Month: August 2017

August 31, 2017

Perspective

WP – A close-up view of the flooding in Houston – Denise Lu, Aaron Williams, Dan Keating, Jack Gillum and Laris Karklis 8/29

WSJ – Harvey’s Test: Businesses Struggle With Flawed Insurance as Floods Multiply 8/29

WSJ – Harvey Makes Landfall in Louisiana as Waters Keep Rising in Texas – Russell Gold, Dan Frosch, Ben Kesling, and Christopher Matthews 8/30

Worthy Insights / Opinion Pieces / Advice

FT – Five charts show why millennials are worse off than their parents – Lauren Leatherby 8/29

Markets / Economy

WSJ – Daily Shot: Tracy Alloway – Major Bubbles Since 1990 vs Bitcoin 8/30

Real Estate

Freddie Mac: What is Causing the Lean Inventory of Houses? – July 2017

  • “The price of land (acquisition and preparation for construction) has risen more rapidly than the price of the structures built on the land. This trend has driven up the share of land cost as a proportion of house price. Since the cost of land is largely a fixed cost in a building project, the increase in the cost of land tends to make entry-level housing less profitable and thus tilts development toward higher-end housing.”
  • “Over the last three decades, land-use regulations have become more burdensome in the U.S., making developable land costlier. As an example, in areas with strict land-use regulation, builders face long delays in obtaining permit approvals. In New Orleans, where regulation is relatively lenient, permit approval is received in 3.5 months on average. In Honolulu, where regulations are particularly strict, permit approval takes around 17 months on average. The 2016 White House Report on land use regulation argues that lengthy approval processes have reduced the ability to respond to growing housing demand in many markets.”

China

FT – Credit default swaps are storing up trouble for China – Joe Zhang 8/29

  • “The China Financing Guarantee Association, a quasi-governmental body that regulates the guarantee companies (in other words, the issuers of the swaps), says it has 194 member institutions, though their ranks have thinned in recent years. Many guarantee companies have simply not bothered to become members of this club.”
  • “In a parallel with the American obsession with home ownership that led to the formation of Fannie Mae and Freddie Mac, the federal housing finance agencies, the Chinese government has in the past few decades done its best to promote small and medium-sized enterprises by providing them with credit guarantees. Tens of thousands of state-owned, private and hybrid guarantee companies have come into being.”
  • “And just like Fannie Mae and Freddie Mac, China’s guarantee companies are all thinly capitalized. This is due partly to the misconception that a third-party guarantee is sufficient for SMEs to tap commercial credit.”
  • “Mispricing in China’s CDS market is severe and chronic. The guarantee companies typically charge only 2-3% to the borrowers, but assume the full risk of their loan delinquency. When the economy was growing fast, from the 1980s through to the early 2010s, these guarantee fees seemed like manna from heaven — so much free money. But when the economy began to slow from 2012 onwards, default rates rose, and many guarantee companies disappeared.”
  • “Unlike CDS in the US, credit guarantees in China have the following deficiency: usually, they cannot be traded. Some observers argue this is probably an advantage for the industry because it forces deal originators to ‘eat what they cook’, minimizing irresponsibility and recklessness in their origination process.”
  • “It is estimated that the total size of China’s market for such instruments is more than $500bn, excluding the credit enhancement these guarantee companies provide to SMEs’ bond sales and asset-backed securities. But no one knows the size of the market for sure.”
  • “Why should this story be of interest to the Chinese public and, indeed, to outside observers? Because it is key to understanding the strange longevity of China’s credit bubble.”
  • “It is true that the country’s credit market is far too big, but against the doomsday scenarios some analysts have painted, it has refused to burst because of the many non-bank financial institutions that have served as plumbers for the banks.”
  • “China’s economic slowdown in the past five years has decimated its microcredit sector and, to a lesser extent, the trust companies. Their destruction has also helped shield the commercial banks.”

India

Bloomberg Quint – RBI Annual Report: 99% of Demonetized Currency Returned – Ira Dugal 8/30

  • “Indian citizens deposited almost all the currency that was scrapped during demonetization, shows data released by the Reserve Bank of India (RBI) as part of its annual report. The government’s abrupt decision to withdraw legal tender status for Rs 500 and Rs 1000 notes, announced on November 8, 2016, was intended to extinguish so-called black money from the economy and curtail the problem of counterfeit notes. The fact that almost all the scrapped currency has been returned puts paid to both those arguments.”
  • “According to the report, specified bank notes (SBNs), or notes that were demonetized, worth Rs 15.28 lakh crore had been received as of June 30, 2017. When demonetization was announced, the currency in circulation stood at Rs 17.97 lakh crore. 86% of this, or Rs 15.45 lakh crore, was rendered invalid by demonetization.”

August 30, 2017

Perspective

WSJ – Daily Shot: Houston is on some the nation’s least absorbent soil 8/29

Worthy Insights / Opinion Pieces / Advice

NYT – Harvey, the Storm That Humans Helped Cause – David Leonhardt 8/29

FT – A happier Japan is a concern for investors – Leo Lewis 8/28

  • “A record 74% of Japanese are satisfied with their lives, and, for the first time in two decades, a majority are content with their income, says a Cabinet Office survey.”
  • “The trouble with all this reported satisfaction, from a market point of view, is that it has happened too early.”
  • “One of the biggest fears is that a too-easily-pleased Japan will lose its hunger for serious reform and salary increases after a couple of years of superficial tinkering. That would undermine many of the big thematic investment cases that have been in place since 2013 — corporate governance reform, womenomics, unwinding of cross-shareholdings and inducing Japanese households to take more investment risk.”
  • On top of that Japanese corporates are basking in the limelight again. “The danger is that, in the glow of public satisfaction they are tending back to the investor-repellent habit of hoarding cash away from the pockets of both their shareholders and employees.”

FT – China’s tech groups are building too much power – Henny Sender 8/28

  • “There is no Silicon Valley comparison to the dominance of Alibaba and Tencent.”

Markets / Economy

FT – US home ownership fall hits young and minorities hardest – Lauren Leatherby 8/28

Energy

WSJ – Harvey’s Lessons for America’s Stretched Energy Infrastructure – Spencer Jakab 8/28

  • “For more than 40 years, the U.S. has worried about the security of its oil supply. Hurricane Harvey is another reminder that the infrastructure that processes and delivers oil is in many ways more important.”
  • “The U.S. has 141 operable oil refineries today, which is 79 fewer than 30 years ago. Those refineries have nearly 30% more capacity and are used much more heavily, about 90% on average over the past 12 months. The heaviest concentration is along the Gulf Coast where the industry has deep roots and has been allowed to expand. Harvey has temporarily knocked out about 15% of U.S. refining capacity.”

