October 31, 2017

Happy Halloween!

If you were only to read one thing…

FT – Billionaire boom is a sign that rates need to rise – Merryn Somerset Webb 10/27

  • “It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product.”
  • “It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalization as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years.”
  • “The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures. Most markets have ended up overvalued (this will really matter one day), while pension fund deficits and a constant sense of crisis have discouraged capital investment — and have possibly held down wages in the UK.”
  • “Set a target, get a distortion. This is standard stuff. But the fact that extreme monetary policy has been going on for so long means that central bankers do not just have macro problems to feel bad about. They are also effectively responsible for the increasingly dodgy micro policies governments have felt forced to put in place in an attempt to alleviate the nasty side effects of very low interest rates, over which they have no control.”
  • “A bit of good news is that this monetary experimentation has been about inflation targeting (everyone, for no obvious reason, is after 2%). And if you set a target and pursue it at the cost of everything else you usually get to it. So inflation is back. In the US, where expectations of inflation are low, September numbers showed average hourly earnings jumping 2.9%, the biggest rise in a decade.”
  • “The Monetary Policy Committee could dig out a list of excuses not to raise rates despite the last GDP growth numbers being rather better than expected. Raising rates will do harm at some point (asset prices will fall and the indebted will suffer). But not reversing is beginning to look like it could do more harm. Unless, of course, you are a billionaire.”

Perspective

Axios – ‘Degree inflation’ may be pushing workers out of the middle class – Christopher Matthews 10/25

  • “A growing number of U.S. employers are requiring bachelor’s degrees for jobs that have long been performed by workers without them, contributing to a rise in income inequality, according to a report published today.”
  • “Why it matters: The report, by Harvard Business School, Accenture, and Grads of Life estimates that 6 million American jobs are at risk of ‘degree inflation,’ a result of employers increasingly using a bachelor’s degree ‘as a proxy for a candidate’s range and depth of skills.'”

  • “‘This phenomenon is a major driver of income inequality,’ Joe Fuller of Harvard Business School tells Axios. ‘We’re hollowing out middle-class jobs and driving everyone to the extremes of the income spectrum.'”
  • “The number of U.S. job openings has reached an all-time high, but more than 13 million Americans — the vast majority with less than a four-year college degree — are unemployed or working part-time when they want full-time positions.”
  • “The costs of the shift are ‘profound’ for the two-thirds of American adults who lack a college degree, Fuller says.”
    • “90% of companies use screening software to weed out applicants lacking the education requirement. That means, even with the right experience, an applicant won’t even be considered by a human.”
    • “‘This puts significant pressure for people with certain aspirations to get a degree even when it’s not directly relevant to their career.'”
    • “When the 6-year graduation rate for 4-year schools in America is just 59%, that means Americans lacking the aptitude to excel in college take on debt for degrees they’ll never receive.”
    • “Hispanics and African Americans are disproportionately hurt by the phenomenon, because they have lower college graduation rates than the population at large.”

Visual Capitalist – Commuters and Computers: Mapping U.S. Megaregions – Nick Routley 10/28

  • “We tend to think of cities as individual economic units, but as they expand outward and bleed together, defining them simply by official jurisdictions and borders becomes difficult. After all, many of the imaginary lines divvying up the country are remnants of decisions from centuries ago – and other county and state lines exist for more counterintuitive reasons such as gerrymandering.”
  • “By ignoring borders and looking purely at commuter data, geographer Garrett Nelson and urban analyst Alasdair Rae looked to map the relationship between population centers in their paper, An Economic Geography of the United States: From Commutes to Mega-regions.”

  • “The study used network partitioning software to link together 4 million commutes between census tracts. This gives us a very granular look at the ‘gravitational pull’ of America’s population centers, and helps us better understand the economic links that bind a region together.”
  • “By combining visual and mathematical approaches, and some creative place-naming, the researchers created a map that they hope reflects America’s true economic geography.”

WSJ – Daily Shot: State College Graduation Rates – Highest & Lowest 10/29

Worthy Insights / Opinion Pieces / Advice

The Atlantic – Harvey Weinstein and the Economics of Consent – Brit Marling 10/23

  • “The blunt power of the gatekeeper is the ability to enforce not just artistic, but also financial, exile.”

Bloomberg View – When Wall Street Looks Pricey, the Rest of the U.S. Thrives – Conor Sen

  • “When stocks are expensive, those with capital are more inclined to expand a business or start a new one.”
  • We’ll see…

Bloomberg View – Faster Growth Begins With a Land Tax in U.S. Cities – Noah Smith 10/24

  • This would cause a major political fight. The odds are that a land value tax would initially be passed onto tenants, until of course there is enough push back.
  • Granted, this goes against the goal of having property in core markets with the ability to benefit from economic rents…

Business Insider – Jeff Flake isn’t brave, he’s helpless – and he doesn’t understand why – Josh Barro 10/24

FT – Investors pass the buck on governance – Rana Foroohar 10/29

  • “Proxy advisers incentivize the wrong company behavior by creating rigid checklists.”

