk incident such as death, illness, or accident.”
  • “Deregulation of the insurance industry in recent years has led to the sharp rise of universal insurance sales, which has helped groups such as Foresea and Anbang Insurance Group to grow.”
  • “Foresea’s premiums soared from Rmb32bn in 2014 to Rmb100bn last year but tumbled 61% in the first quarter this year. The date of Foresea’s letter indicates that, by late April, the regulator had not yet approved new Foresea products, despite the expiration of the three-month ban.”
  • “Beyond Foresea, the CIRC has moved to contain universal insurance in recent months, amid President Xi Jinping’s call to curb financial risk. Analysts warn that the high yields offered by universal insurance force issuers to take risks in order to earn the returns necessary to meet promised payouts.” 
  • “Many universal insurance products ostensibly carry long durations of five or even 10 years but the policies often include generous redemption terms, enabling investors to cash out of the products with minimal penalties.” 
  • “Foresea’s warning that mass redemptions could leave the group unable to meet payouts highlights the liquidity risk created by taking on short-term liabilities to purchase long-term, illiquid assets.”
  • “This month, the CIRC imposed a similar three-month ban on Anbang and accused the group of ‘wreaking havoc’ in the market with aggressive sales tactics. The agency specifically criticized Anbang for selling products with short maturities.”

Worthy Insights / Opinion Pieces / Advice

FT – Murder case highlights property money trail from China to US – Leslie Hook and Lucy Hornby 5/17

  • “A record bail posted in a California court for one of the accused in a murder case has thrown the spotlight on a property fortune that traces its roots to the Chinese military, in a graphic illustration of how money made in China has flooded overseas real estate markets.” 
  • “Tiffany Li is a Chinese-American heiress accused of ordering a hit on her ex-boyfriend in San Mateo county, a leafy suburb of San Francisco where Teslas are more common than violent crime. In April she posted $4m in cash and $62m in California property as bail — among the highest ever posted in the US.”

Real Estate

Bloomberg – Real Estate Deals Vanish in New York – Sarah Mulholland 5/18

  • “In New York City, first-quarter property sales plummeted 58%, to $4.3 billion, compared with a year earlier, according to data from brokerage Cushman & Wakefield Inc. It marked the lowest quarterly sales volume in six years. Nationwide, the picture wasn’t much better. Sales dropped 18%, research firm Real Capital Analytic Inc. found.”

WSJ – Mall Owners Flex Hidden Muscles Over Lenders – Esther Fung 5/16

  • “At a time when retailers are closing thousands of stores across the U.S., some lenders are deciding to renegotiate loans backing malls—and suffer guaranteed losses—rather than run the risk of being stuck owning or operating the malls themselves.”
  • “Shopping mall owner Washington Prime Group last June defaulted on an $87.3 million loan backing Mesa Mall in Grand Junction, Colo., and turned the keys over to creditors.”
  • “Rather than operate the mall, the creditors quickly sold the property—right back to Washington Prime—at a lower price. Late last month, Washington Prime told investors it had repurchased the mall and secured a discounted payoff of the original loan for $63 million.”
  • “The Mesa Mall deal is among the first known instances of mall landlords securing discounted payoffs rather than walking away entirely, but more such deals could be in the offing. In the past 12 months, 318 loans backing retail real estate suffered losses totaling $1.85 billion, with the percentage of lost principal reaching 43.3%, according to data from Trepp LLC, a real-estate data provider.”
  • “Discounted payoffs are warranted in some situations, analysts said. Many malls with otherwise viable business operations are still carrying debts made during the boom years of 2006 and 2007, often at inflated valuations.”


FT – The Big Green Bang: how renewable energy became unstoppable – Pilita Clark 5/18