Finance

FT – Wall St’s top bankers sell own groups’ shares as Trump rally reverses – Ben McLannahan 8/27

  • “Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening.” 
  • “Executives and board members at the top six US banks have been consistent sellers of their own banks’ shares this year, according to an Financial Times analysis of disclosures tracked by Bloomberg.” 
  • “Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett’s big dumping of shares in Wells in April, to avoid tripping over rules capping ownership by a non-bank, sales by insiders outnumber purchases by about 14 to one.” 
  • “That is an unusually long streak of net sales, across each of the big six. Last year, for example, insiders at JPMorgan, Citigroup and Bank of America bought more shares than they sold.”

Environment / Science

FT – Blue dogs of Mumbai expose poor pollution controls – Simon Mundy 8/28

  • “Roaming packs of stray dogs are an established part of the landscape of Taloja, an industrial district to the north-east of Mumbai. But when a group of them turned blue this month, environmental activists sounded the alarm at this vivid evidence of industrial failure to adhere to proper standards of pollution control.”
  • Photo from National Geographic
  • “Investigation of the phenomenon by Mumbai’s pollution control board (MPCB) led it to a more prosaic explanation: the dogs had wandered into the grounds of a factory run by Ducol Organics, a local paint and plastic producer.”
  • “The outcry over the colored dogs reflects rising concerns about pollution in India. A study in February by the US-based research group Health Effects Institute found that India was poised to overtake China as the country with the most deaths caused by air pollution.” 
  • “A study this year by researchers at the Indian Institute of Technology in Mumbai estimated premature deaths due to air pollution in Mumbai rose 62% to 32,014 between 1995 and 2015, outstripping the 41% population increase in the same period.”
  • “In New Delhi — which according to some estimates has the worst air of any major city in the world — the estimated death toll rose 147%, to 48,651.”

Economist – Louisiana fights the sea, and loses 8/26

  • “Between 1932 and 2010 the state [Louisiana] lost more than 1,800 square miles (470,000 hectares) of land to the sea, representing about 80% of America’s coastal erosion over the period. Recent losses have been especially severe because of an increase in big storms raging in from the Gulf of Mexico—such as Hurricane Katrina, in 2005, which led to the inundation of New Orleans and 1,836 deaths. Between 2004 and 2008 alone, Louisiana shrank by more than 300 square miles.”
  • For reference to the Hawaii readers, Oahu is 597 square miles and Maui is 727 square miles.
  • “According to a new report by RAND Corporation, a think-tank, infrastructure in the state worth up to $136bn could be threatened by land loss and increased storm damage, a related threat.”
  • “Starved of silt, and with less new organic matter to counteract its settling, coastal Louisiana is sinking back into its former watery state. Meanwhile, because of melting polar ice caps and thermal expansion, the sea level is rising. In the past decade the observed relative sea-level rise in coastal Louisiana—a figure that combines the effects of rising seas and subsiding land—was over a centimeter a year, or around four times the global average. The delta’s system of land creation has thus been thrown into reverse. In 1930, despite much engineering of the Mississippi’s channel, Louisiana was expanding by almost a square mile a year. Since then, an area the size of Delaware has been lost to the Gulf.”
  • One of the principal causes is due to the levees established by the Army Corps of Engineers along the Mississippi river to protect the flood basins back in the day. Trade-offs…
  • “The damaging effect of the levees was predicted. Weighing the benefits of engineering the Mississippi in 1897, a former president of the American Society of Civil Engineers, E.L. Corthell, noted the need to take into account ‘withholding by the levees…of the annual contributions of sedimentary matters” and, because of this, ‘subsidence of the Gulf delta lands below the level of the sea and their gradual abandonment.’ But while he warned that “the present generation should not be selfish,’ Mr Corthell assumed the economic benefits of protecting the flood zone would ‘be so remarkable that people of the whole United States can well afford, when the time comes, to build a protective levee against the Gulf waters.’”
  • “That illustrates two related weaknesses in much environmental policymaking: an assumption that future politicians will take a longer-term view than current ones, and an excessive willingness to discount the future costs of solving environmental problems caused today… In any event, it is doubtful such a scheme would be affordable or otherwise practical, considering the effects of rising sea levels and fiercer storms, both consequences of global warming…”

Britain

WSJ – Daily Shot: Datastream – UK Household Savings Ratio 8/29

  • “UK’s households are struggling. With real wage growth in negative territory, the household savings ratio is collapsing.”

China

WSJ – Evergrande’s Ever More Risky Bet on Chinese Housing – Jacky Wong 8/28

FT – China orders videotaping of retail investment sales – Tom Mitchell 8/29

  • “China’s banking regulator has issued new rules requiring financial institutions to make video and audio recordings of all investment product sales, saying they were needed to ‘further regulate market order and protect customer rights’.” 
  • “The recordings will also help state-owned banks and the government fend off compensation demands from retail customers when their investments turn sour.” 
  • “’If investors make irrational choices after sales staff have clearly explained the risks, then they will have to accept the consequences,’ said Zhao Xijun, a finance professor at Renmin University in Beijing. ‘In the event there is a dispute, the recordings can be used as evidence’.” 
  • “The new surveillance rules issued by the China Banking Regulatory Commission require financial institutions to preserve the recordings for six months after the relevant investment product has expired. Banks are also not allowed to market investments to customers who refuse to be recorded.” 
  • “The value of outstanding [Wealth Management Products] WMPs has soared from Rmb4.6tn ($690bn) at the end of 2011 to Rmb29tn last year, according to data from Wind Information. But year-on-year growth moderated in 2016 to 23%, compared to a 56% increase in the value of outstanding WMPs in 2015.” 
  • “Data for the value of WMP products sold this year are not yet available. In volume terms, Chinese financial institutions sold 43% more WMP contracts through August 25 compared to the same period a year earlier.” 

