Month: August 2019

South Korean Fertility Rate & Equity vs. Treasury Yields

FT – South Korea’s birth rate falls to new developed world low – Song Jung-a 8/28/19

South Korea’s birth rate, already the lowest in the developed world, has fallen to a new low on factors such as the high cost of private education despite various government initiatives to prop it up, raising concerns about the country’s bleak demographic outlook.

The country’s fertility rate — the number of expected babies per woman — fell to 0.98 in 2018, according to the latest government data released on Wednesday. It was already the lowest at 1.05 in 2017 among members of the OECD, far lower than Israel, which was the highest in the organization with 3.11 expected babies in 2017, the US at 1.77 and Japan’s 1.43.

The replacement level — the total fertility rate for developed countries needed to keep the population constant — is 2.1.

Policymakers are also concerned about the country’s falling potential growth rate due to ageing, with South Korea now having more economically active people aged over 60 than in their twenties.

Despite growing concerns about the looming labor shortages, South Korea maintains a strict immigration policy, not allowing foreign workers to migrate with their families or apply for South Korean citizenship in most cases. 

FT – US company dividends now outstrip Treasury yields – Richard Henderson and Joe Rennison 8/28/19

In case you’re looking for yields from equities…

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Yield Curve From a Month Ago and the Impact of Remittances on Global Capital Flows

WSJ – Daily Shot: Fed Funds Futures Curve 8/28/19

For perspective.

FT – Remittances: the hidden engine of globalization – Federica Cocco, Jonathan Wheatley, Jane Pong, David Blood, and Aendrew Rininsland 8/27/19

…An estimated 270m migrants around the world who will send a combined $689bn back home this year, the World Bank estimates. That figure marks a landmark moment: this year remittances will overtake foreign direct investment as the biggest inflow of foreign capital to developing countries.

Remittances were once viewed by many economists as a secondary issue for developing economies behind FDI and equity investments. Yet because of their sheer volume and  consistent and resilient nature, these flows are now “the most important game in town when it comes to financing development”, says Dilip Ratha, head of the World Bank’s global knowledge partnership on migration and development.

The number of people in the world who live outside the country of their birth has risen from 153m in 1990 to 270m last year according to the World Bank, swelling global remittance payments from a trickle to a flood. As migration has increased, these financial snail-trails have become one of the defining trends of the past quarter-century of globalization – the private, informal, personal face of global capital flows.

For many developing economies, it is a lifeline.

“In times of economic downturn, natural disaster or political crisis, private capital tends to leave and even official aid is hard to administer,” says Mr Ratha. “Remittances are the first form of help to arrive, and they keep rising.”

Remittance inflows help boost countries’ balance of payments and therefore their credit ratings, lowering the borrowing costs of governments, companies and households. In the Philippines, for example, this year’s remittances inflows of $34bn will help reduce what would otherwise be a current account deficit of more than 10% of gross domestic product to a deficit of just 1.5% of GDP.

But remittances have economic downsides too. By helping to subsidize low incomes at home they provide a cushion against the impact of slow growth, which eases pressure on governments to reform their policies.

And, by channeling capital into consumer spending, remittances boost imports – which, some economists say, holds back the development of domestic manufacturing.

Remittances are also one of the key transmission mechanisms of global economic stress. People move in search of opportunities, so emigration rises when an economy is doing badly. When their host country is doing well and migrants prosper, they send more money home – a counter-cyclical boost to the struggling economy at home.

But when host countries hit hard times, the shock is transmitted back to migrants’ families in the form of lower remittances. This can export the slowdown to the recipient country, fueling economic instability on a global scale.

One example is the recent fall in oil prices. It was a blow not only to oil producing countries but also to families across south-east Asia and elsewhere who have breadwinners working in the Gulf.

It proved to be a structural shock for Lebanon, a small economy in which families and the banking system are heavily dependent on inflows from the diaspora.

“We’ve been watching Lebanon closely because remittances have really declined in the past decade, by almost 12% of GDP,” says Frank Gill of S&P Global, one of the big three rating agencies. “This is a key source of funding for the public sector and it’s a major worry for a rating agency, for obvious reasons.”

In May S&P lowered its outlook for Lebanon’s sovereign rating to negative, citing slowing inflows from non-residents as a threat to the country’s fiscal stability.

Although remittances have become one of the chief characteristics of the current era of globalization, political shifts including the rise of populism raise the question of whether their economic importance will prove short-lived.

The backlash against globalization is growing and anti-immigration sentiment is rising in many developed countries. So it is possible that both migration and the capital flows that it drives could begin to ebb.

But the World Bank expects 550m people to join the work forces of low and middle-income countries between now and 2030. And the gaping income disparity between developed and low-income countries – $43,000 a year per capita in the former, and $800 a year in the latter – is set to persist.

