Knock-on Effects of Negative Interest Rates

This one is in its entirety.

Economist – How rock-bottom bond yields spread from Japan to the rest of the world – Buttonwood 9/14/19

It would be hard to think of a business that is on the face of it quite as dull as Norinchukin Bank. A co-operative, it was founded almost a century ago to take deposits from and lend to Japanese farmers. Yet Norinchukin came blinking into the spotlight earlier this year when it emerged that it had been a voracious buyer of collateralized loan obligations (CLOs)—pools of risky business loans used to finance buy-outs by private-equity firms. At the last count, in June, Norinchukin owned $75bn-worth.

The escapades of Norinchukin offer a parable. One part of its lesson is that when interest rates are stuck near zero for a long time, as they have been in Japan, banks’ normal source of profits comes under pressure. The other part is the lengths to which they must go to boost those profits, in this case by buying exotic foreign securities with attractive yields. Norinchukin is not alone. Japanese banks and insurance companies have been big buyers of the triple-A-rated tranches of CLOs, as well as other sorts of investment-grade corporate debt.

For this, blame negative bond yields. When the Bank of Japan’s board meets on September 19th, it is not expected to reduce its main interest rate, currently -0.1%. But any increase in interest rates seems a long way off. And as long as rates are at rock-bottom in Japan, it is hard for them to rise in other places. Bond-buying by desperate Japanese banks and insurance companies is a big part of what keeps a lid on yields elsewhere.

Japan’s sway on global asset markets has been felt ever since it liberalized its capital account in 1980. Later that decade Japanese investors snapped up trophy properties in America, such as the Rockefeller Centre in New York and Pebble Beach golf course in California. In the 1990s they piled into American tech firms. Both forays ended badly, but Japan’s stock of foreign securities has kept growing as its surplus savings have piled up.

Japan is already the world’s biggest creditor. Its net foreign assets—what its residents (government, householders and firms) own minus what they owe to foreigners—are worth around $3trn, or 60% of its annual GDP. And that understates Japan’s influence on global asset markets. Since 2012 both sides of its national balance-sheet have grown rapidly, as Japanese investors borrowed abroad to buy yet more assets.

Japan’s impact is felt most keenly in corporate-credit markets in America and Europe. Its pension and insurance firms, which need to make regular payments to retirees, are at least as hungry for bonds with a decent yield as are their peers elsewhere. But the grasping for yield is made all the more desperate by the struggles of Japan’s banks. It is hard to make money from lending to the government when bond yields are negative. In ageing, high-saving Japan, private-sector borrowers are scarce. So bank profits have suffered. A report last year by a financial regulator found that half of Japan’s regional banks lost money on their lending businesses.

Though yields in Europe are lower than in America, they are nevertheless attractive to Japanese buyers who hedge their currency risk. Most currency hedges are for less than a year and many are for three months. The cost of such hedges is linked to the cost of short-term borrowing in the foreign currency. A rising yield curve thus gives the best currency-hedged returns: the yield is high at the long end but short rates are low. For that reason, currency-hedged Japanese investors have preferred to buy corporate bonds or other credit securities in Europe rather than in America, where short-term interest rates are relatively high.

Locals lament that high-quality European and American corporate bonds are treated as safe assets, akin to sovereign bonds. Analysts’ efforts to work out which companies are more or less likely to default, and so which bonds are more or less valuable, seem almost quaint. “The Japan bid is not driven by credit risk,” complains one analyst. “It is all about headline yield.”

Some see Japan as a template: its path of ever-lower interest rates one that other rich, debt-ridden economies have been destined to follow and will now struggle to escape. But Japan’s troubles also have a direct influence on other countries. This makes itself felt through the country’s considerable sway over global capital markets. The outworkings are strange and unpredictable. Who would have thought that the rainy-day deposits of Japan’s farmers and fishermen would be used to fuel leveraged buy-outs in America and Europe?