FT – Huarong chief warns of bubble in China’s distressed debt market – Don Weinland 8/28

  • “Bubbles in credit and real estate have led to a steady flow of bad debt in China for years. But now a bubble is forming in the market for the bad loans themselves, says the chairman of China’s largest state-controlled ‘bad bank’.”
  • “Banks in China are dealing with an onslaught of non-performing loans that have resulted from poor risk controls and years of loose monetary policy. Investors estimate that China’s stock of bad debt has risen to $3tn this year, in step with a decelerating economy. One prominent analyst said recently that the figure could be as high as $6.8tn.”
  • “As the pool of bad assets rises, so too has the number of Chinese investors willing to chase after bad debt portfolios.”
  • “But many of the newcomers had little experience investing in distressed debt and were pushing up prices for the assets at auctions, said Lai Xiaomin, chairman of China Huarong Asset Management, and a deputy to the 12th National People’s Congress.”
  • “Inexperienced investors presented the risk of creating new losses while also failing to resolve troubled loans, he said.”
  • “China has experienced steady deregulation in how distressed debt is bought and sold since the industry was launched 18 years ago.”
  • “Huarong, along with three other centrally controlled asset managers, was created by the ministry of finance in 1999 to absorb perilously high levels of bad debt from China’s largest commercial banks. At the time, the government directed banks to transfer $1.4tn to the four groups.”
  • “Since then, the asset managers have greatly expanded their businesses in China and globally, operating more like investment banks than bad debt investors. Huarong went public in Hong Kong in late 2015.”

India

Economist – Undue reverence for company founders harms Indian firms 8/26

August 29, 2017

Perspective

WP – Texas flood disaster: Harvey has unloaded 9 trillion gallons of water – Matthew Cappucci 8/27

Worthy Insights / Opinion Pieces / Advice

Bloomberg Quint – Traders Ditch Risk as Dalio to Gundlach Warn on Emerging Markets – Ben Bartenstein 8/27

  • “More investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio in warning that risky assets are overvalued.”
  • “They point to rising global turmoil underscored by the recent terrorist attacks in Barcelona and the racially charged violence in Charlottesville, Virginia, as well as valuations that no longer compensate for potential flare ups in North Korea and Venezuela. That’s not to mention the unpredictability in the U.S., where President Donald Trump is feuding with members of Congress before a critical vote to increase the country’s debt ceiling.”
  • “Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt. Some of the world’s largest money managers, from Pacific Investment Management Co. to T. Rowe Price Group Inc., are advising investors to reduce risk by trimming holdings of developing-nation assets.”

FT – Big Tech can no longer be allowed to police itself – Rana Foroohar 8/27

FT – Why the oil market should not misread Venezuela – Nick Butler 8/27

  • Despite the political turmoil and the country on the verge of becoming a failed state, it is unlikely that oil supply disruptions will be permanent or significant enough to effect global oil prices materially.

Markets / Economy

WSJ – Slowing SUV Sales Could Signal a Turn in the Market – Mike Colias and Christina Rogers 8/26

Real Estate

TechCrunch – VC doors are wide open for real estate startups – Joanna Glasner 8/26

China

FT – China tech groups to demand ID verification for online posts – Yuan Yang 8/26

  • “The Chinese government will oblige tech companies to keep a record of the identities of people posting comments online, in an extension of this summer’s crackdown on internet speech.”
  • “Under the new regulations announced on Friday, all message board providers must authenticate users’ identities from October 1.”
  • “’Online comments . . . give rise to false rumors, filthy language and illegal messages, which damage the online environment,’ said a government spokesperson.”
  • “’This is a way of threatening the general population and media, especially online media,’ said Beijing-based historian Zhang Lifan. ‘It affects everyone.’”
  • “’They are using lots of different methods to restrict people’s ability to criticize or mock officials — this is not normal, even for China,’ Mr. Zhang added.”
  • “…The new regulations are being implemented under the aegis of China’s first cyber security law, which came into force in June and gives regulators the power to punish tech companies that disobey.”
  • “’Now there is a clear legal basis and a process,’ said a Beijing-based lawyer who wished not to be named. ‘This is the cyber space administration saying, ‘I’m going to monitor content, and I’m going to directly regulate tech companies’.”

August 28, 2017

Perspective

VC – The World’s 50 Most Valuable Sports Teams – Jeff Desjardins 8/24

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – Millennials Are Driving the Suburban Resurgence – Justin Fox, Conor Sen, Noah Smith 8/25

Real Estate

The Real Deal – Treasury Department finally adds teeth to LLC disclosure rule – E.B. Solomont 8/22

  • “The Treasury Department closed a gaping loophole in its effort to crack down on money laundering in real estate on Tuesday, extending its LLC disclosure rules to deals that involve wire transfers.”
  • “In a revised geographic targeting order (GTO), Treasury officials said wire transfers would now be subject to regulations that require title insurance companies to disclose the identity of buyers who purchase luxury real estate through LLCs.”
  • “The revised GTO — which covers deals in New York City, Florida, California, and Texas — was also extended to transactions in Honolulu, Hawaii.”
  • “On Tuesday, FinCEN also published an eight-page advisory for financial institutions, alerting them to money-laundering risks associated with real estate. ‘Many real estate transactions involve high-value assets, opaque entities, and processes that can limit transparency because of their complexity and diversity,’ said the advisory, which cited the 1MDB fund scandal, in which embezzled funds out of Malaysia paid for luxury real estate in Beverly Hills and New York, including the Park Lane Hotel.”
  • “’In addition, the real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which it appreciates in value, ‘cleans’ large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations,’ the advisory said.”
  • “The Treasury Department initially launched the LLC disclosure rule in March 2016 in an attempt to crack down on the flow of illicit funds. Since then, FinCEN has renewed the regulation twice, most recently in February. Since July 2016, the rule has covered deals in all five boroughs of New York City; Miami, Broward and Palm Beach counties in Florida; Los Angeles; San Francisco; San Diego; and San Antonio, Texas.  The rule applies to cash deals above $3 million in Manhattan and $1.5 million in the other boroughs.”

