June 28, 2017

If you were to read only one thing…

FT – Xi Jinping’s war on financial crocodiles gathers pace – Minxin Pei 6/25

  • “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.


WSJ – China’s All-Seeing Surveillance State Is Reading Its Citizens’ Faces – Josh Chin and Liza Lin 6/26

  • “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

Worthy Insights / Opinion Pieces / Advice

The Registry – Is Macy’s Amazon’s Next Target – John McNellis 6/23

  • Don’t sell the cow for the magic beans just yet. McNellis is great at providing perspective.

WSJ – Ties Between Chinese Banks and Deal Makers Run Deep – Anjani Trivedi 6/26

Motherboard – Amazon Is Trying to Control the Underlying Infrastructure of Our Economy – Stacy Mitchell 6/25

FT – A family coup in Saudi Arabia – Nick Butler 6/25

FT – Why Italy’s 17bn bank rescue deal is making waves across Europe – FT Reporters 6/26

FT – Italian bailout: too small to fail – Lex 6/26

  • “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.”

Markets / Economy

FT – Advertising agencies squeezed by tech giants – David Bond 6/25

  • “The industry has benefited from the growth in online publicity but it is starting to feel the impact of disruption.”

WSJ – Daily Shot: FRED – US Commercial & Industrial Loan Growth 6/26

WSJ – Daily Shot: FRED – US MZM Money Stock Growth 6/26

Real Estate

Bloomberg – Why Can’t They Build More Homes Where the Jobs Are? – Patrick Clark 6/23

  • “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.”

Bloomberg – These Are the U.S. Cities Where It Costs Too Much to Build – Patrick Clark 6/26

  • “The U.S. needs more new housing.”
  • “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.”


WSJ – Shale Produces Oil, Why Not Cash? – Spencer Jakab 6/26

FT – Oil exporters face fall in foreign exchange reserves – Steve Johnson 6/26


WSJ – Daily Shot: Danske Bank – US Treasury SOMA redemption schedule 6/26

Environment / Science

NYT – Carbon in Atmosphere Is Rising, Even as Emissions Stabilize – Justin Gillis 6/26


FT – Anbang’s predicament amid bank-risk probe – Gabriel Wildau 6/25

  • “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.”


Reuters – Italy winds up Veneto banks at cost of up to 17 billion euros – Silvia Aloisi and Steven Scherer 6/26

  • “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.

Other Links

FT – Sale prices for second-hand private jets fall 35% – Hugo Greenhalgh 6/24

  • “Rich find their planes are hard to sell because of glut created a decade ago.”

WSJ – Daily Shot: Car Ownership Cost Comparison 6/26

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