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Oil Graphics

It’s oil (and energy) graphics day

WSJ – Daily Shot: Reuters – OPEC Oil Production 9/16/19

WSJ – Daily Shot: Arbor Research – Change Oil Production (select countries) 9/16/19

WSJ – Daily Shot: Statista – World’s Largest Oil Producers 9/16/19

WSJ – Daily Shot: BloombergNEF – Energy Production by Type (various countries) 9/16/19

Bloomberg: IEA – Largest Oil Disruptions 9/16/19

US Incomes on the Up and Up…

Bloomberg – The Good News About Income Inequality – Karl W. Smith 9/12/19

The headline from the U.S. Census Bureau’s report this week on health insurance coverage was that the ranks of the uninsured swelled by almost 2 million Americans in 2018. But the larger trends illustrated in the report are more consequential — and more positive — for the U.S. economy.

The upshot is this: The number of uninsured is growing because more people are moving out of poverty and thus losing Medicaid coverage.

That’s consistent with another piece of good news in the report. The average incomes for those in the second quintile — a proxy for the working-class — rose faster than any other group. Indeed, over the last five years incomes for all quintiles have risen nearly in unison, with incomes for the working class slightly edging out all other groups.

This could be a run of good luck, of course. But there is reason to believe that it reflects fundamental changes in the economy. Over the same period, U.S. workers’ compensation as share of GDP has been rising or stable. That’s the longest such period since this figure peaked in 1970.

Taking the long view, the census data on income distribution tells a mostly positive story, albeit with some twists and turns. From 1967 (the earliest date for which there is data) to 1980, incomes rose for all groups, but the most for those at the very bottom of the income scale.

By the late 1970s, however, incomes were stagnating. Then came nearly two decades of neoliberal reforms, including tax cuts, deregulation and an emphasis on inflation control by the Federal Reserve. Real incomes exploded from 1981 to 1999 — but so did inequality. The entire population did better, but the top 20% outstripped the rest.

Then came the China shock. In 2001, China became a member of the World Trade Organization. From then until roughly 2012, Chinese exports grew at double-digit rates, transforming both China’s economy and the rest of the world’s. Economists often downplay the role of China, suggesting that the decline in U.S. manufacturing in particular was driven primarily by technological progress. That undoubtedly played a role, but it’s impossible to overstate the impact of the introduction into the world trading system of a huge and rapidly industrializing nation. It strained the U.S. economy to the breaking point.

Every income quintile lost ground. Once again, however, the poor and the working class were hardest hit. The financial crisis accelerated the process, and the overall downward trend was only briefly interrupted when the housing boom raised incomes in the mid-2000s.

Since then, however, the trajectory of U.S. income has changed fundamentally. All quintiles are rising roughly together, and the working class is doing particularly well.

Much of the populist anger in U.S. doesn’t stem from inequality per se. Instead, the current obsession with inequality is a hangover from the shock of the first decade of the 21st century, when falling incomes were widespread but especially crushing for those at the bottom. That created very real pain and justifiable outrage at the system.

Now the economic tide has turned. The working class is doing better, not just in real terms but relatively. This is news worth recognizing — and celebrating.

Rising Ticket Prices of Music Concerts

First, if you’re looking for some clever graphics illustrating the scale of plastic bottle waste, Visual Capitalist has obliged.

Bloomberg – Concerts Are More Expensive Than Ever, and Fans Keep Paying Up – Lucas Shaw 9/9/19

It’s not your imagination: Concert ticket prices are going through the roof.

And not just for the super wealthy who pay thousands of dollars to see the best acts from the front row. Fans of all types are paying more to see their favorite musicians.

The average price of a ticket to the 100 most popular tours in North America has almost quadrupled over the past two decades, from $25.81 in 1996 to $91.86 through the first half of this year, according to researcher Pollstar. Along with pro sports and Broadway shows, concert prices have far outpaced inflation.

Some of that increase was out of necessity. As piracy eroded music sales, artists began to lean heavily on concerts. Stars like Beyonce and Taylor Swift can make more in a couple nights onstage than they can from a year of album sales. But something else was going on, too. Ticket sellers like Ticketmaster and AEG’s AXS began adopting technology that showed fans would pay almost any price for their favorite acts, especially stars who only come around every few years.

