Perspective

Economist – Ryanair’s mass cancellations are a problem of its own making – Gulliver 9/19

• “When Ryanair convinced many of its pilots to take fewer holidays during peak summer-travel season, it probably thought it was being clever. But poor planning and a bit of bad luck have left the airline with a shortage of working pilots, many of whom have now taken time off, for the autumn. The shortfall has forced Ryanair to cancel some 2,100 flights starting on September 16th and continuing through October.” 
• “Ryanair’s woes were caused in part by a change in the way the airline determines employee leave. Previously, Ryanair counted holidays in the year from April. In 2016, under pressure from the Irish Aviation Authority, Ryanair adopted the calendar year instead. As part of the transition, it needed to allow its employees to take the entirety of their leave between April and December of this year, leaving it with a staff shortage. As a result, the airline will probably have to scrap around 50 flights every day until the end of October.”

Markets / Economy

WSJ – The Fed, a Decade After the Crisis, Is About to Embark on the Great Unwinding – Nick Timiraos 9/18

• “The central bank is likely to announce Wednesday it will start slowly shrinking its $4.2 trillion portfolio of mortgage and Treasury bonds purchased during and after the financial crisis. It will do so passively by allowing some bonds to mature without replacing them next month.”
• “In June, the Fed said when it started to shrink its balance sheet it would do so by allowing a small initial amount of bonds—$4 billion of mortgages and $6 billion in Treasurys per month—to run off the portfolio without reinvestment. Every quarter, it will let a slightly larger amount do so, up to a maximum of $20 billion in mortgages and $30 billion in Treasurys per month.”
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• “For the next year or so, the Fed should still end up buying bonds in most months, since only a small fraction will mature and go not replaced, said Richard Clarida, an economist at Pacific Investment Management Co., or Pimco. He compared the start of the plan to losing weight by eating only two desserts a day instead of three.”
• “One question the central bank hasn’t yet decided: How large should its balance sheet be at the end of the process?”
• “Its holdings have swelled to $4.5 trillion from less than $900 billion before 2008. Though they will fall, the Fed will end up with more assets than it had before the crisis because its liabilities have grown—there’s more currency in circulation. The balance sheet size could settle out at between $2.4 trillion and $3.5 trillion sometime early next decade, New York Fed President William Dudley said in a speech earlier this month.”
• “That would mean the Fed would end up allowing only around $1 trillion to $2 trillion in securities to mature, after having added $3.7 trillion between 2008 and 2014.”
• “One reason markets have been relatively unfazed is that central banks in Europe and Japan are still purchasing assets. Mr. Spector (David Spector, CEO) of PennyMac expects the start of the Fed’s unwinding to have little effect on mortgage rates, which in early September hit their lowest levels of the year.”
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FT – Private equity: wing and a prayer – Lex 9/18

China

WSJ – China’s Backdoor Real-Estate Bailout – Nathaniel Taplin 9/18

• “Chinese property data out Monday showed housing prices weakening across the board in August. Usually this would be a good point to exit China growth plays.”
• “But another 2015-style collapse in Chinese commodity demand remains unlikely. The reason? Slum clearance. Local governments are directly buying up large quantities of houses developers haven’t been able to sell and filling them with citizens relocated from what they call ‘slums’—old, sometimes dilapidated neighborhoods.”
• “That helps explain why the drop in unsold inventories of apartments over the past year has been so sharp—down 22% on the year in August. That has helped prop up the market, especially in China’s smaller cities, despite more restrictions on housing purchases and slowing official figures on sales growth.”
• “The scale of the program is large, accounting for 18% of floor space sold in 2016, according to Rosealea Yao, senior analyst at Gavekal Dragonomics, and is being partly funded by state policy banks like China Development Bank. That fits with Beijing’s broader strategy to head off a debt crisis by helping overextended property and industrial companies shift their debts and bad assets onto the government. Part of that is through a massive expansion of municipal debt and by getting consumers to carry more of the load through cheap mortgages. China Development Bank’s slum-redevelopment lending hit nearly one trillion yuan ($152.6 billion) last year, more than half of which went to purchasing existing commercial housing.”
• “As a result, real-estate investment has held up reasonably well this year and inventories continue to fall: Vacant residential floor space was down another 10 million square meters in August, even though traditional sales have been lukewarm for months.”