What to do with all of these used cars…and more on negative government bond rates

First because we all like graphics…

Bloomberg – Negative Yields Could Be the Death of Bond Markets – Brian Chappatta 7/29/19

Bloomberg – China Will Be the World’s Used Car Salesman – Adam Minter 7/26/19

A Chinese company in Guangzhou recently exported 300 used cars to buyers in Cambodia, Nigeria, Myanmar and Russia. The shipment was a first for China, which till now had restricted large-scale exports of used cars in deference to manufacturers, who feared that poor vehicle quality could damage their reputations. There will be more such shipments — and their impact will reverberate well beyond the mainland’s used-car lots.

With all the focus on electric and self-driving cars, it’s easy to overlook just how big and influential the market for old-fashioned junkers remains. In developed economies, more than twice as many used cars are sold as new ones. For example, there were 17.3 million new vehicles sold in the U.S. during 2018 — and 40.2 million used ones. The gap is forecast to widen in 2019, driven by the ever-escalating price of new cars and a flood of used vehicles coming off lease. Automakers may be forced to slash prices of new vehicles and eliminate incentives in order to prop up sales.

Rich countries from Japan to the U.S. have shipped at least some of their older vehicles to developing nations such as Mexico and Nigeria for decades now. The trade has done more than get polluting autos off the roads; it has helped boost new-car sales by reducing the supply of secondhand alternatives.

Compared to domestic sales, of course, the numbers are quite small: The U.S. exported just under 800,000 used cars last year, a number that’s remained relatively steady since 2013. Nevertheless, that accounted for nearly a third of the passenger vehicles and light trucks exported from the U.S. in 2018. Japanese exports often approach 1 million vehicles annually. Singapore, Korea, several European countries and Canada also export a significant number of used cars.

It makes sense that China would join them. For one thing, inventory is building. In 2018, China sold 28 million new cars and nearly 14 million used ones. Soon, the ratio will flip: China is home to more than 300 million registered vehicles — the largest fleet in the world — and it’s just a matter of time before more of them are resold. The quality of Chinese cars has also improved to the point where many developing-world consumers may well choose them as a cheaper alternative to used Toyotas or Fords.

At the same time, China’s automobile industry is in a slump and policymakers are keen to find ways to boost it. Used-car exports, the government says, can “stimulate the vitality of the domestic automobile consumption market.”

That spells competition and possibly trouble for the automotive sector globally. An increase in the supply of used cars will inevitably drive down prices, especially in the emerging markets such as Nigeria and Cambodia to which Chinese exporters will be marketing their vehicles.

While that’s good news for prospective car buyers in Lagos, over the long term it will impact new car sales and even manufacturing in developing countries, many of which are part of automakers’ global supply chains. Likewise, as fewer cars are exported, say, from the U.S., the competition between new and used vehicles domestically will only stiffen.

And cars are just the beginning. Just as China’s factories drove down the cost of new goods over the last three decades, the growing piles of used stuff purchased — and now unloaded — by Chinese consumers will exert downward pressure on the price of used and new products everywhere.

China’s secondhand car exports are starting modestly and the country will take time to catch up to more established players. But this isn’t semiconductor manufacturing; long-term, China will have more used cars to sell than anybody and its export business will inevitably grow into the world’s biggest. Global automakers might want to strap on their seatbelts.


Shifting Gears on the cash spigot

Bloomberg – Quantitative Tightening to End as Central Banks Retreat – David Goodman & Liz McCormick 7/22/19

Net bond purchases by the Federal Reserve, European Central Bank and Bank of Japan will swing back above zero from September, according to an analysis of their balance sheets by Bloomberg Economics. That’s just eleven months since they collectively hit reverse having spent a decade pumping stimulus into their economies via quantitative easing.

The outlook shows how quickly central banks have been forced to turn tail after spending much of last year leaning toward tightening monetary policy, only to now be looking to loosen it as the world economy slows. It also underscores how their balance sheets are likely to remain permanently larger than the pre-crisis years.