NYT – A Long-Delayed Reckoning of the Cost of Silence on Abuse – Jim Rutenberg 10/22

NYT – Forget Washington. Facebook’s Problems Abroad Are Far More Disturbing. – Kevin Roose 10/29

Real Estate

WSJ – Daily Shot: Moody’s – US Single Family Home Sales 10/29

  • “Moody’s is projecting that many more homes will be sold next year as homeowners finally make their move.”

Others are not as optimistic.

WSJ – Daily Shot: John Burns RE Consulting – US Existing Single Family Home Sales 10/29

FT  – Sand castles on Jersey Shore: property boom defies US flood risk – Gregory Meyer 10/29

  • “Sandy exposed the perils of shoreline living, as the climate warms and sea levels creep higher. In the US alone it left 162 dead, laid waste to 650,000 homes and cost $65bn — the second most expensive weather disaster in history.”
  • “On New Jersey’s fragile barrier islands, the response to Sandy has not been to withdraw inland but rather to build bigger. ‘They did not rebuild bungalows. They knocked those down and built McMansions,’ says Walter LaCicero, Lavallette’s mayor.”
  • That’s one way to do eminent domain.
  • “Improbably, the disaster created a once-in-a-lifetime buying opportunity. Older families unable to pay for repairs sold properties.”
  • “House prices in the worst-hit communities cratered after Sandy. In Lavallette, the median sale price of $532,500 in October 2012 had more than halved to $225,000 by February 2013, according to New Jersey Realtors. This past summer, median prices reached $660,000 and were higher by the beach.”
  • “The Federal Emergency Management Agency has paid out more than $25bn in New Jersey and New York alone, reimbursing towns for the cost of removing debris, repairing roads and bridges, and renting emergency equipment. Gaps in local tax revenue lost when assessed property values collapsed were filled with federal money. The agency granted $1.4bn to 179,000 people and households in the region to cover their costs of shelter and rebuilding.”
  • “Critics say federal policy rewards local officials for hazardous coastal development. ‘If someone told you you’re going to get a new beach every time the oceans washed yours away, you’re probably going to feel more secure allowing high-priced homes to be built there,’ says Rob Moore, senior policy analyst at the NRDC (National Resources Defense Council).”
  • “The aid has strings attached: all new and rebuilt houses must now rest on stilts at least one foot above the estimated crest of a once-in-a-100-year flood.”
  • “Relatively cheap schemes such as hazard zoning and land purchases have typically received about 5% of disaster relief funds, according to a report by the National Research Council, an expert body. Washington is also picking up a bigger tab from coastal disasters, covering 75% of the damages from Sandy compared with 6% for Hurricane Diane in 1955.”
  • “‘Developers, builders and state and local governments reap the rewards of coastal development but do not bear equivalent risk, because the federal government has borne an increasing share of the costs of coastal disasters,’ the council’s study said.”
  • “The prospect of higher and more frequent floods driven by climate change comes as the Trump administration unravels US commitments to rein in carbon emissions, including pulling out of the Paris agreement and abandoning an initiative to factor climate risks into infrastructure spending. As Irma bore down on Florida last month Scott Pruitt, administrator of the Environmental Protection Agency, said the time to discuss the causes and effects of the storm was ‘not now’.”

WSJ – Stuck in Place, U.S. Homeowners Hunker Down as Housing Supply Stays Tight – Laura Kusisto and Christina Rexrode 10/29

FT – Boston prices its graduates out of starter homes – Hugo Cox 10/24

Energy

WSJ – Your Next Home Could Run on Batteries – Christopher Mims 10/15

  • “The rise of these home batteries isn’t just a product of our collective obsession with new tech. Their adoption is being driven by a powerful need, says Ravi Manghani, of GTM Research: renewable energy.”

  • “Without batteries and other means of energy storage, the ability of utility companies to deliver power could eventually be threatened.”
  • “Solar power, especially, tends to generate electricity only at certain times—and it’s rarely in sync with a home’s needs. In some states, such as California and Arizona, there’s an overabundance of solar power in the middle of the day during cool times of the year, then a sudden crash in the evenings, when people get home and energy use spikes.”
  • “For utilities, it’s a headache. The price of electricity on interstate markets can go negative at certain times, forcing them to dump excess electricity or pay others to take it.”
  • “’This is not a long-term theoretical issue that might happen—this is now,’ says Marc Romito, director of customer technology at Arizona Public Service, the state’s largest electric utility.”

Finance

FT – Wall St banks ride boom in leveraged loans as volumes soar – Joe Rennison and Eric Platt 10/29

  • “Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016.”
  • “The overall industry has underwritten leveraged loans worth $1.251tn, and earlier this month eclipsed its previous full-year record set in 2013, according to Dealogic. Volumes are up 38% from a year earlier and more than 60% of the deals have been companies refinancing existing loans.”
  • “The relative dearth of new loans, as opposed to refinancings, has also given borrowers the upper hand. As well as lower rates, borrowers are also able to cut the number of investor protections, called covenants, written into the loans.”
  • “’Net new supply is relatively low so demand is exceeding supply,’ said Christina Padgett, an analyst at Moody’s. ‘Investors are going to get squeezed on price and the issuers are going to take advantage so they have really flexible credit agreements.’”

