Month: June 2017

June 15, 2017

Perspective

WSJ – Daily Shot: Business Insider – U.S. Pretax income growth by income category – 6/14

Economist – Around the world, beer consumption is falling – THE DATA TEAM 6/13

WSJ – Daily Shot: BMI Research – Projected Global Water Availability 6/14

Markets / Economy

Bloomberg – Wheat Soars as U.S. Spring Crop in Worst Shape in 29 Years – Megan Durisin 6/13

  • “A prolonged dry spell has left the U.S. spring wheat crop in its worst shape in almost three decades, sending prices for the grain on a tear.”

WSJ – Daily Shot: Red Spring Wheat Futures – 6/13

  • “According to the USDA, the US wheat crop is now in worse shape than at any time since 1998. Prices spike.”

Real Estate

Bloomberg  – These Cities Have Too Many Stores, and They’re Still Building – Patrick Clark and Dorothy Gambrell 6/12

China

FT – Shanghai loosens housing policy after rare protests – Yuan Yang, Xinning Liu, and Tom Hancock 6/13

  • “The Shanghai city government has made a partial policy concession after a rare housing protest at the weekend, in an effort to placate middle-class anger at measures to pour cold water on a hot property market.”
  • “Some 100 demonstrators gathered in the main shopping street of Nanjing Road on Saturday night — a sight rarely seen in China’s financial capital.”
  • “The crowd said they had bought ‘dual-use’ homes built on land sold for commercial rather than residential development, and criticized the government’s recent decision to enforce an old rule that restricts such land to commercial use.”
  • “’The government has realized its reliance on asset bubbles for growth is not sustainable,’ said Wang Xinling, lead analyst at China Policy, a Beijing think-tank.”
  • “’So it wants to change direction, but the public perceives this as hurting their wealth while the property market stagnates,’ Ms. Wang added.”
  • “Late on Monday the Shanghai government blamed property developers for ‘distorting the policy’ and ‘delaying reforms’, trying to paint the developers — rather than the government — as the target for public anger.”
  • “However, it relented by allowing buyers of ‘dual-use’ homes to move in, although it did not loosen restrictions on selling the houses, which is a big contention for the homebuyers.”
  • “China is worried about property bubbles developing after years of breakneck price rises, and has attempted to cool prices by limiting citizens’ ability to buy houses while simultaneously bringing the residential market under stricter oversight.”
  • “The regulations affect 12m square meters of property, according to Zhang Hongwei, chief analyst of Tospur, a property consultancy.”
  • “About 30 local governments across China have issued measures making it more difficult to buy houses since last autumn.”
  • “As a result, Beijing house prices fell 4% in May, according to a study by the Chinese Academy of Social Sciences. Prices in other big cities are falling or at a standstill and sales have collapsed this year.”
  • “Aspiring homebuyers have been pushed into greyer areas of the market, such as buying dual-use commercial properties.”

June 14, 2017

Perspective

Economist – Climbing without ropes 6/8

  • “A series of remarkable feats increases the appeal of a niche sport.”

FT – Diplomatic victory for China as Panama ditches Taiwan – Ben Bland 6/13

  • “Panama has cut ties with Taiwan and established diplomatic relations with China, as Beijing intensifies efforts to isolate the self-governing island, which it considers Chinese territory.”
  • “Isabel Saint Malo, Panama’s foreign minister, signed a communiqué with her Chinese counterpart Wang Yi on Tuesday in Beijing to formalize the switch, leaving Taiwan with just 20 diplomatic allies.”
  • “Juan Carlos Varela, the president of the central American nation, said that signing up to Beijing’s ‘One China’ principle would generate ‘great potential in all areas’ including investment and job creation.”
  • “Beijing has tightened the squeeze on Taiwan since the election last year of President Tsai Ing-wen and her pro-independence Democratic Progressive party.”
  • “Panama’s defection is the latest diplomatic coup for Beijing, which is capitalizing on the uncertainty surrounding President Donald Trump’s foreign policy by exerting its influence from Southeast Asia to South Korea.”
  • “’China is exercising smart power more often, while the US is retreating from mainstream international politics,’ said Huang Kwei-bo, a professor of diplomacy at National Chengchi University in Taipei.”
  • “Taiwan still has expansive political and economic relations with many countries that do not formally recognize it, including the US, Japan and China itself, which consumes about 40 per cent of Taiwan’s exports.”

Worthy Insights / Opinion Pieces / Advice

Economist – America is no longer a force for stability in the Gulf 6/10

NYT – ‘No Such Thing as Justice’ in Fight Over Chemical Pollution in China – Javier Hernandez 6/12

Real Estate

WSJ – The Mall of the Future Will Have No Stores – Esther Fung 6/12

  • “Some landlords plug empty spaces with churches, for-profit schools and random enterprises while they figure out a long-term plan. Others see a future in mixed-use real estate, converting malls into streetscapes with restaurants, offices and housing. And some are razing properties altogether and turning them into entertainment or industrial parks.”
  • “In all, retailers have announced 2,880 store closings from January to April 6 of this year, more than twice as many as in the same period a year earlier, according to Credit Suisse . For the full year, the investment bank anticipates more than 8,600 stores to close. Analysts predict that 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years.”
  • “Many mall owners are trying to liven up the experience, bringing more dining and entertainment tenants and eschewing the traditional mix of middling food courts, fashion retailers and department stores.”
  • “In GGP’s holdings of more than 130 shopping centers, apparel takes up half of the portfolio by gross leasable area. Food has risen to 13% from 6% and is projected to go to 20% by 2025, said GGP Chief Executive Sandeep Mathrani in a recent earnings call. Apparel will fall by another 10% or so by the fall, and stabilize at around 40%, he said.”

China

Economist – China’s rockiest environmental problem: its soil 6/9

  • “Cleaning filthy soil is much harder than cleaning foul air.”