For investors, the switch back, coupled with shifts toward lower interest rates, strengthens the case for buying bonds given the increased demand and shrinking supply of them. That could add fuel to a rally that’s already pushed average yields on global bonds down by almost 1 percentage point since November, left an almost $13 trillion pile of negative-yielding bonds and sparked predictions that U.S. 10-year borrowing costs could also hit zero. Those lower yields would tend to push investors back into stocks.

Since the Fed began reversing QE in October 2017, it has shed about $370 billion in Treasuries from its balance sheet which had hit $4.5 trillion in 2015. Those holdings will begin to rise later this year as the Fed ends the unwind and engineers plans to move back to pre-crisis norms of holding only government debt by slowly replacing its $1.5 trillion in mortgage-debt holdings with Treasuries.

“The Fed’s plans for the balance sheet are to shift out of MBS and into Treasuries and, given their guidance, they should be buying some bills,” said Mike Schumacher, strategist at Wells Fargo. “That will cause the curve to steepen.”

As for the European Central Bank, Bloomberg Economics is among those predicting it will announce in September that it will be purchasing bonds again. Its base case is that the ECB will start 45 billion euros of monthly net asset purchases to run for a year, starting in the fourth quarter.

And the yields keep going low-low-low

This is just bananas.

WSJ – Daily Shot: Arbor Research – Sovereign 10-yr Yields 7/25/19

And not on the chart…

WSJ – Daily Shot: Switzerland 10yr Government Bond Yield 7/25/19

So I suppose it shouldn’t be much of a surprise that VCs be busy putting capital to work.

WSJ – Daily Shot: statista – US Venture Capital Funding 07/25/19

And from Mike MacKenzie of the Financial Times, he covered a recent IMF report that the US $100 bill has overtaken the $1 bill in terms of circulation volume.

As the IMF note, most $100 bills are held abroad and geopolitical uncertainty may well be driving global demand for holding plenty of “Benjamins”. (The Federal Reserve Bank of Chicago says nearly 80% of $100 bills — and more than 60% of all US bills — are overseas, up from roughly 30% in 1980.) 

Biggest Drug Bust in US Customs History

WSJ – Inside Shipping’s Record Cocaine Bust – Costas Paris 7/24/19

On a cloudy evening on June 16, the MSC Gayane was making its way into Delaware Bay for a stopover at the Port of Philadelphia when it was intercepted by boats carrying about a dozen armed U.S. Customs and Border Protection and other federal agents.

Customs officers escorted the 1,031-foot-long ship, part of a Mediterranean Shipping Co. fleet that handles a significant share of the world’s seaborne trade, to the port in South Philadelphia, and early the next morning seven of the boxes were X-rayed and opened to reveal “bales and bales of cocaine,” according to U.S. officials.

It took about a week to weigh and document the bricks. In all, they weighed 39,525 pounds—nearly 20 tons. The haul, with an estimated street value of $1.3 billion, was the largest drug seizure in the 230-year history of the U.S. customs agency and one of the biggest ever by American authorities.

It was the result of what shipping executives say is a growing trend in drug transport. Smugglers who have long used small planes, speed boats, trucks and other transport have grown bolder about stuffing large amounts of narcotics into commercial distribution shipping networks, trusting that illicit cargo won’t raise alarms in the enormous stream of goods moving between countries.

In February, customs agents seized 1.6 tons of cocaine on the MSC Carlotta at Port Newark in New Jersey. Then in March, authorities found 1,200 pounds of cocaine aboard the MSC Desiree at the Port of Philadelphia.

Shipping executives say the ship’s role in one of the few South American services connecting to Europe likely drew the interest of smugglers. The route and the earlier busts raised alarms for law-enforcement authorities.

MSC, the world’s second-biggest container-ship operator by capacity, faces big losses after paying $50 million in cash and bond to release the vessel after it was held for nearly a month.

The U.S. Attorney for the Eastern District of Pennsylvania says it plans to seek permanent forfeiture of the ship, which is less than two years old and worth an estimated $90 million.