That means job opportunities abroad will continue to look attractive.

And the push from poor countries will be met by a pull from rich ones.

“The western world is ageing, and it’s going to be increasingly reliant on imported labor,” says S&P’s Mr Gill. “I don’t see why that isn’t going to continue.”

Student Loans Scammers

WSJ – Soaring Student Debt Opens Door to Relief Scams – Jean Eaglesham, Michael Tobin, and Coulter Jones 8/26/19

Student debt is soaring—it is now nearly $1.5 trillion—and defaults are at a record. That has been fertile ground for companies that promise to help stretched borrowers by navigating the maze of federal programs that can reduce or forgive debts for those who qualify, such as public-service workers or people on low incomes.

Some companies operate legally, although there is nothing they offer that borrowers can’t get free, regulators say. Other firms are outright scams, or make promises to borrowers that are illegal, regulators and consumer advocates warn.

A record $89.2 billion of student loans was in default at the end of June, New York Federal Reserve data show. Of the $1.48 trillion outstanding, 11%, or $160 billion, was at least 90 days behind on repayments—and the true rate is likely double that, because only half the loans are currently in repayment.

“We’ll do the work for you,” Financial Preparation Services says on its website. “No more drowning in a sea of confusing paperwork and processing!” Its fee: $1,195 for document preparation, then $40 a month for almost 20 years—a total of $10,555—according to a 2018 client agreement reviewed by the Journal.

Many of the FTC cases allege that the companies charged upfront fees for debt relief, which is illegal, or engaged in other prohibited practices such as masquerading as being government-approved, or faking information on applications for federal relief.

Red Flags for a Student Loan Debt-Relief Scam

The Federal Trade Commission says borrowers should beware of companies that:

  • Charge upfront fees. It is illegal for companies to make you pay before they help you.
  • Promise fast loan forgiveness. Scammers may pretend to offer an easy way to wipe out loans—it doesn’t exist.
  • Pretend to have official endorsements, such as using Department of Education logos. The government doesn’t approve any debt relief companies: it advises if you have federal loans to go direct to https://studentaid.ed.gov/sa/
  • Try to rush you into signing up. Companies may say you have to act fast to qualify for programs: Check them out before you commit to anything.
  • Demands your student loan ID, or asks you to sign a power of attorney, to deal with the government on your behalf. You can lose control of your finances, and be cut off from information on what’s happening to your loans.

Hedge Fund Flows

Bloomberg – Hedge Funds Have Already Bled $55.9 Billion This Year – Oliver Telling 8/21/19

Investors yanked $8.4 billion in July, bringing net outflows this year to $55.9 billion, according to an eVestment report on Thursday. That’s up from $37.2 billion for all of last year.

Investors’ frustration with hedge funds continues to mount, driving down management and performance fees to well below the “two and 20” fee model once considered standard, according to Eurekahedge. More hedge funds have shut than started in each of the last three years, and those that do launch are far smaller than they were before the financial crisis.

The pain for hedge funds isn’t spread evenly, with 37% of funds posting net inflows this year. So-called event-driven funds have fared the best, with inflows of $10.3 billion through July, eVestment data show. These funds try to cash in when events such as mergers, takeovers and bankruptcies lead to a temporary mispricing of a company’s shares.

Long/short equity funds are having the hardest time, with net outflows this year of $25.5 billion, according to the report.

FT – Investors pull money from hedge funds at fastest pace since 2016 – Lindsay Fortado 8/22/19

Household Debt in China has become a Thing

WSJ – The Trouble With Rate Cuts in China – Mike Bird 8/21/19

This week, the People’s Bank of China revealed a long-anticipated change to how commercial bank interest rates will be calculated. Revealingly, PBOC officials were at pains to stress that while the move might lower interest rates for corporate lending, mortgage interest rates wouldn’t fall.

Eighteen banks now have to show the PBOC the best interest rates they offer to their clients, based on rates set by the central bank’s medium-term lending facility, a source of credit for the banks themselves.

The change has two objectives. One is to lower rates, at least for some loans.

The other is to improve the transmission mechanism for monetary policy: The PBOC wants banks to do a better job of passing changes in policy on to their customers.

The most interesting aspect of the new approach is the deliberate exclusion of real estate. This is likely because Chinese households went on a borrowing spree after the PBOC’s 2015 round of benchmark rate cuts. In 2016, household debt rose by 6.2 trillion yuan ($878.11 billion)—compared with an increase of around 3 trillion yuan a year on average for the previous five years—and only accelerated subsequently.

Which segues nicely to another Mike Bird article.