FT – China drive to relocate millions of rural poor runs into trouble – Tom Hancock 6/12

  • “Villagers return home after struggling with lack of jobs in urban apartments.”

FT – China accuses 2 more provinces of faking data – Lucy Hornby 6/12

  • “Corruption watchdog cites concerns over figures from Jilin and Inner Mongolia.”

FT – Anbang confirms chairman detained by Chinese government – Tom Mitchell and Lucy Hornby 6/13

Japan

FT – Japan Inc’s silence over Toshiba sends chill across Tokyo – Leo Lewis and Kana Inagaki 6/12

  • “For almost 70 years, Japan Inc, a support network of invisible corporate allegiances, binding investments and unwritten understandings, has stood behind the nation’s companies as the ultimate guarantor of stability.”
  • “But for Toshiba, one of its famous industrial names, corporate Japan has gone missing in its darkest hour of need.”
  • “The failure of Japan Inc to bail out Toshiba is not only a shock for the embattled group — it suggests the framework that has previously helped rescue troubled megabanks and distressed electronics makers may be disintegrating.”
  • “’The deal of Japan Inc was: ‘I will help you when times are tough’,’ says Jesper Koll, head of fund manager WisdomTree Japan, pointing to the diminishing grip of the ‘keiretsu’ — the business groupings whose closeness and mutual support underpinned Japan’s postwar economic growth.”
  • “The Japan Inc concept, say economic historians, evolved over decades to remedy precisely the problem thrown up by Toshiba. It is an unwritten code that demands that, even if the result is unsuccessful, an all-Japanese solution will not only be attempted but will receive broad support from big business, banks and government.”
  • “So far, say people involved in the talks, not a single Japanese company has submitted a bid for the chip division even though business leaders have voiced dismay at the prospect of Toshiba’s technology falling into the hands of Asian rivals.”
  • “Thinning financial ties have contributed to the unravelling of the Japan Inc structures. A long-term trend, accelerated under Prime Minister Shinzo Abe’s governance push, has been the unwinding of the cross-held share stakes between friendly companies.” 
  • “According to Nomura Securities, the ratio of holdings of Japanese stocks by listed Japanese banks and non-financial companies was 10.3% at the end of the financial year that ended in 2015. At its height in 1990, the ratio was 34%. Nomura optimistically predicts Japan’s megabanks will reduce their shareholdings in Japanese companies over the next few years by 20-30% from current levels.” 
  • “The question remains, according to Mr Koll, whether it is still meaningful to talk about Japan Inc, as the Toshiba situation has clearly shown that the old safety nets are gone.”
  • “The chief executive of a large Japanese company, who is close to top METI (Ministry of Economy, Trade and Industry) officials, adds that it is not just a lack of willingness to help. ‘I don’t know if you would call this the ‘end of Japan Inc’ but it is certainly true that the task of resolving the Toshiba problem has taken everyone here by surprise because of its difficulty,’ he says.” 
  • “’I think it has been a wake-up call for METI and Japan for what they can really do in a crisis. Less than they thought, is the frank answer.’”

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/12

  • “Venezuela’s stock market was up another 10% on the day.”

WSJ – Daily Shot: Venezuelan Black Market value for one US dollar 6/12

  • “This rally has little to do with the stock market and everything to do with the collapsing Venezuelan bolivar. It takes over 7k bolivares to buy one dollar on the black market.”

Other Links

WSJ – Daily Shot: Tax Foundation – U.S. Beer Taxes by State 6/13

June 13, 2017

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Bulls, Bears & Charlatans – Ben Carlson 6/11

  • “A market crash is always a possibility. But using scare tactics to get people out of the markets (or keep them in) isn’t helpful to anyone.”

NYT – Stop Pretending You’re Not Rich – Richard Reeves 6/10

Markets / Economy

WSJ – Daily Shot: Change in U.S. Retail Jobs 6/12

Real Estate

WSJ – Daily Shot: Canadian Real Estate Assoc. – Home resales above $1 million 6/12

WSJ – Does Anyone Remember How to Make a Subprime Mortgage? – Kirsten Grind 6/12

Finance

WSJ – Daily Shot: Capital Economics – 10-Year Gov’t Bond Yields 6/12

  • “Take a look at this Capital Economics forecast for German government bond yields – a 1.75% increase in 2.5 years. Note that a 1% increase in the 10-year German yield will result in nearly a 10% mark-to-market loss. Time to short these bonds?”

 

June 12, 2017

Worthy Insights / Opinion Pieces / Advice

WSJ – The Cushion That Saved Taxpayers From Banco Popular’s Failure – Paul Davies 6/7

  • “Regulators can make a determination that a bank is failing or likely to fail with information that investors don’t have. Regulators shouldn’t act too early, but it is right that they should act when waiting threatens the integrity of the financial system or a drawdown of public money. Any investor who doesn’t understand that should steer clear of bank equity and debt. Period.”

The Big Picture: Bloomberg – Jim Chanos on Tesla, China 6/7

  • Interview

Real Estate

WSJ – Daily Shot: Green Street Commercial Property Index 6/9

FT – Real estate: The global luxury condo glut – Anna Dedhar 6/8

  • Podcast

Energy

WSJ – Daily Shot: EIA – Total US Effective Rig Count 6/9

China

FT – LeEco’s listed arm cancels bond fundraising – Emily Feng 6/8

  • “A bond sale (meant to raise Rmb2bn – $300m) by the Shenzhen-listed arm of embattled company LeEco has been cancelled, after the group was asked to address regulators’ concerns about the health of its financials.”

