WSJ – Daily Shot: Bitcoin 11/25/19
A subsidiary of China’s largest construction group has suspended work on one of the nation’s tallest skyscrapers after the developer became the latest in a string of companies to default on a payment.
The default highlights the growing challenges faced by China’s construction groups as the slowing economy trims credit supply, putting the once runaway mega-tower building boom under stress.
In an October 30 letter seen by the Financial Times, China Construction Third Engineering Bureau Co said it would halt construction on a 475m-high (1,558ft) skyscraper in the central city of Wuhan. It said Greenland Group, one of the nation’s largest property companies, had failed to make “a significant” project payment.
Other cash-strapped property developers have also been struggling to keep their tall-building projects afloat. FT research reveals that construction of more than a dozen super tall skyscrapers, defined as buildings higher than 300m (984ft), has been postponed or is behind schedule.
Among them is Zhongnan Center in the eastern city of Suzhou. Construction of the 729m (2,392ft) skyscraper would make it the second highest in the world if it were ever completed, but building work stalled shortly after construction began in 2015.
If the Wuhan Greenland Center construction does proceed, it still faces an uncertain future. Office buildings in Wuhan reported a 36.2 per cent vacancy rate, a near record high, in the third quarter of this year, according to Jones Lang LaSalle, which expects the ratio to keep rising as anticipated new supply floods in.
Until recently, Greenland had been able to rely on selling expensive residential apartments, which it would develop adjacent to its multi-use mega buildings, to insure itself against any potential losses from empty office space. The strategy, however, is under pressure as sales of luxury homes have fallen off owing to the cooling economy and a crackdown on housing speculation.
“There is a fundamental problem with Greenland’s business model,” said Mr Li. “It doesn’t take into account an economic downturn.”
And I thought Marvel was crushing it…
Any official who wants to understand the terrible state of American public-sector pensions should read the financial report of the Illinois Teachers Pension Fund. Its funding ratio of 40.7% is one of the worst in America, according to the Centre for Retirement Research (CRR) in Boston.
Since it was established in 1939, Illinois officials have not once set aside enough money to fund the pension promises made. As a result, three-quarters of the money the state (or rather the taxpayer) now pays in each year merely covers shortfalls from previous years. The situation is getting worse. In 2009 the schemes’ actuaries requested $2.1bn, but only $1.6bn was paid. By 2018 the state paid in $4.2bn, still well short of the $7.1bn the actuaries asked for. The trustees have warned that the plan would be “unable to absorb any financial shocks created by a sustained downturn in the markets”.
Other schemes have attracted similarly stark warnings. Illinois is the class dunce, with six languishing schemes.
Offering workers a defined-benefit pension, where an income based on final salary is paid for the rest of their lives, is an expensive proposition, especially as life expectancies lengthen. Pension shortfalls are common across America, with the average public scheme monitored by the CRR just 72.4% funded. That adds up to a collective shortfall of more than $1.6trn.
When a scheme is underfunded, one of three things can happen. More contributions can be made, by employers or workers or both. Benefits can be cut. Or the scheme can earn a higher return on its investments to make up for the shortfall.
Cities and states are paying more, but still not enough. In 2001 public-sector employers contributed a further 5.3% of their payroll to meet pension promises; now that figure is around 16.5% on average. Even so, in no year since 2001 has the average employer contributed as much as demanded by actuaries. Last year’s shortfall was just under 1% of payroll.
This reluctance is understandable. Politicians dislike raising taxes—or cutting services to pay for higher contributions. Workers do not want to see their current pay reduced by higher deductions, or their future benefits cut. And in any case, in some states courts have ruled that pension benefits, once promised, cannot be taken away.
So states and cities have crossed their fingers and hoped that their investments will bail them out. America’s buoyant stockmarket has done its best to help. Returns on government bonds have also been good for much of the past three decades. Even so, the average public-sector scheme is less well funded now than it was in 2001.
Such severely underfunded schemes risk entering two vicious circles. The first involves costs. Kentucky’s public pension scheme covers a wide range of state employers and some have to pay 85% of payroll to cover their pension obligations. Employing someone on $50,000 a year requires an extra $42,500 of contributions. They naturally seek to lay off workers to reduce this cost. But that leaves fewer people paying in without changing the number currently receiving retirement benefits. That increases the short-term squeeze.