  • “These advances have become too significant for the oil and gas industry to ignore. In the first three months of this year, the heads of some of the world’s largest oil companies have spoken of a ‘global transformation’ (Saudi Aramco) that is ‘unstoppable’ (Royal Dutch Shell) and ‘reshaping the energy industry” (Statoil). Isabelle Kocher, chief executive of French power and gas group Engie, calls it a new ‘industrial revolution’ that will ‘bring about a profound change in the way we behave’.”
  • “None of this means the problem of climate change has been solved, or that fossil fuels will vanish in the near future. Oil, gas and coal still account for about 86% of the energy keeping the world’s lights on, cars running and homes warm — a share that has barely changed in 25 years. Coal and gas-fired power plants are still being built, especially in the developing world where 1.2bn people lack electricity.”
  • “Modern renewables, in contrast, are growing from a tiny base and are often less dependable than dirtier power generators that do not rely on the weather. Wind and solar power accounted for a puny 4.4% of global electricity in 2015, and big battery systems can only store enough power to satisfy a few seconds of global electricity demand, says the International Energy Agency. Electric vehicle sales last year were just 0.9% of all vehicles sold, according to the EV-Volumes consultancy.”
  • “But the emerging energy transition is already causing trouble for companies around the world, from write downs and shrinking sales to sliding share prices and wholesale break-ups:”
    • “In sunny Nevada, casino companies are unplugging from the state utility. NV Energy lost nearly 6% of its customer base virtually overnight in October after MGM Resorts International and Wynn Resorts agreed to pay a combined $103m to defect and buy their power elsewhere. MGM cited “the sharp decline in the cost of renewable energy” as a primary driver of its decision. Caesars later did a $47.5m deal to quit.”
  • “When the definitive history of the energy transition is written, the taxpayers of Germany will deserve their own chapter. They bankrolled the green energy revolution known as the Energiewende, pioneering generous subsidies nearly 20 years ago that helped drive renewables up from 9% of Germany’s electricity mix in 2004 to 32% last year.”
  • “As other European nations — and some US states — boarded the green power wagon, it kindled a wave of demand for wind turbines and solar panels that helped drive costs down worldwide. Solar’s price fall was especially steep after a Chinese manufacturing boom spurred global over-supply.”
  • “The result was doubly miserable for conventional fossil fuel generating companies: renewables crowded them out while simultaneously driving down wholesale power prices, causing billions of euros in losses.”
  • “’Renewables have reached a tipping point globally,’ says Simon Virley, head of power and utilities at KPMG. ‘A subsidy-free future is now in reach for a number of technologies and geographies.'”
  • “None of this means the future of clean energy will be entirely smooth. Indeed, its very success poses a raft of questions for governments that some have barely contemplated.”
  • “Chief among them: what to do with power markets that were never designed for millions of people turning their rooftops into mini power stations?”
  • “How to pay for upgrading grids to cope with the influx of all this renewable power? What to do about incumbent companies calling for the brakes to be slammed on to protect them from green power incursions? Then there is Mr. Trump, who is seeking to unwind the clean power policies of his predecessor.”
  • “In the rest of the world, however, the future of green power appears assured. So much so that an industry that has spent years on the defensive is beginning to show a rising sense of confidence.”
  • “’Fossil fuels have lost,’ says Eddie O’Connor, chief executive of Ireland’s Mainstream Renewable Power. ‘The rest of the world just doesn’t know it yet.’”

Asia – excluding China and Japan

FT- Thai junta nears third year and settles in for longer stay – Michael Peel 5/18

  • “Thailand’s ruling generals were supposed to quit within barely 18 months but they seem more firmly entrenched than ever as they prepare to celebrate the third anniversary of their May 2014 coup.”
  • “A country once among the more democratic in a mostly authoritarian region is now in its longest spell under hardline military rule for decades – and, as the junta flaunts a 20-year ‘reform’ plan, it seems more and more like the new normal.”


Economist – The end of Canada’s housing boom? 5/18

May 18, 2017

If you were to read only one thing…

NYT – Household Debt Makes a Comeback in the U.S. – Michael Corkery and Stacy Cowley 5/17

  • “It took nearly a decade, but debt has made a comeback.”
  • “Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse.”
  • “In the first quarter of 2017, consumer debt rose to $12.73 trillion, exceeding its peak in the third quarter of 2008. Student loans account for 10.6% of that total, up from 3.3% in 2003, while housing’s share, though still great, has fallen back to 2003 levels.”
  • “’This is not a marker we should be super excited to get back to,’ said Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth, a liberal think tank. ‘In the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.’”
  • “Since World War II, total household debt had been increasing with only a few interruptions. The financial crisis changed that steady upward march.”
  • “In late 2008, household debt began a decline that would last for 19 consecutive quarters, an unprecedented period of ‘deleveraging’ during which many Americans shied away from new borrowing. Total debt began to rise again in 2013, finally hitting a new high in this year’s first quarter.”
  • “Student borrowers today owe $1.3 trillion, more than double the $611 billion owed nearly nine years ago. About one in 10 student borrowers is behind on repaying their loans, the highest delinquency rate of any type of loan tracked by the New York Fed’s quarterly household debt report.”
  • “Still, the student loan market is nowhere near the size of the $8.6 trillion mortgage market, making student borrowing less of a threat to the global financial system than the bad housing loans that touched off the financial crisis in 2008.”


