Month: September 2017

September 15, 2017

If you were to read only one thing…

FT – To coin a craze: Silicon Valley’s cryptocurrency boom – Richard Waters 9/13

  • “So-called initial coin offerings, or ICOs, like this have turned into the year’s most striking financial craze. More than $1.8bn has been raised by software developers from the sale of new currencies with names such as Tezzies, Atoms and Basic Attention Tokens.”
  • “In unofficial online markets where these and other digital tokens are traded, the mania has hit even more bizarre levels. The value of Ripple — at five years, a cryptocurrency veteran — soared this year on a wider boom that was led by bitcoin. Ripple’s notional value, including coins held by the company for later sale, jumped from $500m at the start of the year to more than $35bn, before falling back to $19bn.”
  • “The boom in cryptocurrency prices has been fed by uncontrolled speculation, leading regulators to act. In recent days, Chinese authorities have banned ICOs and are now reported to be on the brink of shutting down all cryptocurrency exchanges. The Financial Conduct Authority, the UK regulator, warned anyone thinking of buying coins in an ICO that they should only do so if they are prepared to lose everything. Jamie Dimon, chief executive of JPMorgan, sent bitcoin prices down 10% on Tuesday when he called the currency a ‘fraud’ and threatened to sack anyone at his bank caught trading it.”
  • “But cryptocurrencies’ promoters argue that beyond the speculative mania, something profound is taking place. It has created a new way for start-ups developing platforms based on blockchain and other technologies to raise money, using online crowdfunding techniques.”
  • “Networks such as IPFS are based on a vision of decentralized online services where ordinary users interact directly with each other, rather than through internet companies that set themselves up as gatekeepers to the online world. According to the enthusiasts, many of the most popular internet applications could be remade in this way, leaving the control — and the profits — in the hands of the users.”
  • “But there is another view that draws on a different aspect of internet investment history. ‘There’s a tendency to turn the brain off and jump in. It’s like Pets.com [which shut down in 2000],’ says Mark Williams, a lecturer in financial risk management at Boston University. The speculation is being fed by a hype that is as insidious as the dotcom craze of the late 1990s, he says: ‘People are treating it like a lottery ticket.’”
  • “The value of the best-known digital currency, bitcoin, has risen eightfold in the past year. That has led to a hunt for the next untapped markets, lifting the notional value of all cryptocurrencies to more than $130bn. With nothing more needed to launch a coin sale than a ‘white paper’ — the document that coin promoters use to lay out their grand plans — and the promise of some computer code, the steady flow of ICOs in the past year has turned into a flood.”
  • “The boom, which began in early summer, is already exhibiting many of the characteristics of other speculative crazes. New coins have proliferated: more than 150 token sales have been conducted or announced this year. CoinMarketCap lists prices for about 1,100 coins, with more than 120 ICOs planned before the end of September.“
  • “Celebrity endorsements have followed. Paris Hilton used Twitter to boost LydianCoin, a currency for a mooted advertising market that its backers hope will raise $100m. Boxer Floyd Mayweather got there before her, using the run-up to his late August bout with Conor McGregor to promote the prediction market Stox.com and content marketplace Hubii Network.”
  • “Underpinning new blockchain-based networks such as IPFS are protocols, or rules, embedded in software that govern how participants interact. At least in theory, many of the interactions that happen online, such as those on social networks, ecommerce sites and search engines, could take place between willing users on decentralized networks.”
  • “What supporters see as a profound financial innovation, however, others warn can be an easy route to creating funny money. When buyers have been so willing to purchase currencies issued on nothing more than the promise of a future market, it’s not surprising that so many are trying to mint new ones.”
  • “Selling coins has another advantage that the ICOs are less keen to highlight: it exploits a regulatory loophole. By selling a currency rather than shares they stay outside the scope of securities regulation, removing any constraints on how they market their offerings.”
  • “Regulators are working on closing this loophole. The US Securities and Exchange Commission said in July that it had determined that many coins were in fact a type of security, and would look at the underlying nature of each ICO to determine whether they should be regulated as securities.”
  • “For their creators, ICOs have another obvious attraction. They have made it possible to raise far larger amounts than start-ups can usually tap, at least as long as enough investors can be persuaded to suspend their disbelief.”
  • Caveat emptor.

Worthy Insights / Opinion Pieces / Advice

FT – China exploits the vulnerability of open democracy – Jamil Anderlini 9/13

  • “Soft targets like New Zealand are testing grounds for Chinese global espionage.”

WSJ – The Life of a Contractor Worker Is a Grind of Snubs, Anxiety and Stagnation – Lauren Weber 9/13

Bloomberg Businessweek – Kim’s Nukes Aren’t a Bargaining Chip. They’re an Insurance Policy – Michael Shuman 9/7

Markets / Economy

WSJ – Daily Shot: Moody’s – US State Pension Burdens 9-14

Environment / Science

NYT – Cassini’s Mission to Saturn in 100 Images – Jonathan Corum 9/14

WEF – Business Insider – This map reveals that temperatures have risen in nearly every US state over the last century – Leanna Garfield 9/13

Agriculture 

Bloomberg Businessweek – This High-Tech Vertical Farm Promises Whole Foods Quality at Walmart Prices – Selina Wang 9/6

September 14, 2017

Perspective

WSJ – Daily Shot: US Census Bureau, Piper Jaffray – Construction & GDP Correlation 9/13

WSJ – Daily Shot: Moody’s – Impact of Irma on Southwest US 9/13

FT – Chart of the day, offshore tax haven market-share edition – Cardiff Garcia 9/11

  • “In all the micro-data we have access to, offshore wealth turns out to be extremely concentrated: the top 0.1% richest households own about 80% of it, and the top 0.01% about 50%.” – Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman

Worthy Insights / Opinion Pieces / Advice

WSJ – There’s a Speeding Mass of Space Junk Orbiting Earth, Smashing Into Things – Robert Lee Hotz 9/12

Economist – The lessons of fidget spinners 9/9

  • “Sales might have peaked, but they have changed toys.”

Economist – Mobile technology is revamping loyalty schemes 9/7

  • “If you want loyalty, get big data.”
  • “When Caesars Entertainment, a casino group, went bankrupt in 2015, auditors valued its loyalty database at $1bn, more even than its property on the Las Vegas strip.”

Markets / Economy

WSJ – Daily Shot: US Real Household Median Income (2016) 9/13

WSJ – Daily Shot: US Real Household Income by selected income percentiles 9/13

WSJ – Daily Shot: US Real Household Income by ethnicity 9/13

WSJ – Daily Shot: BMO Wealth Management – Bloomberg – Declining Corporate R&D 9/13

Energy

WSJ – Daily Shot: Bloomberg – Retail Gasoline Price Spike 9/13

  • Never waste a good crisis…

FT – Nigeria to resist cuts to its oil output, minister says – Anjli Raval 9/12

Finance

VC – Comparing Bitcoin, Ethereum, and Other Cryptos – Jeff Desjardins 9/11

Shipping

WSJ – Daily Shot: Baltic Dry Index 9/11

  • “The Baltic Dry shipping index hit the highest level in a couple of years amid better demand for iron ore.”

China

FT – Life sentences, $290m fine for Ponzi scheme in China – Edward White 9/11

  • “The two men who led a massive Chinese lending scam were sentenced to life behind bars by a Beijing court on Tuesday.”
  • “Ding Ning, the 35-year-old founder of Ezubao, was sentenced to life imprisonment after being charged with fraud, smuggling precious metals, illegal procession of firearms and illegally crossing China’s border. The company’s former chairman Ding Dian was also sentenced to life.”
  • “Ezubao was established in 2014 and became one of China’s highest-profile peer-to-peer lending sites, promising investors annual returns of up to 15%, write Edward White and Xinning Liu. According to the official Xinhua news agency, the Ponzi scheme raised more than Rmb50bn ($7.6bn) from 900,000 investors before arrests were made in early 2016.”
  • “The Beijing Intermediate Court issued fines of Rmb1.9bn (US$290m), which one Chinese lawyer said could mark a new precedent for fraud cases in China. Another 24 people linked to the scam, were handed sentences ranging from three to 15 years.”
  • “Ezubao’s risk controller was quoted by Xinhua in 2016 as saying ‘95% of [our] projects are fake’.”

