“In a new study in the journal Science, researchers analyzed the economic harm that climate change could inflict on the United States in the coming century. They found that the impacts could prove highly unequal: states in the Northeast and West would fare relatively well, while parts of the Midwest and Southeast would be especially hard hit.”
China
WSJ – Daily Shot: Credit Suisse – Bank Lending to RE Developers (China) 6/29
WSJ – Daily Shot: Moody’s & Danske Bank – Wealth Management Product Investment Exposure 6/29
The helicopter attack on the capital seems a bit fishy (grenades were dropped – but none exploding, no one was injured from the shots, and there was no resistance for more than half an hour)… but nonetheless, President Maduro has used the attack as a reason to establish marshal law.
“Samsung Electronics is expected to overtake Intel as the world’s largest chipmaker in the current quarter, for the first time ever, on the back of strong demand for chips for mobile devices and data servers.”
“Intel has been the number one chipmaker since 1993 after releasing the Pentium CPU (central processing unit) for personal computers. However, the rapid adoption of mobile devices around the world has enabled Samsung to close the gap in chip sales in recent years.”
“Samsung is estimated to have generated $15.1bn in chip sales for the April-June quarter, surpassing Intel’s estimated sales of $14.4bn, according to Nomura. Samsung is also expected to displace Intel as the industry leader for the full year, unless memory chip prices fall sharply in the second half. Samsung’s 2017 chip sales are forecast at $63.6bn, versus Intel’s estimated $60.5bn.”
“Appetite for building enclosed malls of more than 800,000 square feet has dried up. Department stores, once dependable foot-traffic generators, are closing locations amid stiff competition from off-price retailers and the growth of online shopping.”
“A mall construction spree in the 1970s and 1980s has left in its wake aging properties at a time when there is little capital available for upgrades. As anchor stores close, more mall space sits idle and foot traffic wanes, hastening the march toward death.”
“In all, there are roughly 1,200 malls in the U.S., and some analysts see the figure bottoming out at 500 to 800.”
“As of the current quarter, there were 612 so-called superregional malls, which typically have a gross floor area of 800,000 square feet or more, only two more than there were in 2010. Between 2002 and 2009, there were 37 such malls built. The number of smaller enclosed malls of 400,000 to 800,000 square feet stands at 599, up by 16 since 2010. Between 2002 and 2009, 40 such malls were constructed.”
“But other categories of retail are flourishing. The number of neighborhood shopping centers and strip centers has jumped by 2,303 since 2010 to 114,683. These centers typically offer a narrower range of goods and feature tenants such as grocery stores, laundromats and other necessity-based services that cater to nearby residents.”
To be sure, not everyone is hurting.
“Grade A malls in dense neighborhoods with above-average household incomes are still doing well, and their landlords argue that consolidation in the industry works in their favor.”
“About two-thirds of the contractors who are struggling with the labor shortages gripping the construction industry say it has become a challenge to finish jobs on time, according to a new survey.”
“More than one-third of contractors said they are being forced to turn work down and 58% said they are putting in higher bids, said the survey sponsored by USG Corp. and the U.S. Chamber of Commerce. Three-quarters of those who said they are having difficulty finding skilled labor said they are simply asking their employees to work harder.”
“Labor shortages are partly due to the increasing number of construction projects moving forward. During the first four months of this year, construction spending amounted to $359.5 billion, 5.8% more than the same period in 2016, according to the U.S. Census Bureau.”
“Also, tens of thousands of workers left the building trades during the economic downturn.”
Finance
WSJ – Daily Shot: US Leveraged Loan Issuance 6/26
WSJ – Daily Shot: Pension Partners – European High Yield Index – Effective Yield 6/26
“Capital flight disguised as overseas tourism spending has artificially cut China’s reported trade surplus while masking the extent of investment outflows, according to research by the US Federal Reserve.”
“A significant share of overseas spending classified in official data as travel-related shopping, entertainment and hospitality may over a 12-month period have instead been used for investment in financial assets and real estate, the Fed paper argued.”
“Disguised capital outflows in the year to September may have amounted to $190bn, or 1.7% of gross domestic product, according to the paper.”
“Foreign exchange purchases by individuals are capped at $50,000 a year, with the money meant to be used for consumption purposes such as travel, foreign medical care and tuition.”
“Until recently, however, Chinese bank tellers rarely asked for documentation to prove how the foreign currency they sold to individuals was actually used. Clients typically ticked the “travel” box on bank disclosure forms, even when they intended to stash funds in foreign bank or brokerage accounts.”
“Those wanting to buy real estate or make other large investments could pool quotas from friends and family in a process known as “antlike house moving” — named after the way ants can transport an entire colony by carrying one small piece at a time.”
“The Fed’s suspicion was sparked by a sharp rise of so-called travel spending among Chinese tourists.”
“Previously, official data showed the scale of Chinese travel spending was consistent with other middle-income countries. But in 2014 this spending became “anomalously high”, the Fed paper argued, with per-capita travel spending as a share of per-capita GDP reaching the same level as the UK — where per-capita GDP is seven times higher.”
“Zhang Zhiwei, chief China economist at Deutsche Bank in Hong Kong, acknowledged the possibility of disguised capital outflow but suggests another explanation: the wealth effect from rising house prices. ‘It’s hard to pin down how much comes from each factor,’ he said.”
Europe
WSJ – Daily Shot: Bloomberg & BMI – Select European Country NPL Exposure 6/26
Come July 1, there will be a national goods and services tax that is implemented. In anticipation of this, many retailers and developers are pushing their products through discounts prior to the deadline.
