January 8, 2018

Perspective

Visual Capitalist – Visualizing the Global Millionaire Population – Jeff Desjardins 1/4

Worthy Insights / Opinion Pieces / Advice

Bloomberg Gadfly – A French Challenge to Gundlach’s ‘Disaster’ Bond Theory – Mark Gilbert 11/17/17

  • “A record month for inflows into corporate bonds is ‘setting up a disaster for when rates rise & `investors’ learn that, yes, these bonds have rate risk’ was yesterday’s latest tweeted warning from Jeffrey Gundlach.”
  • “French utility Veolia Environnement SA is one of a handful of low-rated borrowers—assessed at BBB or lower by Standard & Poor’s—with fixed-rate debt repayable in three years or longer that trades at yields below zero in euros.”
  • “Veolia already has three-year paper that trades at a negative yield. Those bonds, however, were sold in 2005 at a yield of almost 4.5%; they dipped below zero for the first time last year, and recently turned negative once more.”
  • “But on Thursday, Veolia went one better by pulling off the neat trick of persuading investors to pay it directly to borrow, selling 500 million euros of bonds repayable in three years at a negative yield of 0.026%—’a first for a BBB issuer,’ the company trumpeted in a press release. What’s more, the sale was oversubscribed by more than four times.”
  • “Now, you could view the sale one of two ways. For the optimists, it provides evidence that investors are awash with cash and still confident that the European Central Bank’s bond-buying program will continue to support the market.”
  • “If, like Gundlach, though, you’re concerned that the world of fixed-income is in for a rude awakening and that the stress will first show up in the corporate bond market, you’ll probably view it as a last hurrah before reality hits home with a vengeance.”

FT – Iran and the oil price – Nick Butler 1/2

  • “Increasing oil exports would be an obvious way to fund more public spending.”

FT – Watch 10-year Treasury yields for signs of danger in 2018 – John Authers 12/29

  • “Investors should stay in stocks as a big bear market looks unlikely as early as 2018.”

Mauldin Economics – Outside the Box: Et Voila – Grant Williams 1/3

NYT – How Do You Vote? 50 Million Google Images Give a Clue – Steve Lohr 12/31

  • The more our world becomes ‘codified,’ the more insights will be derived, the less privacy we will have, and the more predictive the models will become…

WSJ – The Limits of Amazon – Christopher Mims 1/1

  • “The tech giant is very good at delivering what customers need, but is it as well positioned to sell them things they want?”

WSJ – Bitcoin Isn’t a Currency, It’s a Commodity – Price It That Way – Nathaniel Taplin 1/3

Real Estate

Housing Wire – Value of U.S. housing market climbs to record $31.8 trillion – Kelsey Ramirez 12/29

  • “The total value of all homes in the U.S. increased in 2017 to a total $31.8 trillion, according to the latest report from Zillow.”
  • “This is up from last year’s record high of $29.6 trillion, data from 2016 shows.”
  • “This is so high, that total homes in Los Angeles and New York City metro areas are worth $2.7 trillion and $2.6 trillion, respectively, the size of the U.K. and French economies.”
  • “This is an increase of $1.95 trillion over the past year, more than all of Canada’s GDP or two companies the size of Apple, Zillow’s report showed.”
  • “And renters are also now spending more money than ever before on housing, spending a record $485.6 billion in 2017. This is an increase of $4.9 billion from 2016.”
  • Renting in San Francisco is especially expensive as renters collectively paid $616 million more than renters in Chicago, despite having 467,000 fewer renters in San Francisco.
  • “Of the 35 largest U.S. markets, most home value growth occurred in Columbus, Ohio, which saw an increase of 15.1% to $152.3 billion in 2017.”

WSJ – You Got Priced Out of … Philadelphia? The Spread of Hot Housing Markets – Scott Calvert and Laura Kusisto 1/3

  • “The gentrification of the Fishtown neighborhood here looks like something city planners dream of, with developers renovating old row houses as young professionals, along with new restaurants and businesses, pile in.”
  • “But home prices have shot up so quickly in recent years that the latest wave of young professionals say they are having a hard time making the finances work.”
  • “Now several Philadelphia City Council members want to pass a law requiring property developers to set aside 10% of new projects as below-market units, to improve overall affordability in a city that once was among America’s biggest bargains.”
  • “Soaring housing costs aren’t confined to New York or San Francisco. Cities including Pittsburgh, Detroit, Buffalo and Nashville all have explored or adopted policies that, like Philadelphia’s, seek to create more cheap housing by an approach known as inclusionary zoning.”
  • “’It really underscores the housing-affordability problem is much more widespread than simply a problem in the 10 most expensive coastal cities,’ said Stockton Williams, executive director of the Terwilliger Center for Housing at the Urban Land Institute in Washington, D.C.”

WSJ – Private-Equity Funds Focused on Property Raising Less Capital – Peter Grant and Shefali Anand 1/4