India

Economist – Panipat, the global center for recycling textiles, is fading 9/7

  • A lesson of what happens when companies fade away when they don’t innovate, invest in R&D, and squeeze their capital and labor.

September 13, 2017

Perspective

WSJ – Irma Leaves 6.7 Million Florida Utility Customers in the Dark – Erin Ailworth 9/11

NYT – Houston’s Floodwaters Are Tainted With Toxins, Testing Shows – Sheila Kaplan and Jack Healy 9/11

  • “It is not clear how far the toxic waters have spread. But Fire Chief Samuel Peña of Houston said over the weekend that there had been breaches at numerous waste treatment plants. The Environmental Protection Agency said on Monday that 40 of 1,219 such plants in the area were not working.”
  • “The results of The Times’s testing were troubling. Water flowing down Briarhills Parkway in the Houston Energy Corridor contained Escherichia coli, a measure of fecal contamination, at a level more than four times that considered safe.”

NYT – In Houston After the Storm, a City Split in Two – Jack Healy 9/8

  • “Life in Houston now comes with a twinge of survivor’s guilt for those in dry neighborhoods, and envy among those still dealing with floodwater.”

Worthy Insights / Opinion Pieces / Advice

WSJ – Why the Markets Keeps Going Up and What Would Bring It Down – Justin Lahart 9/12

  • “Big, fast-growing companies have led the recent rally, and that should continue-but when it ends, get out fast.”

WEF & Business Insider – A neuroscientist who studies decision-making reveals the most important choice you can make – Chris Weller 8/4

  • Spoiler alert, it’s who you surround yourself with.

Markets / Economy

FT – US companies transformed into 800lb gorilla in bond market – Eric Platt, Nicole Bullock, and Alexandra Scaggs 9/12

  • “Thirty US companies together have more than $800bn of fixed-income investments, according to a Financial Times analysis of their most recent filings with the US Securities and Exchange Commission.”
  • “Their holdings of Treasuries, corporate, agency and municipal debt, as well as asset- and mortgage-backed securities, means they collectively have more firepower in debt and credit markets than high-profile asset managers including AllianceBernstein, Invesco and Franklin Templeton.”
  • “’They are asset managers in their own right,’ Ramaswamy Variankaval, head of JPMorgan’s corporate finance advisory group, said of the companies.”
  • “A reluctance by American multi-nationals to repatriate profits generated overseas has pushed the size of the US corporate cash piles to more than $2tn, a rise of 50% over the past decade and more than double the levels at the turn of the century, according to the Federal Reserve.”
  • “In total, the 30 companies, which include venerable household names like Ford, Coca-Cola and Boeing, have more than $1.2tn in cash, cash equivalents, marketable securities and investments, according to the FT analysis.”
  • “The 30 companies have amassed a portfolio of more than $400bn of US corporate bonds, representing nearly 5% of the outstanding market.”
  • “They compete for such debt alongside pension funds, sovereign wealth funds and other investors, helping to drive down borrowing costs for corporate America.”
  • Seems self-serving to an extent…

Finance

WSJ – China to Shut Bitcoin Exchanges – Chao Deng and Paul Vigna 9/11

  • “The policy shift in the world’s No. 2 economy shows how nations are wrestling with bitcoin and its place in the financial system. In China, specifically, the government’s attack on bitcoin comes amid a focus on preventing capital from fleeing to digital currencies.”
  • “After a Chinese news organization Friday reported on China’s commercial-trading ban, Bitcoin slid around 10% to $4,186, from levels above $4,600 on Thursday, according to research site CoinDesk. It has hovered around that level since, closing Monday at $4,211.”
  • “China has long been a major hub for bitcoin, which was created by an anonymous programmer during the depths of the 2008 financial crisis as an alternative to official currencies. Much of the world’s bitcoin is mined—created through powerful algorithms—in China. As recently as this past January, before new rules damped trading in the country, more than 80% of global bitcoin activity took place in yuan.”
  • “The stakes for Beijing grew as prices of virtual currencies like bitcoin soared, adding to the risk that Chinese investors would continue to speculate and expose themselves to big losses. Analysts and investors attribute the sharp rise in bitcoin last year to Chinese investors, who began buying it up while at the same time selling the yuan amid worries that the Chinese currency would weaken.”
  • “While China in the past accounted for the bulk of global bitcoin trading activity, the country’s share has dropped dramatically since the government started making moves to cool the market.”
  • “In April, Japan’s Financial Services Agency implemented rules that recognized bitcoin as a payment method. Since then, Japan has become the top market for bitcoin trading, accounting for almost half of global volumes. The U.S. share of trading has jumped to above 25% from 5% over the past year.”

Health / Medicine

NYT – New Gene-Therapy Treatments Will Carry Whopping Price Tags – Gina Kolata 9/11

  • “The first gene therapy treatment in the United States was approved recently by the Food and Drug Administration, heralding a new era in medicine that is coming faster than most realize — and that perhaps few can afford.”
  • “The treatment, Kymriah, made by Novartis, is spectacularly effective against a rare form of leukemia, bringing remissions when all conventional options have failed. It will cost $475,000.”
  • “With gene therapy, scientists seek to treat or prevent disease by modifying cellular DNA. Many such treatments are in the wings: There are 34 in the final stages of testing necessary for F.D.A. approval, and another 470 in initial clinical trials, according to the Alliance for Regenerative Medicine, an advocacy group.”
  • “The therapies are aimed at extremely rare diseases with few patients; most are meant to cure with a single injection or procedure. But the costs, like that of Kymriah, are expected to be astronomical, alarming medical researchers and economists.”
  • “One drug, to prevent blindness in those with a rare genetic disease, for example, is expected to cost between $700,000 and $900,000 per patient on average, noted Dr. Aaron Kesselheim, director of the program on regulation, therapeutics and law at Brigham and Women’s Hospital.”
  • “Drug makers argue that the prices ought to reflect the value of a curative treatment to the patient. Dr. Kesselheim and other experts are far from convinced.”
  • “Elizabeth Pingpank, a spokeswoman for Bluebird Bio, which is developing several gene therapies, said the company realizes its prices will be a challenge.”
  • “Bluebird and several other companies have set up a consortium with academics to try to figure out novel ways to enable insurers to pay the expected high prices.”
  • “’We recognize that most payers in the U.S. are not currently set up to support one-time therapies that generate long-term transformative benefits,’ Ms. Pingpank said.”
  • “Indeed, health care executives already are rushing to develop new payment models.”
  • “’It’s amazing how many think this is in the future,’ said Dr. Steve Miller, chief medical officer at Express Scripts, said of the looming payment problem. ‘This is right now.’”
  • “The idea favored by Dr. Miller and others is to pay for these novel drugs as you might a mortgage on a house.”
  • “An insurer would pay a large fraction up front, when the patient is treated, and then make regular payments until the entire bill is paid — or the disease returns.”
  • “That would require an unprecedented type of cooperation among insurers. Patients often change insurers, and there is no benefit to a new insurer in continuing payments for an injection that a patient had long ago — even if it was curative.”

China

WSJ – Daily Shot: Natixis – Cross Border M&A Deals by Chinese Corporates 9-12

FT – China’s biggest banks ban new North Korean accounts – Yuan Yang and Xinning Liu 9/11

  • “China’s biggest banks have banned North Koreans from opening new accounts in an unprecedented move to clamp down on financial flows with the country’s unruly neighbor.”
  • “Multiple bank branches, including those of the country’s top four lenders, told the Financial Times they had imposed a freeze on new accounts for North Korean people and companies. Some are going even further, saying they are ‘cleaning out’ existing accounts held by North Koreans by forbidding new deposits.”
  • “The moves give weight to the theory that since Pyongyang’s sixth and most powerful nuclear test this month, policy hawks in Beijing have gained the upper hand in an internal debate over whether to toughen sanctions against the Kim Jong Un regime.”
  • “The measures go further even than what has been agreed internationally.”

