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.”

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