“In late April, President Xi Jinping convened a politburo meeting specifically focused on stability in the financial system. Foreshadowing the crackdown, he ordered that those ‘financial crocodiles’ that destabilize China’s financial system must be punished.”
“While Mr. Xi did not name those financial crocodiles, it is not hard to find Chinese tycoons fitting this description: those who have borrowed recklessly and bought expensive overseas assets with abandon. A crackdown on such behavior is not only long overdue, but also can serve multiple purposes. As the Chinese saying goes, you slaughter a chicken to warn the monkeys.”
“Making an example of China’s wealthiest tycoons can have an instant and powerful deterrent effect and rein in overly aggressive business practices endangering the stability in China’s overleveraged and under-regulated financial sector. But the political benefits of a clampdown on Chinese tycoons, so far overlooked by most observers, are likely to be even more significant.”
“A large number of these tycoons had made their immense fortune before Mr. Xi’s ascent to the top in late 2012. As good relations with government officials are critical to business success, it is reasonable to assume that many, if not most, Chinese tycoons have cultivated close personal ties with members of China’s ruling elite.”
“Carrying out such a purge is relatively easy. Since many Chinese tycoons depend on state-owned banks for funding, the simplest way of pushing them under is to order the banks to cut off credit. This could force overleveraged tycoons into a liquidity crisis and even bankruptcy. Even those with healthier balance sheets will not be safe. The Chinese authorities will have no difficulty finding them to be in breach of some rule or other, ensuring that a politically motivated purge can be passed off as tough regulatory enforcement action.”
“A broader campaign to subdue Chinese tycoons will also help eliminate a longer-term threat to the Chinese Communist party in general, and the authority of Mr. Xi in particular. Under his leadership the party has methodically neutralized threats to its rule — from rival factions, corrupt officials, the media and liberal activists. But one powerful group, business tycoons, has remained largely untouched — until now.”
“This crackdown will be discriminating. A large number of Chinese tycoons will be sitting ducks because of their enormous wealth and questionable political allegiances. Others will be left alone or forced to prove their loyalty. When it is over, we should expect a complete re-ordering of China’s economic oligarchy.”
“The move against Anbang, Dalian Wanda and others is only the opening shot in this campaign.“
“Facial-recognition technology, once a specter of dystopian science fiction, is becoming a feature of daily life in China, where authorities are using it on streets, in subway stations, at airports and at border crossings in a vast experiment in social engineering. Their goal: to influence behavior and identify lawbreakers.”
“China is rushing to deploy new technologies to monitor its people in ways that would spook many in the U.S. and the West. Unfettered by privacy concerns or public debate, Beijing’s authoritarian leaders are installing iris scanners at security checkpoints in troubled regions and using sophisticated software to monitor ramblings on social media. By 2020, the government hopes to implement a national ‘social credit’ system that would assign every citizen a rating based how they behave at work, in public venues and in their financial dealings.“
“A world where everyone can be tracked by their face wherever they go is still a long way off, and will require much better algorithms and cameras than currently exist, said Anil Jain, the head of Michigan State University’s Biometrics Research Group.”
“China is moving in that direction, abetted by a vast surveillance network. Industry researcher IHS Markit Ltd. estimates China has 176 million surveillance cameras in public and private hands, and it forecasts the nation will install about 450 million new ones by 2020. The U.S., by comparison, has about 50 million.”
WSJ – Daily Shot: Data is Beautiful – World’s Highest Paid Athletes 6/27
“Blame central bank printing presses, and a consequent hunt for yield, for mispriced risks. By using public funds, European regulators have done nothing to dispel the notion that the ultimate costs of financial stability will continue to be borne by taxpayers.”
“In a logical world, builders would rush to put up homes in the U.S. regions adding jobs at the fastest pace. In reality, it’s not so simple.”
“San Francisco’s metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.”
“You can see the imbalance in this chart, based on one that Lawrence Yun, chief economist for the National Association of Realtors, uses to explain the shortage of for-sale homes across the country. For each metro, it compares net new jobs created from 2012 to 2016 with the number of new housing units authorized over the same period. Historically, one new housing unit for every two jobs created is considered normal, Yun said.”
“Nationally, builders have added fewer new units in the 10 years ending in 2016 than in any 10-year period since 1990. Low vacancy rates have led to rising rents. House hunters are sweating it out in seller’s markets, in which homes go quickly—and often above the listing price.”
“There are two ways to ease the inventory crunch, Yun said in an interview: ‘Either the builders build homes, or real estate investors unload homes onto the market.’”
“Why aren’t builders swinging into action? One reason may be a mismatch between the places people want to live and the places where buildable land is available. Plus, builders have had a hard time filling open positions, which boosts labor costs and slows the pace of construction. Zoning rules often prevent greater population density, pushing builders to erect single-family homes on the peripheries of big cities, instead of apartment buildings closer to job centers.”
“Regulatory costs play a role, too. On average, they account for 24% of the expense of building a new home, according to a 2016 study from the National Association of Home Builders. In San Diego, they drive 40% of the cost of a new home, according to a report by a local housing group.”
“Existing homes are in short supply for both buyers and renters, from bustling coastal metropolises to smaller inland cities. Home seekers are bidding up prices and historically low ownership rates mean more people are renting, triggering fierce competition for leases. There are signs that rent growth is slowing—it’s just not slowing quickly enough.”
“A new report published by the National Multifamily Housing Council and the National Apartment Association—two trade groups for landlords—seeks to quantify just how much rental housing is really needed in cities across the U.S.—as well as how difficult it is for real estate developers to actually deliver.”