China

Bloomberg Businessweek – China’s Grocery Trolls Make Giant Piggy Banks of Wal-Mart and Carrefour – Rachel Chang and Mengchen Lu

  • In late 2015 China updated its Food Safety Law. “The new version removed a clause in the previous law that said victims must prove personal injury or loss to be eligible for compensation. The change has spawned a cottage industry of professional complainers who’ve developed sophisticated operations to challenge food manufacturers and retailers for compensation.”
  • “A Beijing court said 80 percent of the food safety-related cases in 2015 were filed by individuals who specialize in finding flaws. ‘They are the No. 1 problem supermarkets in China are facing now,’ says Chu Dong, vice chairman of the China Chainstore & Franchise Association, an industry group. ‘They are harming not just the retail industry but placing a heavy burden on regulatory and judicial authorities in China and betraying the spirit of the law.’”
  • “Professional complainers are a mainstay on the mainland because the nation’s laws guarantee aggrieved buyers a unique degree of protection and compensation. A different statute granting compensation of three times the purchase price to those who buy counterfeit or damaged goods has given rise to professional ‘fraudbusters’ who scour store shelves on the lookout for fakes. Their ranks swelled tenfold after the more generous food safety law came into effect, says Shandong native Wang Hai, who prefers to be called a ‘food safety informer.’ Pending cases he’s filed include complaints about fake alcohol and beef from steroid-injected cattle smuggled from overseas.”
  • “On the plus side, these folks help police the system. The negative is that there is also a good deal of gaming the system.”
  • “Wal-Mart, one of the leading Western supermarket chains in China, received almost 4,000 food safety complaints last year, compared with about 700 the year before the revised law took effect, according to a person familiar with the matter who asked not to be identified because the information hasn’t been disclosed publicly.”

Europe

NYT – Wine War in Southern France Has Streets Running Red – Liz Alderman 8/25

  • Wine makers in the Languedoc region in France are taking matters into their own hands to keep Spanish wines from undercutting their pricing and production.

August 25, 2017

Perspective

FT – The great Silicon Valley land grab – Richard Waters 8/23

KFF.org – Medicaid and the Opioid Epidemic – Katherine Young and Julia Zur 7/14

Worthy Insights / Opinion Pieces / Advice

MarketWatch – Retailers aren’t hurting because people are buying ‘experiences’ instead of stuff – Rex Nutting 8/22

  • “The brick-and-mortar retail industry is in crisis. For many old-line retailers, sales and market share are plunging fast. The most obvious explanation for their distress is the rise of online shopping, but some analysts mistakenly point to another trend: ‘Shoppers are choosing experiences over stuff, and that’s bad news for retailers.’”
  • “Instead of purchasing a couch, we’re going to Paris! Or maybe buying avocado toast.”
  • “The reality is more mundane: We are spending a smaller portion of our budget at the mall, but the money we’re saving is mostly going for the most expensive health care in the universe.”
  • “If you’ve heard these stories about the shift away from material things and toward experiences, you might be shocked to learn that retail spending hit a record $1.4 trillion in the second quarter. Retail spending has increased in 30 of the past 33 quarters. We still love to buy stuff.”
  • “The problem for retailers is that prices are falling for many retail goods such as clothing, electronics, appliances, furniture, tools, luggage, toys and many other things. That is killing the bottom line for traditional retailers, who get less revenue per unit sale but still have to pay the fixed costs of rent and payroll.”
  • “For consumers, on the other hand, falling prices are a godsend, because we can buy even more stuff and still have some money left over to spend on other things.”
  • “It would be great if we really could afford to shift our spending from the boring things we need to the fun things we want, but in reality most of the money we are saving due to cheaper clothes and cheaper gasoline is going for goods and services that no one would call fun: hospital bills, financial services, rent, and prescription drugs.”
  • “Over the past 20 years, there has been a revolution in our spending patterns. Since 1997, Americans have shifted a significant portion of their spending from physical things like autos, clothing and petroleum to services like health care, rent and internet access.”
  • “At the margin, we are spending a little bit more on having fun than we did 20 years ago, but most of our money still goes for necessities, not experiences.”

Markets / Economy

WSJ – Global Economics Grow in Sync – Josh Zumbrun 8/23

  • “For the first time in a decade, the world’s major economies are growing in sync, a result of lingering low-interest-rate stimulus from central banks and the gradual fading of crises that over years ricocheted from the U.S. to Greece, Brazil and beyond.”
  • “All 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. It is the first time since 2007 that all are growing and the most countries in acceleration since 2010, when many nations enjoyed a fleeting snapback from the global financial crisis.”
  • “In the past 50 years, simultaneous growth among all the OECD-tracked countries has been rare. In addition to happening last decade, it has only happened in the late 1980s, and for a few years before the 1973 oil crisis.”

Finance

FT – What happened to the ‘too big to fail’ banks? – Patrick Jenkins and Ian Bott 8/23

China

FT – Back to the future for China tycoon sweepstakes – Gabriel Wildau 8/23

  • “To be a Chinese tycoon these days is to live with uncertainty: while some see their wealth and status rise meteorically, others fall out of favor with Beijing — with serious consequences for their wealth and freedom.”
  • “Led by chairman Hui Ka-yan, Shenzhen-based Evergrande has seen its share price almost quadruple this year. Shares in Sunac China, led by Sun Hongbin, have nearly tripled. The price rises have catapulted both up the ranks of China’s rich list.”
  • “By contrast, last year’s upwardly mobile tycoons, Wu Xiaohui of Anbang Insurance and Wang Jianlin of Dalian Wanda, who seemed to represent China’s future as a global investor as they snapped up foreign real estate and entertainment assets, are on the defensive.”
  • “’If you look at Sun Hongbin, he sells bonds offshore and brings the money onshore to build houses. It’s different from Wanda, which borrows from banks onshore to invest offshore. That’s much more sensitive,’ said Yang Guoying, researcher at China Financial Think Tank and a popular commentator on Weibo.”
  • “Offshore investors have a strong appetite for Evergrande’s high-yield debt, despite persistent warnings from analysts and short sellers that the group is highly leveraged. It is a high-risk bet that keeps paying off.”
  • “Evergrande’s net debt of $48bn at the end of last year was the highest among Chinese listed developers, according to data from Thomson Reuters.” 
  • “Tianjin-based Sunac ranked eighth with $8.8bn, and that was before its recent, largely debt-financed deal to buy 13 theme parks from Wanda for $6.5bn. Sunac has spent more than $17.5bn on acquisitions since the start of 2016, according to Dealogic.”
  • “’All these big private enterprises have something in common, which is that they’ve grown very big, very fast, and they’ve done it through debt sales and bank loans,’ said Ai Tangming, chief economics columnist for Sina Finance, a major domestic news website. ‘But Evergrande and Sunac have handled their government relations extremely well, and it’s paying off.’”