The second concerns the accounting treatment of public-sector funds. Many assume nominal returns on their portfolios of 7% or more after fees. This optimism has a big impact.
These calculations look surreal by comparison with private-sector pension funds. Their accounting rules regard a pension promise as a debt like any other. After all, courts insist pensions have to be paid, whatever the investment returns. The discount rate must therefore be based on the cost of debt—for companies, the yield on AA-rated corporate bonds. Since that yield, now around 3%, is far lower than the return assumed by public-sector funds, private-sector pension liabilities are very expensive. Faced with a $22.4bn shortfall, General Electric recently froze pension benefits for 20,000 employees.
These different accounting approaches seem to imply that it is cheaper to fund a public-sector pension than a private-sector one. In reality, that cannot be the case. The public-sector pension deficit is therefore much larger than the $1.6trn estimated by the CRR.
This is a crisis no one wants to solve, at least not quickly. The Chicago Teachers scheme is aiming for 90% funding, but not until 2059—long after many retired members will have died. New Jersey’s teachers’ scheme is not scheduled to be fully funded until 2048. Such promises might as well be dated “the 12th of never”. The bill for taxpayers seems certain to rise substantially. For the states with the biggest pension holes, political conflict is in store.
Government bonds issued by big developed economies have surged in price this year — pushing yields to record lows. A key reason is that these “safe assets” are in short supply.
A wide variety of investors and corporations prize the highest-quality government bonds for their cash-like qualities — and the near certainty of getting their money back.
According to research by Oxford Economics, the resultant global shortage of these safe assets is going to get worse. The consultancy calculates that the supply of these assets will grow by $1.7tn annually over the coming five years — with a $1.2tn issuance of bonds to fund the US budget deficit the largest driver. But demand for these assets is estimated to grow more rapidly, creating a $400bn annual shortfall and indicating that government bond yields are set to remain low.
“The largest buyers are relatively price-insensitive and will continue to accept low returns in exchange for safety,” said Michiel Tukker, global macro strategist at Oxford Economics.
Mr Tukker said the extra demand would come as the global economy grew more quickly than the supply of safe assets. Governments around the world could alleviate the shortage by issuing more debt, he said. Indeed, higher borrowing has recently moved towards the top of the political agenda in the UK, the US and even the eurozone.
However, a big shift towards looser fiscal policy around the world is unlikely, unless there is an economic downturn, Mr Tukker thinks. In that case, he said, central banks would be likely to respond by ramping up their own purchases of safe assets — adding to demand.
In Chile, it was sparked by a minor increase in the capital’s subway fare. In Ecuador, it was the end of fuel subsidies, and in Bolivia, a stolen election.
Latin America, which a decade ago harnessed a commodities boom to pull millions out of poverty and offer what many saw as a model of modernization, is in revolt. It’s not another pink tide, nor is it a lurch to the right; the movement is more a non-specific, down-with-the-system rage. Furious commuters are looting cities, governments are on the run, and investors are unloading assets as fast as they can.
With almost three dozen countries and more than 600 million inhabitants, Latin America defies easy generalization, which makes it difficult to predict what will come next. A few weeks ago, Evo Morales, the longstanding president of Bolivia, seemed headed for reelection. Today, he and his top aides are in exile in Mexico while some in his country have taken to the streets again to protest what they say was the military coup that removed him.
In that sense, there are parallels with the Arab Spring, which began in 2010, and the collapse of the Soviet Union two decades earlier. Both were unforeseen and moved in surprising directions, yet they offer lessons in retrospect. “There were a lot of cracks, but no one saw it coming,” says Javier Corrales, a professor of political science at Amherst College in Massachusetts, of events in Bolivia and across the region.
Two common factors stand out, he suggests: commodity dependence and the middle income trap, referring to the stagnation that often sets in after a population climbs out of extreme poverty and then struggles to achieve further development. Latin America is the most unequal, lowest-growth major region in the world right now, offering a cautionary tale for other parts of the globe with similar dynamics.