“The first chart seeks to quantify the demand part of the equation. It looks across metropolitan areas, estimating future homeownership rates, household formation, demand for second homes, and attrition of older units—among other factors.”
Second chart…
“The bad news for cities on this chart is that rent is expensive all over. In seven out of 10 cities where it’s hardest to build, more than two-fifths of renters spend at least 35% of their income on rent. The worst on that count is Miami, where 54% of renter households spend more than one-third of their income to pay for housing.”
“Last week China’s banking regulator ordered lenders to report their credit exposures to Anbang Insurance Group and three other private conglomerates that have been snaffling up overseas assets in recent years.”
“The move adds to the problems facing Anbang, which has become known for splashy purchases including New York’s Waldorf Astoria hotel.”
“Anbang’s rise over the past three years has been spectacular. Premium revenue reached Rmb504bn ($74bn) last year from only Rmb26bn in 2013, driven by sales of universal life insurance, a savings product.”
“Anbang is big, and its business model creates risks. Combined assets from Anbang’s life, property and casualty, and health units rose from Rmb163bn to Rmb2.5tn over the same period, making it China’s second-largest privately owned insurer behind Ping An Insurance Group.”
“The group’s business model creates a potential for a maturity mismatch. It sells investment products with maturities as short as two years, but ploughs much of the revenue into assets that could be difficult to sell on short notice. That could leave it struggling to raise cash if many investors ask for their money back at once.”
“Anbang’s various subsidiaries own Rmb1.06tn worth of shares in mainland-listed companies, according to Wind Information. Anbang has also completed foreign acquisitions worth more than $11bn since 2014, according to Dealogic.”
“Premium revenue at Anbang Life Insurance plunged to just Rmb1.5bn in April from a monthly average of Rmb27bn last year and Rmb82bn per month in January and February, according to CIRC data.”
“Sam Radwan, partner at Enhance, a consultancy that advises Chinese insurers, says that many companies that sell short-dated universal life policies use cash from new product sales to help them meet payouts on maturing ones. That way they do not have to sell longer-dated investments. But a halt to sales would threaten that practice if it continues.”
“Analysts say regulators may face pressure to allow Anbang to resume at least some new product sales or arrange other temporary funding support. That would give the company more time to raise cash by selling assets or raising new equity.”
“Anbang’s last big equity injection, worth $9bn, was in 2014. Since then, Anbang has relied on leverage to fuel its rapid asset growth.”
“The leverage ratio at Anbang Life Insurance — total assets divided by shareholders’ equity — rose from 3:1 to 17:1 from 2013 to 2016, according to Financial Times calculations based on the company’s annual report. State-owned China Life Insurance, which follows a more conservative strategy, has a ratio of 9:1.”
“Anbang Life’s solvency ratio — a metric used to measure an insurer’s ability to meet promised payouts — fell from 150% at the end of last year to 129% three months later. It is still well above the 100% ratio that signals potential inability to meet obligations.”
“Italy began winding up two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders’ good assets in the hands of the nation’s biggest retail bank, Intesa Sanpaolo.”
“The government will pay 5.2 billion euros to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of Popolare di Vicenza and Veneto Banca, which collapsed after years of mismanagement and poor lending.”
“Economy Minister Pier Carlo Padoan said the total funds ‘mobilized’ by the state would be for up to 17 billion euros – three times more than had initially been estimated to recapitalize the banks with public money.”
“The decree effectively means that the Veneto banks’ branches and employees will be part of Intesa Sanpaolo by Monday morning, a move designed to avoid a potential run on deposits that could have spread chaos across the whole banking industry.”
“Intesa Sanpaolo, Italy’s best-capitalized large bank, said last week it was open to purchasing the rump of the good assets for one euro on condition Italy’s government passed a decree agreeing to shoulder the cost of winding down the two banks.”
Well, good thing they waited. Now they were paid €5.2 billion for the good assets.
“Americans’ finances are in the best shape they have been in years. As a group, U.S. households’ debt-to-income and debt-to-asset ratios in the first quarter fell to their lowest levels since the early 2000s. A prolonged period of low rates have made that debt easier to bear: The Federal Reserve this week reported that households’ overall debt-service ratio—the share of after-tax income going toward debt payments—are near historic lows.”
“But Americans face financial obligations beyond debt payments, such as rents and auto leases, and these are taking a bigger bite out of pay. Indeed, the Fed report shows the share of income going toward non-debt financial obligations is sitting near its highest level since the 1980s. It is a development that particularly for households at lower income levels may be crimping spending.”
“Commerce Department figures show the homeownership rate fell to its lowest levels in over a half-century in the years since the financial crisis, and it doesn’t look likely to recover anytime soon. That has tightened the supply of rental units, pushing rents up 18% over the past five years, according to the Labor Department, even as inflation away from housing has been nearly nonexistent.”
“So while many people who own their homes have benefited from rock-bottom mortgage rates, renters’ monthly nut has risen. Those renters tend to be poorer: The Fed’s most recent survey of consumer finances, conducted in 2013, showed the median annual income of families that rented was $27,800 versus $63,400 for families that owned.”
“Then there are the payments that aren’t included in the Fed’s data on financial obligations, but that consumers are nevertheless obliged to pay. Mobile phone and internet plans, for example, have moved to the essential spending bucket for most households, and they come with a monthly bill. The Labor Department estimates that spending on information and information processing services—a category that includes mobile telephone, landline telephone and internet services—now counts for 3.2% of the average consumer’s spending versus 2.3% in 2000.”
