“The European Central Bank is closing a chapter on one controversial policy, government bond purchases, while extending the life of another: negative interest rates.”
“The central bank Thursday laid out plans to wind down its giant bond-buying program by the end of this year, but said it likely would wait ‘at least through the summer of 2019’ before raising its deposit rate, now at minus 0.4%.”
WSJ – Daily Shot: Deutsche Bank – US Budget Deficit Funding and % Holdings 6/14
Real Estate
WSJ – Daily Shot: Bloomberg – World’s Most Expensive Housing Markets Relative to Salary 6/12
WSJ – Daily Shot: Mary Meeker Internet Trends 2018 – Airbnb vs Hotel ADR 5/31
“Funds have been raised at a record rate in the US this year for shell companies that offer a ‘blank cheque’ to sponsors to pursue takeovers, providing further evidence of the rehabilitation of a controversial tool that waned in the wake of the financial crisis.”
“The so-called special purpose acquisition companies, or spacs, have raised $4.5bn so far in 2018 — the largest amount for this type of fundraising in the period, according to Dealogic, which began recording the deals in 1995. That followed a brisk 2017, the second strongest year on record with nearly $10bn sold.”
“The funds are placed in an interest-bearing account until a target is identified — and spac investors can get their money back if they do not approve of the acquisition. They are basically a bet that the sponsors can find a good company at a reasonable price.”
“Spacs offer investors, often hedge funds, a cash proxy with the option of the acquisition. Sponsors get a 20% stake in the acquired company, if investors approve it, for a nominal amount of money.”
“’Beating plastic pollution’ was the theme of World Environment Day on June 5, but Thailand is falling behind Asian and European countries in the fight against plastic waste.”
“The issue has been brought into focus after a dead whale was found last month to have swallowed 80 plastic bags.”
“The whale, found in Songkhla province, served as a reminder of Thailand’s problem with plastic, and the abject failures of the government and retail industry to bring the nation’s environmental consciousness in line with the rest of the world’s.”
“Thailand is the world’s sixth biggest contributor to ocean waste, while China is the largest. Thailand generates 1.03m tons of plastic waste per year, with over 3% of that finding its way into the ocean, Tara Buakamsri, Thailand country director for Greenpeace, told the Nikkei Asian Review.”
“Of the country’s total waste, plastic accounts for 12% — higher than China’s at 11%. A survey by the government in 2017 found that, on average, Thais each use eight plastic bags per day, which equates to about 198bn per year.”
China
WSJ – Daily Shot: PIMCO – China’s Contribution to Global Credit Creation 6/12
WSJ – Daily Shot: Trading Economics – Hong Kong Home Ownership Rate 6/12
“Airbnb’s branded buildings promise management companies 5% to 15% of the profit hosts generate. At Domain, residents who rent through Airbnb would pay Niido 25% of their home-sharing income. In exchange, Diffenderfer says, residents will have access to the same hotel-style amenities visitors will receive.”
“California is poised to become the first U.S. state to require solar panels on nearly all new homes.”
“The California Energy Commission on Wednesday is expected to approve a requirement that residential buildings up to three stories high, including single-family homes and condos, be built with solar installations starting in 2020.”
“California is pursuing aggressive policies to reduce air pollution and combat climate change—including a mandate to slash greenhouse gas emissions 40% below 1990 levels by 2030—that are helping drive renewable energy in the state.”
“Solar accounted for nearly 10% of California’s electricity generation in 2016, Energy Commission data shows.”
“Currently, about 20% of new single-family homes in the state are built with solar, said Bob Raymer, senior engineer with the California Building Industry Association, which represents thousands of home builders, contractors, architects and others. Making solar mandatory on homes is expected to add $8,000 to $10,000 to construction costs, he said.”
“While the building-industry organization would have preferred the Energy Commission hold off a few more years on mandating that homes be fitted with solar, it helped shape the rule to reduce compliance costs and increase flexibility, Mr. Raymer said. Builders would have the option to install solar in a communal area if it doesn’t make sense on individual rooftops. By installing batteries that help homeowners save energy for later use, builders can also gain some flexibility in meeting efficiency standards.”