“We all undervalued tickets for many, many years,” said Joe Killian, who runs a media consulting firm and founded a concert series in New York’s Central Park.

Higher prices have been good for the concert business. The live-music industry surpassed $8 billion in revenue in 2017, and is on pace for another record in 2019. Live Nation Entertainment Inc., which owns Ticketmaster, touts its ability to charge higher prices. 

It’s not just tickets, either. Music fans also face skyrocketing prices for food, beverages and merchandise. The average fan spent $20 at events in 2016 staged by Live Nation, the world’s largest promoter. This year, that figure is expected to reach $29, an increase of almost 50%.

If artists’ growing reliance on live music has led to any guilt about appearing greedy, the rise of ticket resale sites like StubHub took care of that. For years, entertainers watched as scalpers vacuumed up tickets and resold them for far more on such exchanges. Agents took this as proof that tickets were underpriced — and their artists underpaid.

Ticketmaster and others have since developed the ability to change pricing at any moment, enabling artists to charge more upfront and keep more of the dollars that went to scalpers. They can also reduce prices closer to show time if tickets aren’t selling, or create special windows for true fans.

Not every artist has embraced the new philosophy. Ed Sheeran booked the highest-grossing tour of all time while charging less than $100 a ticket, making him one of the cheapest of the top tours. He is adamant that his show be affordable to all his fans.

An Update on the Greatest Asset Bubbles in History and Labor Force Participation of US 65+ Year Olds is Up

WSJ – Daily Shot: BoAML – Greatest Asset Bubbles in History 9/9/19

WSJ – Daily Shot: Deutsche Bank – US Labor Force Participation 65 Yrs and Older 9/9/19

Dwindling Supply of German Bunds and The Largest Land Owners in America

In case you are wondering who are the folks in America with the largest swaths of land, have a gander thanks to Dave Merrill, Devon Pendleton, Sophie Alexander, Jeremy CF Lin, and Andre Tartar at Bloomberg.

Next, here is a country with some of the most sought after bonds on the planet and they’ve been curtailing supply.

FT – Why Germany’s bond market is increasingly hard to trade – Tommy Stubbington – 9/1/19

After a record-breaking rally in bond markets, all of Germany’s government debt now trades at sub-zero yields. That raises an important question: what kind of investors are happy to hoover up bonds that guarantee a loss if they are held to maturity?

One answer is that investors — in the sense of fund managers seeking to generate a return on their clients’ money — do not actually own very much of the German bond market.

An analysis by Union Investment, a Frankfurt-based asset manager, shows that the overall value of Bunds outstanding has been falling slightly since 2014 thanks to Germany’s aversion to running budget deficits. But the volume of freely tradable Bunds on the market has fallen much more sharply, and is expected to drop below €70bn by 2024 down from more than €600bn a decade earlier.

The precipitous drop has been caused by the rise of a class of bondholders typically indifferent to the level of yields. These include foreign reserve managers at central banks, financial institutions that since the crisis have had to hold ever larger piles of government bonds to meet regulatory requirements, and the German central bank itself. The Bundesbank holds more than €350bn of Bunds as a result of the European Central Bank’s quantitative easing program.

Given the paucity of Bunds, it is not surprising that Berlin is under growing pressure to borrow more, particularly with the German economy seemingly headed for recession. But the modest scale of fiscal loosening plans — finance minister Olaf Scholz has discussed a €50bn stimulus package — seems unlikely to alter the dynamics of the Bund market, for now.

Global Interest Rate Table and Human Migrations

WSJ – Daily Shot: Developed World Interest Rate by Term 9/5/19

WSJ – Daily Shot: Statista – World’s Biggest Human Migrations 9/5/19

Cashless Society…Sounds Great So Long as the Cashless Infrastructure is Running | US Asset Boom Has Not Been as Kind to All

WSJ – In Zimbabwe, Promise of Mobile Money Fades When the Power Goes Out – Bernard Mpofu and Gabriele Steinhauser 9/1/19

More than most other places in the world, this southern African nation with a long history of monetary dysfunction has staked its financial system on mobile money, which allows funds to change hands through the touch of a few buttons on an old-school cellphone or through a smartphone app.