WSJ – China’s Floundering Crackdown On Household Debt – Mike Bird 8/16/19

Beijing is wisely wary of the decade-long boom in China’s housing market, the consequent build-up in borrowing and what it means for the country’s development model. But in the data there is no sign of a crackdown.

Last week, in its annual Article IV assessment of the Chinese economy, the International Monetary Fund raised its forecasts for Chinese household debt by several percentage points. The IMF expects household debt to rise to 56.2% of GDP this year, and as high as 67.9% of GDP in 2024. The latter figure would be well above current levels in Japan and the eurozone.

In the past 12 months, developers have booked a record 11.7 trillion yuan ($1.66 trillion) in pre-sales—sales of homes due to be completed in the years ahead. Assuming that buyers put down a deposit of around 30%, that is north of 8 trillion yuan in mortgage debt not yet fully on the shoulders of the household sector.

In comparison, Chinese household debt rose by 7.3 trillion yuan between the end of 2017 and the end of 2018, according to data from the Bank for International Settlements. 

The government has good reasons to want to stop the buildup. Many emerging markets have struggled to regain high levels of growth after generating considerable property-related debt, particularly in Asia.

But there is no sign that household debt is even plateauing, let alone declining. Beijing’s stated preference is for an end to speculative household borrowing, but it is proving to be a difficult habit to kick.

Where to find yield in this world and in Venezuela tienen hambre

Bloomberg – BoAML: US % of Global Investment-Grade Yield – John Authers 8/19/19

Bloomberg – BoAML: US & Non-US Investment-Grade Fixed-Income Yield – John Authers 8/19/19

FT – Fears grow of Venezuela malnutrition time-bomb – Michael Stott and Gideon Long 8/20/19

“Six to eight million people are living in a state of undernourishment,” said Susana Raffalli, a veteran Venezuelan humanitarian adviser who has worked across the world with the Red Cross and Unicef, the UN agency for children. 

In a recent report on global food security, the FAO estimates that between 2016 and 2018, about 21.2% of the Venezuelan population was undernourished. When Mr Maduro came to power in 2013 the figure was 6.4%, it says.

In a June report, Unicef estimated that 3.2m children in Venezuela were “in need of assistance”.

Mr Maduro (President Nicolas Maduro) blames a US-orchestrated economic war for the problems with food supplies. The US has imposed an increasing array of sanctions on Venezuela in an effort to force the president from office.

The White House and Venezuelan opposition say the principal culprit is an economy ruined by years of mismanagement whose collapse began years before the first significant US sanctions in 2017. In a statement, the US state department described Venezuela as “one of the worst man-made humanitarian disasters in the modern world”.

Mr Maduro has repeatedly denied there is widespread hunger in his country. He told the BBC earlier this year: “Venezuela has the highest levels of nutrients, has extremely high levels of access to food, and that stereotype, that stigma [of hunger] that they have tried to put on us, has only one objective: to present a humanitarian crisis that does not exist.”

But hunger is one of the main reasons for the mass exodus from the country in recent years, according to diplomats and aid workers. More than 4m Venezuelans have fled abroad, and for those who remain, the food situation is increasingly perilous.

Venezuela will face long-term consequences from chronic undernourishment, especially of children, humanitarian organizations warn. NGO data seen by the FT show the weight and height of Venezuelan children have fallen significantly below the average for comparable populations.

Bees Dying in Brazil

Bloomberg – Bees Are Dropping Dead in Brazil and Sending a Message to Humans – Bruce Douglas and Tatiana Freitas 8/19/19

Around half a billion bees died in four of Brazil’s southern states in the year’s first months. The die-off highlighted questions about the ocean of pesticides used in the country’s agriculture and whether chemicals are washing through the human food supply — even as the government considers permitting more. Most dead bees showed traces of Fipronil, an insecticide proscribed in the European Union and classified as a possible human carcinogen by the U.S. Environmental Protection Agency.

Since President Jair Bolsonaro took office in January, Brazil has permitted sales of a record 290 pesticides, up 27% over the same period last year, and a bill in Congress would relax standards even further.

The fertile nation is awash in chemicals. Brazil’s pesticide use increased 770% from 1990 to 2016, according to the Food and Agriculture Organization of the United Nations. 

Still, in its latest food-safety report, Brazil’s health watchdog Anvisa found that 20% of samples contained pesticide residues above permitted levels or contained unauthorized pesticides. It didn’t even test for glyphosate, Brazil’s best-selling pesticide, which is banned in most countries.

Hunting for Yield

FT – Negative yields force investors to plunge into riskier debt – Robin Wigglesworth 8/15/19

Two decades ago, well over half of the global bond market boasted yields of at least 5%, according to ICE Data Indices. The post-crisis splurge of central bank bond buying and rate cuts lowered this to under 16% a decade ago, but investors could still find plenty of higher yielding debt. Today, a mere 3% of the global bond market yields more than 5% — the lowest share on record.