Europe

WSJ – Daily Shot: Euro Area GDP 8/24

August 24, 2017

Markets / Economy

WSJ – Mutual Funds Mark Down Uber Investments by Up to 15% – Rolfe Winkler and Greg Bensinger 8/22

  • “Vanguard Group, Principal and Hartford Funds all marked down their shares by 15% to $41.46 a share for the quarter ended June 30, according to the fund companies’ latest disclosure documents. T. Rowe Price Group Inc. cut the estimated price of its Uber shares by about 12% to $42.70 for the same period.”
  • “Uber’s shares don’t trade publicly, so the mutual-fund companies that hold them must estimate the shares’ worth each quarter. Seven mutual-fund companies had mostly maintained a $48.77 share price since the fourth quarter of 2015, when Uber first sold its shares to investors at that price.”
  • “Fidelity Investments held its estimate of $48.77 as of June 30. The one outlier is BlackRock Inc., which wrote up the shares slightly each of the past two quarters, settling at $53.88 as of June 30.”
  • “At least seven mutual-fund companies own shares in Uber, several of them first buying in during a 2014 funding around at $15.51 a share. The price has roughly tripled since then through a series of funding rounds, but Uber hasn’t raised new capital since last year at the $48.77 price.”

Finance

WSJ – Think Rates Are Going Up? Banks Don’t – Rachel Louise Ensign 8/22

  • “After years of waiting for interest rates to rise, some banks are lending as if that day will never come, loading up on a record amount of loans and securities that carry low rates for long periods.”
  • “The percentage of bank assets that won’t mature or change rates for more than five years reached a new high in the second quarter, according to Federal Deposit Insurance Corp data released Tuesday. That means banks are allowing more borrowers to lock in low rates for long periods, a potential risk should rates move sharply higher.”
  • “Across all banks, the percentage of total assets that are at a fixed rate for more than five years was 27.5% in the second quarter of 2017, its highest since the FDIC started tracking it in 1984. The metric reached 33.7% in the second quarter at banks with $1 billion to $10 billion in assets.”
  • “Commercial real-estate loans made up 31.5% of assets at those midsize and smaller banks in the quarter, up from 25.7% in the second quarter of 2012. The figure is far lower at bigger banks, at 6.4%, and has remained steady in recent years.”
  • “The growth rate for commercial real-estate loans, now around 9%, has helped banks compensate for a slowdown in general business lending, much of which is floating rate, meaning the interest rates on the loans rise and fall with market rates.”

Environment / Science

NYT – Alaska’s Permafrost is Thawing – Henry Fountain 8/23

  • “Once this ancient organic material thaws, microbes convert some of it to carbon dioxide and methane, which can flow into the atmosphere and cause even more warming. Scientists have estimated that the process of permafrost thawing could contribute as much as 1.7 degrees Fahrenheit to global warming over the next several centuries, independent of what society does to reduce emissions from burning fossil fuels and other activities.”

August 23, 2017

Perspective

Visual Capitalist – Interactive: tableau – Visualizing Median Income For All 3,000+ U.S. Counties – Jeff Desjardins 8/22

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – The Energy Revolution Will Be Optimized – Liam Denning 8/16

  • “The primary job of the 20th-century oil major or utility was to raise the capital required to build enormous energy production and distribution networks to feed industrialization. The onus was on providing ever more supply, since growth in demand was a given.”
  • “The latter no longer holds true. Energy efficiency matters more now, especially as concerns about pollution, including carbon emissions, have intensified. The job of the 21st-century energy provider, therefore, will be less and less about sheer quantity and more about both quality and smart consumption. Think software-as-a-service rather than just getting Windows 95 installed on as many desktops as possible.”

Markets / Economy

WSJ – How Retiring Baby Boomers Hinder U.S. Wage Growth – Eric Morath 8/21

  • “Departing older employees are being replaced by younger and cheaper workers, San Francisco Fed study finds.”

Real Estate

WSJ – The Price Isn’t Right for Home Builders – Justin Lahart 8/22

  • “Shares of home builders look pricey and vulnerable to a correction as costs rise and affordability is strained.”

Finance

FT – Here is the big reason banks are safer than a decade ago – Alan Smit and Martin Arnold 8/21

  • “The build-up to the financial crisis was marked by a rapid growth in wholesale funding, where banks borrow from one another and other financial institutions, rather than raising money through deposits from retail banking customers.”
  • “When the subprime mortgage meltdown began, banks lost faith in each other and those wholesale funding markets seized up.”
  • While western banks have backed off of it, “wholesale funding now accounts for more than a third of many Chinese banks’ total liabilities — three times as much as five years ago. Some analysts fear Chinese banks may yet generate another ‘Lehman moment’.”

China

FT – Dalian Wanda drops £470m London property purchase – Don Weinland and Judith Evans 8/22

  • “Chinese property developer Dalian Wanda has walked away from a plan to buy London’s Nine Elms Square amid mounting pressure from Beijing to curtail high-profile overseas acquisitions.”
  • “The 10-acre plot is part of London’s largest residential development site, where a number of real estate companies are building 20,000 mainly luxury homes south of the river Thames.”
  • “However, the land will still be acquired by Chinese buyers after a last-minute adjustment to the deal.”
  • “Hong Kong-listed Guangzhou R&F Properties stepped in to make its second hastily arranged deal involving Wanda in a matter of weeks. In July, R&F, which is based in the southern Chinese city of Guangzhou, agreed to purchase 77 Wanda hotels on the Chinese mainland.”
  • “R&F told reporters in Hong Kong that it bought the site jointly with CC Land, another Chinese property developer that this year acquired London’s ‘Cheesegrater’ skyscraper. R&F also owns the nearby Vauxhall Square site.”
  • “Wanda still owns the One Nine Elms site in the same area, which is slated for a 200-metre-high development that includes 437 homes and 3,584 sq ft of retail space, as well as one of the first Wanda Vista hotels to be built outside of China.”

Japan

FT – Japan looks to staunch regional student exodus – Leo Lewis 8/21

  • “Japan is planning an enrolment cap for Tokyo’s private universities to reverse a tide of ambitious 18-year olds eager to abandon the provinces and study in the capital.”
  • “The plan to clip Tokyo’s academic wings is part of a broader drive to protect regional economies from implosion — a fate some consider inevitable as the country’s population ages and shrinks.”
  • “Particularly acute, say government officials, is the ‘drastic decline in the population of 18-year olds’ — a group whose ranks not only want to study in Tokyo, but are increasingly keen to remain in the capital after graduating, to work.”
  • “To reduce Tokyo’s magnetism in an uneven economy, proposed regulation will place an indefinite ban on any private university within Tokyo’s 23 wards from applying for an increase to its annual intake of new students.”
  • “The plan’s success, say officials, hinges upon regional universities — and the job markets nearby — raising their game. ‘Universities have a major role in realizing regional revitalization but not many of them are that successful in driving structural changes in regional industry,’ said a report justifying the Tokyo quota cap.”
  • “The report, which recommended the cap come into force within the current fiscal year, which ends in March 2018, warned that unless Tokyo’s dominance was offset, regional university finances would deteriorate.”
  • “Regional revitalization policies have included encouraging bank mergers and legalizing casino gambling. But despite these policies, the annual number of 20-24 year old Japanese moving into Tokyo has risen 35% since Mr Abe became prime minister.”