WSJ – Daily Shot: WHO – Global Smoking use under age of 15 6/23
WSJ – Daily Shot: Axios – Number of US Payphones 6/23
“A corporate governance minefield awaits fund managers who will be obliged to pour billions of US dollars into Chinese equities after MSCI, the most influential indexer of emerging market equities, decided to include domestic Chinese A-shares in its main global indices.”
“Murky or undisclosed ownership structures, regular corruption scandals, exposure to unregulated shadow finance and a predominance of behind-the-scenes state influence over corporate decisions are just some of the governance challenges that global investors in the Chinese A-shares are set to encounter, analysts say.”
“A crucial feature of stock market governance is that investors exert influence over the board of directors, who in turn run the company to serve the interests of investors. But for state-owned companies in China, almost the opposite applies. Directors are appointed by the state to run the company for the benefit of state stakeholders who often shy away from engagement with portfolio investors.”
“Although the 222 A-shares slated for inclusion a year from now will represent only 0.73% of MSCI’s flagship emerging markets index, the cohort is far from insignificant. UBS, an investment bank, estimates that passive and active investors who track the index will be obliged to invest about $15bn in the Chinese shares.”
“There is, really, no price discovery. And if there’s no price discovery, is there really a market?” – Steven Bregman, co-founder of Horizon Kinetics
“It seems algos are programmed with a bias to buy. Individual stocks have risen to ludicrous levels that leave rational humans scratching their heads. But since everything always goes up, and even small dips are big buying opportunities for these algos, machine learning teaches algos precisely that, and it becomes a self-propagating machine, until something trips a limit somewhere.” – Wolf Richter
“J.P. Morgan estimated this week that passive and quantitative investors now account for 60% of equity assets, which compares to less than 30% a decade ago. Moreover, they estimate that only 10% of trading volumes now originate from fundamental discretionary traders. This unprecedented rate of change no doubt opens the door to unaccountability, miscalculation and in turn, unforeseen consequence.”
Data, data, data. The more I know about your customers, the more you’re willing to pay me to broker transactions. And the more I know about you (consumer), the better able I am to match you (sell you) with products you’d want.
“This is a game changer for Chinese M&A and could pretty much stop all outbound deal making in its tracks.” – Keith Pogson, EY’s senior partner for financial services in Asia.
“Chinese regulators have ordered three major internet platforms to halt all video and audio streaming services, as the country ramps up its control over online content.”
“Microblogging site Sina Weibo was one of the three slapped with the streaming ban. Popular news portal site iFeng and video streaming platform ACFUN have also been ordered to stop streaming.”
“The three companies did not possess the necessary license to stream audio and visual content and were ‘not in line with national audiovisual regulations and propagating negative speech,’ according to an announcement posted on Thursday night on the website of the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), China’s media oversight body.”
“Users would now have to apply for a license to continue video or audio streaming, according to a statement issued by the company.”
“The abrupt halt on video and audio streaming comes as China steps up its policing of internet content, particularly content it deems salacious. Earlier this month, more than 60 social media accounts, some on Weibo and including many celebrity gossip channels, were shut down for disseminating ‘vulgar content’ and ‘negatively impacting society’.”
“Meanwhile, a new cyber security law that took effect in June now mandates that any data relating to national security must be held on Chinese servers and large data transfers abroad must first be reviewed.”
“When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!”
“It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.”
“The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.”
“In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they ‘were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.’”
“’Failing or likely to fail’ is the key phrase that banking supervisors use for banks that ‘should be put in resolution or wound up under normal insolvency proceedings,’ the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation.”
“Turkey has removed the concept of evolution from its high school curriculum, in what critics fear is the latest attempt by President Recep Tayyip Erdogan’s government to erode the country’s secular character.”
What does one do when there is an inconvenient truth… deny its existence and keep future generations in the dark.
Essentially, there is precedence when looking at China’s Asian neighbors that would provide examples why the country has room to run. However, the credit boom of late is still a major concern.
“The warning signs of significant financial distress have grown in tandem with a surge in interbank borrowing and lending over the past couple of years. The strains have intensified since Beijing’s leaders made it clear in late 2016 that they were determined to rein in runaway debt and started nudging up money market rates as well as cracking down on nefarious shadow banking activities.”
“The risk of contagion is a key reason why China’s regulators are striving to rein in Wealth Management Products (WMPs), which totaled Rmb30tn at the end of April. The complex structure of WMPs typically yokes together any number of banks and NBFIs, which are now the largest borrowers on the interbank market.”
“Beijing is especially wary of banks allocating cash raised through WMPs to external asset managers. City commercial banks, which depend heavily on WMPs for funding, are particular enthusiasts of these ‘entrusted investments’, which totaled more than Rmb5tn at the end of 2016.”
“Regulators have taken aim at entrusted investments because they hide further layers of leverage and obscure the ultimate borrower. In recent weeks, the China Banking Regulatory Commission, under new chairman Guo Shuqing, has issued a flurry of directives to haul banks back into line. Banks have responded by pulling back their cash from the capital markets, increasing the very strains that the regulators want to avert.”
“A looming shake-out in the young, burgeoning interbank market for negotiable certificates of deposit (NCDs) could intensify a cash crunch. Regulators recently required banks to count NCDs as part of their lending and borrowing totals, dimming their attraction. More than 60% of outstanding NCDs will mature over the next four months, a big headache for those banks that rely on this source of funding.”
“Banks are not the only weak link. Insurance companies are net interbank lenders, but the breakneck expansion of some insurers is fanning concerns. China’s insurance regulator, worried about the risk of mismatched maturities, has clamped down on so-called universal life insurance policies, which are thinly disguised WMPs.”