Indeed, truly high-yielding debt is now almost an endangered species. Bonds with yields of more than 10% amount to just 0.4% of the global fixed income universe, according to ICE.

Negative interest rates in Japan and the eurozone, and mounting expectations that the US Federal Reserve will follow last month’s rate cut with several more this year, have expanded the pool of bonds with sub-zero yields to more than $16tn — or around 27% of the global bond market.

This is primarily a European phenomenon. While US bonds account for just under half the $55tn global investment-grade bond market, they pay out 88% of all yield, according to Bank of America. 

There are, broadly speaking, two main ways for investors to counteract the global yield drought: buying longer maturity or riskier debt. But hunger for long-term bonds from investors such as pension funds and insurers means that the yield pick-up one would normally expect to receive through buying bonds maturing decades into the future, has also fallen sharply.

That leaves many investors pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments. 

Negative Yielding Debt Make-up & Negative Corporate Bonds

In case you’re wondering where all this negative debt is…

WSJ – Daily Shot: Deutsche Bank – Distribution of Negative Yielding Debt 8/14/19

Negative yields are spreading into Corporate debt.

WSJ – Daily Shot: Deutsche Bank – Negative Yielding Corporate Bonds 8/14/19

WSJ – Daily Shot: Deutsche Bank – Percentage of Govt Bonds Trading at Negative Yields 8/14/19

The Bell Curve of Daily Stock Market Movements, E&P Multiples, and Large Pharmaceutical Charities

WSJ – Daily Shot: Chartr – US Stock Market Daily Movements (Last 10yrs) 8/13/19

Bloomberg – Energy’s Dumb Money May Be Wising Up – Liam Denning 8/13/19

Traditionally, these swung low when oil prices were very high, in anticipation of an inevitable cyclical downswing, and rose when prices fell, pricing in the next recovery. In this latest cycle, however, that relationship has changed. When oil prices fell sharply in 2015 and 2016, valuation multiples soared (and equity issuance spiked). But when oil dropped in late 2018 and this summer, multiples fell alongside it.

The higher risks around energy earnings and damaged trust means investors demand more to buy into them – meaning a higher cost of capital expressed in lower valuations.

Economist – Why America’s biggest charities are owned by pharmaceutical companies 8/13/19

When patients in need of medicines in America go to fill their prescription the price they have to pay can vary wildly. For generic off-patent drugs prices are usually low for the uninsured and free for those with insurance. But for newer patent-protected therapies prices can be as high as several thousand dollars per month. Those without insurance might end up facing these lofty list prices. Even those with coverage will often have to fork out some of the cost, called a co-payment, while their insurance covers the rest.

These co-payments, which for the most expensive drugs can themselves be prohibitively high, can act as a deterrent to filling a prescription. Into this gap a new type of charity has emerged: one that offers to pay co-payments for patients. There are two main types of such charities. There are independent ones, like the Bill and Melinda Gates foundation, America’s largest charity, which spent $3.4bn on co-payments in 2014.

There are also co-pay charities owned by drug makers themselves. According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The co-pay charity run by AbbVie, a drug maker that manufactures humira, a widely taken immunosuppressant, is the third largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth largest. Johnson and Johnson, an American health conglomerate, runs the fifth largest. Half of America’s top 20 largest charities are co-pay charities owned by pharmaceutical companies.

The impact of these charities is large and growing. Most of them are less than 20 years old. In 2001 just five drug makers operated co-pay charities, spending a total of $370m. That had risen 20-fold to $7.4bn by 2016. According to Ronny Gal, an analyst at Bernstein, a research firm, the co-payment on the price of a drug is usually just 10% of the cost the pharmaceutical company ultimately charges to the insurance provider. This would mean that $7.4bn spent on copayments could earn drug makers $74bn in revenues, which would account for nearly a quarter of total drug spending in America. Add in spending by the Gates Foundation and this share rises to a third.

Pharmaceutical companies will often claim that helping patients with their co-payments is one way of making expensive drugs more accessible. But it has the fortunate consequence of making their customers price insensitive, because insurance companies will often use high co-payments to nudge their customers into opting for generics over costlier branded drugs: no co-pay, no incentive to save money.

Using co-pay charities to support high prices is good for business, but charitable contributions foster healthy profits in another way too: they are tax deductible. The corporate tax codes of most countries allow companies to deduct the cost of any charitable giving from pre-tax profits. But in America the system is more generous, says Jason Factor, a tax lawyer at Cleary Gottlieb Steen and Hamilton. Companies that give products for the benefit of the “needy or ill” can deduct up to twice the cost of gifted goods.