Worthy Insights / Opinion Pieces / Advice

Ms. Webb offers an interesting perspective at why inflation may not be that far away. Why…because the primary source of deflation – China – appears to have changed tact.
“For years, party officials have been incentivized to force growth out of their regions, regardless of the effects on prices, global macroeconomics or, for that matter, pollution. But in the party conference in October, Xi Jinping shifted emphasis.”
“Instead of focusing on growth, China’s leader talked of ‘three tough battles’: against preventing major risks (mainly financial — the new target is to be ‘further deleveraging’); poverty (Xi fancies a ‘moderately prosperous society’ in all respects); and pollution (he wants to see the sky blue again).”
“The result has been pretty instant. Almost as the delegates headed home, say the analysts at Gavekal, prices of natural gas (a ‘clean fuel’) doubled; steel output stalled; and cement sector output actually fell even as demand for it and hence prices rose. China doesn’t seem to be adding new capacity to the global economy in the way that it was and that should mean it isn’t exporting deflation to the rest of the world any more either.”
“That is a dynamic that is arguably beginning to show up everywhere else. The slack is disappearing. There is no spare capacity left in Japan (or you would see new cuts to it). Industrial production in the US hit a record high in December, despite the US being too busy with buybacks and financial engineering over the past decade to build new capacity. Manufacturing output in the UK is at its highest in 10 years.”
“This could all lead us to several interesting conclusions. The first, highlighted by Gavekal, is that it is an explanation for the way stock markets in countries that have been hampered with too much productive space in the past are suddenly breaking out. See China, Japan and Korea — markets you might want to stick with for a bit.”
“The second is that, guess what, the boom in the US might not be entirely down to Donald Trump’s policies. The factories could be humming because global capacity constraints are being hit rather than because he’s the best economic manager ever. And the third is that the real inflation our great leaders (the central banks) think is impossible however much they might print, isn’t impossible at all.”

Markets / Economy

NYT – Cash-Strapped Chinese Giant Taps a New Money Source: Its Workers – Alexandra Stevenson and Cao Li 2/1

“Just before payday, an email went out to employees from top executives: Give us your money, and we’ll make it worth your while.”
“It was one of many pitches by HNA Group, a Chinese conglomerate struggling under an estimated $90 billion in debt accumulated during a global shopping spree that included buying stakes in multinationals like Hilton Hotels and Deutsche Bank.”
“The company, in an email, advertised an ’employee treasure’ product with an 8.5% return if workers handed over $1,500. A similar one dangled 9%. A third mentioned a return as high as 40% if employees ponied up $15,000.”
“These pitches, more than a dozen of which were reviewed by The New York Times, were not part of an employee stock program. Instead, they appear to be high interest loans, with the company as borrower and its workers as lenders.”
“The conglomerate has seen its borrowing costs rise sharply on the global bond market in recent months, an indication that some investors are increasingly worried about the company’s ability to pay its debts. Seven public companies under the umbrella of HNA have suspended trading of their stock, suggesting that big announcements that could affect key businesses are in the works. The company is also starting to sell assets.”
“It is unclear how much money HNA has raised from employees. The company has long offered such investments to its employees as a way to incentivize them and to share in the company’s success, Thomas A. Clare, an attorney for HNA, said in an email.”
“Companies around the world allow employees to buy stock or provide other ways for workers to invest in the business. But the HNA pitches do not offer direct ownership stakes in the business.”
“The offers reviewed by The Times had similar hallmarks, namely high returns for funding certain operations.”
“Chinese companies have often turned to individual investors or their own workers to raise money. But such moves, according to some China finance experts, can signal problems.”
“’It’s a desperation measure when companies really have no other source of financing and they are stuck,’ said Anne Stevenson-Yang, co-founder of J Capital Research, a corporate research firm.”
“A small company in the southeastern Chinese city of Wenzhou called Wenzhou Liren Educational Group made national news in 2011 after it went bankrupt and was unable to pay nearly $790 million it borrowed from employees and local residents. In 2015, an online peer-to-peer platform called Great Group pressured employees to buy investments in order to raise funds when it found itself in a financial bind, the Chinese news media widely reported. The two companies did not respond to requests for comment.”
“As HNA has faced more questions about its operations by both the local and foreign media, the company has issued groupwide emails urging employees to not speak to reporters. In January, HNA’s human resources department told employees they would be required to take a test on how to deal with the news media, according to an internal document reviewed by The Times.”

Real Estate

Bloomberg – Rental Glut Makes NYC the Worst Performer for Equity Residential – Oshrat Carmiel 1/31

Energy

eia – U.S. monthly crude oil production exceeds 10 million barrels per day, highest since 1970 – Jack Perrin and Emily Geary 2/1

Reuters – Suncor to cut 400 jobs as it rolls out self-driving trucks – Julie Gordon 1/31

“Suncor Energy Inc said on Wednesday that it expected to cut some 400 heavy-equipment operator positions over the next six years as it rolls out a fleet of self-driving trucks at its Canadian oil sand mining operations.”