Energy
WSJ – Daily Shot: BMI Research – U.S. Shale Output 6/22
WSJ – Daily Shot: GasBuddy – U.S. Average Retail Gas Price Chart 6/22
“It’s worth noting that despite these sharp declines in crude futures, US gasoline prices at the pump have barely budged.”
Data, data, data. The more I know about your customers, the more you’re willing to pay me to broker transactions. And the more I know about you (consumer), the better able I am to match you (sell you) with products you’d want.
“This is a game changer for Chinese M&A and could pretty much stop all outbound deal making in its tracks.” – Keith Pogson, EY’s senior partner for financial services in Asia.
“Economic reality is beginning to catch up with the false hopes of many Britons. One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. Indeed, in the year since, they have managed to maintain those standards by running up household debt.”
“Chinese buyers have been gobbling up houses all over the world in recent years. There could be some nasty surprises when the buying stops.”
“There are already signs of imminent pain for the global property market, thanks to China’s efforts to stop money pouring out of the country. Inquiries from China for foreign real estate fell 31% in the first quarter from a year ago, according to Juwai.com, a portal that connects potential Chinese buyers to property listings overseas. For some of the most popular destinations, the drop was even bigger—42% for the U.S. and 39% for Australia.”
“The property market Down Under looks particularly vulnerable. China accounts for four in every five foreign buyers in Australia, with their interest a prime reason why home prices have surged to unaffordable levels: Prices in Sydney, for example, are up 72% since 2012.”
“Some are waking up to the potential trouble ahead, with Australia’s household debt now nearing 200% of disposable income. Moody’s downgraded 12 Australian banks and their affiliates Monday, citing rising risks associated with the housing market, following a similar move by Standard & Poor’s last month. The country’s four biggest banks alone have a $1.1 trillion exposure to Australian housing loans, making up 55% of their total portfolios, according to Morgan Stanley.”
“Worse still, nearly 40% of home loans now are interest-only, meaning borrowers don’t need to repay the principal for a certain period, usually five years. Such loans work fine when house prices keep rising. The worry now is that prices will start falling as Chinese buying interest wanes: Meanwhile, homeowners who have only had to pay interest on mortgages could see a rise in payments as the interest-only period on their loans expires.”
“Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.”
“Really? A dollar-denominated bond that pays back 100 years from now, from a junk-rated country that has barely managed to stay solvent for more than half that time in its entire history as a creditor? While there is certainly an investment case for taking part, several analysts warn that this issue is a classic sign of a market getting ahead of itself.”
“The point, though, is not the 100 years. The complexities of bond math mean that, once maturities go beyond 30 years, the investment case barely changes. Barring default, with a yield of nearly 8%, the bond will repay investors in full in about 12 years, all else (such as inflation) being equal — and that’s leaving aside its resale value. Many investors will have much shorter horizons.”
“In a world starved of yield, the 7.91% on offer proved to be quite a pull and the bond attracted orders of $9.75bn for the $2.75bn issued. ‘People are looking out over the next 12 to 24 months and see a pretty positive outlook [for Argentina],’ says David Robbins, head of emerging markets at TCW in New York. ‘Duration in high yield is something they are more comfortable with.’ Argentina, he notes, is in effect selling equity in its economic recovery.”
“Sérgio Trigo Paz, head of emerging market fixed income portfolio management at BlackRock, says the rationale and the pricing are all good. But, he adds: ‘When you put it into perspective, it gives you a sense of déjà vu.’”
“He sees two scenarios. In one, the Fed is right about inflation and rates will continue to rise. This would turn the Argentine bond into ‘a bad experience’. In the other, markets are right, US inflation and payrolls will disappoint and we will be back in a low rate environment, which will be good for the bonds — until deflation rears its head again, hurting the Argentine economy and its ability to pay.”
“In the meantime, he says, there is a ‘Goldilocks’ middle ground in which investors can suck up an 8% coupon. Beyond that: ‘It doesn’t look good either way — which is why you get an inflection point.'”
“After a chaotic months-long search for a buyer, Toshiba has picked a consortium led by a Japanese government-backed fund as the preferred bidder for its prized memory chip business.”
“The group — which includes the Innovation Network Corporation of Japan fund, private equity group Bain Capital and the Development Bank of Japan — competed against rival offers topping ¥2tn ($18bn) from US chipmaker Broadcom and Apple supplier Foxconn.”
“’Toshiba has determined that the consortium has presented the best proposal, not only in terms of valuation, but also in respect to certainty of closing, retention of employees, and maintenance of sensitive technology within Japan,’ the company said in a statement on Wednesday.”
Long a Chavista, attorney general Luisa Ortega is being investigated now that she has expressed concern at how far those in power are willing to go to quiet dissent.
“Chinese stocks have gained direct entry to MSCI’s global benchmark equity index for the first time, marking a milestone in Beijing’s efforts to draw international funds into the world’s second-largest market.”
“The move means mainland stocks, known as A-shares, will next year be included in MSCI’s flagship emerging markets index, obliging the estimated $1.6tn of investment funds that track the index to buy mainland equities.”
“China’s domestic equity and bond markets are the second- and third-largest in the world, respectively, yet foreigners hold just roughly 2% of each. Three previous proposals by MSCI to include mainland stocks were rebuffed by the index provider’s stakeholders — mostly large asset managers.”
Perspective
WSJ – Daily Shot: Tax Foundation – Massachusetts’s Proposed Soda Tax 6/20
“The only time the Fed really succeeded in executing a soft landing, according to most economists, was when it raised rates through 1994. In the mid-1960s and mid-1980s it had a couple of qualified successes. Its other tightening cycles over the past 60 years were followed by recessions, though in some cases a recession was necessary to wipe out inflation.”