WSJ – Beijing Lands in Another Debt Mess – Anjani Trivedi 6/9

WSJ – Perpetual Doesn’t Mean Forever in China – Jacky Wong 6/8

  • “Chinese companies growing appetite tapping an unconventional source of financing might not be a source of eternal bliss.”
  • “Perpetual securities, bondlike instruments that pay interest but have no maturity dates, have become popular in China in recent years: Issuance jumped to $55 billion in 2016 from less than $1 billion in 2012, according to Dealogic. This year, Chinese companies have been keener to issue them in offshore markets, raising some $4.4 billion, more than their dollar-denominated issuance in all of 2016.”
  • “A big reason Chinese companies like perpetuals is that they are classified as equity on their balance sheets. The accounting logic is that perpetual issuers don’t ever have to repay the bond’s principal and can choose to defer annual coupon payments—making them similar to dividends.”
  • “Treating perpetuals as equity means companies can report lower gearing ratios, a measure investors commonly use to assess a company’s indebtedness. China Evergrande, the country’s biggest property developer by assets, had a net debt-to-equity ratio of 120% as of December. That ratio would have jumped to 432% if its perpetual bonds had been counted as debt. Investors are happy to play along as the perpetuals usually pay higher yields. Evergrande effectively paid an 11% coupon on its perpetuals last year.”
  • “But whatever the accounting rules say, perpetual securities still work much more like debt than equity in China. To start with, companies can defer coupon payments on perpetuals only if they aren’t paying dividends to their shareholders. Given that Chinese companies often have a majority shareholder, and therefore nearly always pay a dividend, that clause rarely applies.”
  • “Moreover, perpetuals in China often include a clause that automatically steps up the coupon rate, usually after three to five years. Since the step-up is usually quite steep, issuers have a strong incentive to redeem their perpetuals early—making them not so perpetual, after all. The coupon on a recent $500 million perpetual bond issue from state-owned Power Construction Corp. of China will jump by 5 percentage points, more than double its initial yield, after five years.”
  • “Investors hoping to live happily ever after with perpetuals ought to scrutinize why companies are issuing such disguised debt in the first place—and whether it is really in their interests.”

FT – Chinese regulators target staff shareholding plans – Gabriel Wildau and Nan Ma 6/9

  • “The Shenzhen Stock Exchange is querying listed companies about a series of unusual plans to sell shares to employees while insuring them against losses if stock prices fall.”
  • “At least 21 Shenzhen-listed companies announced employee shareholding plans in the first week of June that include guarantees by the chairman or senior executives to protect workers against downside risk, according to exchange filings compiled from Wind Information.” 
  • “While it is not yet clear whether such plans will enable large shareholders to sell directly to employees, market observers still view them as a response to the tighter rules. With stake sales more difficult to execute, large shareholders are looking for ways to boost their share prices, at least until they can find ways to offload their shares.”

NYT – China’s New Bridges: Rising High, but Buried in Debt – Chris Buckley 6/10

Middle East

FT – Crisis in the Gulf: Qatar faces a stress test – Simeon Kerr 6/9

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/9

  • “Venezuela’s stock market has gone ‘vertical’ as it becomes the only legal ‘safe-haven’ to escape the currency collapse.”

FT – Venezuela woes on paying Russia debt raise prospect of default – Jonathan Wheatley and Robin Wigglesworth 6/9

  • “Reports of a failure to pay a debt to Russia and a requested ruling on whether such a failure constitutes a ‘credit event’ that could trigger insurance contracts on billions of dollars of international bonds have brought Venezuela closer than ever to the brink of financial collapse.”
  • “Matters may soon come to a head. On Wednesday, the International Swaps and Derivatives Association, an umbrella organization of the finance industry’s biggest banks and money managers, was asked by an anonymous member whether the reported default to Russia should be classified as a ‘credit event’ and trigger insurance-like contracts on Venezuela’s roughly $36bn in sovereign bonds.”
  • “The ISDA ruling may take some time. And even if it decides a credit event has occurred, there would be no automatic default on Venezuela’s sovereign bonds.”
  • “But it is clear from the terms of those bonds that should the government fail to meet any other debt obligations, bondholders can demand immediate payment.”
  • “Should the sovereign bonds then go into default, the roughly $35bn of outstanding PDVSA bonds would not be affected, and may even be left intact. The government in Caracas almost certainly would not.”

June 9, 2017

If you were to read only one thing…

FT – Amazon to ramp up lending in challenge to big banks – Ben McLannahan 6/7

  • “Amazon is planning to expand its lending to small businesses in the US, the UK and Japan, in a direct challenge to the big banks which have historically dominated.”
  • “The Seattle-based company launched Amazon Lending with little fanfare six years ago, offering select sellers on its platform instant loans for up to 12 months at annual interest rates ranging from about 6 to 17%.”
  • “Now, having done about $3bn of originations in total and $1bn within the past year, Amazon is expanding offers to more of the 2m or so businesses on its ‘marketplace’ platform. Such independent sellers — many of which pay Amazon to store, package and ship merchandise to customers on their behalf — account for about half of Amazon’s total units sold worldwide.”
  • “Amazon supplies funds from its own balance sheet within 24 hours, then deducts loan payments every two weeks automatically from the seller’s account. If the account runs dry, or if sales suddenly dip, Amazon can put a freeze on any merchandise held in its warehouses until the seller pays up.”
  • “’It’s a ‘can’t lose’ proposition for Amazon,’ said Jordan Malik, a Las Vegas-based publisher, noting that the company has a near-perfect view of any seller’s cash flows. ‘It’s a very clever thing they’ve done.’”