  • “Private-equity funds that focus on real estate have been raising less money for the past few years, and chances are dim that there will be much pickup in fundraising in 2018.”
  • “But the reason for this trend isn’t that pension funds, endowments and other institutions that invest in private equity have lost their appetite for commercial property. A big part of the slowdown is that private-equity funds haven’t been able to spend all of the money they have raised, according to investors, analysts and fund managers.”
  • “The declining pace of fundraising and spending is partly due to the old age of the current real-estate cycle. Prices started rising in 2009 and remain near record levels in many cities, including San Francisco and New York, making it trickier to make new investments.”
  • “This is especially true for the most aggressive opportunistic private-equity funds that typically try to produce returns of at least 20%. Fundraising by these funds has fallen particularly sharply, dropping to $33.5 billion as of Dec. 27, compared with $43.8 billion in 2016 and $63.7 billion in 2015, Preqin said.”
  • “Still, the large amount of unspent cash sitting in the vaults of private-equity funds has been comforting to investors who are concerned the markets are due for a steep correction. As long as demand for property stays strong, prices are likely to remain healthy.”
  • “Green Street Advisors says that there was $136 billion of buying power sitting with private-equity firms and real-estate investment trusts at the end of 2017. That compares with about $120 billion at the end of 2016 and less than $80 billion at the end of 2011.”
  • “Another trend that some expect to accelerate in 2018: investors who buy stakes in real-estate fund managers. Dyal Capital Partners, which raises money to buy minority equity stakes in alternative asset managers, in 2016 purchased an interest in Starwood Capital Group.”
  • “Park Hill is seeing a number of large foreign investors who invest in real estate express an interest in buying into managers, Mr. Stark said. They are saying: ‘Rather than investing through some third-party manager, why don’t we buy into a manager,’ he said. ‘If you have enough capital you can leverage the talent and buy the machine, not just pay to rent one’.”

WSJ – Peak Commercial Real-Estate Prices Force Investors to Get Creative – Peter Grant and Shefali Anand 1/2

Finance

FT – Private equity turns to early loans to boost returns – Henny Sender 12/31

  • “Borrowed money improves fund rating on key metric of results over time but is risky.”

FT – How high-frequency trading hit a speed bump – Gregory Meyer, Nicole Bullock, and Joe Rennison 1/1

  • “Smaller volumes and a fall in market volatility have dented business – so much so that some are quitting.”

China

FT – China steps up capital controls with overseas withdrawal cap – Charles Clover and Tom Mitchell 12/31

  • Under the guise of preventing money laundering and terrorist financing, “China’s authorities have capped overseas withdrawals using Chinese bank cards at Rmb100,000 per year.”
  • “China has sought to limit foreign exchange purchases by its citizens in an effort to conserve forex reserves. The new measure plugs one of the few remaining ways Chinese citizens get money out of the country by broadening the Rmb100,000 ($15,400) limit from a single account to a single individual.”
  • “Previously, the annual limit of Rmb100,000 for overseas withdrawals was set for a single bank card.”
  • “An annual purchase limit of $50,000 worth of foreign currency per person remained unchanged, said the State Administration of Foreign Exchange (SAFE) in a statement on Saturday.”
  • “A regional currency analyst said that the move appeared to be a tightening of capital controls. ‘I was not expecting this since outflows have been slowing. But by doing this it clearly shows China’s desire to manage the outflows more aggressively, particularly on individual flows’ he said.” 
  • In other words, if you happen to make or to have made a meaningful amount of money in China, don’t plan on taking it home. It’s like a casino, the house always wins if you play long enough – especially, if you’re not allowed to leave the table with your chips.
  • The follow up question: will U.S. companies with meaningful overseas cash balances be allowed to repatriate funds in 2018 now that the U.S. tax laws have changed?

FT – Dalian Wanda to slim down ecommerce unit as it refocuses on core – Emily Feng 1/2

NYT – China Offers Tax Incentives to Persuade U.S. Companies to Stay – Sui-Lee Wee 12/28

Japan

FT – Japan Inc: a corporate culture on trial after scandals – Peter Wells and Leo Lewis 1/2

  • “Public admissions by some of the country’s greatest companies reveal deeper problems in how they are run.”

South America

WSJ – Cash-Strapped Venezuela Offers to Pay for Medicines With Diamonds – Kejal Vyas 1/4

  • “With hospital shelves bare and the government stumped on how to settle $5 billion in arrears to pharmaceutical companies, cash-strapped Venezuela recently offered some foreign suppliers alternative compensation: diamonds, gold and coltan, the rare metal used to make cellphones and Playstations.”
  • “While it isn’t clear if any of the companies accepted it, the proposal underscores how Venezuela’s economic collapse is forcing President Nicolás Maduro’s embattled administration to improvise to pay for goods as severe dollar shortages push the country toward a barter society.”
  • “Bartering is also creeping into daily street transactions for staples, partly because the government is too broke to print enough currency. The so-called Strong Bolivar, which the government created in 2008 by lopping three zeros off its previous currency, lost 97% of its value in 2017 alone as the oil-rich country plunges further into hyperinflation.
  • “Using commodities as payment isn’t uncommon for large global companies trading in mining or oil, but is almost unheard of as a way to settle debts to other sectors like pharmaceuticals, according to Caracas-based economic consultant Orlando Ochoa.”
  • “Given the country’s opaque finances, it isn’t clear how much Venezuela holds in certified precious metals and stones.”
  • “As for the Health Ministry’s proposal to pharmaceutical suppliers, ‘It feels like a bluff,’ Mr. Ochoa said. ‘It’s as if they want to show off their assets to give the illusion that there’s still an intention of paying even though they can’t pay’.”
  • “Lower crude prices and nearly two decades of profligate public spending have left Venezuela’s economy—once Latin America’s most prosperous—in tatters. Gross domestic product shrunk by more than 16.5% in 2016, according to the government, and there is scant evidence of improvement in 2017. The International Monetary Fund estimates inflation will top 2,000% in 2018. The government has defaulted on more than $700 million in bonds in recent months, spurring drastic cuts in imports that have resulted in chronic shortages of food and medicine.”
  • “Tito López, head of Venezuela’s Pharmaceutical Industry Chamber, says because companies in his sector haven’t received payments from the government in more than a year, 95% of medications that were available three years ago aren’t now. Antibiotics and treatments for chronic illnesses like hypertension and diabetes are among those hardest to find.”
  • In the past pharmaceutical companies operating in Venezuela have considered accepting bonds or even oil as payment, but the government has never followed through, Mr. López said. ‘What we’re missing is a serious system that actually guarantees payments,’ he added.”

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