An MSC spokesman said the firm wasn’t the target of any probe. The company said it chooses its crews from a pool of seafarers that have been vetted by U.S. authorities and given special visas.

Following the bust, the carrier said it was adding security guards on ships sailing from the western coast of South America, adding closed-circuit cameras on its vessels and implementing cabin checks on board to ensure workers don’t have contraband container seals or other evidence of drug smuggling.

Cheap money is changing the game

Bloomberg Businessweek – A Decade of Low Interest Rates Is Changing Everything – Liz McCormick with John Gittelsohn, Christopher Anstey, Ben Holland, and Michelle F. Davis 7/22/19

It’s hard to wrap your head around just how low U.S. interest and bond yields are—still are—a decade after the Great Recession ended. Year after year, prognosticators said that rates were bound to go back up soon: Just be ready. That exercise has proved to be like waiting for Godot.

Thirty-year mortgage rates are a fraction of long-run averages, and companies too are paying very little to borrow. All that cheap money has been helping the economy along. On the other side of the ledger, bank depositors are getting paid only a fraction of 1% on their savings.

The longevity of low rates has upended long-standing assumptions about money and reshaped a generation of investors, traders, savers, and policymakers. The Federal Reserve has tried to push the U.S. into a higher-rate regime, raising rates nine times since 2015, when the key short-term rate was near zero. But now the central bank appears ready to reverse course and start cutting again when it meets at the end of July.

Anne Walsh, chief investment officer of fixed income at Guggenheim Partners, says there’s been “a paradigm shift of epic proportion for investors.” Not only are short-term rates low, but long-dated bond rates are minuscule, too, suggesting that investors see little likelihood of rates—and the economic conditions they reflect—changing anytime soon.

Borrowers of all kinds have been clear benefactors of this sea change, with many nations and companies locking in low rates for as long as a century. Belgium and Ireland have sold 100-year bonds, as did Austria this year at a yield of 1.171%. In 2015, Microsoft Corp. sold 40-year bonds and the University of California issued 100-year debt. Subdued rates have also buffered the U.S. Treasury from rising interest costs on the federal debt.

Individuals have had to get used to earning paltry rates. The national average rate on savings accounts is 0.10%, little changed from four years ago and down from 0.30% in 2009, according to data from Bankrate.com. In 2000, well before the financial crisis, the rate was 1.73%.

The problem is the same for institutions that manage savings on behalf of others. Pension funds, overseeing trillions in retirees’ future cash, have been ratcheting down return expectations. The 30-year Treasury bond, a favored debt security, yields about 2.5%—compared with an average 6.5% since the 1970s. Even a record rise in stock prices hasn’t solved the low-return problem for pension funds, because many of them cut their allocations to equities after the financial crisis.

Where low rates really bite isn’t in current returns but in the future gains investors can reasonably expect. Interest rates set a kind of baseline for the return on all assets. As they fall, bond values rise and stocks often do, too. But once rates have settled at or near rock bottom, there’s less room for that kind of price appreciation.

While some Fed officials wish they could get back to more-normal rates, so they have more room to ease again in the future if they need to fight a downturn or fresh financial crisis, they seem to have their hands tied. For all the problems low rates may cause, policymakers see them as a stimulant to growth. Although unemployment rates are very low, the economy took an agonizingly long time to recover from the financial crisis. And now a slowdown in global growth and headwinds from Trump’s trade war have made risks to U.S. output too strong to ignore.

The surprising persistence of low rates has even quietly reordered the hierarchy on Wall Street. Hedge fund managers may still be glamorous on shows like Billions, but in real life they’ve had to fight to retain clients. Partly that’s because many hedge fund managers thrive on volatility, and in a world where the dreaded spike in interest rates has never arrived, there’s been too little of that for them. The long fall in rates has made it easier so far to earn money with simple investments such as stock and bond index funds. Meanwhile, cheap financing costs and rising asset values have been a boon for private equity firms. Investors have committed about $4 trillion to them in the last decade, according to data from research firm Preqin Ltd.