August 22, 2017

Perspective

WSJ – Daily Shot: Business Insider – Most Popular Food Restaurants by State 8/21

Bloomberg – How Far Does $1 Million Go in Retirement – Suzanne Woolley 8/21

Bloomberg View – Trump-Friendly Idaho Doesn’t Put America First – Matthew Winkler 8/18

Worthy Insights / Opinion Pieces / Advice

The Registry – McNellis: Hollowing out the Museum – John McNellis 8/21

  • “(Housing) Density is like heaven: everyone wants to go to heaven, but no one wants to die.”

FT – Will China buy Saudi Aramco – Nick Butler 8/20

Markets / Economy

FT – More companies sell bonds to fund pension obligations – Eric Platt 8/20

  • “This is a Goldilocks moment for companies who want to fund their pensions given the hunger for yield and attractive returns today.” – Owais Rana, Conning (an investment management company)

Real Estate

Bloomberg – Manhattan Gets $20,000-a-Month Homes for New Breed of Seniors – Oshrat Carmiel 8/21

Shipping

WSJ – Daily Shot: Baltic Dry Index 8/18

  • Enough consolidation has occurred to the point that shipping costs are back up.

August 21, 2017

If you were to read only one thing…

WSJ – China Tightens Rules on Cash Leaving Country as Growth Slows – Liyan Qi 8/18

  • “China formalized existing measures to curb outbound investment, underscoring persistent capital-outflow pressure faced by Beijing.”
  • “The government must restrict overseas investment in sectors such as property, hotels, cinema, entertainment and sports teams, the State Council said in guidelines released on the main government website Friday.”
  • A cannon was just fired through the hallway.
  • “Officials have warned against rising risks in such investment over the past year, but it is the first time the cabinet has publicized such controls in the form of official guidance.”
  • “Establishment of equity-investment funds and any investment platforms that aren’t linked to any specific projects are also restricted by the government, according to the measures jointly drafted by the country’s top economic planner, Commerce Ministry, central bank and Foreign Ministry.”
  • “Authorities must also step up oversight of investment projects that aren’t considered to meet the technology, environment and security standards required by the governments of the destination countries, according to the guidelines dated Aug. 4.”
  • “The government is setting up a list to track down and penalize offenders, the cabinet said.”
  • “China’s outbound direct investment outside the financial sector declined 44.3% over the first seven months from a year earlier, with investment in property and entertainment down by 81.2% and 79.1%, respectively, the Commerce Ministry said on Tuesday.”
  • “’Irrational outbound investment has been effectively contained further,’ the ministry said.”

Perspective

WSJ – Daily Shot: Tax Foundation – What is the Real Value of $100 in Metropolitan Areas? – Kari Jahnsen 8/17

FT – Trump says it is ‘foolish’ to remove Confederate symbols – Neil Munshi 8/17

Worthy Insights / Opinion Pieces / Advice

Project Syndicate – The Lost Lesson of the Financial Crisis – Mohamed El-Erian 8/17

NYT – We Need Immigrants With Skills. But Working Hard Is a Skill. – Jeff Flake 8/18

Energy

WSJ – OPEC’s Sick Man, Venezuela Could Jolt Oil Market – Spencer Jakab 8/17

  • “Venezuela’s already falling oil production will get worse, maybe much worse, before it gets better, potentially roiling global energy markets. The cash-strapped country has been unable to maintain its oil fields, meaning some of the production losses will be permanent.”
  • “The country now produces between 1.9 million and 2.2 million barrels a day, depending on whether one uses unofficial or official data, down from around official estimates of 2.5 million in late 2015 and 3.4 million before Hugo Chávez took power in 1999.”
  • “The decline in production is so dramatic that Venezuela, home to the world’s largest proven crude reserves, is actually importing barrels of light crude, which it needs to mix with its heavy varieties to make them usable.”
  • “The problem is cash, debt and production. Venezuela is struggling under $120 billion in debt, and it has pledged barrels of oil as repayment for Russian and Chinese loans. After supplying the domestic energy market and paying for crude imports, Venezuela only has 600,000 to 800,000 barrels a day left over to generate net cash flows, according to Columbia University’s Center on Global Energy Policy. The country earns some 90% of its foreign currency revenue from oil exports.”
  • “If the country can right itself, output might stabilize, but any rebound would be modest. Years of underinvestment may have done permanent damage to Venezuela’s conventional oil reservoirs. Reviving output would require substantial foreign investment, including in heavy-oil deposits. Now that Venezuela has burned not just western multinationals but also state companies from Russia and China, doing so will be a tall order without regime change.”

China

NYT – Joshua Wong and 2 Others Jailed in Hong Kong Over Pro-Democracy Protest – Alan Wong 8/17

  • “The sentences risked casting the three young men as Hong Kong’s first prisoners of conscience, undermining the city’s reputation as a haven of civil liberties with special status in China.”

August 18, 2017

Perspective

FT – Over $9tn of bonds trade with negative yields – Eric Platt 8/16

  • “Along with central bank interest rate cuts — including setting unprecedented negative rates in Europe and Japan — the bond-buying programs explain why $9tn still trades with a negative yield, and why sub-zero rates are a reality that investors likely have to contend with for years to come.”