BloombergBusinessweek – There Are Now More Indexes Than Stocks – 5/12

Real Estate

WSJ – Daily Shot: BMO – US Rent vs Income Growth 5/16

Bloomberg – Blackstone Sees End of Property’s ‘Great Run’ as Returns Fade – Joyce Koh and Pooja Thakur Mahrotri 5/16

  • “Blackstone Group LP, the world’s biggest private equity fund, told investors to dial back their expectations for property returns as the ‘great run’ of the past five years becomes harder to replicate.”
  • “Investors should ‘calibrate their expectations,’ Chris Heady, Asia Pacific chairman and head of Asian real estate, told a conference in Singapore on Tuesday. ‘They’re probably going to be lower over the next five years.'”


FT – Oil market rebalancing needs ‘much work’, says IEA – Anjli Raval 5/16

  • While Opec has been curbing supply, the rest of the world (specifically, US shale, Brazil, and Canada) is taking up the slack.

FT – US shale groups refuse to lie down and die – Ed Crooks 5/16

  • “Failures of North American exploration and production companies soared after oil prices started falling about three years ago, with 114 seeking Chapter 11 bankruptcy protection in 2015 and 2016, according to Haynes and Boone, the law firm. But like monsters in a horror movie, these businesses have proved exceptionally hard to kill off.”
  • “Of the 10 largest US exploration and production companies to have gone into Chapter 11, eight have emerged and are still operating, having shed billions of dollars of debt.”
  • “As Michael Watford, chief executive of Ultra Petroleum, which emerged from Chapter 11 in April, put it on a call with analysts this month: ‘In many ways, we are the same, but in other ways we are better.’”

May 17, 2017

If you were to read only one thing…

Economist – Sorry, we’re closed: The decline of established American retailing threatens jobs 5/13

  • “Consumer confidence is strong and unemployment is at its lowest level in a decade, yet S&P Global Ratings expects retailing defaults this year to surpass those in 2009 when the economy was in the depths of a recession.”
  • “The total amount of capital, both debt and equity, supporting American retailing (excluding Amazon) now exceeds $2.5tn, according to The Economist’s tally.”
  • Further, “the retailing industry employs 15.9m people, accounting for one in nine American jobs.”
  • Mr. Mathrani (Sandeep Mathrani, head of GGP one of the world’s largest mall real estate investment trusts) reckons that, for shopping centers to match demand, 30% of space should close permanently. In one particularly gloomy scenario, all retail property would shrink by as much. If staff dropped by the same proportion, 4.8m would be at risk of the sack—around half the number of American jobs lost during the financial crisis.”
  • “Retailing accounts for at least one in ten jobs in every American state. Not since the decline of manufacturing began in the 1980s has an industry with so many workers faced such a profound shift.”
  • “Across the world, 192m retailing jobs are threatened by automation, according to estimates by the Eurasia Group, a consulting firm.”
  • “Retailing jobs surpassed those in manufacturing 15 years ago and now exceed them by 28%. Wages may be low for salespeople—$13 an hour on average. Nevertheless, a job in retailing is a reliable way for those with little training to earn money. Just 20% of shop workers have a university degree.”
  • How does this relate to e-commerce? “For every percentage-point increase in their share of e-commerce sales, a retailer’s margins shrink by about half a point, according to estimates by Morgan Stanley, a bank.”
  • “The result is that America’s rich landscape of shops now looks like a dangerous glut.”
  • “Department stores’ floor space has contracted by 11.5% since 2006, but sales have shrunk more than twice as fast, according to Green Street Advisors, a real-estate research firm. To reach the inflation-adjusted sales productivity of 2006, at least another 800 department stores would need to close, reckons D.J. Busch at Green Street.”
  • “Even that might not solve retailers’ problems. Shutting unproductive stores is fraught with peril: shops risk losing their customers to competitors, both online and off. Karen Hoguet, Macy’s chief financial officer, has noted that when a chain closes a store in a particular area, online sales in that region often drop, too.”
  • “The Economist has calculated what might happen to retailing workers (excluding those who work in car and fuel sales), if e-commerce grows as Cowen expects. Assuming that employment in stores rises or falls with changes in those stores’ sales, and that labor productivity improves at historical rates, retailing jobs could shrink by 12%, or 1.5m jobs, by 2022. If e-commerce’s share of sales is 50% greater than what Cowen expects, employment could fall by 17%.”
  • “This slow melt has so far attracted little attention from politicians, despite jobs in retailing outnumbering those in coal mining, which has caught the political eye, by a factor of 300.”