In 2009, bond powerhouse Pacific Investment Management Co. saw all this coming, when they dubbed their multiyear investment outlook “the new normal” and predicted lower long-term yields. They saw the same issues the Fed and central bankers around the world are grappling with now: slow growth, a combination of technological innovation and low-cost global labor that eases inflationary pressure, and a glut of savings as the populations of rich countries age. Looking ahead, with many of those 2009 factors remaining, “the new wrinkle is concern around global trade and countries looking more inward,” Pimco Group Chief Investment Officer Dan Ivascyn says. “Yields can absolutely go a lot lower.”

US Municipal Pension Gaps

Image is from a few days ago, but telling.

WSJ – Daily Shot: WFC – State & Local Govt Pension Fund Status 7/18/19

And if you’re in an interactive mood, Visual Capitalist posted a very neat tableau interactive that illustrates how Americans differ by Age.

This one is differences by Owning or Renting.

What’s the right protocol when you have too much gas…

WSJ – Texas Showdown Flares Up Over Natural-Gas Waste – Rebecca Elliott 7/17/19

A pipeline company is challenging Texas’ practice of allowing drillers to set unwanted natural gas on fire, in a case that could test state limits for how much of the fuel can legally go to waste.

Now, shale producer Exco Resources Inc. is seeking to flare nearly all of the gas produced by a group of South Texas wells, even though its operations are already connected to a network of pipelines. Williams Cos., the operator of the pipelines, is challenging the request, in what is believed to be the first such dispute on record.

Williams attorney John Hays Jr. told commissioners in a hearing last month that granting Exco’s request would open the door to wasting gas any time doing so is more profitable than transporting it.

The Texas Railroad Commission has received more than 27,000 requests for flaring permits in the past seven years and has not denied any of them, records show.

The case underscores the tensions surfacing in Texas as the state grapples with booming oil production and its side effects. It also exposes a growing rift between frackers and pipeline companies as the natural-gas glut is set to worsen.

Natural-gas pipeline construction in Texas, home to America’s hottest oil field, the Permian Basin, has lagged far behind production growth, in part because producers have been reluctant to commit to long-term contracts. The state’s gas output is expected to increase about 30% over the next five years, according to consulting firm RBN Energy.

In the region’s two largest oil basins, the Permian Basin and Eagle Ford, operators flared or vented—where gas is released without being burned—into the atmosphere an average of about 740 million cubic feet of gas a day during the first quarter, according to public data compiled by energy analytics firm Rystad Energy. That gas would be worth about $1.8 million a day at current prices and produced greenhouse gas emissions equivalent to that of nearly five million cars driving for a day, according to estimates from the World Bank and the Environmental Protection Agency.

Chicken Thighs vs. Chicken Breasts

Bloomberg – Americans Are Finally Getting Tired of Chicken Breasts – Leslie Patton and Lydia Mulvany 7/17

You may have noticed that your chicken (at least in the US) has been more flavorful of late.

For decades, the chicken breast has been America’s darling. Now everybody, it seems, is doubling down on thighs.

In the U.S., production is at a record high. Retail sales of thighs have jumped nine-fold in the past decade, and restaurants are buying more dark meat, too, according to Tyson Foods Inc., the largest U.S. meat processor.

“Consumers’ palates are changing,” said Sabrina Bewley, Tyson’s senior director of food service poultry marketing and innovation. “They seek out more Latin, Indian and East Asian dishes, which often feature dark meat.”

The fate of chicken breasts can be blamed partly on the poultry industry, which created birds so big-chested that some developed a tough, coarse texture that’s come to be known as “woody breast.”

Demand is so high for thighs that prices have eclipsed that of the traditionally more expensive breasts. As of July 10, jumbo boneless, skinless chicken breasts were $1.13 a pound, and the equivalent boneless, skinless thighs were $1.24, according to Russ Whitman, senior vice president at commodity researcher Urner Barry.