Europe

WSJ – Daily Shot: Europace German House Price Index 9-11

September 12, 2017

Perspective

Vox – Why Hollywood keeps making the same kinds of movies, in one chart – Alissa Wilkinson 9/7

WEF – This developed country’s shadow economy is worth one-fifth of its GDP – Charlotte Edmond 8/29

Worthy Insights / Opinion Pieces / Advice

FT – The lessons of Hurricane Harvey – Nick Butler 9/10

  • “The most important lesson for the energy sector emerging from Hurricane Harvey is that the key issue of energy security is no longer physical shortages of fuel supplies but the quality of the infrastructure system that takes energy to the final consumer.”
  • “As the waters recede, Hurricane Harvey should serve as a reminder that we live in a world where stability and continuity are the exception rather than the norm. The systems we depend on have to be built, and wherever necessary rebuilt, to minimize the disruption caused by events that are beyond all prediction.”

Energy

WSJ – Daily Shot: Baker Hughes US Crude Oil Rotary Rig Count 9/10

Finance

WSJ – Daily Shot: Swiss Re US Wind Cat Bond Price Return Index 9/8

China

Bloomberg – China’s Latest Bond Default Is a Cautionary Tale for Investors – Lianting Tu, Yuling Yang, Jun Luo, and Judy Chen 9/10

  • “Lulled by years of implicit government support for troubled companies, locals are now having to get acquainted with defaults, which have risen six-fold since the end of 2015 as Beijing shuts down unproductive industries. It’s also placing scrutiny on underwriters, with companies like Wuyang Construction accused by investors of holding back information and providing inconsistent financial figures.”
  • “Beijing’s bailout track record has made Chinese bond investors complacent, according to Yu Lu, a senior analyst at China Chengxin International Credit Rating Co. in Beijing.”
  • “’Investors in China still focus too much on yields rather than risk,’ Yu said. ‘The implicit guarantee in this country has led to poor risk control — they should enhance due diligence and strengthen their analysis of risk.’”

September 11, 2017

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics – Irving Fisher and Japan – Charles Gave 8/23

Oaktree – Yet Again? – Howard Marks 9/7

WSJ – Why American Students Need Chinese Schools – Lenora Chu 9/8

  • “After putting her son in an elite state-run school in Shanghai, an American mother finds that the U.S. education system could learn a few things from China – most of all that teacher knows best.”

Finance

FT – Red hot competition for private equity deals will hit returns – Chris Flood 9/9

  • “Private equity managers have raised around $260bn so far this year and are on track to surpass the industry’s annual fundraising record of $369bn registered in 2007, according to Prequin. The data supplier reckons that 811 managers are currently on the road looking to raise a further $578bn. “
  • “As a result, competition for deals among private equity managers is red hot at a time when many equity markets are trading at or close to their all-time highs. This is fueling concerns that profitable deals are becoming increasingly difficult to identify for private equity managers, which are now sitting on a record $1tn of excess capital that they have been unable to put to work.”
  • “Thomas Toth, a managing director at Wilshire Associates, the consultancy, says the amount of excess capital is ‘very substantial’ and has helped push up prices paid for deals. He says assets are being acquired on multiples of 10 (measured as total enterprise value as a multiple of underlying earnings), beyond the previous peak of 9.7 times, registered in 2007 before the financial crisis.”
  • “’We don’t expect to see private equity managers generate the same levels of returns that investors have been accustomed to,’ says Mr. Toth.”
  • “Wilshire’s working assumption is that private equity managers, on average, will generate annualized returns of 9.4% over the next decade, down from its 11.2% 10-year estimate in 2009.”
  • “He says that any rush to put money to work by private equity managers will ‘further compress’ future returns.”
  • “But just 6% of private equity managers plan to invest less money over the next 12 months, while 62% plan to invest more, according to Preqin.”
  • As to whom is raising this money,
  • “Apollo Global raised the bar for private equity fundraising to a fresh high last month when the New York-based investment manager said it had gathered $24.7bn for its latest buyout fund, the largest of its kind.”
  • “CVC Capital Partners raised around €16bn while Silver Lake gathered $15bn for its fifth buyout fund. KKR attracted $13.9bn for its 12th Americas fund and a further $9.3bn for an Asia-focused fund, while 3G and Bain are looking to raise $10bn and $7bn respectively.”
  • “Jeffrey Hooke, a finance lecturer at Johns Hopkins Carey Business School, says that institutional investors, such as US public pension schemes, and their consultants feel more comfortable with established ‘name brand’ managers, even if smaller, lesser-known companies might offer better return prospects.”
  • “Mr. Hooke examined funds run by the 18 largest private equity managers and found that three-quarters, including some funds run by KKR, Silver Lake and Bain, failed to beat the S&P 500 consistently between 2006 and 2016.”
  • “Mr. Hooke says the lavish marketing budgets of large private equity managers entice potential clients and that institutional investors could achieve better results if they themselves acquired holdings in the types of companies targeted by buyout funds.”
  • Not surprisingly, “those funds that have performed better than average tend to launch during periods of notable equity market weakness.”

China

Reuters – Trust issues? China targets a $3 trillion shadow banking industry – Engen Tham 9/9

  • “The trusts, at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed towards greater transparency.”
  • “But the fast-growing 20 trillion yuan ($3 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts.”
  • “One of the biggest challenges facing regulators is that many trusts employ a baffling array of structures, and funnel money through complex webs of beneficiaries, which makes untangling transactions extremely difficult.”
  • “The practices of the trusts, and the speed at which the industry is growing, have made them a target for Beijing as it tries to keep a lid on risky lending, cool overheated markets and control corporate debt.”
  • “In April, Deng Zhiyi, head of the CBRC’s trust department, warned of ‘severe risks’ from funds flowing into the real estate, coal and steel sectors through trusts.”
  • “The industry is now roughly a tenth the size of China’s commercial banking sector.”
  • “However, the regulator set out in detail in April certain structures that the trusts should not use, such as money-pooling schemes and structuring products to avoid restrictions on leverage.”
  • “That was ‘a signal for financial institutions that from a legal and enforcement perspective, we are entering a stricter period,’ said Armstrong Chen, financial compliance partner at King & Wood Mallesons.”
  • “Trust firms will also have to start registering the details of their products, identifying the ultimate borrower of funds, this year, said Chen, who is in regular contact with the regulators.”
  • “Chen said the requirement would improve transparency, but people at trust firms say it will still be difficult to detect the use of the under-the-table agreements typical of the industry.”
  • “Despite these changes, the government’s job managing the trusts keeps growing. In the first half of this year, trust loans increased by 1.31 trillion yuan, which compared with 279.2 billion in the period last year, according to central bank figures.”

Reuters – China studying when to ban sales of traditional fuel cars: Xinhua – Tom Munroe and Yawen Chen 9/9

  • “China has begun studying when to ban the production and sale of cars using traditional fuels, the official Xinhua news agency reported, citing comments by the vice industry minister, who predicted ‘turbulent times’ for automakers forced to adapt.”
  • “Xin Guobin did not give details on when China, the world’s largest auto market, would implement such a ban. The United Kingdom and France have said they will ban new petrol and diesel cars from 2040.”
  • “To combat air pollution and close a competitive gap between its newer domestic automakers and their global rivals, China has set goals for electric and plug-in hybrid cars to make up at least a fifth of Chinese auto sales by 2025.”
  • “Under the latest proposals, 8% of automakers’ sales would have to be battery electric or plug-in hybrid models by next year, rising to 10% in 2019 and 12% in 2020, but the rules would not be enforced until 2019, a year later than initially planned, the sources said.”

