Headwinds to Rising Interest Rates

FT – Why the global shortage of safe assets is getting worse – Tommy Stubbington 11/18/19

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.

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Insights on the Political Unrest in Latin America and the Worst Cities for Traffic

Bloomberg Businessweek – Unequal and Irate, Latin America Is Coming Apart at the Seams – Daniel Cancel 11/17/19

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.”

Bloomberg – It Takes Five Minutes to Drive a Kilometer in Metro Manila – Claire Jiao 10/26/19

For most people, it could be worse…

Graphics: Interest Rates, Wealth, Inequality, Healthcare Costs, Energy Outlook & South Korean Demographics

Lots of graphics today. Enjoy.

INTEREST RATES

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

Bloomberg – Richest 1% of Americans Close to Surpassing Wealth of Middle Class – Alexandre Tanzi and Michael Sasso 11/9/19

US HEALTHCARE COSTS

Bloomberg – U.S. Needs to Cure the Health-Care Cost Disease –  Noah Smith 11/8/19

OPEC ENERGY OUTLOOK

Bloomberg – OPEC Looks Ahead and Sees Oil’s Plateau – Nathaniel Bullard 11/8/19

SOUTH KOREAN DEMOGRAPHICS

WSJ – South Korea Is Having Fewer Babies; Soon It Will Have Fewer Soldiers – Dasl Yoon and Timothy Martin 11/6/19

Homeowners Staying Put and a Lack of Building Permits Have Created Supply Constrained Markets

WSJ – People Are Staying in Their Homes Longer – a Big Reason for Slower Sales – Laura Kusisto 11/3/19

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.

Bloomberg – How California Became America’s Housing Market Nightmare – Noah Buhayar and Christopher Cannon 11/6/19

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.

Trailblazing Affordable Care Initiative by UnitedHealth

Bloomberg Businessweek – America’s Largest Health Insurer Is Giving Apartments to Homeless People – John Tozzi 11/4/19

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.

Clever Approach: Ocean Clean Up and Maggot Protein

Bloomberg TicToc_The Ocean Cleanup 10/27/19 (YouTube Video) 

Boat that picks up plastic from rivers before reaching the oceans. Pretty sweet.

Bloomberg – Leading Maggot Farmer to Expand From Cape Town to California – Antony Sguazzin 10/30/19

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. 

Projections on Electric Vehicle Penetration Rates and the Energy Transition

BloombergNEF – Forecasted Electric Vehicle Penetration Rates 10/29/19

Bloomberg – DNV Energy Transition Outlook 2018 10/29/19

The Rise of Online Installment Loans

Bloomberg – America’s Middle Class Is Addicted to a New Kind of Credit – Christopher Maloney and Adam Tempkin 10/29/19

The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse.

And yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit.

It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.

In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion. In the process, they’re helping transform the way that a large swathe of the country accesses debt. And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.

In the decade through 2018, average household incomes for those with a high school diploma have risen about 15%, to roughly $46,000, according to the latest U.S. Census Bureau data available.

Not only is that less than the 20% increase registered on a broad basket of goods over the span, but key costs that play an outsize role in middle-class budgets have increased much more: home prices are up 26%, medical care 33%, and college costs a whopping 45%.

To keep up, Americans borrowed. A lot. Unsecured personal loans, as well as mortgage, auto, credit-card and student debt have all steadily climbed over the span.

For many payday lenders staring at encroaching regulatory restrictions and accusations of predatory lending, the working class’s growing need for credit was an opportunity to reinvent themselves.

Enter the online installment loan, aimed in part at a fast expanding group of ‘near-prime’ borrowers — those with bad, but not terrible, credit — with limited access to traditional banking options.

Ranging anywhere from $100 to $10,000 or more, they quickly became so popular that many alternative credit providers soon began generating the bulk of their revenue from installment rather than payday loans.

Yet the shift came with a major consequence for borrowers. By changing how customers repaid their debts, subprime lenders were able to partly circumvent growing regulatory efforts intended to prevent families from falling into debt traps built on exorbitant fees and endless renewals.

Whereas payday loans are typically paid back in one lump sum and in a matter of weeks, terms on installment loans can range anywhere from 4 to 60 months, ostensibly allowing borrowers to take on larger amounts of personal debt.

“The benefit of installments loans is you have more time to make the payments; the downside is the payments on these high-cost loans go exclusively towards the interest, possibly for up to the first 18 months,” the National Consumer Law Center’s Saunders said.

The industry, for its part, argues that just as with payday loans, higher interest rates are needed to counter the fact that non-prime consumers are more likely to default.

Between Enova and rival online lender Elevate Credit Inc., write offs for installment loans in the first half of the year averaged about 12% of the total outstanding, well above the 3.6% of the credit card industry.