It’s a reversal of white meat’s decades-long U.S. market domination. Dark meat has always been more popular abroad, but breasts became the big thing in the U.S. in the 1980s when producers started cutting up birds for the sake of convenience. Before that, consumers bought whole birds, and it was up to home cooks to do the dismembering. White meat caught on because it was lower in fat and perceived to be healthier, while the dark meat was often added to sausage or shipped overseas to other countries…

The dark meat helps form a tasty gravy, and it’s more nutritionally dense, said John Umlauf, the company’s (frozen-food maker Saffron Road) senior vice president of culinary operations.

“The dark meat has more blood in it,” he said. “That’s why it’s juicier. White meat can dry out.”

Historically, thighs were more attractive to frugal shoppers. Now it’s the taste and the ease of preparation.

Slowdown in the Permian Basin & Per Capita TP Consumption

For those of you with shale stocks that have been wondering what’s going on lately. Here is a little context.

Butt first… maybe it has to do with the diet?

WSJ – Daily Shot: statista – Toilet Paper Consumption per Capita (select countries) 7/17/19

Bloomberg – America’s Hottest Shale Play Is Slowing Down – Ryan Collins 7/16/19

The almost relentless thrust that has doubled crude output from the Permian Basin in three years is showing some signs of waning. Oil flows from the formation spanning West Texas and New Mexico are set to increase by less than 1% in August from July, data from the Energy Information Administration show. So far this year, the monthly rate has only exceeded 2% once, compared with six times in 2018.

Producers are dialing back growth plans due to a manifold of problems, including pipeline jams, slower flows from wells drilled too close together and higher costs for acreage. The dilemmas are killing returns and keeping investors at bay.

Permian explorers such as Parsley Energy Inc. are cutting their 2019 growth rates by as much as 40 percentage points below last year’s. The number of rigs in the basin has dropped 10% from a peak in November to 437 last week, the least since March 2018, according to data from Baker Hughes.


More Permian drillers are combining after the blockbuster $38 billion Occidental Petroleum Corp. takeover of Anadarko Petroleum Corp. two months ago. Callon Petroleum Co. agreed to buy Carrizo Oil & Gas Inc. for about $1.2 billion in an all-stock deal Monday.

It’s a move many investors have demanded. Ben Dell, founder of activist investor Kimmeridge Energy Management Co., said in March that there are 20 shale drillers that should combine. Kimmeridge targeted Carrizo last year, pushing for more asset sales or an outright merger.

Beyond flat-out mergers, producers including Pioneer Natural Resources Co., Devon Energy Corp. and Apache Corp. have sold off less-important leases as they seek to tap their most productive acreage. That’s after stock offerings from the shale patch shrank last year to the lowest since at least 2006, down more than 60% from 2017.


Meanwhile, a wave of multibillion-dollar petrochemical plants are being built along the U.S. Gulf Coast to take advantage of cheap feedstock from the Permian to make plastic raw materials. The latest one to be announced is an $8 billion partnership between Qatar Petroleum and a Chevron Corp.-Phillips 66 joint venture.

That follows Exxon Mobil Corp. and Saudi Arabia’s state-controlled petrochemicals company formally approving construction of a new chemical complex in Texas last month. Demand for plastics is growing more than 4% a year, Chevron Phillips Chemical Chief Executive Officer Mark Lashier said.

Mexico Connection

A dispute between Mexico and pipeline companies threatens the much-needed relief valve for natural gas from the Permian, where the fuel is a byproduct of oil output. The country’s state-run power utility is considering about $3 billion in arbitration against pipeline operators in a tussle that could discourage investments.

That’s bad news for American drillers, who have looked forward to conduits coming online on time to haul stranded gas south of the border. Prices in the Permian have dipped into negative territory multiple times this year, meaning producers were paying customers to take their gas so they could keep the oil spewing.

Back at it… oh, and Demographic Destiny in South Korea and beyond

Sorry for the hiatus.

I’m back and am going to change up the format. I will return to semi-regular postings, however, the volume will be down materially out of respect for your time and mine. I will keep each post to one article/graphic (maybe two) and will endeavor to aggregate a summary of meaningful trends/articles from time-to-time (likely annually).