September 8, 2017

Perspective

WSJ – Daily Shot: US Auto Fuel Efficiency 9/7

NYT – An Enormous, Urgent Task: Hauling Away Harvey’s Debris – John Schwartz and Alan Blinder 9/6

  • “Of all the challenges that southeast Texas faces after Hurricane Harvey, few will linger longer or more visibly than the millions of pounds of debris already crowding curbs and edging onto streets. The cleanup, needed from northeast Houston’s neighborhoods to the wealthy suburbs southwest of the city, will take months and cost billions of dollars.”
  • “At the same time, Houston officials are asking residents to separate their Harvey-related waste into five piles: appliances; electronics; construction and demolition debris; household hazardous waste; and vegetative debris. A look at these streets suggested that few people seemed to be heeding the city’s pleas.”
  • “Other cities have been through this battle with a storm’s leavings. After floodwaters inundated East Baton Rouge Parish, La., last year, crews collected about two million cubic yards of debris. Superstorm Sandy, in 2012, led to about six million cubic yards of debris in New York State — the equivalent of four Empire State Buildings, according to the Federal Emergency Management Agency. Katrina left behind 38 million cubic yards. Getting the stuff gone is a long process. It was only last month that Baton Rouge finished the debris removal process it organized in the wake of last year’s flooding there.”
  • “In Houston, where city officials say that some eight million cubic yards of debris will need to be hauled away, collection is farther along in some neighborhoods than in others.”
  • “The job of deciding how to move these mountains has been left to county and local officials, who hire debris removal companies to help them dig out. FEMA will reimburse the local governments for 90% of the cost.”

Economist – How government policy exacerbates hurricanes like Harvey 9/2

  • “The bad news is that storms and floods still account for almost three-quarters of weather-related disasters, and they are becoming more common. According to the Munich Re, a reinsurer, their number around the world has increased from about 200 in 1980 to over 600 last year. Harvey was the third ‘500-year’ storm to strike Houston since 1979.”
  • In regard to encouraging less than desirable behavior, “the National Flood Insurance Program (NFIP) has been forced to borrow because it fails to charge enough to cover its risk of losses. Underpricing encourages the building of new houses and discourages existing owners from renovating or moving out. According to the Federal Emergency Management Agency, houses that repeatedly flood account for 1% of NFIP’s properties but 25-30% of its claims.”

Worthy Insights / Opinion Pieces / Advice

Economist – Lexington: Our columnist bids farewell 9/7

  • “After five years, which included reporting trips to 46 states, this Lexington offers some parting thoughts on American politics.”

Economist – How to provide a protein-rich diet to a growing population 8/31

  • “What goes onto people’s plates matters. So does what gets fed to animals.”

Markets / Economy

WSJ – Daily Shot: Goldman Sachs – Ownership of US equity market since 1945 9/7

NYT – Milestone for BMI: More Than $1 Billion in Music Royalties – Ben Sisario 9/7

  • “The organization, whose hundreds of thousands of members include stars like Taylor Swift, Ed Sheeran and Sting, announced on Thursday that it had $1.13 billion in revenue and distributed $1.02 billion in royalties during its most recent fiscal year, which ended in June. BMI and other performing rights organizations, like its rival Ascap, collect money whenever songs are played on the radio, streamed online or piped into a restaurant.”

Real Estate

Bloomberg Quint – India Trumps Hong Kong as No. 1 for Home-Price Gains in Asia – Pooja Thakur 9/6

  • But when you look at the last 5 years…

Finance

WSJ – Daily Shot: Global High-Yield (HY) Corporate Bond Issuance 9/7

Bloomberg – Bennett Goodman Builds $95 Billion Credit Machine – Nabila Ahmed, Sridhar Natarajan, and David Carey 9/5

China

WSJ – China’s Bad Banks Show It Still Has a Big Bad Loan Problem – Anjani Trivedi 9/7

  • “There are Chinese banks and then there are China’s bad banks. To understand just how worrying the country’s bad-loan problem has become, it’s worth taking a look at the latter.”
  • “China Cinda Asset Management , the second-largest of four asset managers set up in the 1990s to clean up China’s then already large pile of souring loans, is still at it two decades on, managing and restructuring distressed assets offloaded by banks. The company’s latest results offer a lens into the rapidly deteriorating asset quality in China, that’s at odds with the relatively rosy picture of China painted for investors by its near-7% growth and corporate profits that have surged to multiyear highs.”
  • “The current pace at which Cinda is acquiring distressed assets is far outpacing the rate at which it can dispose of these assets. That has pushed down the price at which it can sell bad-loan portfolios to close to 20 cents on the dollar from 30 cents this time last year. Its income from disposing bad assets dropped 64% on the year, with returns on restructured assets falling to 8.7%in the first half from 10.6% a year ago. Losses from impairments on its assets more than doubled in the first half, driven by a more-than 10-fold increase in provisions.”
  • “These trends suggest China’s bad-loan problem is rather more severe than investors would guess from looking at the big banks’ results: The likes of ICBC and Bank of China actually reported improving nonperforming loan ratios in the first half. One reason they were able to do so is that they have been offloading bad assets to the likes of Cinda, which picks up around 60% of its distressed assets from the big banks.”

Japan

Bloomberg – Japanese Companies Cut Bonuses, Pushing Overall Wages Lower – Yuko Takeo and Yoshiaki Nohara 9/5

Russia

FT – Russia seeks to close Ukraine’s window to the west – Jeffery Mankoff and Jonathan Hillman 9/6

  • “Last month, Russia completed a railway that bypasses Ukraine. The project was entrusted to a special military unit and completed a year ahead of schedule, underscoring its importance to the Kremlin. It is the latest of several Russian-led infrastructure projects that, coupled with the devastation wrought by the conflict with Russian-backed separatists in the Donbas region, risk turning Ukraine, historically a bridge between east and west, into an island.”
  • “Isolation from emerging east-west connectivity could be one of the most enduring and most damaging consequences of the war for Ukraine, one that both Kiev and its western partners need to pay more attention to overcoming.”
  • “A UN assessment in November 2014 found that 53 bridges, 45 road sections, and 190 railway facilities had been damaged. Altogether, infrastructure losses were estimated at $440m, and while some repairs have been carried out, funding constraints and security challenges have limited reconstruction.”
  • “For both sides in the conflict, altering patterns of trade and transit is a means of shaping Ukraine’s political and economic destiny. While military forces have destroyed critical infrastructure such as bridges and railways, the governments in both Kiev and Moscow are building new connections that will re-orientate trade flows.”

South America

WSJ – Daily Shot: Brazilian CPI YoY Change 9/7

  • “Brazil’s CPI was lower than expected, which solidified the expectations for another rate cut.”

September 7, 2017

Perspective

WSJ – Daily Shot: WEF – National per capita GDP without capital cities 9/5

Worthy Insights / Opinion Pieces / Advice

WSJ – Workers: Fear Not the Robot Apocalypse – Greg Ip 9/5

FT – Will stability become the new watchword for the oil market? – Anjli Raval 9/5

  • “The oil world is divided into two camps.”
  • “There are those who believe the crude price will eventually spike higher, repeating the boom-bust pattern that has defined the market for more than a century. Lined up against them are those betting prices will defy history, staying low and rangebound.”
  • “Complicating the debate is that it hinges on a US shale industry that is barely a decade old and accounts for little more than 5% of global supplies. Can it really eliminate the risk of a price spike by growing fast enough to meet forecasts for rising demand?”
  • “Of total global production at about 98m barrels a day, US crude output makes up 9.2m b/d with the country’s fast-growing shale segment comprising just 5.6m b/d, energy data show “
  • “The mismatch is why drastic cuts to investment in future production have forced global energy bodies and exporter countries, such as Opec’s de facto leader Saudi Arabia, to warn of a looming supply gap.”
  • “Historically about 15bn barrels of new supplies from conventional resources are approved for development each year, the International Energy Agency says. This fell to 8bn in 2015 and 5.5bn in 2016. Despite a rise to 8bn-9bn barrels this year, the IEA expects that global oil supply will still struggle to keep pace with demand after 2020.”
  • “Global oil consumption is expected to grow on average by 1.2m b/d each year to 2022. The IEA’s forecasts also account for unconventional supplies as well as declining output rates from existing fields.”
  • “Tim Gould, the IEA’s long-term supply analyst, accepts that US shale supply could increase ‘significantly’ from today’s levels. ‘But after that, large scale increases will be difficult to achieve. There is less of a chance that it can ramp up to fill any gap.'”
  • “Proponents of this view, including hedge fund manager Pierre Andurand, say oil will return to $100 a barrel.”
  • “But those confident the price will stay rangebound are not convinced. The fear — or hope — of an emerging supply gap is exaggerated, they say, and fails to acknowledge shale supply as a transformational force.”
  • “’The oil market is indeed the most competitive it has ever been,’ said Ed Morse at Citigroup, who argues that US shale has broken the historically oligopolistic market structure.”
  • “Rather than Opec’s production determining market balances, US shale is the new source of responsive supply. Mr. Morse argues the shale deniers are underestimating its prowess, from the geology to the technology allowing this oil to be unlocked.”
  • “’There is just an unwillingness to understand shale. It’s a world that many still find alien,’ said Mr. Morse, who believes $45-$65 oil is likely to persist for years.”
  • “Those pushing the lower-for-longer — and maybe forever — thesis also question the willingness of Opec producers and their allies to maintain supply curbs as production from the US to Canada’s oil sands and Brazil’s deepwater fields thrives.”
  • “Unquestionably, US shale’s resilience has enabled it to surpass even the most bullish expectations. But Bob McNally at consultancy Rapidan Group said the industry had yet to prove itself as a ‘swing producer’, able to put a floor as well as a ceiling on prices. Volatility, he said, is the only certainty.”
  • “Perpetual $50-$60 is as wrong now as endless $100 was four years ago.”