FT – Why credit is the Hotel California of markets – Michael Mackenzie 10/24

  • “The endless debate over valuation metrics that have accompanied the storming bull run in stocks misses a much bigger point about investing in 2017. Thanks to the outsized role of central banks, it is the credit markets that run the show. If you want clues on when the bull run in equities is entering the red zone, keep your eyes on the corporate debt market.”
  • “Before central banks’ quantitative easing policies engineered the current cycle of financial suppression, credit markets had already established their bona fides as an early warning system for investors. When equities peaked in October 2007, the credit market had already begun turning lower.”
  • “A decade on, the risk premium, or additional yield, offered by corporate bonds over that of a US government bond is at its narrowest since 2007. That provides very little protection for buyers, with even a modest drop in bond prices erasing the meagre fixed income being paid by borrowers.”
  • The big lesson digested by investors since the financial crisis is that you need to own yield, and the money gushing into bond funds remains immense. About $241bn flowed into US high grade bond funds and exchange traded funds in the first nine months of the year, according to Bank of America Merrill Lynch estimates. That’s a whopping 34% higher than 2012’s full-year record of $180bn, the bank says.”
  • “This high tide of money means companies can keep selling debt — running at a record $1.4tn pace this year in the US — at very low interest rates. The resulting higher leverage in the system helps explain why the equity market keeps updating the record books with alacrity.”
  • “’As long as people are tripping over themselves to buy bonds, it remains a very favorable environment for risk taking,’ says Jack Ablin, chief investor officer at BMO Wealth Management.”
  • “True, a number of strategists concede the current credit cycle is looking a little long in the tooth, but they also think the water can remain warm and soapy for a while yet.”
  • “The Federal Reserve may have begun trimming its balance sheet, but other central banks are still buying and the scale of their largesse keeps US credit spreads tight as international money hunts yield. Not until next March will collective bond buying from the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England peak at around $15.3tn, according to BofA.”
  • “But kick the tires of the credit machine a little harder and there are nascent signs of trouble.”
  • “The quality of covenants — designed to protect bondholders from a borrower defaulting — loiters in the gutter, reflecting a market awash with far too much money.”
  • “In another troubling sign, companies have raised just $215bn from the US high yield market in 2017, the second-slowest figure since 2011, as flows of money into the sector have been choppy this year. While this suggests that some money managers are doing their credit homework, the recent bankruptcy filing of Toys R Us sends a grim tiding about market complacency.”
  • “Bonds in the highly indebted retailer were trading near par and then plunged below 30 cents on the dollar.”
  • “So where does this leave investors? Sure the music is still playing and will probably do so for some time yet. But watch the yield curve. The Fed’s autopilot sequence of rate increases has sharply narrowed the difference between yields on short and long dated Treasuries. This reflects expectations that inflation will stay low — bad for debtors — as well as concern that the economy’s growth prospects are limited.”
  • “If there’s further curve flattening after a tax reform deal, that will send a gloomy signal about the economy, finally push credit spreads wider and should worry the most ardent of equity bulls.”
  • “As we know from 2008, there is no exit once the credit market turns. Credit is the Hotel California of markets — and equity investors usually discover they are trapped in the basement.”

China

FT – Inside China’s secret ‘magic weapon’ for worldwide influence – James Kynge, Lucy Hornby, and Jamil Anderlini 10/25

  • “Xi is quietly ramping up a Communist party department to expand Beijing’s soft power.”

India

FT – India agrees $32bn plan to recapitalize state banks – Simon Mundy 10/24

  • “India’s government has announced a $32bn recapitalization plan for the country’s ailing state-controlled banks in a bid to tackle a festering economic problem.”
  • “The finance ministry promised on Tuesday to take a ‘massive step . . . to support credit growth and job creation’ by shoring up bank balance sheets strained by soaring corporate defaults over the past three years.”
  • “The state banks have been faced with weak credit demand this year and have lost market share to private sector rivals.”
  • “Concerns about the condition of the state-owned banks, which account for more than two-thirds of sector assets, have been mounting along with estimates of their bad loans.”
  • “This is because of a spurt in loans to companies in sectors such as steel and infrastructure over much of the past decade, many of which subsequently turned sour. Gross non-performing loans at the state-controlled banks rose to 13.7% of their assets at the end of June, up from 5.4% in March 2015.”
  • “Beyond the recapitalization, the government promised to push the banks to step up their lending to small and medium-sized enterprises, including by partnering with financial technology companies.”
  • “This sector was badly hit by India’s demonetization last year, which triggered a shortage of bank notes that rocked companies long used to dealing entirely in cash.”

Japan

WSJ – Japan to Young Investors: Loosen Up – Suryatapa Bhattacharya 10/29

Puerto Rico

Rhodium Group – America’s Biggest Blackout – Trevor Houser and Peter Marsters 10/26

Russia

NYT – In Russia, a Bribery Case Lifts the Veil on Kremlin Intrigue – Andrew Kramer 10/21

South America

WSJ – Daily Shot: Latinobarometro – Does Your Government Favor the Elite 10/29

  • It would be hard to argue it doesn’t.

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