But now, amid power cuts lasting for up to 17 hours a day, EcoCash breaks down frequently. The outages are blocking everyday economic activity and exacerbating a financial crisis that has left Zimbabwe’s government bankrupt and some five million people, about a third of its population, in need of food aid.

Eight out of 10 transactions in Zimbabwe—from buying milk to filling up a car or settling a utility bill—are done via cellphones, almost exclusively on EcoCash.

“We are more or less a cashless economy,” said Ashok Chakravarti, an economist based in Harare who believes that the EcoCash outages will hurt Zimbabwe’s gross domestic product, which the International Monetary Fund expects to shrink by 5.2% this year.

A government austerity program and limits on issuing T-bills haven’t stopped the new Zimbabwean dollar from losing value. Inflation spiked to 176% in June. Last month, the finance minister announced Zimbabwe’s statistics agency would stop publishing annual inflation data until February, saying it was distorted by the reintroduction of a local currency.

WSJ – Historic Asset Boom Passes by Half of Families – David Harrison, graphics by Danny Dougherty and Maureen Linke 8/30/19

US Migration, US Crude Oil Production (Select States), and How Singapore Deals with Traffic

Bloomberg – More People Are Leaving NYC Daily Than Any Other U.S. City – Wei Lu and Alexandre Tanzi 8/29/19

New York leads all U.S. metro areas as the largest net loser with 277 people moving every day — more than double the exodus of 132 just one year ago. Los Angeles and Chicago were next with triple digit daily losses of 201 and 161 residents, respectively.

This is according to 2018 Census data on migration flows to the 100 largest U.S. metropolitan areas compiled by Bloomberg News.

At the other end of the spectrum, seven cities had on average more than 100 new arrivals every day. Dallas, Phoenix, Tampa, Orlando, Atlanta, Las Vegas and Austin saw substantial inflows from both domestic and international migration. Sun Belt cities Houston and Miami claimed the 8th and 9th spots in the ranking. Seattle was the only cold-weather destination among the top 10.

The migration figures exclude the natural increase in population, which is the difference between the number of live births and the number of deaths.

In 10 of the top 100 metros, deaths exceed births. Thus, without migration these cities would be shrinking. Half of the 10 are located in Florida. In 11 more cities, mostly in Utah and Texas, there are more than twice as many births as deaths. Provo, which ranks first in births and last in deaths, had a 5-1 ratio.

While New York is experiencing the biggest net exodus, the blow is being softened by international migrant inflows. From July 2017 to July 2018, a net of close to 200,000 New Yorkers sought a new life outside the Big Apple while the area welcomed almost 100,000 net international migrants.

The second most attractive locale for international migrants was Miami with an addition of 93,000, followed by Los Angeles, Houston, Boston and the nation’s capital, Washington D.C.

Phoenix passed Dallas as the greatest beneficiary of domestic migration, adding more than 62,000 residents between July 1, 2017 to July 1, 2018. Dallas got an influx of 46,000, while Las Vegas, Tampa and Austin rounded out the top five metro areas.

Some areas are affected by high home prices and local taxes, which are pushing residents out and deterring potential movers from other parts of the country. About 200,000 residents left New York last year. Los Angeles had a decline of nearly 120,000 and Chicago fell by 84,000. Miami, Washington D.C., San Francisco and San Jose experienced similar trends.

WSJ – Daily Shot: US Crude Oil Production (Select States) 8/30/19

Note that BP just sold out of all its Alaska operations this last week after having been in business in the State for 60 years

Bloomberg – Tesla Unplugged: In Singapore, It’s Just Another Unwelcome Car – Adam Minter 8/27/19

An interesting way to do things.

Few places on Earth feel the impact of the automobile quite so keenly as Singapore. Car ownership rates are low — around 11%, compared to 80% in the United States — but that still amounts to nearly 1 million vehicles (600,000 of which are private and rental cars) packed into an island city-state half the size of Los Angeles. Roads account for at least 12% of the total land mass.