“Ms. Ortega’s rebellion and Mr. Ramirez’s resignation are a sure sign that the regime has lost moral authority even among some of its most fervent supporters. As misery and anger grow, disenchantment within the regime will spread. Its power to coerce may then begin to weaken.”
“At a news conference Monday at NASA’s Ames Research Center in Mountain View, Calif., the Kepler space telescope team released a catalog of 219 new planet candidates, including 10 that are near-Earth size and orbiting in their star’s “Goldilocks zone” – neither too hot nor too cold – where liquid water could exist.”
“In its twice-yearly health-check on the financial system, published this month, the Bank of Canada concluded that ‘extrapolative expectations’ are a feature of the market. In other words, people are buying because they hope, or fear, that prices will keep rising.”
“Common to all these cities are buyers from emerging markets, notably China, who have helped to drive a wedge between the price of homes and the local fundamentals of incomes and rental payments. They are willing to pay above the odds to secure a safe place for their savings. Though fairly small in number, their presence is enough to inflate bubbles.”
“Canada’s housing market thus opens a window on a tragic flaw in the global economy. In only a few decades China has mastered the manufacture of high-quality goods. But it takes far longer to be able to manufacture safe stores of value. Instead, their affluent citizens seek out rich-country assets, including houses. This fundamental mismatch limits the ability of policymakers to stop bubbles from inflating.”
Thing is, “the demand from emerging markets for safe assets will not soon diminish. Recent history shows that big run-ups in property prices often reverse suddenly. Better to batten down the hatches now in case the weather turns bad.”
“As Chinese authorities struggle to contain runaway home prices, a long-awaited plan for a property tax has stalled, the latest sign of entrenched interests impeding efforts to transform the country’s growth model.”
“The average price of a Shenzhen home last year was 41 times the average income, against 29 in London, 23 in Tokyo and 15 in New York, according to Macquarie Securities. Since late last year, 45 Chinese cities have introduced purchase limits and other measures in an attempt to cool rising property prices.”
“For years, economists have advocated for China to move away from administrative tools like purchase bans in favor of a property tax. Top Communist party leaders committed to imposing a property tax in a landmark blueprint for economic reform approved in November 2013.”
“By imposing an annual levy on home ownership, a property tax would reduce the appeal of housing as a speculative investment. While the merits of property taxes in general are a matter of debate among economists, few doubt that is sorely needed in China, where 50m homes lie empty, according to the China Household Finance Survey conducted by researchers from Southwestern University of Finance and Economics in Chengdu.”
“Yet market observers say there is little prospect of the government implementing a tax within the next few years — at the annual session of China’s rubber-stamp parliament in March it was announced that legislation for the levy was not on the agenda this year.”
“’Among well-informed economists in the government, establishing a property tax has been consensus for a long, long time,’ says Gan Li, director of the CHFS and professor of economics at Texas A&M University. ‘The concern is politics. No one wants to be blamed for bursting the housing bubble.’”
“China’s home ownership rate is 87%, according to the survey — creating a large and powerful constituency opposing a property tax. In the US, the rate is only 64%, according to census data.”
“A survey by FT Confidential Research, an independent research service owned by the Financial Times, found that 28% of families in medium-sized and large cities own a home that is vacant. Chinese investors have long favored housing over the volatile stock market and low-yielding bond market, and capital controls limit households’ ability to buy foreign assets.”
“Twenty countries of the Organization of American States backed a resolution condemning Mr Maduro’s unpopular plans to convene a constituent assembly to draw up a new constitution on July 30 – falling short of the two-thirds majority needed. A rival proposal, backed by Caribbean countries, also failed to pass after hours of talks and bickering over procedural matters at the body’s general assembly in the Caribbean resort of Cancún.”
“’The crisis is real,’ Honduras’ foreign minister María Dolores Agüero told the meeting. ‘It cannot be that under the doctrine of non-intervention the alternative is to do nothing.’”
“The only thing a good investor should care about is the price they can purchase these companies for compared with their own reasonable estimate of fair worth. Yes, mindless momentum chasers may panic and sell, but any long-term investor worth their salt would take this as an opportunity to buy should they believe they are getting a bargain. Active fund managers actually dumped Apple shares en masse before their recent surge.”
“In Beijing and Shanghai, housing speculators are gasping for air as tighter credit bites. But in the inland cities that drive the bulk of China’s steel and copper demand, property owners are smiling: Data released Monday showed prices rose 7% on year in May, the fastest pace since early 2014.”
Essentially the credit hose has been redirected to the third tier cities. However, one has to wonder, does that mean that there was a bench of buyers waiting to move into these ghost cities that just needed the credit to do so? Or is this a function of investors now picking up vacant units (reducing unsold inventory) now that they can comfortably speculate on appreciation? Basically, is there true demand for these units all of a sudden?
“Argentina has launched a landmark sale of US dollar-denominated bonds maturing in 100 years, a dramatic market rehabilitation for a nation that spent more than a decade fighting investors over the fallout from its 2001 default on $100bn of debt.”
“Joining only a handful of sovereign borrowers to sell century bonds, Monday’s debt sale also highlights a broader enthusiasm for emerging market securities. Over the past 12 months the JPMorgan index of such dollar-denominated securities has produced a 9% total return for investors.”
“Adam Bothamley, head of debt syndicate for HSBC, said the deal came after inquiries from investors suggested demand existed. ‘It’s less about it being a 100-year maturity bond, it’s a way to express the strongest view around the trajectory of the story for investors’, he said.”