Real Estate

WSJ – Daily Shot: The 12 Most Expensive Rental Markets 9/5

Australia

Economist – How Australia broke the record for economic growth – E.A.D.W. 9/6

  • “The last time Australia suffered a recession the web browser had just been invented and Bryan Adams topped the charts. Figures released today will show that its economy has racked up the longest stretch of growth in modern history: 104 quarters. The Netherlands, the previous title-holder, dipped into recession—defined as two consecutive quarters of contraction—after 103. In these 26 years, Australia has navigated the Asian financial crisis, the collapse of the dotcom bubble and the Great Recession, largely without scars. Its once-in-a-generation mining boom ended in 2014. Yet it has managed to avoid a bust…”
  • “The luck seems set to continue. The central bank predicts that GDP growth will pick up to about 3% in the next couple of years. But families have reason to feel less optimistic. Unemployment rates have flat-lined above their equivalents in America, Britain and Japan. Underemployment (the number of people who would like more work) is close to record highs. Rising national income is not trickling down to workers: wage growth has fallen to about 1.9%, its slowest pace since the last recession. This is all the more uncomfortable because household debt has ballooned. Its ratio to GDP is close to 190%, one of the highest in the world. If the central bank raises interest rates, many families will have difficulties repaying their mortgages. For now, it is likely to do nothing—and the growth will go on.”

Europe

FT – Polish president warns ‘multi-speed’ EU will collapse – James Shotter and Jim Brunsden 9/5

  • “Andrzej Duda says bloc would lose attractiveness for countries deemed ‘second class.'”

South America

NYT – Brazilian Corruption Case Ensnares Ex-Presidents da Silva and Rousseff – Shasta Darlington and Ernesto Londono 9/5

  • “Brazil’s attorney general on Tuesday charged former President Luiz Inácio Lula da Silva; his successor, Dilma Rousseff; and several other senior figures of the Workers’ Party with running a ‘criminal organization’ that raked in hundreds of millions in bribes during the party’s nearly 14-year reign.”
  • “The attorney general, Rodrigo Janot, whose term ends this month, described the governments of Mr. da Silva and Ms. Rousseff as essentially fronts for a criminal enterprise through which senior politicians collected roughly $450 million from entities that included the state-run oil company Petrobras and the Brazilian National Development Bank. In addition to his conviction, Mr. da Silva has been charged in several other cases in which he stands accused of accepting bribes of relatively modest sums.”
  • “But the 230-page charge sheet released Tuesday puts him at the center of a huge conspiracy. Mr. Janot wrote that the allegations should not be seen as a sign that the judiciary was ‘criminalizing politics’ or routine ‘political negotiations,’ but rather as a record of a ruling elite that systematically used public money to ‘buy popular support.’”

September 6, 2017

If you were to read only one thing…

FT – China rewrites history with new censorship drive – Ben Bland 9/4

  • “First it put the squeeze on ideologically impure academics. Then it tried to censor foreign publishers such as Cambridge University Press. Now President Xi Jinping’s government is intensifying its drive to rewrite Chinese history by amending the archival record itself.”
  • “New research by a legal scholar reveals that Chinese authorities have been taking advantage of the digitalization of historical documents by systematically deleting Chinese journal articles from the 1950s that challenge the orthodoxy promoted by Mr. Xi.”
  • “In the past if someone wanted to censor, they had to go to the bookshelves and remove copies or pages but today, with a few keystrokes, you can wipe out content everywhere instantaneously.” – Glenn Tiffert, University of Michigan
  • “Mr. Tiffert said that digitalization has become an enabling tool for authoritarian regimes such as China, which has taken the lesson from the collapse of the Soviet Union that Communist governments ‘may not survive critical scrutiny’.”
  • “Although the Communist party has always tried to keep a tight grip on the historical narrative, Zhang Qianfan, a professor of constitutional law at Peking University, said it was getting worse, making ‘society and particularly the younger generations more ignorant about modern history’.”

Perspective

WSJ – Daily Shot: Business Insider – 17 US Companies with Biggest Cash Piles 9/4

WSJ – Daily Shot: recode – Tech companies lead in R&D spending 9/4

Statista – America’s Fattest States – Niall McCarthy 9/4

Bloomberg Businessweek – Love of Coastal Living Is Draining U.S. Disaster Funds – Christopher Flavelle 8/31

  • “Founded (the National Flood Insurance Program – NFIP) in 1968 to make sure homeowners in flood-prone areas could get affordable insurance, the program ends up paying most residential flood insurance claims in the U.S. Partly as a result, development along coasts and riverbanks and in flood plains has exploded over the past 50 years. So have claims for flood damages. The NFIP is now about $25 billion in debt.”
  • “The issues surrounding the NFIP go beyond just insurance and straight to the costs of climate change—specifically, whether the government will concede that the most vulnerable places simply can’t be protected. While hurricanes contribute greatly to costs, putting a sudden spotlight on the insurance issue, it’s the chronic flooding that happens away from the public eye, in places such as Dauphin Island (Alabama), that slowly drains the NFIP. The island has one of the country’s highest concentrations of houses that the Federal Emergency Management Agency calls ‘severe repetitive loss’—those that flood most often. The owners of those 84 properties have gotten almost $17 million since 1978, an average of $199,244 each.”
  • Of course, they’re not alone. “Last year the Natural Resources Defense Council won a lawsuit seeking to uncover how many homes FEMA has designated severe repetitive loss. The data the agency was forced to release showed that about 30,000 properties had cost taxpayers $5.5 billion since 1978.”

Worthy Insights / Opinion Pieces / Advice

Project Syndicate – The Normalization Delusion – Adair Turner 9/4

  • “The psychological bias to expect a return to ‘normality’ will remain strong. But the drivers of post-crisis economic performance are so deep that no return to normality is likely any time soon.”

Real Estate

WSJ – Daily Shot: FRED – Total Private Construction Spending – Office 9/4

Finance

Bloomberg Gadfly – China Herds ICO Cats – Tim Culpan 9/3

  • “The declaration Monday by China’s central bank that initial coin offerings are illegal and should be halted immediately shouldn’t come as any surprise.”
  • “Beijing had been mulling a plan for controlling this year’s boom in cryptocurrencies, with QQ.com reporting last week that authorities met with the chief securities and banking watchdogs. The state-endorsed National Internet Finance Association had also warned that ICOs pose a financial risk and may disrupt social economic order.”
  • “More than $1.8 billion has been raised through the 135 initial coin offerings listed at CoinSchedule this year.”