The surging popularity of online installment loans, combined with a growing ability to tap into big data to better screen customers, has helped boost the fortunes of many subprime lenders.

Subprime installment loans are now being bundled into securities for sale to bond investors, providing issuers an even lower cost of capital and expanded investor base. Earlier this month Enova priced its second-ever term securitization backed by NetCredit loans. The deal paid buyers yields between 4% and 7.75%. Its debut asset-backed security issued a year ago contained loans with annual interest rates as high as 100%.

The bulk of their growth has been fueled by the middle class.

About 45% of online installment borrowers in 2018 reported annual income over $40,000, according to data from Experian Plc unit Clarity Services, based on a study sample of more than 350 million consumer loan applications and 25 million loans over the period. Roughly 15% have annual incomes between $50,000 and $60,000, and around 13% have incomes above $60,000.

For Tiffany Poole, a personal bankruptcy lawyer at Poole, Mensinger, Cutrona & Ellsworth-Aults in Wilmington, Delaware, middle America’s growing dependency on credit has fueled a marked shift in the types of clients who come through her door.

“When I first started, most filings were from the lower class, but now I have people who are middle class and upper-middle class, and the debts are getting larger,” said Poole, who’s been practicing law for two decades. “Generally the debtors have more than one of these loans listed as creditors.”

You Could Buy a Condo, a Home, or a lot of things for $1M, or You Could Buy a Parking Space

Bloomberg – A Parking Space in Hong Kong Just Sold for Almost $1 Million – Shawna Kwan 10/23/19

If anyone needed further evidence of Hong Kong’s sky-high real estate prices they found it this week with news that a car parking spot sold for almost $1 million.

The space went for HK$7.6 million ($970,000), making it the most expensive place to park an automobile in the city, and perhaps anywhere in the world.

The car-parking spot is (in)…The Center in Central, which also happens to be the priciest office tower in the world. For the cost of the parking space, you could buy a one-bedroom apartment in Manhattan.

Side note, …the seller was Johnny Cheung Shun-yee, a businessman with a reputation for flipping property. He made around HK$900 million last year in about nine months by buying and selling floors in the same office building.

Hypothetical WeWork Exchange | Variance in US Retail Gas Prices | A Quick Take on the Riots in Chile

First because I really enjoyed this mock interchange by Matt Levine of Bloomberg representing the initial investment conversation between Adam Neumann (WeWork) and Masayoshi Son (Softbank). Just to repeat, this is most likely not what was said.

Bloomberg – How Do You Like We Now – Matt Levine 10/23/19

Son: What does your company do?

Neumann: We lease office buildings, spruce up the space and sublet it in small chunks.

Son: Hmm I invest in visionary tech stuff, this doesn’t really sound like my thing.

Neumann: Did I mention we are a state of consciousness. A generation of interconnected emotionally intelligent entrepreneurs.

Son: Okay yeah that’s more like—

Neumann: The world’s first physical social network. We encompass all aspects of people’s lives, in both physical and digital worlds.

Son: You’re crazy! I love it! But could you be, say, ten times crazier?

Neumann: You’re going to invest $10 billion in my company, which I will use as kindling to light the whole edifice on fire, and then when we are both standing in the ashes you will pay me another billion dollars to walk away while I laugh at you.

Son: All my life I have dreamed of meeting someone as crazy as you, but I never really believed this day would come. 

Neumann: I’m gonna use your money to buy a mansion with a room shaped like a guitar, where I will play the world’s tiniest violin after all your money is gone. 

Son: YES PUNCH ME IN THE FACE.

Neumann: Also I’ll rename the company “We” and charge it $6 million for the name.

Son: RUN ME OVER WITH A TRUCK.

WSJ – Rising California Gasoline Prices Highlight Growing Divide in U.S. – Amrith Ramkumar 10/23/19

…An unpleasant truth for many Americans, even at a time of abundant global oil supplies: Regional differences in taxes, environmental rules and access to energy infrastructure can translate into large seasonal swings in gasoline prices.

Prices have surged this fall in California and other West Coast states following outages at several refineries in the region. Analysts said the coast is generally vulnerable because of its limited pipelines and refineries that turn oil into fuel products such as gasoline. Higher gas taxes in some states aiming to fund local infrastructure projects and varying pricing strategies by energy companies also drive gaps.

The volatility isn’t an isolated event. The standard deviation of gas prices—a measure of how much each state’s price varies from the national average—has hit its highest level this year in data going back to 2005, according to price tracker GasBuddy. The figure has risen in each of the past three years.

And for those that haven’t been following the riots in Santiago, Chile, John Authers of Bloomberg summarized the situation very well in his 10/22 article “Chile’s Violence Has a Worrisome Message for the World.”