FT – Tech companies invade banks’ territory with customer loans – Ben McLannahan 6/7

Perspective

NYT – Venezuelan Exiles in Miami Turn to Public Shaming of Maduro Supporters – Lizette Alvarez 6/7

FT – Is it finally time for a pay rise for American workers? – Sam Fleming 6/7

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – It’s Not Just Retail That’s Changing. It’s Us. – Barry Ritholtz 6/7

Markets / Economy

FT – Streaming revenue to surpass physical music sales this year – Shannon Bond 6/6

WSJ – Daily Shot: Banco Popular CoCo debt 6/8

FT – Streaming revenue to surpass physical music sales this year – Shannon Bond 6/6

Real Estate

National Real Estate Investor – Are Investors Ready to Return to Non-Listed REITs? – Beth Mattson-Teig 6/7

WSJ – Daily Shot: John Burns Real Estate Consulting – US Home Prices 6/8

  • “With wage growth remaining tepid, this estimate suggests that homes are overvalued (in part due to low mortgage rates).”

WSJ – New Houses Get Smaller as First-Time Buyers Move Into the Market – Jeffrey Sparshott 6/5

  • “The median size of a new single-family home slipped by a scant 2% to 2,422 square feet in 2016, according to Census Bureau data released last week. While that’s a small adjustment, it’s the first time since 2009 and only the third time in the last 20 years it’s fallen.”

Energy

Bloomberg – Iraqi Oil Floods Into U.S. After Saudi Arabia Cuts Back – David Marino 6/7

South America

Bloomberg – No One Has Ever Made a Corruption Machine Like This One – Michael Smith, Sabrina Valle, and Blake Schmidt 6/8

  • “Year after year… 0.5% to 2% of revenue was directed to illicit payoffs, mainly to Brazilian politicians and executives of state companies, particularly the national oil producer, Petrobas. Some years graft expenses neared 2 billion reais ($611 million). It just depended on the demands of Odebrecht’s political contacts.”

Other Links

Ancestry.com – What’s the Most Popular Surname in Your State?

June 8, 2017

Perspective

Pew Research Center – The rise of multiracial and multiethnic babies in the U.S. – Gretchen Livingston 6/6

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Greatest Hits From Michael Mauboussin & Meir Statman 6/6

  • Mauboussin: “Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.”
  • Statman: “Risk is not measured by standard deviation but rather by the probability of not getting to your goal.”

Real Estate

WSJ – Millions of Young People Shut Out of the Housing Market – Laura Kusisto 6/7

  • “Roughly three million potential first-time home buyers have been shut out of the market over the last decade, according to a new study, suggesting the market’s recovery of the past few years could have been stronger.”
  • “Tight lending standards and acute shortages of affordable housing in many markets have reduced the pool of potential buyers, particularly among young people, reducing a key component of housing demand.”
  • “In all, the number of first-time U.S. home buyers averaged 1.5 million a year over the last decade, compared with the historical average of 1.8 million, according to a new study to be released Thursday by Genworth Mortgage Insurance that examines mortgage data from Fannie Mae, Freddie Mac, the Federal Housing Administration, Veterans Affairs and other sources. The study looked at data going back to 1994 and defined first-time buyers as anyone who hasn’t owned a home in the last three years.”
  • “Lackluster demand for homeownership among younger people has been one of the main factors holding back the housing recovery. Many young people have been delaying buying homes due to tight credit, student loans and rising rents that have made it difficult to save for down payments.”
  • “’What’s been missing is confidence,’ said Sam Khater, deputy chief economist at CoreLogic Inc.”
  • “But that is starting to change. So far this year, first-time buyers represented about 38% of the market, greater than the historical average of 35%, according to Genworth. Some two million first-timers purchased homes last year, or 37% of the market.”
  • “’We’ve had a very strong surge in first-time home buyers,’ said Tian Liu, chief economist at Genworth.”
  • “Credit also appears to be loosening. According to Genworth, about 78% of first-time buyers are using low-down-payment loans, compared with the historical average of 73%.”
  • “Economists said a wave of first-time buyers is likely coming over the next decade, as a large cohort in their mid-20s begin to buy homes.”
  • “’As we’re seeing millennials age into homeownership, there’s a huge tailwind coming,’ said Nela Richardson, chief economist at Redfin.”

Energy

WSJ – An Energy Shock from the High Seas – Spencer Jakab 6/6

  • “Circle January 2020 on your calendar for what could be a major disruption to the energy market and a jolt to the global economy.”
  • “The origin of the problem isn’t some oil cartel’s machinations, a looming war or even a technological shift—it is a bureaucratic body that few people have heard of: the International Maritime Organization. Just 30 months from now the cargo vessels that are the lifeblood of global trade will be required to cut the sulfur content in their fuel from 3.5% to 0.5%.”
  • “Ships move more than 10 billion tons of cargo a year and do it far more efficiently than road or rail, but it comes at a high cost in terms of overall pollution because ships use fuel oil, which is just about the cheapest, dirtiest stuff to come out of refineries. About 9% of all sulfur dioxide emitted globally comes from ships, contributing to acid rain and many premature deaths annually. Even the new cap is 500 times the sulfur content of most road diesel.”
  • “While standards have changed for many fuels, the rapid nature of the switch means that, if shippers fully comply, there could be price spikes. Ships that currently use cheap high sulfur fuel oil will have to switch to some other source higher up in the product slate that comes out of refineries. Even with significant investment, refiners may not be ready and ships may have to burn more expensive marine diesel.”
  • “Is the threat real? While energy traders mainly focus on the next several months, derivative prices indicate it is. For example, crude futures expiring in July 2020 are just 1% more expensive than those expiring in July 2017. By contrast, Rotterdam high sulfur fuel oil is 16% cheaper and New York ultralow sulfur diesel is 10% more expensive.”