Tech Crunch – Cryptocurrencies have crashed 20% in two days – Fitz Tepper 9/4

  • “The cryptocurrency correction may have started.”
  • “After months of unprecedented appreciation, almost every digital currency is seeing double digit losses over the last 48 hours.”
  • “The cryptocurrency market as a whole has lost 20% in just two days as it fell to $142 billion, down from a total market cap of about $180 billion on Saturday.”
  • “Of course it’s important to put things into context – this ‘crash’ still leaves Bitcoin at double the price it was just four months ago. But it shows why ‘investing’ in cryptocurrencies isn’t for the faint of heart.”
  • “So why did cryptocurrency crash this weekend? A few reasons:”
  • “This morning China outlawed ICOs, saying they have ‘seriously disrupted the economic and financial order.’ Whenever a government sanctions bitcoin or cryptocurrencies the market always takes a hit, especially right after the SEC warned against the legality of some ICOs.”
  • “Another possibility – the market was simply overheated. This crash started right around the time Bitcoin hit an all-time high of a few dollars under $5,000. In other words this may be a natural cool down – if you look at Bitcoin’s history periods of rapid growth are always followed by some type of downturn – the same thing happens when traditional equities rapidly appreciate.”

China

FT – Hanergy founder disqualified from Hong Kong markets for 8 years – Lucy Hornby 9/4

  • “Li Hejun, the entrepreneur and founder of solar energy group Hanergy who was briefly China’s richest man, has been disqualified from the management of any corporation in Hong Kong for eight years.”
  • “In a series of investigative reports into Hanergy in 2015, the Financial Times detailed creative use by its Hong Kong listed subsidiary Hanergy Thin Film Power of unpaid receivables from its parent to book profits, its reliance on China’s shadow banking market for funding and the tendency of its shares to book all their gains in the last 10 trading minutes of each day.”
  • “The Hanergy investigation drew attention to the role of shell companies in Hong Kong small-caps and the conflicts of interest between Hong Kong-listed businesses and the mainland Chinese parent companies that draw financing from the Hong Kong market without being subject to its disclosure rules.”

Japan

Bloomberg View – How Japan Needs to Change to Welcome Immigrants – Noah Smith 9/3

September 5, 2017

Perspective

Howmuch.net – The Working Class Can (Not) Afford the American Dream – Raul 8/31

Howmuch.net – The Rising Costs of Sending Your Kids to a Private School – Raul 8/20

Howmuch.net – Status of US State Economies – Raul 8/15

Worthy Insights / Opinion Pieces / Advice

Bloomberg Businessweek – Why Private Equity Has $963 Billion in Dry Powder – Melissa Mittelman 8/31

  • “Investors give private equity managers their capital with the expectation that they’ll make it grow. But today these managers are sitting on a record $963.3 billion of dry powder, as they call money that they’ve raised but have yet to invest. The size of that pile, and the fact that it keeps rising, is making everyone antsy. A little dry powder is great if managers are holding out for better deals. But a lot can make for overly itchy trigger fingers, or can start to make investors wonder if there are cheaper ways to do nothing with cash.”

LA Times – Yes, ExxonMobil misled the public – Naomi Oreskes and Geoffrey Supran 9/1

NYT – To Understand Rising Inequality, Consider the Janitors at Two Top Companies, Then and Now – Neil Irwin 9/3

Bloomberg View – The Flaws in India’s Growth Model Are Becoming Clear – Mihir Sharma 9/3

  • “India has a way of confounding expectations. Analysts agreed that, months after Prime Minister Narendra Modi’s ill-fated decision to withdraw 86 percent of currency from circulation overnight, growth would bounce back. Economists polled by Bloomberg expected growth in the April to June quarter to be 6.5%; other estimates were even higher. So when the government’s official statisticians released the real number last week — 5.7% over the equivalent quarter of the previous year — there was general surprise, even shock.”
  • “India’s economy has been growing less and less healthy for awhile. GDP growth has now declined steadily for six straight quarters. This is a slowdown caused by factors deeper than the cash ban or any other temporary phenomenon. Something is broken in the Indian government’s policy mix.”
  • “…Government spending and low oil prices have deceptively boosted the growth numbers, masking the true state of the economy. In fact, if public spending is excluded, growth in the past quarter barely topped 4%. Export growth is terrible and industrial growth is the lowest in five years. And the government will struggle to keep investing at these levels; it started spending big unusually early in India’s financial year, which starts in April, and has already run through 93% of its budgeted fiscal deficit.”
  • “…Effective reform — and political will — is precisely what’s needed now. The government’s first task should be to clean up bad debts far quicker than it has so far — even if powerful people, including company owners, lose money in the process. Second: The government needs to stop chasing after foreign capital to replace shy domestic capital, if it means that the rupee stays high and exports struggle. And third: Officials must quickly fix those parts of the GST that are putting small companies and exporters out of business.”

Finance

Visual Capitalist – The Unparalleled Explosion in Cryptocurrencies – Jeff Desjardins 9/1

FT – University start-ups aim for the Facebook formula – Hugo Greenhalgh 8/31

  • Rather than watch their students leave University to pursue a worthwhile business start-up, Universities are getting in on the venture capital business seeking to support and nurture the talent within.

FT – Credit cards: dealing with delinquency – Lex 8/31

Tech

Fortune – Everything You Needed to Know About Overvalued Unicorns in One Chart – Anne VanderMey 8/24

Fortune – 5 Ways Businesses Are Already Using Blockchains – Jeff John Roberts – 8/21

Health / Medicine

NYT – The First Count of Fentanyl Deaths in 2016: Up 540% in Three Years – Josh Katz 9/2

  • “The first governmental account of nationwide drug deaths in 2016 shows overdose deaths growing even faster than previously thought.”
  • “Drug overdoses killed roughly 64,000 people in the United States last year, according to the first governmental account of nationwide drug deaths to cover all of 2016. It’s a staggering rise of more than 22% over the 52,404 drug deaths recorded the previous year.”
  • “Drug overdoses are expected to remain the leading cause of death for Americans under 50, as synthetic opioids — primarily fentanyl and its analogues — continue to push the death count higher. Drug deaths involving fentanyl more than doubled from 2015 to 2016, accompanied by an upturn in deaths involving cocaine and methamphetamines. Together they add up to an epidemic of drug overdoses that is killing people at a faster rate than the H.I.V. epidemic at its peak.“
  • “It’s an epidemic hitting different parts of the country in different ways. People are accustomed to thinking of the opioid crisis as a rural white problem, with accounts of Appalachian despair and the plight of New England heroin addicts. But fentanyls are changing the equation: The death rate in Maryland last year outpaced that in both Kentucky and Maine.”

Canada

WSJ – The Underappreciated Risks to Canadian Banks – Aaron Back 8/31

  • “Americans looking north to Canada see a housing market that echoes their own before the financial crisis. While there are substantial differences that make Canadian lenders more resilient, investors still should be on guard.”
  • “Canadian housing prices have been rapidly rising for years, prompting local governments in frothy areas to take draconian measures such as a 15% tax on foreign buyers.”
  • “It isn’t all foreign cash—Canadian debt levels also have soared. Last year its households had debt equivalent to 176% of disposable income, according to the OECD. That compares to 112% in the U.S., down from a 2007 peak of 144%.”
  • “Canada’s banks, however, are showing no signs of stress. The country’s six biggest lenders that dominate this highly concentrated market have just reported solid quarterly earnings. Mortgage delinquency rates are remarkably low, at only around 0.2%.”
  • “It helps that most Canadian mortgages are ‘full recourse’ loans, making it much harder for borrowers to default and walk away. Around half of the mortgages written by the big six banks are also insured, directly or indirectly, by the Canadian government.”
  • “Nonetheless, the risks are substantial. Unlike in the U.S., where 30-year fixed rates are the norm, the standard Canadian mortgage rate resets every five years. In July, Canada’s central bank raised rates for the first time in seven years. Analysts expect more hikes, especially after Canada reported strong 4.5% annualized gross domestic product growth for the second quarter. That will make regular debt payments even more burdensome for Canadian households.”