“California has more solar power installed than any other state, with roughly 21 gigawatts of generation capacity, according to the Solar Energy Industries Association. That is far more than the second -largest solar-producing state, North Carolina, which has 4.3 gigawatts.”
“The commission expects the cost of adding solar, when combined with other revised efficiency standards, to add about $40 to an average monthly payment on a 30-year mortgage. However it estimates the investment would more than pay for itself, with consumers on average saving $80 a month on heating, cooling and lighting bills.”
“Nowhere is demand more pent up than in the San Francisco Bay Area. In the past four months, 39 homes in Silicon Valley have sold for $500,000 or more over the listing price, says Mark Wong, a real-estate broker with Alain Pinel Realtors, based in Saratoga, Calif..”
“That figure includes a ‘lovingly cared for and well maintained home’ (read: not updated). The 53-year-old, three-bedroom, one-story house on 0.197 acre in West San Jose got 15 offers and sold to an all-cash buyer for $2.5 million—$815,000 over asking. A three-bedroom, 2,040-square-foot house in the Glen Park neighborhood sold in October for $2.6 million—nearly $1 million over its listing price of $1.675 million.”
“Seattle is another hot spot. Over the past year, the city has seen the greatest increase in the country in the share of sales above the asking price, surging to 52% of home sales in 2017 from 20% of sales in 2012, according to Zillow.”
“One can’t begrudge BlackRock for putting out its hand for a small slice of the money on offer. Even if the experiment somehow goes awry, it won’t make much of a dent in a company with $6.3 trillion of assets under management.”
“But the sheer imbalance between the supply of investable funds and suitable outlets for investment that gave rise to this move should ring some alarm bells for investors generally. At market tops when money is desperate to find a home, it often winds up in places it shouldn’t.”
“Homeowners soon will be able to count income they earn from Airbnb Inc. rentals on applications for refinance loans.”
“A new program—expected to be announced on Thursday by Airbnb, mortgage giant Fannie Mae and three big lenders—will allow anyone who has rented out property on Airbnb for a year or longer to count some or all of that money as income.”
“The mortgages will be backed by Fannie Mae, an acknowledgment that Americans today increasingly are earning money through the ‘gig economy,’ such as renting out rooms or ride-sharing.”
“Initially, three lenders, Quicken Loans, Citizens Bank and Better Mortgage, will participate in the program. Fannie will evaluate the initiative and could decide over time to back mortgages from any lender that chooses to count Airbnb income in a refinancing, as long as the short-term rentals aren’t against local laws.”
“Still, the move raises worries about encouraging homeowners to borrow more based on the unpredictable tourism industry.”
“Executives at the three lenders said one crucial difference between the housing bubble and today is technology, which makes it easy to keep track of how much income homeowners are earning from Airbnb.”
“The cut in oil production engineered by OPEC and Russia is now in its second year, defying skeptics and helping to boost crude prices. But the cartel’s compliance owes a big debt these days to a single member: Venezuela.”
“A founding member of the Organization of the Petroleum Exporting Countries, Venezuela pumped only 1.64 million barrels a day last month, well below its 1.97 million barrel a day allocation, according to estimates by S&P Global Platts. That gap of 330,000 barrels a day is marginally more than the amount that the entire cartel is undershooting its 32.73 million barrel-a-day target.”
“Calling even the decline so far in Venezuela’s petroleum industry historic is almost an understatement. Just last year, output was down by almost 30%. In percentage terms, that is worse than in major producing countries that broke apart and saw their economies collapse, such as the former Soviet Union, and Iraq in 2003.”
“Hong Kong is starting to be eclipsed by Singapore as the favorite destination for the wealth of China’s rich.”
“At stake for banks in both cities is a huge pile of money. China’s high-net-worth individuals control an estimated $5.8 trillion—almost half of it already offshore, according to consulting firm Capgemini SE. For some, the city-state of Singapore is preferable because it’s at a safer distance from any potential scrutiny from authorities in Beijing, according to interviews with several wealth managers. Multiple private banking sources in Singapore, who would not comment on the record because of the sensitivity of the subject, report seeing increased flows at the expense of Hong Kong.”