Tax Foundation – Which States Benefit Most from the Home Mortgage Interest Deduction? – Amir El-Sibaie 8/10

WSJ – Daily Shot: The New Right-Wing Extremism: Unified, Tech-Savvy and Emboldened – Dan Frosch, Cameron McWhirter and Ben Kesling 8/16

Worthy Insights / Opinion Pieces / Advice

Economist – The death of the internal combustion engine 8/12

  • “…electrification has thrown the car industry into turmoil. Its best brands are founded on their engineering heritage—especially in Germany. Compared with existing vehicles, electric cars are much simpler and have fewer parts; they are more like computers on wheels. That means they need fewer people to assemble them and fewer subsidiary systems from specialist suppliers. Car workers at factories that do not make electric cars are worried that they could be for the chop. With less to go wrong, the market for maintenance and spare parts will shrink. While today’s carmakers grapple with their costly legacy of old factories and swollen workforces, new entrants will be unencumbered. Premium brands may be able to stand out through styling and handling, but low-margin, mass-market carmakers will have to compete chiefly on cost.”
  • “Assuming, of course, that people want to own cars at all. Electric propulsion, along with ride-hailing and self-driving technology, could mean that ownership is largely replaced by “transport as a service”, in which fleets of cars offer rides on demand. On the most extreme estimates, that could shrink the industry by as much as 90%. Lots of shared, self-driving electric cars would let cities replace car parks (up to 24% of the area in some places) with new housing, and let people commute from far away as they sleep—suburbanization in reverse.”
  • “Even without a shift to safe, self-driving vehicles, electric propulsion will offer enormous environmental and health benefits. Charging car batteries from central power stations is more efficient than burning fuel in separate engines. Existing electric cars reduce carbon emissions by 54% compared with petrol-powered ones, according to America’s National Resources Defense Council. That figure will rise as electric cars become more efficient and grid-generation becomes greener. Local air pollution will fall, too. The World Health Organization says that it is the single largest environmental health risk, with outdoor air pollution contributing to 3.7m deaths a year. One study found that car emissions kill 53,000 Americans each year, against 34,000 who die in traffic accidents.”

Economist – The merits of going English – 8/10

  • “Why educationalists like the English system of tuition fees financed by loans on easy terms.”

LinkedIn – Acknowledging My Own Straight White American Male Privilege – Jim McCarthy 8/11

Markets / Economy

WSJ – Daily Shot: Bitcoin Valuation 8/16

Bloomberg – ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone – Adam Tempkin 8/15

  • “There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.”
  • “Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.”
  • “’We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,’ Chief Economist Amy Crews Cutts said in an email Tuesday. ‘In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.’”
  • “The reason for the increase, she posited, is that lenders have loosened underwriting requirements as more firms tap into a declining market for car loans, not that there are more customers with worsening credit profiles.”
  • “Cutts said Equifax data show that lenders are extending repayment periods and offering longer terms, with many starting to exceed seven years.”
  • “That’s not to say a repeat of the financial crisis is nigh. There might not even be cause for major concern over the auto loan market, Cutts said. Monolines and dealer-finance lenders accounted for just 4% of new originations in the second quarter.”
  • “Meanwhile, the overall rate of late payments exceeding 60 days on all types of auto loans came in at a still-healthy 0.91%, up just eight basis points from last year. The rate on prime loans was at 0.33%, an increase of three basis points.”
  • “’Risk in auto lending is actually very balanced,’ Cutts said. More than 90% of overall auto loans are made by banks, credit unions, and captive auto finance companies, and these entities have become increasingly conservative and discerning in their underwriting.”
  • “Still, the ‘rapid rise’ in deep subprime delinquencies should not go unnoticed, Cutts said.”
  • “’As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,’ Cutts said. ‘The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.’”

Real Estate

WSJ – Daily Shot: FRED – Multifamily Housing Under Construction 8/17

  • “Multifamily housing that is already under construction will be flooding the rental market in the months to come.”

WSJ – Daily Shot: Capital Economics – US National Home Price / Income Ratios 8/17

Finance

WSJ – Sale of Once Hot High-Frequency Trading Frim Reflects Industry Troubles – Alexander Osipovich 8/16

  • “These upstart firms use sophisticated computer algorithms to move in and out of stocks, futures and other positions in fractions of a second. Known as high-frequency traders, or HFT, they thrived in the years following the financial crisis by exploiting the markets’ big price swings.”
  • “But more recently, there have been fewer dramatic swings in stocks, commodities and other markets. The CBOE Volatility Index, a widely followed measure of expected U.S. stock-market volatility, has hovered near historic lows this year.”
  • “Now, one electronic trading firm’s deal to acquire a struggling rival shows how this persistently low volatility is upending the HFT world and forcing out weaker players.”

FT – Private equity fundraising hits post-crisis high – Attracta Mooney 8/16

  • “Private equity fundraising is at its highest level since the boom years in the run-up to the financial crisis, leaving companies in a ‘precarious position’ as they struggle to invest record sums.”
  • “More than $240bn has been raised across private equity and venture capital funds in North America and Europe in the seven months to the start of August, according to a report from Pitchbook, a data provider.”
  • “The company believes private market fundraising in 2017 could eclipse last year, when $344.8bn was raised. The last time private equity did this well was 2007, when managers attracted $419bn.”
  • “According to Pitchbook’s research, private equity funds are sitting on record ‘dry powder’ — sums that have yet to be invested — as managers struggle to find suitable businesses. Pitchbook estimates that the amounts were $739bn at the end of 2016, higher than in 2007-08.”

Tech

FT – Uber crafts share sale plan to prop up valuation – Richard Waters 8/16

  • “Uber is planning a new round of fundraising that would at least match the $68bn peak valuation it reached before this year’s round of scandals — though investors who take part would be able to buy into the ride hailing company at a lower overall price than the headline number suggests.”
  • “The plan would include a secondary sale of shares by existing investors at a current market valuation that is likely to be some way below $68bn.”
  • “The fundraising plan is part of an attempt by Uber’s board to bring more stability to the company’s shareholder base as it tries to recover from the departure of founder Travis Kalanick as chief executive officer.”
  • “Pairing it with a secondary share sale would also give existing investors, including employees, a chance to cash in part of their holdings at a time when the chances of an initial public offering in the near-term appear to be receding.”
  • “It could also reduce the influence of venture capital firm Benchmark, which owns 13% of Uber’s stock and earlier this month mounted a high-profile lawsuit against Mr. Kalanick.”
  • “The sale by Uber itself would raise about $1bn and be set at or above the valuation Uber achieved in June last year, when it sold a 5% stake to Saudi Arabia for $3.5bn. The secondary share sale, on the other hand, would be for as much as $10bn, and would reflect a market price that took into account the company’s struggles this year.”
  • “To enable Uber to sell the higher-priced shares, investors who bought in would be offered the chance to buy the secondary stock on a pro-rata basis, resulting in an average price per share at a discount to the headline valuation.”
  • “The arrangement — showing that Uber itself could still raise some money at the $68bn valuation — would save face for Saudi Arabia, which otherwise would be seen as having overpaid for its stake in the company last year, according to one person familiar with the plan.”
  • “Another person said the structure would also save other Uber investors from being forced to write down the value of their existing holdings.”