Finance

FT – Global investors develop taste for US high-yield corporate bonds – Eric Platt 6/6

China

FT – China’s next ‘city from scratch’ called into question – Jamil Anderlini 6/6

  • “When the Chinese government announced its plan to create a new city from scratch in a rural northern backwater of the country on April 1, the effect was immediate.”
  • “Housing prices in the area tripled almost overnight as property speculators rushed to the area — about 100km south-west of Beijing — in the hopes of cashing in on the new project, described by state media as a ‘grand strategy crucial for a millennium to come’.”
  • “Share prices for listed companies with even tenuous connections to the ‘Xiongan New Area’ soared as analysts estimated that up to $580bn — roughly the annual gross domestic product of Argentina — would be spent in the next few years on building up the new city, which will eventually cover an area twice the size of Hong Kong and nearly three times the size of New York City. The government is aiming for a population of 2.5m people as soon as 2030.”
  • “The Xiongan plan draws on a blueprint that has been tried and tested in China before. As it was unveiled at the start of April, China’s state-controlled media hailed it as President Xi’s answer to the ‘special economic zones’ of Shenzhen and Pudong, both of which were launched under the auspices of China’s former paramount leader, Deng Xiaoping.”
  • “However, critics of Xiongan point out that for every Shenzhen and Pudong there are scores of half-empty or failed ‘special economic zones’ now dotted across China.”
  • “They argue that Xiongan shares none of the natural advantages of those earlier experimental cities, such as proximity to booming financial centers, world-class ports or enormous depots of international capital. They also worry about Beijing’s stated plan to exclude foreign investment, at least at the earliest stages, in favor of state investment and planning.”

June 7, 2017

If you were to read only one thing…

WSJ – Chinese Banks Face Up to Funding Squeeze – Anjani Trivedi 6/5

  • “Household deposits—long the backbone of China’s economy, funding inexorable loan growth—are fleeing: Around 1.2 trillion yuan ($176 billion) left the banking system last month. Meanwhile, growth in corporate deposits has slowed, reducing the rise in deposits overall to a crawl.”
  • “The exodus is proving a double whammy for China’s banks. Not only are they losing a stable source of funding, they are also bearing the brunt of higher costs to raise cash as financial conditions tighten.”
  • “Much of the money pulled out of conventional deposits is being invested in the rapidly multiplying population of investment funds, which offer higher rates. Yu’e Bao, run by Alibaba-backed Ant Financial, has become one of the world’s biggest money-market funds—with $165 billion under management—offering investors a 7-day annualized rate of over 4%.”
  • “Ironically, it and other funds are achieving such returns by investing in financing tools issued by banks. When China liberalized deposit rates in 2015, banks started churning out new investment products, including so-called negotiable certificates of deposit. Issuance of these short-term products in April totaled $180 billion, up 60% from a year earlier. Their relatively high rates—up to 4% or 5%—have made them attractive to money-market funds like Yu’e Bao.”
  • “But the upshot for banks is that stable deposits on which they pay just 1.5%—the benchmark rate—are being converted into flighty funds on which they must pay up to 5%. And even this source of funding may dry up. Last month, Yu’e Bao capped the size of new investments, likely under pressure from regulators alarmed at its rapid growth.”

Perspective

FT – Beer sales slide as global alcohol consumption falls – Scheherazade Daneshkhu 6/3

  • “The global market for alcoholic drinks contracted 1.3% last year, which was steeper than the average fall of 0.3% in the previous five years, according to figures from the International Wine and Spirits Research, the London-based industry group.”
  • “Alexander Smith, editor of IWSR magazine, said the drop was surprising given an improving global economy and the usually close correlation between global growth rates and drinking alcohol.”
  • “Global gross domestic product rose 3.1% last year, according to the International Monetary Fund, which forecasts a further improvement to 3.6% this year.”
  • “Beer sales fell 1.8%, compared with a five-year average decline of 0.6%. This was mainly because of weakness in China, the world’s biggest beer market by volumes, though sales in other large beer markets, such as Brazil and Russia which have both been in recession, were down.”
  • “In the US, ‘2017 is shaping up to be the worst year for beer volumes since 2009, when total industry volumes were down 2%’, according to Trevor Stirling, analyst at Bernstein.”
  • However, “the IWSR said it expected the alcohol industry to return to growth this year, predicting a rise in consumption of 0.8% until 2021, driven by whisky.”

Worthy Insights / Opinion Pieces / Advice

The Irrelevant Investor – Satisfaction Yield – Michael Batnick 6/6

  • “The utilitarian benefit of two investments are identical when they yield an identical return, but the satisfaction yield, reflecting expressive and emotional benefits, varies by the paths of identical returns.”
  • “The fact that the return of principal under different scenarios can evoke such different emotions tells us a lot about why investor behavior is the most important factor in determining success or failure.”

Real Estate

WSJ – Daily Shot: Wells Fargo – Origin of Foreign Capital buying US Real Estate 6/5

Bloomberg – Americans Are Pouring Money Into Their Homes Like It’s the 1990s – Vince Golle 6/6

Energy

Bloomberg – ‘Gas Apocalypse’ Looms Amid Power Plant Construction Boom – Naureen Malik and Brian Eckhouse 5/23

  • “The Marcellus Shale formation has added lots of supply to a major power grid, but demand is growing slowly.”

NYT – The Biggest, Strangest ‘Batteries’ – Diane Cardwell and Andrew Roberts 6/3

Africa

NYT – Nigeria’s Afrobeats Music Scene Is Booming, but Profits Go to Pirates – Dionne Searcey 6/3

  • “Artists across the world battle illegal sales of their work. But Nigeria’s piracy problem is so ingrained that music thieves worry about rip-offs of their rip-offs, slapping warning labels on pirated CDs to insist that ‘lending is not allowed.'”

Canada

FT – Toronto house price fall signals market is cooling – Ben McLannahan 6/5

  • “According to sales data released on Monday by the Toronto Real Estate Board, the average sale price for all home types in the Greater Toronto Area was C$863,910 ($640,674) in May, a drop of 6.2% from C$920,791 in April. The number of home sales fell by 12% over the month, while listings were up 19%.”
  • “Talk of tackling rapid price appreciation appears to have ‘changed market psychology’, said Jean-François Perrault, chief economist at Scotiabank in Toronto. ‘The benefits of holding on to a property, if you’re a speculator, have probably peaked. I think we’re moving to a healthier market.’”
  • A change from one month to the next does not make a trend. Keep your eye on this.