“The rich may be feeling exposed by changing banking practices. Hong Kong has signed tax transparency agreements that for the first time last year required all banks to report their account holders’ information to Hong Kong tax officials, in preparation for giving that information to 75 jurisdictions, including mainland China. Singapore will have similar agreements with 61 jurisdictions. But they don’t include either Hong Kong or Beijing, meaning its accounts and account holders aren’t visible to the Chinese government.”
“Overall, Hong Kong remains the primary destination for China’s offshore money, according to a Capgemini survey, followed by Singapore and New York. Yet the number of Chinese high-net-worth individuals who view Hong Kong as their preferred overseas place of investment is down to 53%, from 71% two years ago, according to a survey in July by Bain & Co. More than 20% favor Singapore, up from 15% two years ago.”
“‘We see Singapore, not Hong Kong, as the bridgehead of China’s investment overseas,’ says Li Qinghao, co-founder of NewBanker Tech Consulting, which organized the Sentosa conference last year. About 78% of S$2.7 trillion ($1.9 trillion) in assets under management in Singapore comes from overseas sources.”
“An elite group of Chinese pigeon fanciers have pushed the prices of racing birds to record highs, reflecting a mood of exuberance among China’s wealthy following a pick-up in economic growth and asset prices that has buoyed luxury spending.”
“Xing Wei, a property tycoon, paid €400,000 ($490,000) to purchase a Belgian pigeon called Nadine, in what is thought to be the largest deal on record. He followed that with a Rmb3m ($475,000) purchase of a champion bird called Extreme Speed Goddess at a Beijing auction in December.”
“Soaring pigeon prices are matched by bigger prizes for pigeon-racing competitions. China’s premier 500km ‘Iron Eagle’ race series held by the Pioneer International club in Beijing boasts a prize pot of Rmb450m ($71.2m).”
“Higher property and equities prices helped the wealth of China’s 2,000 richest people increase nearly 13% last year, according the country’s top rich list. The number of people known to possess assets above $300m grew faster last year than any other in the previous decade, said Rupert Hoogewerf, the compiler of the list.”
“After years of declines following the anti-corruption campaign launched by President Xi Jinping in 2012, sales of luxury goods in China grew 20% last year, according to business consultancy Bain. Art auction sales in Shanghai saw 42% growth last year, according to consultancy ArtTactic.”
“Pigeon industry insiders say just half a dozen enthusiasts are responsible for largest sales. ‘Five years ago Rmb300-Rmb400 ($47 – $63) was a very high price for a pigeon,’ said Zhang Wangbin, who runs a club in the central city of Wuhan whose auctions this winter saw several birds sell for 10 times that amount. ‘It’s the result of economic development,’ he added.”
“Pigeons are not the only animals to catch the eye of China’s business elite, with Japanese Koi carp prices also seeing a China effect. Kentaro Sakai, president of the Sakai Fish Farm, Japan’s biggest Koi breeder, said a single fish could sell for up to ¥42m ($380,000).”
“State Bank of India Ltd. reported a quarterly loss for the first time in at least 17 years as its treasury operations turned unprofitable and provisions for bad loans increased. The public lender reported a significant divergence in bad loans from RBI’s assessment which weighed on the bottom line.”
Other Interesting Links
WSJ – Daily Shot: Number of Times a State has Hosted a Super Bowl 2/8
“The 30-second television ad has been dethroned. As US television networks face growing digital competition for marketing dollars and viewers’ attention, they are selling shorter ads. The result? Thirty-second spots, long the industry standard, now make up fewer than half of all US TV commercials.”
“China’s seemingly insatiable demand for foreign assets has driven up prices for everything from U.S. Treasury bonds to global companies to luxury real estate. Now, a combination of market forces and capital controls are choking off the flow of Chinese cash. Asset markets around the world will have to adjust.”
“As Chinese exports boomed starting in the early 2000s and foreign investment flooded into the country, the central bank recycled these inflows into foreign government bonds, mostly Treasurys, to keep the yuan from rising. The buying persisted for over a decade, driving bond prices up and driving yields down globally.”
“The form of China’s foreign buying shifted in 2014, when the U.S. began exiting quantitative easing and China’s growth slowed. Ordinary Chinese feared that the yuan, which had steadily risen for years, would fall as growth slowed. Both individuals and companies rushed to get money out of China, snapping up trophy assets and luxury real estate around the world.”