To manage the traffic and other impacts on urban livability, Singapore imposed the world’s first congestion pricing scheme in 1975. Initially, it applied only to morning rush hour in the central business district. But as the numbers of humans and cars expanded, so too did efforts to control the impacts via such schemes. They were effective in controlling traffic, but did little to crimp the appetite of upwardly mobile Singaporeans for new cars that would contribute to traffic. Indeed, between 1975 and 1989, the annual rate of automotive growth averaged 4.4% (it peaked at 9.6% in 1980).

So in 1990, Singapore established a quota for the number of new vehicles annually allowed on its roads. Aspiring car owners bid for 10-year ownership permits. The cost of these permits, combined with other taxes, have made Singapore the most expensive place in the world to own a car, forcing buyers to regularly pay three or four times more for a model than they would elsewhere. And ownership is only going to become more expensive: in 2018, Singapore cut the annual growth rate of new vehicles to 0% (commercial vehicles are excluded from the policy until 2021). The government justified the cut “in view of Singapore’s land constraints and our commitment to continually improve our public transport system.”

They aren’t joking. In 2014, Prime Minister Lee Hsien Loong unveiled his commitment to a “car-lite Singapore” and a 15-year, $1.5 billion program to boost public transportation. Among other initiatives, the subway system will double by 2030, to 224 miles (at a cost of more than $21 billion). The goal is to boost the number of commuters using public transit at rush hour to 75% and to ensure that 90% of journeys to the city center can reach there within 45 minutes.

Singapore’s government hasn’t been nearly as aggressive when it comes to aiding the deployment of personalized electrified automobiles. Just ask Elon Musk: in 2018, he tweeted that “Singapore govt is not supportive of electric vehicles.”

His grudge, it appears, dates back to 2016, when Singapore imposed a $10,850 carbon emissions surcharge on a Tesla Model S to account for carbon emitted during the electricity generation process (Singapore is heavily reliant on fossil fuels). There is also Singapore’s slow deployment of battery-charging infrastructure compared to other countries.

Masagos Zulkifli’s repudiation of Tesla as a lifestyle is easier to understand. Thanks to Tesla’s premium pricing (and Singapore’s taxes), a used model S can exceed $250,000 in the city-state (a new one can be double). In fairness, other electric vehicles also have eye-popping prices in Singapore — the Kia Niro is one of the cheapest at $132,600. But from the perspective of policymakers seeking to electrify transport for as many people as possible, a car that exceeds the price of some homes isn’t a climate change solution — it’s a bauble.

Capital Controls in Argentina & Further Down the Negative Debt Rabbit Hole

Economist – Argentina’s beleaguered government imposes capital controls 9/2/19

When Mauricio Macri was elected president of Argentina in 2015, one of his first acts was to abolish capital controls that restricted buying and selling of the peso. The move symbolized Argentina’s pivot back to open markets and liberal economic reforms under his rule. On September 1st, after weeks of market turmoil, Mr Macri was forced to issue a decree re-imposing controls in an attempt to shore up the currency. From now on ordinary Argentines’ purchases of dollars will be capped at $10,000 a month. Companies will face restrictions on their ability to purchase dollars in the foreign-exchange market and to pay dividends to investors abroad.

FT – Argentina: how IMF’s biggest ever bailout crumbled under Macri – Michael Stott and Benedict Mander 9/1/19

Following days of market chaos in the wake of the vote (the August 11 primary vote that went to Peronist rival Alberto Fernandez (no relation to former president Cristina Fernandez de Kirchner)), Mr Macri’s government bowed to the inevitable last week and asked creditors for more time to pay back Argentina’s $101bn of foreign debt, including the IMF money, as Buenos Aires struggled to avoid the country’s ninth sovereign default — and the third this century. Currency controls were imposed on businesses on Sunday after it lost an estimated $3bn in reserves in just two days last week.

Bloomberg – The Unstoppable Surge in Negative Yields Reaches $17 Trillion – John Ainger 8/30/19

Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.