I’d like to tip my hat to Seth Godin (Blog and Podcast) for giving me the nudge to get back at it.

Now to dusting off the cobwebs… (note that I’ve emphasized select content in bold).

Bloomberg – South Korea Foreshadows a Gray, Slow-Growth Future – Noah Smith 7/15/19

In 1960, South Korea had a total fertility rate of more than six children per woman, high enough to cause a population explosion. But as the country developed, this number dropped decade by decade:

A country needs a fertility rate of about 2.1 – a little more than one child per parent – to maintain long-term population stability. South Korea’s fertility is now about half that number. And it’s still falling. The country’s statistics office reported that in 2018, the fertility rate fell to a record low of 0.98 – much lower even than in countries such as Japan, whose rate is above 1.4.

…South Korea is headed for a demographic crash. Although the country’s population has been rising due to higher birth rates in earlier generations – an effect known as population momentum – this is set to reverse as early as next year. During the next half-century, unless something changes, the population of 51 million could fall by a third.

The question is whether this rapid shrinkage will hurt South Korea’s economy. Mathematically, it’s possible for countries to endure population decline while growing richer on a per-capita basis. This has been the experience of Japan, whose population has been shrinking since 2008:

So if people can continue to get richer, why does total population size matter? The answer, in short, is because population aging tends to make countries less productive. Old people retire, meaning they no longer contribute much to economic production, slowing the growth of per-capita output. And as the ratio of retirees to workers grows, each worker has to spend more money, time and effort supporting the growing legion of the elderly.

Falling population can also affect how much companies want to invest in a country. Companies want to produce goods and services near to where their customers live, so when the absolute size of a national market begins to shrink, it reduces the incentive to build new offices and factories there. As recently as the late 1990s, Japan invested about 30% of its gross domestic product, but that number is now down to about 24%. Although some investment can be wasteful, lower investment often precedes a reduced capital stock and a lower living standard in the long run.

An aging population can also reduce productivity growth. Once workers are past their mid-40s, their productivity starts to decline — possibly because they’re slower to adapt to changing business conditions. A 2016 paper by economists at the International Monetary Fund suggested that aging could be a reason for the productivity slowdown in Europe. Another recent paper, by economists Nicole Maestas, Kathleen Mullen and David Powell, found that U.S. states with more elderly populations experience slower growth in per-capita GDP.

So a graying world will also be one where living standards grow more slowly. Unfortunately, there are no known policies that can raise birth rates substantially. As economist Lyman Stone has documented, offering financial incentives for childbirth and providing free child care has only a modest effect.

That leaves immigration as the main option for population stability. In theory, South Korea could offset population decline by taking immigrants from neighboring China or other nations. For countries with fertility only slightly below replacement rates, such as the U.S. or France, this strategy is feasible. But for South Korea, the amount of immigration needed to maintain a stable population would be staggering — as much as a third of the country’s entire population would have to be either immigrants or their descendants five decades hence. It’s not at all clear that the native-born population would tolerate such a rapid increase in diversity, especially in a country that has little history of immigration.

There’s a more fundamental problem with the immigration strategy – it can’t work for the entire world. Fertility rates are falling in most countries. China, which could serve as the main source of immigration for South Korea, is seeing its working-age population fall by millions every year. India’s will follow. Even in Africa, which is expected to supply most of the world’s population growth during the next century, a transition to low fertility is underway:

In the long run, this means the supply of potential immigrants will dry up. And in the short run, population growth in poor countries and population shrinkage in rich ones will slow the decline in global poverty rates.

So unless new and effective policies to raise birth rates are discovered, population in many nations will age dwindle, with countries such as South Korea leading the way. This means a new age of slow growth and increased dependency burdens is in the offing. Governments, economists and business people need to start planning for a graying world. They need to devise ways to utilize the elderly’s talents more effectively, increase automation, provide services for old people more efficiently, reduce medical costs and redesign pension systems to make them financially sustainable. The gray wave probably can’t be stopped, but the human race will have to find ways to cope.