China

FT – Beijing’s uneasy deals with overseas car groups under strain – Charles Clover 8/31

  • “A spate of new foreign joint ventures in China’s car industry has revived debate about an often criticized three-decade-old policy of trading market access for technology.”
  • “This week, the Renault-Nissan alliance became the latest car group to sign a joint venture to produce electric vehicles with longtime partner Dongfeng Motor Corporation, based in Wuhan, following an announcement by Ford in August that it plans to partner with little-known Zotye Auto to make EVs.” 
  • “The Renault-Nissan Dongfeng partnership is significant because it goes further than other JVs and calls for the groups to share a common technological platform. It is not clear whether other overseas car groups will follow this course because of issues over trust on the sharing of technology.”
  • “The new EV joint ventures are part of a Chinese effort to master the technology for electric vehicles — and rely on a tried and tested model of working with the global car industry since the 1980s. In a nutshell, joint ventures are the only way for foreign groups to access the world’s largest and most lucrative market. China gives the overseas companies the right to sell cars in exchange for their technology, management expertise and a share of their profits.” 
  • “’China’s central planners said ‘how can we basically force global automakers to participate and bring their very best electric vehicle technology to China?’’ says Michael Dunne, president of Dunne Automotive, a Hong Kong-based car consultancy.” 
  • “Since 1984, starting with Jeeps, foreign carmakers have been allowed to produce cars in China — but only in concert with a local partner holding at least 50 per cent of the venture. In practice, this is almost always one of six anointed state companies.”
  • “The results of the three-decade-old policy have been mixed. Rather than transforming Chinese car companies into technology giants, the joint venture companies have arguably made Chinese carmakers complacent, according to Chinese policymakers. He Guangyang, a former minister of industry, controversially described the JVs as ‘like opium’ in an interview five years ago.”
  • “Bart Demandt of carsalesbase.com says this is a legacy of the joint ventures. ‘The state-owned companies, especially those which have 50/50 joint ventures with foreign automakers, have had little incentive to invest in their domestic brands as the profits have been pouring in from producing import-brand cars for their partners.’” 
  • “However, the Chinese government is still relying on this model, and recently set its sights on the nascent battery powered car industry. Last year it included EVs as one of 10 sectors that it wants to be internationally competitive by 2025 as part of a new industrial policy ‘Made in China 2025’.” 
  • “Foreign carmakers are wary of the new requirements and have pressed on China to delay the EV quotas by at least a year. But they have few alternatives. ‘The global automakers say ‘wow, this really has teeth, because if we want to grow in this market we don’t have a choice. There is no work around’,’ says Mr Dunne.” 
  • “The second prong of the policy is to pressure foreign carmakers to ‘localize’ their electric vehicle technology, meaning in practice to share it with their joint venture partners.” 
  • “Bill Russo, head of Gao Feng Advisory in Shanghai, calls this ‘a real game-changer for the multinational carmakers’.” 
  • “’They must comply with a new set of regulations for both component localization and credits for EV sales in order to be in the game. As carmakers will be required to pay fines if they are not selling EVs, they will be required to add EV production in order to sustain their existing business in China.’” 
  • “This has created fears that their proprietary technology could be stolen. Over the past two decades, foreign makers of everything from high-speed trains to fighter planes have licensed the technology to local Chinese partners only to find a few years later that their partner is a major international competitor.” 

FT – Anbang sells stakes in Chinese megabanks amid troubles – Gabriel Wildau 8/31

  • “Anbang Insurance Group, the Chinese conglomerate that captured global attention with splashy foreign acquisitions, sold stakes worth as much as $1bn in the country’s largest banks this year, as the company struggles with a sudden drop in premiums.”
  • “In May, China’s insurance regulator banned Anbang’s life insurance unit from selling policies for three months and accused the group of ‘wreaking havoc’ on the market with aggressive pricing.” 
  • “Anbang had relied on sales of high-yield investment products to fund foreign private-equity acquisitions as well as stakes in Chinese listed companies. Chinese investors flocked to so-called ‘universal insurance’, which combined high yields with short maturities and bore little resemblance to traditional insurance.” 
  • “But an industry-wide crackdown on universal insurance has caused premiums from such products to drop more than half in the first half of the year, according to data from the China Insurance Regulatory Commission. At Anbang, such premiums fell 98%, due in part to the CIRC ban.” 
  • “The sales of shares in China’s ‘big four’ state-owned commercial banks appear to suggest that, with cash inflows from product sales drying up, Anbang sold assets to meet payouts on maturing products. Anbang said the share sales did not reflect cash flow problems.” 
  • “Last month, a Chinese credit-rating agency downgraded Anbang’s Life Insurance, saying that ‘income has fallen substantially [and] the availability of debt financing is reduced’. The agency also noted that Anbang Life posted a net loss in the first half.” 
  • “Anbang dropped off the lists of the top 10 shareholders in three of China’s big four state-owned commercial banks in the second quarter, according to the banks’ financial statements released this week. In the fourth bank, Anbang also reduced holdings but remained in the top 10.” 
  • “Anbang is also not the only insurer to sell stakes in big banks in the second quarter. Ping An Insurance, the country’s largest insurer by assets, sold down in ICBC.”

NYT – As Bike-Sharing Brings Out Bad Manners, China Asks, What’s Wrong With Us? – Javier Hernandez 9/2

  • “There are now more than 16 million shared bicycles on the road in China’s traffic-clogged cities, thanks to a fierce battle for market share among 70-plus companies backed by a total of more than $1 billion in financing. These start-ups have reshaped the urban landscape, putting bikes equipped with GPS and digital locks on almost every street corner in a way that Silicon Valley can only dream of.”
  • “But their popularity has been accompanied by a wave of misbehavior. Because the start-ups do not use fixed docking stations, riders abandon bicycles haphazardly along streets and public squares, snarling traffic and cluttering sidewalks. Thieves have taken them by the tens of thousands, for personal use or selling them for parts. Angry and mischievous vandals hang them in trees, bury them in construction sites and throw them into lakes and rivers.”
  • “Such problems have raised questions about the sustainability of China’s bike-share boom. But the debacle has also led many Chinese to look for deeper explanations and ask if bike-sharing has revealed essential flaws in the national character, prompting a far-reaching debate about social decay and the decline of decorum and morality in the country.”
  • “Some say abuse of the bicycles reflects an every-man-for-himself mentality in China that has its roots in the extreme poverty of the last century. Others are bothered by what they see as a lack of concern for strangers and public resources. The transgressions have been chronicled in the local news media with a tone of disbelief, in part because Chinese generally see themselves as a law-abiding society and crime rates are relatively low.”
  • “In many cities, the supply of bicycles far exceeds demand, bringing chaos to sidewalks, bus stops and intersections and prompting grumbles that excessive competitiveness — seen as a national trait — is spoiling a good thing. In Shanghai, where officials have struggled to maintain order, there is now one shared bike for every 16 people, according to government statistics.“
  • “In some places, the authorities have confiscated tens of thousands of bicycles and imposed parking restrictions. News outlets have documented the waste with astounding images of mountains of candy-colored bicycles, each hue representing a different bike-share company.”

FT – China’s migrant workers feel pinch as Beijing pulls back on wages – Tom Hancock 9/3

Europe

Bloomberg Businessweek – Germany’s Housing Market is Red Hot, But Don’t Call It a Bubble – Stephan Kahl and Andrew Blackman 8/21

  • A different way of engaging with rising real estate values…

South America

Bloomberg Businessweek – Brazil’s Lost Decade: The Invisible Costs of an Epic Recession – David Biller and Gabriel Shinohara 8/21

  • “Once the emerging-market darling of Wall Street, Brazil’s economy went from growth of 7.5% in 2010 to shrink by virtually the same amount in the last two years. Unemployment has risen to a near-record high, GDP per capita fell to 2009 levels and the budget deficit is hovering around 10% of GDP. There is no sign the Latin American giant will recover its investment-grade status any time soon.”
  • Fortunately…

FT – Brazil ends worst recession as GDP expands for second straight quarter – Joe Leahy 9/1

  • “Brazil’s gross domestic product expanded for the second consecutive quarter in the three months ended June, officially ending the worst recession in Latin America’s largest economy.”
  • “GDP grew just 0.2% in the quarter compared to the first three months of the year and 0.3% compared with the same quarter a year earlier, the state statistics agency, IBGE, said.”