“Inequality is the main cause of the disenchantment being felt by citizens throughout the region in the face of a stunned political establishment yet to understand that the current development model is unsustainable,” wrote Alicia Bárcena, the executive secretary of the United Nations’ Economic Commission for Latin America and the Caribbean, in a recent essay. The people want to eradicate the culture of privilege, she added.
The region is caught between competing models of government: leftist populism and market-oriented liberalism. Governments of each type have been plagued by incompetence, corruption, and a failure to meet social demands. The result has been a growing fury toward the ruling classes, leading people to the streets.
“People are angry at their political systems,” says James Bosworth, author of the weekly newsletter Latin America Risk Report. “There’s an anti-incumbent wave and governments haven’t dealt with the roots of the problem, and those problems aren’t going away.”
For most people, it could be worse…
Lots of graphics today. Enjoy.
WSJ – Daily Shot: German Govt Bond Yield Curve 11/6/19
WSJ – Daily Shot: US Govt Bond Curve 11/8/19
WEALTH AND WEALTH INEQUALITY
WSJ – Daily Shot: statista – Citizen Wealth by Country 11/5/19
WSJ – Daily Shot: BBC – Highest Gini Index Scores within OECD 10/29/19
US HEALTHCARE COSTS
OPEC ENERGY OUTLOOK
SOUTH KOREAN DEMOGRAPHICS
U.S. homeowners are staying in their residences much longer than before, keeping a glut of housing inventory off the market, which helps explain why home sales have been sputtering.
Homeowners nationwide are remaining in their homes typically 13 years, five years longer than they did in 2010, according to a new analysis by real-estate brokerage Redfin. When owners don’t trade up to a larger home for a growing family or downsize when children leave, it plugs up the market for buyers coming behind them.
More homeowners staying put has helped cause housing inventory to dwindle to its lowest level in decades, which has also helped push up prices on homes for sale. Adjusted for population, the inventory of homes for sale is now near the lowest level in 37 years of record-keeping, according to housing-data firm CoreLogic Inc.
Fewer homes for sale is a big reason why even ultralow mortgage rates, record levels of home equity and a strong job market haven’t jump-started the sluggish housing market.
In the San Francisco metropolitan area, a typical homeowner stays 14 years, up from less than 10 years in 2010. Inventory in the same period has plunged more than 46%.
Meanwhile, the Seattle metro has seen a huge influx of new jobs, and housing supply hasn’t kept pace. Homeowners there are staying more than three years longer than they did in 2010. The inventory of homes for sale in Seattle has declined more than 50% over the last nine years, while home prices have risen more than 80%, according to Redfin.
But this isn’t just a problem in pricey coastal markets. Homeowners are staying longer in every one of the 55 metros that Redfin studied. Cities where it was once relatively easy to buy a home are seeing owners staying much longer, creating a serious inventory crunch.
Around Salt Lake City, owners now typically remain in their homes for more than 23 years, or nearly nine years longer than they did in 2010, according to Redfin. The shortage of homes has helped drive the median home price up nearly 75% in the same period to around $340,000.
Some charts from the article that help paint the picture.
Bottom line, too little housing. You’ll note that HI is at the top of the list for housing prices and at or near what appears to be the bottom of the list of permits per capita.
In 1986, Congress enacted a law to bar hospitals from turning away patients who are unable to pay. Any hospital with an emergency room that participates in federal health programs must evaluate and stabilize every patient who comes through the door, including those who are uninsured, indigent, addicted to drugs, or mentally ill.
No institution has a similar obligation to ensure that those people have a safe place to sleep. As a society, we’ve effectively decided that people shouldn’t die on the street, but it’s acceptable for them to live there. There are more than half a million homeless in the U.S., about a third of them unsheltered—that is, living on streets, under bridges, or in abandoned properties. When they need medical care or simply a bed and a meal, many go to the emergency room. That’s where America has drawn the line: We’ll pay for a hospital bed but not for a home, even when the home would be cheaper.