China

Economist – A provincial shuffle shows the power of China’s president 5/27

WSJ – Here’s How a Chinese Tech Firm Borrowed $2.1 Billion in a Hurry – Ryan McMorrow 6/3

  • “LeEco, a catchall name for a variety of businesses controlled by the internet tycoon Jia Yueting, poses little threat by itself to China’s financial system. But a review of the company’s finances shows the extent of the opaque ways Chinese firms can use to raise money — and how failures could ripple through the system.”

FT – China’s new graduates hit by falling wages – Tom Hancock 6/4

India

FT – India Inc walks a banking tightrope – Simon Mundy and Amy Kazmin 6/4

  • “A wave of defaults by struggling infrastructure companies, and others that borrowed heavily during much of the past decade, has left India’s public-sector banks saddled with a huge and growing bad loan burden that represents one of the most serious long-term threats to the country’s economic growth.”
  • “Even after the 1990s liberalization that allowed the entry of new private-sector banks, the state-owned lenders still hold more than two-thirds of banking sector assets. Impaired loans now account for 17.8% of assets, and well over 20% at several banks. As these banks now reel under the weight of $186bn in stressed assets, loan growth in the country has fallen dramatically, to 5.1% in the financial year ending in March — the slowest pace for 63 years — while corporate investment fell in three out of four quarters last year.”

South America

Economist – Bello: Argentina’s new, honest inflation statistics 5/25

  • “The end of bogus accounting.”

Other Links

BBC – How air conditioning changed the world – Tim Harford 6/5

June 6, 2017

Perspective

Economist – The super-rich are different: they pay less tax 6/1

Visual Capitalist – The Problem With Our Maps – Nick Routley 6/2

Worthy Insights / Opinion Pieces / Advice

FT – Grantham says higher valuations will persist – Robin Wigglesworth 6/1

  • “The US stock market has entered an era of higher valuations and probably has further room to rise, according to Jeremy Grantham, the founder of asset manager GMO and a known bearish spotter of financial bubbles.”
  • “Mr. Grantham, a notoriously bearish ‘value investor’ who correctly called and dodged the Japanese, dotcom and housing bubbles, sees little to worry him in the US market today. Expressing a preference for emerging market equities to US stocks, GMO’s founder points to seemingly durable pillars of healthy corporate profits, low interest rates and any lack of euphoria.”
  • “’I’ve dedicated my life to financial bubbles, and I don’t think it is a bubble,’ he told the Financial Times. ‘This is the broadest market of all time . . . That is not the nature of a bubble.’”
  • “Moreover, the normally bearish investor — who has built much of his career on the observation that market levels ultimately tend to revert to their long-term average — has even reluctantly conceded that US share prices may have shifted durably to a higher level since the late 1990s.”
  • “He laid out the case for why ‘this time seems very, very different’ in his quarterly letter to investors, pointing out that despite some wild swings in recent decades — caused by the dotcom bubble and subsequent crash, and then the global financial crisis — US price-to-earnings have averaged over 23 times since 1997, compared with nearly 14 times in the preceding decades, when he started his career.”
  • “The central reasons are globalization increasing the earning power of US multinationals, the growing political influence of American corporations and more onerous regulations stifling the growth of disruptive upstarts, in turn leading to increasingly monopolistic US companies, and above all a secular and durable decline in interest rates.”
  • “Mr. Grantham admits his new tone gets ‘groans from fellow value investors’ where it has ‘rattled a lot of cages’, but argued that previously dependable rules have to be re-examined and some even cast aside, given that the ‘world has changed’.”
  • “’You now have to treat previously cast-iron rules with suspicion. They’re more like aluminum rules now.’’’

Real Estate

WSJ – Daily Shot: John Burns Real Estate Consulting – US Investor Purchase Percentage 6/1

WSJ – Riksbank Chief Wants Swedish Government to Cool Red-Hot Property Market – Nina Adam 6/1

  • “Sweden’s central bank governor Stefan Ingves said a red-hot housing market and record-high level of household debt will put the Scandinavian country’s economy in peril unless the government cools the property sector down.”
  • “Swedish property prices have soared in recent years, fueled by low borrowing costs and strong economic growth. The Riksbank estimates that house prices have doubled and apartment prices have tripled over the past 10 years. At the same time, household debts have risen to 180% of disposable incomes, which is a record high.”
  • “Goldman Sachs earlier this month attached about a 35% chance to a housing bust in Sweden over the next five to eight quarters.”
  • “The Bank for International Settlements and others have warned that a long period of very low global interest rates could lead to a fresh cycle of boom and bust in housing markets. While that seems like a distant prospect in many parts of the world, Sweden may be an early test of how much has changed since the last financial crisis.”

Finance

NYT – In Texas, Some Rare Good News About Cities With Pension Woes – Mary Williams Walsh 6/1