August 31, 2017

Perspective

FT – Taxpayers face lion’s share of $50bn storm Harvey bill – Alistair Gray 8/30

  • “Tropical storm Harvey is shaping up to be one of the three costliest natural disasters in modern US history.”
  • “As the system encircles the devastated region for a sixth consecutive day, some forecasters warn it may prove even more financially ruinous than superstorm Sandy and be topped only by Hurricane Katrina.”
  • “This time, however, the insurance industry — traditionally the backstop in tough times — is expected to avoid picking up much of the tab as many householders lack cover for flooding. Taxpayers are likely to cover a big chunk of the loss, but how much support the state will provide is far from clear.”
  • “Gary Martucci, director at the rating agency Standard & Poor’s, described the storm as ‘unique’ in that it released so much rainfall while its winds caused a small proportion of the devastation. Flood damage is particularly difficult to assess, not least because it makes it harder for loss adjusters to access stricken properties.”
  • “Many homeowners will not, in any case, be covered as standard US home insurance policies exclude flood damage. For decades the industry has been unprepared to underwrite flood risk because of the potential for catastrophic losses.”
  • “Householders can get cover from a government-backed scheme, the National Flood Insurance Program (NFIP), but only about one in six properties in the county in which Houston is located has the protection, according to Larry Greenberg, insurance analyst at Janney Montgomery.”
  • “Lawyers predict protracted disputes over insurance coverage — on issues ranging from the definition of flood damage to whether or not a property was rendered inaccessible.”
  • “Mr. Pasich (Kirk Pasich, attorney), who represents corporate policyholders, expects battles for years to come. ‘Some of the litigation that came out of Katrina is still going on,’ he said.”

Worthy Insights / Opinion Pieces / Advice

Bloomberg – Kushners’ China Deal Flop Was Part of Much Bigger Hunt for Cash – David Kocieniewski and Caleb Melby 8/31

MarketWatch – Amazon is actually the weakest of the big U.S. retailers, Moody’s says – Ciara Linnane 8/31

  • “The perception that as soon as Amazon enters a product category, it immediately wins is also flawed, said the analyst. While Amazon is clearly disruptive, it does not dominate any category in which it operates.”
  • Well maybe not ‘any’…very few companies have figured out the hype game so well (except for maybe Tesla and Bitcoin).

Project Syndicate – Odious Ratings for Public Debt – Ricardo Hausmann and Ugo Panizza 8/30

Markets / Economy

WSJ – Daily Shot: ADP – US Job Creation by Category 8/31

Real Estate

FT – Harvey floods prompt alert on risk of mortgage bond defaults – Joe Rennison 8/30

  • “Tropical storm Harvey has put up to $30bn of securitized commercial mortgages on the watch list of analysts and investors, as damage from the disaster has heightened the risk of defaults.”
  • “Morningstar Credit Ratings said 1,529 properties, with an outstanding mortgage balance of $19.4bn could be affected. The majority of the properties are in Harris County, which has suffered from severe floods since Harvey hit Texas as a hurricane on Friday.”
  • “Data company Trepp cast a wider geographical net and put the universe of affected loans at a larger $29.6bn across 2,200 properties.”
  • “Fitch Ratings estimates $10.4bn of loans in bonds it has provided credit ratings to could be impaired.”
  • “’The storm could add long-term uncertainty to the performance of the properties if homes are damaged and residents . . . are unable to move back promptly,’ Fitch said.”
  • “The risk centers on properties that may be uninsured against flood. The widespread impact of the hurricane means that properties outside traditional flood zones could be affected, said analysts. Other risks include the possibility that flooding may have left undamaged properties stranded. For example, a hotel may be open but if people cannot reach it, then it will suffer.”
  • “But Mr. Clancy (Manus Clancy, head of research at Trepp) added that damage from previous storms, such as from Hurricane Katrina or Hurricane Sandy, had resulted in little knock-on effect to commercial mortgage-backed securities. Traders and analysts said there had been little noticeable effect in markets, with bonds trading without impairment on Wednesday.”
  • “’The market has not reacted in a way to assume assets will be written off,’ said Mr Clancy. ‘People want to know their Houston exposure but they are expecting there will be enough insurance proceeds to cover the value of the bonds.’”

FT – ‘Nonprime has a nice ring to it’: the return of the high-risk mortgage – Ben McLannahan 8/30

Energy

FT – Storm Harvey exposes Achilles heel for global energy market – Gregory Meyer and Jude Webber 8/31

  • “’It’s a major event. It’s going to impact both domestic and world markets,’ says John Auers, executive vice-president at Turner Mason, a consultancy.”
  • “The shale drilling boom catapulted the US into the top tier of oil and gas producers in the past decade. Refineries clustered in Texas and Louisiana have expanded and now export about 4m barrels per day of refined fuel overseas.”
  • “The US’s new status as an energy powerhouse has created a more flexible, diverse, and arguably resilient world fuel market.”
  • “But Harvey is exposing an Achilles heel: the concentration of US energy assets in a low-lying, hurricane-prone coastal corridor makes the world more exposed to local weather.”
  • “The immediate effects of the storm have been to knock out more than 3m barrels per day of oil refining capacity, or 16% of the US total, according to S&P Global Platts. Among the refineries to close was the nation’s largest, Motiva in Port Arthur, Texas, where nearly four feet of rain fell.”
  • “’There are huge amounts of US products that are not being delivered,’ says Olivier Jakob of Petromatrix, a Swiss-based consultancy. ‘The US is exporting so much compared to before, this is a major disruption for world oil flows.’”
  • “The Gulf’s energy industry may well recover quickly from Harvey, but the Atlantic hurricane season has months to go. On Thursday a storm named Irma was forecast to blow into the Caribbean as a major hurricane.”

FT – European fuel armada heads for US after tropical storm Harvey – David Sheppard 8/30

  • “A flotilla of European fuel tankers is preparing to sail to the US in the wake of tropical storm Harvey, as oil traders rush to replace supplies of petrol knocked out by the worst storm to hit Texas in 50 years.”
  • “Shipbrokers in London said almost 40 cargoes of petrol had been booked or were being negotiated so far this week, well up on the usual volume, and traders were asking for flexibility to deliver either to the Atlantic seaboard or the Gulf Coast depending on when ports may reopen.”
  • “Tanker earnings for the transatlantic route, a proxy for demand, have soared almost six-fold in the past week, shipbrokers said, rising to more than $20,000 a day for the benchmark voyage, from $3,500 a week ago. The total number of shipments could still change because not all voyages are arranged through brokers, and some still being discussed may not be finalized. About 25 have already been fixed or are expected to be in the coming days.”

Finance

WSJ – Daily Shot: S&P Global Market Intelligence – BB/BB- Spreads 8/31

WSJ – Daily Shot: S&P Global Market Intelligence – B+/B Spreads 8/31

WSJ – Daily Shot: S&P Global Market Intelligence – Debt Buyers 8/31

  • “This chart shows banks pulling out of corporate leveraged loans, as institutions (such as BDCs, CLOs, credit funds, hedge funds, etc.) pile into the market.”

China

Bloomberg – China’s $2 Trillion of Shadow Lending Throws Focus on Rust Belt – Jun Luo and Alfred Liu 8/29

  • “By analyzing 237 Chinese banks, many of them small and unlisted regional lenders, Bedford casts a new spotlight on underground financing and the risks it poses to the nation’s $35 trillion banking industry. Shadow loans grew almost 15 percent to 14.1 trillion yuan ($2.3 trillion) by December from a year earlier, equal to about 19% of economic output, he estimates.”
  • “’This is a sleeper issue,’ Bedford wrote. ‘The remarkable level of concentration in regional banks in rust-belt region banks, combined with evidence that these assets are increasingly being used to roll over loans to existing borrowers as well as being swapped between banks without a clear transfer of risk are alarming.’”
  • “Accounting for this financing, Chinese banks’ nonperforming loans could be three times higher than the official published level, he said.”
  • “By recording such lending under ‘investment receivables’ rather than ‘loans’ on their financial statements, banks were able to disguise what is in effect lending, to get around regulatory lending curbs or heavy reliance on wholesale funding. Such financial engineering also enabled some lenders to overstate their capital adequacy ratios, understate nonperforming loans and reduce provision charges.”