WSJ – Amazon’s 49,000% Gain: The Most ‘Super’ of ‘Superstocks’ Since 1926 – Jason Zweig 5/16

  • “From 1926 through 2015, only 30 stocks accounted for one-third of the cumulative wealth generated by the entire U.S. stock market; Amazon was one.”
  • “That’s 30 out of a grand total of 25,782 companies that were publicly traded over that period.”

Economist – Courting trouble: Why Trumponomics won’t make America great again 5/13

Economist – Citizen Kushner: Donald Trump’s family and a controversial visa scheme 5/11

Markets / Economy

Bloomberg Intelligence – The fall (and rise) of active management – Eric Balchunas and Sean Casey 5/12

FT – Pimco dims US inflation target after ‘noticeable softening’ – Adam Samson 5/15

Real Estate

WSJ – Fewer Home Builders Means Happier Home Builders – Justin Lahart 5/15

  • “One reason behind optimism among housing construction companies is there is less competition among them, which has limited supply.”


WSJ – The Real Winner From Oil Supply Cuts – Spencer Jakab 5/15

  • “The most surprising result of the anticipated deal among big oil producers to extend supply cuts might be that the U.S. re-emerges as the world’s biggest oil producer.”
  • “The ultimate free-rider on Saudi sacrifice is nimble U.S. shale. So much capital is now being deployed that the U.S. may become the world’s top oil producer by 2018, topping Russia and Saudi Arabia.”
  • “U.S. production of oil peaked almost a year after the crude bear market started, reaching 9.61 million barrels in June 2015. After dropping below 8.5 million by last summer, the old record may be exceeded in a matter of months. The U.S. Energy Information Administration recently updated its forecast and expects U.S. production to average 10 million barrels a day next year. Russia currently produces 10.3 million barrels and Saudi Arabia 9.95 million. If related liquids are included then the U.S. has been the top global petroleum producer since 2013.”

Asia – excluding China and Japan

Economist – Pluralism in Indonesia: An unfair trial leaves Chinese-Indonesians feeling vulnerable 5/13


Economist – A sorry tale: A migrant worker’s story of her travails is a huge hit in China 5/11


Economist – State of disrepair: India needs to curb borrowing by profligate state governments 5/11

South America

Economist – Bello: Venezuela’s crisis spills over 5/11

  • “Latin America wakes up to its biggest headache.”

May 16, 2017

If you were to read only one thing…

WSJ – China’s Debt Addiction Will Be Hard to Cure – Anjani Trivedi 5/15

  • “China is attempting cure itself of an addiction to debt. The problem is, that could just stoke yet more demand.”
  • “Take local-government debt, one of the biggest contributors to the overall growth in debt in recent years. A major concern has been off-balance-sheet ‘local-government financing vehicles,’ whose debt now represents around 10% of China’s $8 trillion bond market.”
  • “The money raised is supposed to finance infrastructure projects and the like. But much of it—around half, according to Wind Info—has been put to unproductive uses like paying down old debt and keeping moribund local companies alive. The debt is often issued in the guise of corporate bonds, and can be bought by banks.”
  • “Beijing is now trying to rein in the financing vehicles’ voracious debt appetite. Though the debt isn’t recorded on local governments’ books, there’s little doubt they will be on the hook if defaults start growing. As of 2016, local-government debt totaled 33 trillion yuan ($4.782 trillion), of which UBS analysts estimate a third is implicit or hidden liabilities.”
  • “Earlier this month, authorities issued a directive restricting local governments from guaranteeing debt issued by these financing vehicles and other public-private partnerships. It also prohibited injecting public assets such as land into these vehicles to improve their credit quality.”
  • “So far, so sensible. The problem is the likely cost in overall economic growth, a point China’s central bank acknowledged in its quarterly report this weekend. While bursting this particular debt balloon could reduce the amount of money being misused, it could also stymie genuine investment. Depending on how thoroughly the new directive is executed, it could drain 2 trillion yuan of infrastructure financing this year, according to UBS analysts, and leave local governments with a financing gap exceeding 1 trillion yuan. That’s more than 10% of annual infrastructure investment in China.”
  • “The last time Beijing tried to reduce this kind of debt—in 2014—the knock-on effect on investment and growth was so severe that it soon backed down: Issuance bounced back to record highs just months later.”