“The China bid, or at least the expectation of one, sent prices of luxury properties soaring, fueled real estate bubbles from Vancouver to Sydney and pushed up prices of companies seen as desirable for Chinese buyers.”
“Alarmed by the outflow, Beijing began to tighten capital controls in 2015 and 2016, but the deal-making persisted until this year when the government cracked down on money transfers by individuals and discouraged companies from pursuing ‘irrational’ deals abroad. So far this year, outbound mergers and acquisitions by Chinese companies are down 27% from the same period a year earlier, according to Dealogic.”
“Now, pretty much the only thing the Chinese government encourages its companies to buy abroad are high-tech companies such as computer chip makers. But these strategic assets are precisely the kind that Western governments increasingly don’t want to fall into Chinese hands.”
“In real estate there is no way to say for sure how much Chinese buying drove up prices, but governments from Canada to Australia have moved to control foreign buying to rein in property bubbles.”
“Nor is China set to return as a big buyer of U.S. Treasurys. Indeed, if the Federal Reserve keeps tightening, China could be a seller of bonds as it fends off depreciation pressure on the yuan.”
“In the years ahead, financial markets around the world will have to live without the ever-present China bid. Whether China was a savvy investor or the dumb money, asset prices will likely be lower.”
“China achieved its economic miracle by unleashing the entrepreneurial private sector. With President Xi Jinping poised to further consolidate power at the Communist Party’s twice-a-decade leadership shuffle kicking off Oct. 18, the narrative of the next five years is becoming clear.”
“The state is pushing back.”
“The logic is straightforward. Nominally communist China relies on its vibrant private sector for growth, but state-owned companies are indispensable tools for political patronage, social control and economic policy. Any financial rot in the state sector could weigh on the economy and weaken the Communist Party’s grip.”
“With private business already commanding around 70% of the economy, Mr. Xi and his allies have decided to strengthen key state-controlled companies by boosting their market power and easing their debt burdens.”
“For investors, the implications are significant: higher global goods prices because state-owned companies are notoriously inefficient, and a smaller chance of the long-feared Chinese debt crisis. Corporate debt, which is largely in the state-owned sector, ticked down as a percentage of GDP in the second quarter, according to J.P. Morgan—the first decline since 2011. The trade-off is slower Chinese growth. Chinese banks, whose shares are currently on a tear, will need to keep subsidizing bloated state enterprises. And those enterprises’ need for a deep pool of capital inside China means a free-floating yuan will remain a distant dream.”
“For investors, the tilt back toward the state means that innovative privately owned tech and consumer companies may continue to outperform—but probably less so than in the past. Hulking state-owned titans, enjoying newly privileged market positions, may reward investors more reliably: The state-dominated Shanghai stock market has roundly outperformed the technology-and-consumer-focused Shenzhen market this year.”
“Deng Xiaoping, the grandfather of China’s economic reforms, famously said that it was acceptable to let ‘some people get rich first.’ The people are far richer than they were three decades ago. Now it’s the state’s turn once again.”
“Airbnb is stepping up its challenge to traditional hotel operators, launching branded, purpose-built apartments in Florida in a tie-up with a US real estate developer.”
“The partnership with Newgard Development Group marks the first time the San Francisco-based home-sharing group has worked with a property developer. It underscores how Airbnb is expanding beyond simply booking accommodation, its core service that has already hit hotel operators in cities across the world.”
“The 300-unit rental complex in Kissimmee, Florida, near Orlando, will be built and owned by Newgard but carry a new brand: ‘Niido powered by Airbnb’.”
“Harvey Hernandez, chief executive of Miami-based Newgard, said the company planned to build 2,000 Airbnb-branded units in the next two years. Tenants who rent the apartments can choose to sublet them through Airbnb for up to 180 days a year.”
“The Kissimmee apartment building, due to open early next year, includes features such as keyless doors and secure storage that will make it easier for long-term tenants to rent out their rooms when they are away. Through an app, tenant hosts can manage their Airbnb guests’ stay and even co-ordinate services such as changing bedsheets.”
“It will have human touches as well. A ‘master host’ will be on site, and all apartments will have a mandatory cleaning service, in the style of a serviced apartment.”
