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

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