“At lunchtime in New York, indications were that the bond would have an effective yield of 7.92%, sold at 90 cents on the dollar and an annual coupon of 7.125%.”
“Keep in mind, Argentina has defaulted on sovereign debt on eight occasions since independence in 1816, and its 2001 default was at the time the world’s largest.”
“In recent years Mexico has issued 100-year debt denominated in dollars, euros and sterling, and in 2015 the Brazilian oil company Petrobras sold $2.5bn of century bonds, which on Monday traded at a yield of 7.8%.”
“Argentina is rated single B by credit rating agencies. The lead bookrunners on the deal were Citi and HSBC, with Nomura and Santander acting as co-managers.”
“In any discussion of the oil market it is all too easy to ignore the real world consequences of the price fall that has occurred over the last three years. We might appreciate a small cut in the price of petrol or gasoline at the pump, even though its effect is dampened by high levels of taxation. But we do not give much thought to the impact of price changes on the supplying countries. That is short-sighted because the structural shift that has taken place is profoundly destabilizing and potentially very dangerous.”
“A new note from the Energy Information Administration in the US published last month sets out the impact of the fall in prices in recent years. It is worth summarizing the data, which are expressed in real 2016 dollars.”
“These are big numbers for all the countries involved. Very few have diverse economies that can adjust quickly to the fall in the price of a crucial export commodity. Most have large dependent populations, especially of children and young people. Nigeria, for instance, has some 115m people, amounting to 61% of its population, under the age of 25; Angola 13m — 63% of its population.”
“But simply looking down on the failings of the oil producers is not an adequate response.”
“The price fall has reduced the revenue of the Opec states by some $750bn from the 2012 level — a fall of over 60%. None have fully adapted to that loss of income. Most have assumed that the price change would be temporary and some have even borrowed to cover the shortfall of revenue against current spending — thereby storing up even more problems for the future.”
“The real pain of enforced austerity is only just beginning and will deepen as governments realize that the price fall is more structural than cyclical. The latest attempt to manage the market by extending the production quota for another nine months has had no positive effect. Prices for Brent crude on Friday were down to about $48 per barrel.”
“The pain will be profoundly destabilizing. At least five Opec states are at risk of very serious political and economic destabilization, including major economies such as Venezuela and Nigeria. Civil unrest is already evident in Libya and latent in Algeria. Across the whole of the cartel there is a substantial and growing group of restless, unemployed youths aged between 15 and 30.”
“In reality, the structural fall in the oil price is the most destabilizing economic event to have hit the world since the financial crash of 2008. In this case, the impact is being felt in slow motion but it is building and feeding on existing conflicts and tensions. And just as the collapse of the subprime housing market in the US shook the global economic system, so the problems of the cartel cannot be contained within the countries themselves. When problems are rapidly globalized through migration, terrorism and even health risks if key public services collapse, the deteriorating situation within Opec is all too likely to become our problem too.”
“China’s decision to detain the chairman of Anbang Insurance Group, one of the country’s most acquisitive companies, is stunning in itself. The knock-on effects on the Chinese financial system could deepen the drama.”
“If customers of Anbang—owner of New York’s Waldorf Astoria hotel—start surrendering their policies and stop buying new ones, that could accelerate a continuing cash drain at the company. China’s insurance regulator has already been clamping down on the primary source of Anbang’s cash since late last year—short-term, high-yielding investment products disguised as insurance policies. Its premium income plunged 99% in April while its solvency ratio halved in the first quarter from the previous year.”
“The company’s tentacles reach far and deep into China’s financial system, with one key route being its lending of short-term funds into Chinese money markets.”
“Take its dealings with Chengdu Rural Commercial Bank, a provincial bank of which Anbang owns more than one-third, and which itself has some 40 subsidiaries across towns and villages in China. Anbang provides around 40% of the deposits for Chengdu Rural, and accounts for 80% of its related-party transactions, most of which are short-term, money-market loans. The bank also pays Anbang a high 5% interest on its deposits and holds some of Anbang’s debt.”
“Such tight relationships illustrate how financial stress at Anbang could quickly ripple through China’s banking system. Banks like Chengdu Rural have already become increasingly reliant on short-term wholesale funding and have been resorting to capital raises: The loss of a big cash provider like Anbang could cause real pain. Interbank funding conditions are already tight in China—the country’s central bank made its biggest one-day cash injection into the market in nearly six months on Friday. If the detention of Anbang’s chairman leads to the company stepping back more broadly from Chinese markets, the saga could have a while to run.”
“The US Department of Justice on Thursday moved to seize an additional $540m in assets purchased with funds stolen from Malaysian sovereign wealth fund 1MDB, including a luxury yacht, a Picasso painting, jewelery and rights to the movie Dumb and Dumber.”
“The US now estimates that a total of $4.5bn was pilfered by Malaysian public officials and their associates including Jho Low, a well-connected Malaysian businessman who held no formal role in the project.”
“Including the new lawsuit and earlier civil forfeiture actions, the US government has moved to recover $1.7bn of that amount, according to Kendall Day, acting deputy assistant attorney-general. This represents the largest such US seizure action under a DoJ initiative aimed at recovering money stolen by corrupt foreign officials.”
“The apparent fall from grace of the founder Wu Xiaohui has shone a spotlight on a brand of Chinese capitalism that has taken root in the financial industry.”
“According to Fedeagro, an agricultural association, Venezuela produces only enough food to cover between 30-40% of domestic consumption, compared with about 70% a decade ago. Chronic food shortages ensure that Venezuelans regularly skip meals and go hungry. A survey from the Universidad Central de Venezuela found that three-quarters of the Opec nation’s population lost weight involuntarily in 2016.”