WSJ – Amazon’s IPO at 20: That Amazing Return You Didn’t Earn – Steven Russolillo 5/14

  • “A $10,000 investment in Inc. 20 years ago would be worth $4.9 million today. Good luck finding an Amazon investor who can brag about a return like that.”
  • “Monday is the 20th anniversary of Amazon’s initial public offering. Its vertiginous stock chart is a reflection of the internet giant’s dominance. Shares have gone from under $2 on a split-adjusted basis to $961.35 at Friday’s close. The 36% compounded annual gain by buying Amazon at its first-day closing price earned an investor 155 times what would have been made in the S&P 500, including dividends. At $460 billion, Amazon now sports the fourth-largest market capitalization in the S&P 500.”
  • “’This massive outperformance has led to an explosion in hindsight bias, with investors fooling themselves into believing Amazon’s ascent was somehow obvious or inevitable,’ writes Michael Batnick, director of research at Ritholtz Wealth Management and author of the popular ‘Irrelevant Investor’ blog. ‘You had to be some sort of sociopath, void of any human emotions, to earn these monstrous gains.’”
  • “History shows stock investors regularly underperform the market’s returns. Volatility often triggers irrational behavior when investors almost always would fare better by ignoring the noise. Similar patterns are only exacerbated when focusing on individual securities.”
  • “As Mr. Batnick points out, Amazon shares have had daily declines of 6% 199 times. The stock has fallen 15% over a three-day span on 107 different occasions. And the damage was far worse over longer time horizons.”
  • “Amazon has suffered at least 20% pullbacks in 16 of its 20 years on the public markets. The drawdowns were more than 40% apiece in nearly half of those instances, including a 64% plunge in 2008 during the depths of the financial crisis. Worst of all, shares lost 95% of their value when the tech bubble burst from December 1999 through October 2001.”
  • “Most investors just couldn’t ride that out.”

Worthy Insights / Opinion Pieces / Advice

Zero Hedge – Hedge Fund CIO: “This Is Unprecedented… No Trader Has A Model For This” – Tyler Durden 5/14

  • “’Everyone buying assets today is building somewhat plausible arguments, but they’re really all just geared to decisions made in Beijing.’” – Eric Peters, CIO of One River Asset Management
  • “The most crowded trade in the world is cognitive dissonance on China. ‘We need persistent increases in debt relative to GDP for the world economy to function. And since 2011, 100% of global non-financial private-sector net credit creation has occurred in China. Across the western world, it’s been zero.’ Since 2008, non-financial private-sector credit has risen 20% per year in China. In the west, net credit creation occurred through rising government debt – but for that fact, our economies would’ve suffered profoundly. Instead, global asset and liability levels have grown inexorably, led by Chinese credit creation.”
  • “’At 20% annual credit growth, China’s asset (and liability) base doubles every 3.5 years.‘ Seven years ago China’s asset base was roughly $15tn. Then it doubled. And doubled again.”
  • “’China’s asset base today is roughly $60tn, on its way to $120tn sometime in 2020,’ he laughed, his spreadsheet sprouting trees, racing to the sky. ‘The US asset base is $90tn. They’ll pass us in 2yrs. When we were $60tn, China was $10tn.’”
  • “‘People believe they’re leveraged to all of these wonderful things happening in the world. But they’re simply leveraged to what happens in China.’”
  • “Oil prices, iron ore, copper, real estate, and today’s global cyclical recovery are all directly tied back to China. And this can all continue for a time. Or end abruptly.”
  • “’What makes this so difficult to model is that this’ll be the first cycle that ends based on decisions made in Beijing, not Washington or Frankfurt.’”

Markets / Economy

WSJ – How Big Are Mutual Funds’ Puerto Rico Losses? $5.4 Billion – Heather Gillers and Tom McGinty 5/14

  • “Those losses, which are both actual and unrealized, were tucked inside a wide range of funds managed by Franklin Resources Inc., OppenheimerFunds Inc., Vanguard Group, Goldman Sachs Asset Management, Western Asset Management Co., Lord, Abbett & Co., AllianceBernstein Holding LP and Dreyfus Corp., which is part of BNY Mellon Investment Management.”
  • The two companies with the largest losses are Oppenheimer and Franklin with losses as much as $2.1bn and $1.6bn respectively.

Real Estate

NYT – Real Estate’s New Normal: Homeowners Staying Put – Conor Dougherty 5/14

  • “‘Once mortgage rates climb to 5 or 5.5%, we are going to start to see the lock-in effect really take hold,’ said Svenja Gudell, chief economist at Zillow.”

WSJ – Daily Shot: Bloomberg – US Apartment Sales Volume 5/15


FT – China real estate investment rises as sales slowdown drags on – Hudson Lockett 5/14