Jeffrey Brenner is trying to move that line. He’s a doctor who for more than 25 years has worked largely with the poor, many of them homeless. Recently, his place in the health-care system has shifted. After decades in shoestring clinics and nonprofits, he’s become an executive at UnitedHealth Group Inc., America’s largest health insurer. Brenner is expected to contribute to its bottom line. He plans to do it by giving people places to live.
The research and development lab for this experiment is a pair of apartment complexes in a down-at-the-heels corner of Phoenix called Maryvale. Here, Brenner is using UnitedHealth’s money to pay for housing and support services for roughly 60 formerly homeless recipients of Medicaid, the safety-net insurance program for low-income people. Most states outsource their Medicaid programs to private companies such as UnitedHealth, paying the insurer a per-head monthly fee—typically $500 to $1,000—to manage members’ care. The company’s 6 million Medicaid members produced $43 billion in 2018, almost 20% of total revenue.
It’s a profitable business overall. But the most expensive patients, who often present a complex blend of medical, mental health, and social challenges, cost UnitedHealth vastly more than it takes in to care for them… And despite their extreme costs, these patients often get poor care. “This is just sad. This is just stupid,” Brenner says. “Why do we let this go on?”
Sitting in a vacant studio apartment on the second floor of one of the complexes, Brenner shows me data on a patient named Steve, a 54-year-old with multiple sclerosis, cerebral palsy, heart disease, and diabetes. He was homeless before UnitedHealth got him into an apartment. In the 12 months prior to moving in, Steve went to the ER 81 times, spent 17 days hospitalized, and had medical costs, on average, of $12,945 per month. In the nine months since he got a roof over his head and health coaching from Brenner’s team, Steve’s average monthly medical expenses have dropped more than 80%, to $2,073.
After testing the idea in Phoenix, Milwaukee, and Las Vegas, UnitedHealth is expanding Brenner’s housing program, called MyConnections, to 30 markets by early 2020. It’s a business imperative.
The goal is for them to “graduate” within a year to paying their own rent. (Most get a disability check; those who don’t get help from MyConnections to apply.)
Brenner aims to reduce expenses not by denying care, but by spending more on social interventions, starting with housing. How to do it is still largely uncharted. “I don’t think we’ve figured any of this out,” he says. “We’re at a hopeful moment of recognizing how deep the problem is.” A trip to any big-city ER reveals the magnitude of the challenge.
One of Brenner’s greatest challenges is deciding who should benefit from the program. Giving patients housing sounds beguilingly simple, but the economics are a high-wire act. Medicaid isn’t paying UnitedHealth anything directly for housing assistance. The company spends from $1,200 to $1,800 a month to house and support each member, so it must save at least that much to break even on Brenner’s program.
On average about 60 members are enrolled in the Phoenix sites at any given time. Once a week, Brenner and his team get on the phone to evaluate potential candidates—anywhere from 2 to 14 people whose names have surfaced in UnitedHealth’s data. They want patients who are homeless and whose medical spending exceeds $50,000 annually, with most of that coming from ER visits and inpatient stays. People living on the streets with less extreme medical costs may need a home just as much, but it doesn’t pay for UnitedHealth to give them one.
Boat that picks up plastic from rivers before reaching the oceans. Pretty sweet.
The company behind the world’s first industrial-scale maggot farm based on organic waste plans to kick off its international expansion with a plant in California next year, taking advantage of two global problems: a shortage of protein and an abundance of trash.
The plant in Jurupa Valley will be followed by operations in the Netherlands and Belgium, and is part of a drive by AgriProtein and a handful of competitors worldwide to tap into demand for high-grade protein for fish and poultry feed and offer a solution for the unwanted organic waste that cities and farms produce.
“The world is long on waste and short on protein,” Jason Drew, AgriProtein’s chief executive officer, said in an interview.
The California operation will be modeled on the facility in Cape Town, which rears black soldier flies on about 250 metric tons of organic waste daily. The flies’ larvae are then harvested to produce 4,000 metric tons of protein meal a year. At any one time, including eggs, there are 8.4 billion flies in the factory.
The plant also produces 3,500 tons of fatty acid oil and 16,500 tons of frass, or maggot droppings, which is used as fertilizer.