  • “Detroit. Stockton. Puerto Rico. The list of places bankrupted by ballooning pension obligations and other debts is growing. But now comes some good news about two cities, Dallas and Houston, that have pulled back from the brink.”
  • “Just six months ago, the mayor of Dallas, Michael S. Rawlings, was warning that his city might need to declare bankruptcy after a panic led stampeding retirees to pull half a billion dollars out of its pension fund for police officers and firefighters.”
  • “But instead of going to bankruptcy court, Mr. Rawlings went to Austin, the state capital, to lobby for state pension laws that would stop the bleeding. So did the mayor of Houston, Sylvester Turner, who faced other pension problems and had persuaded the city’s labor groups to agree to concessions worth $1.3 billion over the next 30 years.”
  • “Each city had its own bill, because each had its own unique problems. But both bills involve measured reductions in pension accruals for workers and retirees — mainly in secondary benefit categories like inflation adjustments and lump-sum payouts. In exchange, the pension funds will receive more money from the cities to protect the core benefits.”
  • “As happy as the resolution may seem, the steps that Texas took are illegal in other places where public pensions are imperiling the finances of cities and states. Illinois, California, Oregon, Pennsylvania and Kansas are among the states where, by law, public pensions cannot be reduced — not even the pensions that current workers hope to earn in the future.”
  • “That doctrine, known as the California Rule, explains why California cities like Vallejo and Stockton reduced their payments to other creditors when they went into bankruptcy but did not touch their workers’ costly pension plans.”
  • “Both cities were spurred to act by the risk of credit downgrades and by a recent accounting change that calls for cities to calculate the number of years before their pension funds will run out of money — a once-unthinkable catastrophe that has come to pass in Prichard, Ala.; Central Falls, R.I.; and now Puerto Rico.”
  • “Those developments — and Detroit’s bankruptcy — have shown that Washington will not bail out government pension funds that go bust; officials had to patch together money from other sources, and even then, the retirees of Prichard, Central Falls and Detroit had their benefits cut. Cuts are expected soon in Puerto Rico, too.”

China

WSJ – Baidu’s Turn as a Bank Is Unwelcome – Jacky Wong 6/1

  • “Everything is a bank in China these days it seems—even its biggest internet search engine.”
  • “Eager to get a bigger slice of the pie, Baidu has been aggressively selling its own wealth management products. Assets in its financial services business had more than doubled to $3.7 billion by the end of March from three months previously, according to Fitch. It has also been offering microloans, many of them unsecured, to consumers who may be unable to borrow from banks.”
  • “Fitch, rightly, is worried that Baidu is running the same risk as China’s banks: its aggressive selling of investment products and microloans could come back to bite the company if there is a wave of defaults. Baidu has around $5 billion of net cash to cover any losses. But with its core search business stagnant, investors shouldn’t welcome Baidu taking on such new risks.”

FT – Billionaire Anbang boss Wu Xiaohui barred from leaving China – Henny Sender and Lucy Hornby 6/2

Puerto Rico

Bloomberg – Puerto Rico’s Exodus Is Speeding the Island’s Economic Collapse – Jonathan Levin and Rebecca Spalding 6/2

  • “The choice is heartbreaking: stay to help other families, or leave to help your own.” 
  • “That’s the calculation thousands in Puerto Rico are making. The bankruptcy of the U.S. commonwealth, the culmination of years of decline, has accelerated an exodus that’s adding to the island’s economic misery.”
  • “The population drop is astonishing. The island has lost 2% of its people in each of the past three years. A comparable departure from the 50 states would mean 18 million people moving out since 2013. About 400,000 fewer Puerto Ricans live on an island of 3.4 million today compared with a decade ago, when its economy began contracting.” 
  • “The departures have trapped Puerto Rico in a downward spiral. A grinding recession, with joblessness at 11.5%, and $74 billion mountain of debt that pushed the island to insolvency has made collecting taxes key to an economic rebound. At the same time, more Puerto Ricans from all walks of life are moving away to better their lives, meaning government revenue is dwindling.”
  • “Puerto Rico’s bond debt has grown 87% since 2006. A simple way for individual islanders to avoid having to pay it is to move to the mainland.”
  • “The government doesn’t seem to have come to grips with the outflow. Puerto Rico’s turnaround plan — a path to sustainability approved by a U.S. oversight board — assumes the population will shrink just 0.2% each year for the next decade. It uses that number as the basis for its projections of tax receipts and economic growth.”
  • Further, “the exodus isn’t confined to professionals. Among the throngs leaving are construction workers and taxi drivers. Research by the Federal Reserve Bank of New York found that college graduates make up roughly the same proportion of emigres as they do in the island’s general population, suggesting that the departures have touched every corner of the commonwealth.”
  • “While migration is the main driver in population fluctuation, a declining fertility rate isn’t helping either. The natural population increase — excess births over deaths — fell to 3,000 last year from 20,000 a decade ago, as families facing poorer economic prospects and the threat of the Zika virus put off having kids. At the same time, younger generations of child-bearing age are more likely to take off for the mainland.”
  • Seems like the only way to stop this trend is to make Puerto Rico a full-fledged state. Question is whether or not all the vested parties are willing to go along with it.

South America

WSJ – Daily Shot: Brazil GDP 6/1

June 2, 2017

Perspective

Bloomberg Quint – Pimco’s Prophecy: Stop Relaxing! Use Rallies to Accumulate Cash – John Gittelsohn 6/1

  • “Investors have become too complacent and monetary, fiscal, trade and geopolitical risks abound, Pimco’s Richard Clarida, Andrew Balls and Dan Ivascyn said in a report issued Wednesday. There’s a 70% chance of a recession in the next five years, they said.”
  • “’We believe that many market participants today are too relaxed, that medium-term risks are building and that investors should consider using cyclical rallies to build cash to deploy when markets eventually correct — and possibly overshoot — as risks are repriced,’ the executives said in Pimco’s annual Secular Outlook for the next three to five years.”