Construction

Economist – Efficiency eludes the construction industry – 8/17

  • “The global market is worth $10trn. Euler Hermes, an insurer, expects 3.5% growth this year. Yet more than 90% of the world’s infrastructure projects are either late or over-budget, says Bent Flyvbjerg of Saïd Business School at Oxford University. Even the sharpest of tech firms suffer. Apple’s new headquarters in Silicon Valley opened two years behind schedule and cost $2bn more than budgeted. Smaller projects have similar woes. One survey of British architects found that 60% of their buildings were late.”
  • “Construction holds the dubious honor of having the lowest productivity gains of any industry, according to McKinsey, a consultancy. In the past 20 years the global average for the value-added per hour has inched up by 1% a year, about one-quarter the rate of growth in manufacturing. Trends in rich countries are especially bad. Over the same period Germany and Japan, paragons of industrial efficiency, have seen nearly no growth in construction productivity. In France and Italy productivity has fallen by one-sixth. In America, astonishingly, it has plunged by half since the late 1960s.”
  • “Prices for building materials are not to blame. They are subtracted from measures of value-added (and have not risen in any case). The burden over time of complying with regulation—applying for permits, for instance—is only partly responsible. In America such rules account for one-eighth of the productivity lost since 1987, according to the Bureau of Labor Statistics.”
  • “More culpable are two broader structural trends. First, the industry has become less capital-intensive, with workers replacing machinery. This shift is more understandable in countries with access to inexpensive labor. In Saudi Arabia, for example, it is cheaper to import workers from India or Pakistan than to buy machinery. In many countries, however, labor costs might be expected to spur firms to substitute workers with capital.”
  • “Instead, volatility in demand for construction has trained builders to curb investment. ‘The industry has learned through bitter experience to prepare for the next recession,’ says Luc Luyten of Bain & Company, a consultancy. Capital-heavy approaches to construction bring high fixed costs that are difficult to cut in downturns. Workers, in contrast, can be fired.“
  • “The second big problem is that the industry has, for the most part, failed to consolidate. Efficient firms should theoretically squash laggards, yielding bigger, more productive companies. ‘But construction is an industry that appears to have defied Adam Smith,’ says Mr Luyten. That is partly because building codes differ not just between countries but within them, which makes it harder to reap the benefits of scale. The customized nature of most projects further limits the usual advantages of size. Because the designs of most projects differ, contractors have to start from scratch for each one.”
  • “America now has about 730,000 building outfits, with an average of ten employees each. In Europe there are 3.3m with an average of just four workers. Competition is fierce and profit margins are thinner than for any industry except retail. This fragmentation creates its own problems. Slim margins make investment even less likely. Often projects have more than a dozen subcontractors, each keen to maximize profit rather than collaborate to contain costs, says Thijs Asselbergs, a professor at Delft University of Technology.”
  • “The result is an industry that raises prices for clients and mostly ignores tools that might improve productivity. ‘While we are all using iPhones, construction is still in the Walkman phase,’ says Ben van Berkel, a Dutch architect. Many building professionals use hand-drawn plans riddled with errors. A builder of concrete-framed towers from the 1960s would find little has changed on building sites today, except for better safety standards.”
  • “Examples of how the industry might move forward are not hard to find. More builders could use computer-aided design, as is standard among architects. Other methods are in earlier stages, but show promise, such as remote-controlled cranes and self-driving bulldozers (Komatsu, a Japanese equipment-maker, is developing the latter). A few niches, such as maritime construction, have shown how investments in technology and mass production can boost efficiency.”
  • “On land, a few firms are mass-producing homes. BoKlok, a spin-off from IKEA, a Swedish flat-pack-furniture seller, does only one-fifth of its construction work on site; the rest is done in factories. Parts can be standardized and costs cut as a result. BoKlok reckons that it builds twice as quickly as the industry norm. An American firm called Katerra also builds prefabricated sections of apartments at a factory in Arizona. It helps that each firm does every stage of construction itself, rather than relying on a tangle of subcontractors.”
  • “However, such techniques remain unusual. For most firms, slim margins and the specter of future downturns continue to restrain investment. Even for companies that do adopt new methods, growth may be limited by doubts about the quality of new techniques. A few modular towers in China have seen water seep between units. In Britain, past attempts at mass-produced housing are a sour memory: poorly built modular social housing from the 1960s has been demolished. British mortgage lenders shun homes built with ‘non-traditional construction methods’. BoKlok and Katerra hope their buildings will last a century. But perceptions, like so much else in construction, can be slow to change.”

China

FT – Prominent China debt bear warns of $6.8tn in hidden losses – Gabriel Wildau 8/16

  • “One of the most influential analysts of China’s financial system believes that bad debt is $6.8tn above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked.”
  • “In her latest report, Ms. (Charlene) Chu (with Autonomous Research) estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34%, well above the official 5.3% ratio for those two categories at the end of June.”
  • “But Chen Long, China economist at Gavekal Dragonomics in Beijing, said this methodology implicitly assumes that an economic crash will eventually occur in China.”
  • “Mr. Chen argues that credit losses are highly correlated with economic performance: bad loans rise when growth slows. If China can prevent a sharp downturn, credit losses will be much smaller, despite the extraordinary increase in leverage.”
  • “Ms. Chu acknowledges that an acute crisis does not appear imminent. Government influence over both borrowers and lenders has allowed Beijing to delay problems much longer than would be possible in a more market-driven system.” 
  • “What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities. The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.” – Charlene Chu

WSJ – Cleaning Up China With a Mountain of Debt – Nathaniel Taplin 8/16

Economist – The Communist Party is redefining what it means to be Chinese 8/17

  • “For most of its history the Communist Party wanted to smash China’s past, not celebrate it. During the Cultural Revolution in the 1960s and 1970s it sought to overturn the ‘four olds’: old customs, old culture, old habits and old ideas. Temples, mansions and tombstones were ravaged, along with any artefacts or people associated with the bourgeois way of life. Small wonder that Communist ideology lost its appeal. The blistering pace of change in recent decades has kindled an anxiety that China is suffering from moral decay and a concomitant yearning for a revival of ancient values. The government is harnessing those feelings, using ancient rites and customs to spread favored values.”

India

WSJ – How India’s Debt Could Kill Its Growth – Daniel Stacey, Kara Dapena and Jessica Kuronen 8/17