“’The demographic that we are targeting are travelling more than ever before,’ said Mr Hernandez. ‘So when that property is empty, they can be making money with it.’”
“Newgard, Airbnb and the tenant will all derive revenue from the short-term rentals, with Newgard taking 25% of the nightly room rate, Airbnb taking 3% (the same commission it charges hosts anywhere), and the tenant receiving the remainder.”
“Marriott operates serviced apartments whereby it does not own the property but the building carries its branding and Marriott provides hospitality services. Unlike Marriott, Airbnb will not operate the hospitality services and nor is it charging Newgard for the use of its brand.”
“The US has been shipping its shale oil riches to different parts of the world, including Canada and India, inspiring White House officials to muse about American ‘energy dominance’. But one place that is buying very little of this crude is the officials’ backyard.”
“Last week as the US reported a record 2m barrels a day in crude oil exports, refineries located up the highway from Washington on the east coast imported about 900,000 b/d, mainly from Africa.”
“A big reason is the Jones Act, a 97-year-old US law that requires all ships starting and ending their voyages on US coasts to be American-flagged, built and crewed.”
“What animates critics in the oil market about the Jones Act is that it increases the cost of shipping crude from the Gulf coast to the east coast above the rate charged by foreign-flagged carriers. That helps incentivize exports from Texas oilfields and imports by refiners in the east. The reliance on shipping reflects the fact that no crude oil pipelines link the oilfields of the central US to the east coast.”
“’It’s basically a constraint on the efficient operation of the oil market,’ says Sandy Fielden, director of research for commodities and energy at Morningstar.”
“US lawmakers liberalized trade in crude oil in December 2015, allowing unfettered exports after years of tight restrictions for every destination but Canada. They let the Jones Act stand, though they gave some refiners temporary tax relief related to oil transport costs.”
“The effects are plain to see. In 2015, tankers laden with crude oil from the US gulf coast delivered an average of 50,000 b/d to ports on the US east coast, according to ClipperData, a vessel tracking service. The volumes nearly halved in 2016 and have halved again this year, the data show.”
“Ending the export ban has caused shipments to soar to countries previously blocked from buying US oil, including long hauls to Asia. Crude oil exports to countries other than Canada are averaging about 325,000 b/d this year, ClipperData’s records show, more than treble the levels of 2015.”
“Meanwhile, US east coast refineries near Philadelphia and New York have been importing nearly 1m b/d from countries such as Nigeria and Angola, about 50% higher than two years ago.”
“The increased imports to the east coast come despite falling rates to hire a Jones Act tanker as the industry struggles with a surplus of ships built before the export ban was lifted. The US fleet of Jones Act tankers and tugboat-barge units totals 94 vessels, according to Overseas Shipholding Group, one of the biggest operators in the sector.”
“Sam Norton, chief executive of OSG, estimates the cost of hiring one for crude service is about three to four times higher than using a foreign-flagged vessel. Some shipping consultants say it is even higher.”
“The Jones Act is unlikely to abolished, despite the longstanding efforts of politicians such as Senator John McCain of Arizona.”
“’Since people have been living with it for so long, it’s difficult to say what it would be like if they changed it or if it were repealed,’ says Mr Fielden of Morningstar.”
“With Tropical Storm Ophelia’s transition to Hurricane Ophelia on Wednesday, 2017 became the first year in more than a century — and only the fourth on record — in which 10 Atlantic storms in a row reached hurricane strength.”
“Troubled by huge debts run up by big state companies and politically connected local governments, China is taking steps instead to go after the little guys.”
“Chinese officials have ordered provincial governments to establish online platforms naming those who do not pay their obligations, official media reported this week. The lists should be maintained by local news organizations as well as courts and regulators, the report said, with an aim of exposing deadbeats and pressuring them to pay up.”
“The new effort is unlikely to affect big borrowers, like major state-owned companies and other big firms, whose debts are almost never called in. But it could intensify and centralize officials’ broader moves to assign ratings to individuals based on creditworthiness and other criteria; practices like credit scoring are only just now taking off in the country.”
Japan
WSJ – Daily Shot: BOJ asset purchases and pace of purchase 10/12
“The BoJ is quietly slowing its securities purchases (as part of ‘yield targeting’).”