WSJ – Daily Shot: John Burns Real Estate Consulting – US 30-Year Old Milestones 6/1

Real Estate

WSJ – Daily Shot: John Burns Real Estate Consulting – National Mortgage Rate Sensitivity 6/1

WSJ – Daily Shot: John Burns Real Estate Consulting – US Household Growth 6/1

WSJ – Daily Shot: John Burns Real Estate Consulting – Burns US Home Value Index 6/1

China

WSJ – China’s Debt Problem Moves Back to the Future – Nathaniel Taplin 6/1

Other Links

WSJ – Daily Shot: US Percentage of Population on Food Stamps 6/1

June 1, 2017

If you were to read only one thing…

Business Insider – A likely shift in the mortgage market is creating ‘prisoners’ in housing – Akin Oyedele 5/29

  • “The housing market’s comeback after the financial crisis has turned out to be a mixed bag.”
  • “Prices have recovered to pre-housing-crisis levels. But with slow wage growth, that means there are fewer affordable houses available to buyers, especially in bigger cities.” 
  • “On the surface, the price trend ought to be good news for existing homeowners looking to sell. However, the likely rise in mortgage rates from historic lows means that there will be less incentive to move, according to Mark Fleming, the chief economist at First American.”
  • “‘You do become a prisoner in your home because of rates,’ he told Business Insider.” 
  • “‘There’s going to be a growing challenge of an increasing financial penalty caused by the rate lock-in effect over time.'”
  • “Since the 1980s, the long-term drop in interest rates created a built-in incentive to move, Fleming said. Even if a seller’s income was unchanged, it was possible to effectively move into a lower mortgage rate, and so be able to even afford a slightly bigger home.” 
  • “Now, the likelihood that rates will rise from historic lows has spurred the so-called rate lock-in effect: homeowners don’t sell because of the perceived or actual difference in their monthly mortgage payments if they swap their old rate for a new, higher one, Fleming said.”
  • “In a market with tight inventory, the decision to sell depends on whether homeowners want to risk selling and then not being able to find a new home.”
  • “‘The existing homeowner is trapped in this prisoner’s dilemma of the cooperative outcome,’ Fleming said. ‘If we all acted simultaneously, it would solve the problem. But we can’t take the risk of being the one that acts when everyone else doesn’t.'” 

Perspective

FT – Central banks risk messy ‘market melt-up’ – Michael Mackenzie 5/26

Worthy Insights / Opinion Pieces / Advice

FT – The hidden dangers of passive investing – Renaud de Planta – 5/29

  • “At first glance, it’s a persuasive argument. Poorly performing and expensive active managers have lingered in the system for too long, eroding returns for investors.”
  • “Yet on deeper reflection, index-tracking products are no miracle remedy. They’re more like antibiotics: valuable when deployed in moderation, but likely to do more harm than good should their use become widespread.”
  • “Indeed, if passive equity funds were to continue their present growth trajectory, they would own all listed stocks by 2030. That could threaten the free-market economy.”
  • “Essentially, the industry is an oligopoly, dominated by just three giants of asset management, who between them control almost three quarters of all passively-managed investment in stocks.”
  • “As demand for index products grows, a greater proportion of the world’s listed companies will fall under the control of the three largest investment management groups. Already, these firms collectively own close to 20% of US large-cap companies.”
  • “Passive dominance won’t happen overnight. Yet, left unchecked, the growth of index-trackers has the potential to erode the market-based economy, one industry at a time.”
  • “There is also a geopolitical dimension. If the passive giants end up owning large swaths of the capital market, they will also have a big say on the composition of stock and bond indices. Effectively able to decide which country or company should be included or excluded from those benchmarks, they would wield enormous influence over international capital flows. Note BlackRock’s recent call for China to be included in MSCI’s global equity indices.”
  • “Some might see that as an excessive concentration of power.”
  • “None of this relieves the pressure on active managers to perform and offer better value to their clients. Nor does it deny the utility of passive investment. Index products offer benefits to investors. The problem is that if the majority of us embrace them, index-trackers threaten to sabotage the entire economic system. Much like antibiotics, if passive funds are overused, they will create more problems than they solve.”

WSJ – Going Out for Lunch Is a Dying Tradition – Julie Jargon 5/30

Markets / Economy

FT – Debt pile-up in US car market sparks subprime fear – Ben McLannahan 5/29

WSJ – Smoky Diesel Cloud Hangs Over Auto Industry Profits – Stephen Wilmot 5/30

  • The knock-on effect: diesel engine cars now have a bad taint to them making inventories of auto manufacturers with large diesel production less valuable and hurting the resale value of existing diesel vehicles.

Real Estate

WSJ – Why Banks Haven’t Been Burned by Retail’s Meltdown – Lillian Rizzo and Rachel Louise Ensign 5/28

WSJ – Dead Mall Space Could Spur Warehouse, E-Commerce Deals – Esther Fung 5/30

  • “Excess parking facilities and underused retail space could be redeveloped into small-scale last-mile delivery or pickup facilities, according to Fitch Ratings.”

Energy

WSJ – OPEC Oil Deal Sinks Tanker Industry – Spencer Jakab 5/30

FT – Oil prices slip further as traders seek bigger production cuts – Anjli Raval and Neil Hume 5/30

  • “Oil prices took a further hit on Tuesday, reflecting disappointment among traders that Opec and its allies agreed to only extend, but not deepen, production cuts to drain the market of excess inventories.”

Australia

Zero Hedge – “This Market Is Crazy”: Hedge Fund Returns Hundreds of Millions To Clients Citing Imminent “Calamity” – Tyler Durden

  • “…Australian asset manager Altair Asset Management made the extraordinary decision to liquidate its Australian shares funds and return ‘hundreds of millions’ of dollars to its clients according to the Sydney Morning Herald, citing an impending property market ‘calamity’ and the ‘overvalued and dangerous time in this cycle.'”

South America

FT – Venezuelan armed forces stay loyal to President Maduro – Gideon Long 5/29

  • Bottom line as Daniel Lansberg-Rodriguez, Latin American specialist at Northwestern University, puts it “[The government] has gone to great lengths to keep the military on its side through cash bonuses, wage hikes and the doling out of lucrative governorships and ministries,.”
  • “Having profited from ‘smuggling, arbitrage and narco-trafficking schemes,’ many within the military worry that if the president falls they will end up in court and then jail, he said.”

Other Links

WSJ – Daily Shot: FiveThirtyEight – Sleep Patterns by U.S. State 5/30

WSJ – Daily Shot: World Economic Forum – World’s Most Crowded Cities 5/30