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.”

Perspective

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

  • “A $10,000 investment in Amazon.com 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

China

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

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