“With retailers closing thousands of stores and malls growing emptier, it’s easy to think Americans would be less inclined to pony up for good causes at the register. But the latest Charity Checkout Champions report says that people contributed $441 million last year to some of the biggest point-of-sale campaigns, up 4.5% from 2014.”
“The biggest fund-raiser is eBay for Charity, which raised $56.6 million by allowing sellers to give a portion of sales to one of 34,000 charities. The Miracle Balloon program at Sam’s Clubs and Walmart stores came in at No. 2, raising $37 million for Children’s Miracle Network Hospitals in just seven weeks. And Petco bumped the McDonald’s Coin Collection program, benefitting Ronald McDonald House, out of third place, generating $28.3 million in gifts for the Petco Foundation, which funds pet welfare and adoption groups.”
The last time this happened I covered in my 10/28/16 – 11/3/16 post. Well now the record is $664,000.
“The buyer was listed as Kwan Wai-ming, whom local news outlets identified as executive director of the Huarong Investment Stock Corporation. His company declined to comment. That price, paid for a spot in an apartment complex on Hong Kong Island, was a new local record, breaking the previous $615,000 paid for a slightly smaller spot last year.”
“For his money, Mr. Kwan may get convenience. He already owns property in the same apartment complex where the parking spot is situated, called the Upton, in the Sai Ying Pun district. He previously bought two apartments for $9.7 million and two other parking spots in the complex for $995,000, according to the Hong Kong land registry.”
“But some wealthy residents revel in the recognition that comes with a Lamborghini or even a coveted license plate. Last year, a plate carrying the number 28, which sounds like a phrase for ‘easy money’ in Cantonese, sold for a record $2.3 million at auction.”
“The Mountain View, Calif., company is finalizing an order to buy 300 apartment units from Factory OS, a modular-home startup, in a building likely to serve as short-term housing for Google employees, according to executives from both companies.”
“The global oil glut is proving immune to the limits set by the Organization of the Petroleum Exporting Countries and its big-producer allies like Russia, fueling the idea that output caps withholding almost 2% of world crude supply were a miscalculation.”
“In the U.S., the Energy Information Administration said Wednesday that crude stockpiles fell last week by 1.7 million barrels, less than the 2.6 million drop forecast by a Wall Street Journal survey. At the same time, gasoline inventories rose by 2.1 million barrels, compared with the survey’s expectation of a 700,000 decline, underlining worries about the oversupply extending to crude oil’s products.”
“Oil stockpiles in the Organization for Economic Cooperation and Development—a club of 35 countries with industrialized economies—rose by 18.6 million barrels in April and were higher than they were when OPEC agreed to its cut late last year, said the International Energy Agency, a Paris-based group that advises governments on energy trends.”
“Adding to oil traders’ angst: U.S. oil production has come roaring back to life. The IEA said U.S. crude supply will grow almost 5% on average this year, and nearly 8% in 2018, potentially vaulting American producers ahead of Saudi Arabia in daily output.”
“’Such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be faster,’ the IEA said.”
“Saudi energy minister Khalid al-Falih said this week that the production cuts would start having an impact this summer, accelerating a drop in stored oil that OPEC said began in January. He has said OPEC and Russia would do ‘whatever it takes’ to bring supply back in line with demand.”
“Daniel Yergin, vice chairman of IHS Markit and a long-time oil market watcher, said OPEC wouldn’t abandon its production-cut agreement, which took almost a year to put together through 2016.”
“’When OPEC and the other producers agreed to this deal, they hoped that, as the old adage says, time heals all—and time will heal the inventory problem,’ Mr. Yergin said. ‘They should now take a deep breath and realize this will take a lot more time.’”
“The cartel set a tough goal last December, when its officials said they wanted to cut oil-storage levels to the five-year average.”
“OPEC said OECD storage levels actually have been falling but by only 88 million barrels in the first four months of 2017. At that pace, it would take until March 2018 for stockpiles to fall another 250 million barrels to the five-year average.”
WSJ – Daily Shot: eia – US Wind and Solar Electricity Generation 6/15
“While Beijing is carrying out a high-profile campaign to reduce leverage in its financial markets with one hand, with the other it is encouraging more potentially reckless borrowing. This week, the regulator put pressure on the country’s big banks to lend more to small companies and farmers, while the government announced tax breaks for financial institutions that lend to rural households.”
“If the goal of lending to poorer customers sounds noble, the concern is that the execution will only worsen Chinese banks’ existing problems, namely high levels of bad loans and swaths of mispriced credit. Bank lending to small companies is already growing pretty fast, with non-trivial sums involved: It jumped 17% in the year through March to 27.8 trillion yuan ($4.084 trillion). That compares favorably with the 7% rise in loans to large- and medium-size companies over the same period.”
“But lending standards are set to get even looser. Banks have been told they should tolerate higher nonperforming loan ratios for small companies and agriculture-related lending, meaning they need to worry less about credit quality. The regulator also asked banks to keep interest rates on such loans at an ‘appropriate’ level—effectively allowing banks to ignore the proper pricing of risk.”
“This all flies in the face of efforts to cull bad credit from the economy. Chinese banks are already given plenty of leeway to classify loans how they like: The new measures may only encourage them to avoid writing off bad debt. It isn’t clear, either, how allowing small businesses and farmers to borrow even more will help China Inc. cure its addiction to debt-fueled growth.”
“A number of banks have slowed marketing of Anbang-branded investments to their customers in recent days, according to people with knowledge of the situation.”
