Tag: Auto Industry

November 9, 2017

If you were only to read one thing…

Bloomberg – America’s ‘Retail Apocalypse’ Is Really Just Beginning – Matt Townsend, Jenny Surane, Emma Orr, and Christopher Cannon 11/8

  • “The so-called retail apocalypse has become so ingrained in the U.S. that it now has the distinction of its own Wikipedia entry.”
  • “The industry’s response to that kind of doomsday description has included blaming the media for hyping the troubles of a few well-known chains as proof of a systemic meltdown. There is some truth to that. In the U.S., retailers announced more than 3,000 store openings in the first three quarters of this year.”
  • “But chains also said 6,800 would close. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.”
  • “The reason isn’t as simple as Amazon.com Inc. taking market share or twenty-somethings spending more on experiences than things. The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.”
  • “The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.”
  • “Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.”
  • “Making matters more difficult is the explosive amount of risky debt owed by retail coming due over the next five years.”
  • “Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20%, to $35 billion, and the industry’s leveraged loans are up 15%, to $152 billion, according to Bloomberg data.”
  • “Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.”
  • “Retailers have pushed off a reckoning because interest rates have been historically low from all the money the Federal Reserve has pumped into the economy since the financial crisis. That’s made investing in riskier debt—and the higher return it brings—more attractive. But with the Fed now raising rates, that demand will soften. That may leave many chains struggling to refinance, especially with the bearishness on retail only increasing.”
  • “One testament to that negativity on retail came earlier this year, when Nordstrom Inc.’s founding family tried to take the department-store chain private. They eventually gave up because lenders were asking for 13% interest, about twice the typical rate for retailers.”
  • “Store credit cards pose additional worries. Synchrony Financial, the largest private-label card issuer, has already had to increase reserves to help cover loan losses this year. And Citigroup Inc., the world’s largest card issuer, said collection rates on its retail portfolio are declining. One reason that’s been cited is that shoppers are more willing to stop paying back a card from a chain if the store they went to has closed.”
  • “The ripple effect could also be a direct hit to the industry that is the largest employer of Americans at the low end of the income scale. The most recent government statistics show that salespeople and cashiers in the industry total 8 million.”
  • “During the height of the financial crisis, store workers felt the brunt of the pain when 1.2 million jobs disappeared, or one in seven of all the positions lost from 2008 to 2009, according to the Department of Labor. Since the crisis, employment has been increasing, including in the retail industry, but that correlation ended as jobs at stores sank by 101,000 this year.”
  • “The drop coincides with a rapid acceleration in store closings as bankruptcies surge and many of the nation’s largest retailers, including Wal-Mart Stores Inc. and Target Corp., have decided that they have too much space. Even before the e-commerce boom, the U.S. was considered over-stored—the result of investors pouring money into commercial real estate decades earlier as the suburbs boomed. All those buildings needed to be filled with stores, and that demand got the attention of venture capital. The result was the birth of the big-box era of massive stores in nearly every category—from office suppliers like Staples Inc. to pet retailers such as PetSmart Inc. and Petco Animal Supplies, Inc.”
  • “Now that boom is finally going bust. Through the third quarter of this year, 6,752 locations were scheduled to shutter in the U.S., excluding grocery stores and restaurants, according to the International Council of Shopping Centers. That’s more than double the 2016 total and is close to surpassing the all-time high of 6,900 in 2008, during the depths of the financial crisis. Apparel chains have by far taken the biggest hit, with 2,500 locations closing. Department stores were hammered, too, with Macy’s Inc., Sears Holdings Corp. and J.C. Penney Co. downsizing. In all, about 550 department stores closed, equating to 43 million square feet, or about half the total.”
  • “One response to the loss of store-based retail jobs is to note that the industry is adding positions at distribution centers to bolster its online operations. While that is true, many displaced retail workers don’t live near a shipping facility. The hiring also skews more toward men, as they make up two-thirds of the workforce, and retail store employees are 60% women.”
  • “The coming wave of risky retail debt maturities doesn’t take into account that companies currently considered stable by ratings agencies also have loads of borrowings. Just among the eight publicly-traded department stores, there is about $24 billion in debt, and only two of those—Sears Holdings Corp. and Bon-Ton Stores Inc.—are rated distressed by Moody’s.”
  • “’A pall has been cast on retail,’ said Charlie O’Shea, a retail analyst for Moody’s. ‘A day of reckoning is coming.’”

Perspective

FT – Forbes says Wilbur Ross lied about being a billionaire – Lindsay Fortado and Shawn Donnan 11/7

  • “Forbes business magazine has booted US secretary of commerce Wilbur Ross off its list of the richest people in America for the first time in 13 years, alleging he lied to them about his net worth by more than $2bn.”

FT – Electric cars’ green image blackens beneath the bonnet – Patrick McGee 11/7

  • “Nico Meilhan, a Paris-based car analyst and energy expert at Frost & Sullivan, says regulators should not encourage this race to sell electric vehicles with bigger batteries. ‘It’s a race, but it’s a very stupid race. It’s not towards a good solution,’ he says. ‘If you switch from oil to cobalt and lithium, you have not addressed any problem, you have just switched your problem.’”
  • “Instead, he says regulators should take weight into account by taxing heavier vehicles and creating incentives for smaller models in both electric and traditional vehicles.”
  • “Mr. Meilhan points out that petrol-engine cars weighing just 500kg — such as the French Ligier microcar or some popular ‘kei cars’ in Japan — emit less lifecycle emissions than a mid-sized electric vehicle even when driven in France, where carbon-free nuclear power generates three-quarters of electricity.”
  • “’If we really cared about CO2,’ he adds, ‘we’d reduce car size and weight.’”

WSJ – Jet-Set Debt Collectors Join a Lucrative Game: Hunting the Superrich – Margot Patrick 11/7

  • “Private investigators spend millions, scour globe, chasing an estimated $2 trillion in pending claims.”

Worthy Insights / Opinion Pieces / Advice

Economist – Asian households binge on debt 11/2

  • “What should be good news for the global economy has its downsides.”

FT – The House of Trump and the House of Saud – Edward Luce 11/8

  • “The blossoming relationship with Riyadh symbolizes the decay of the US-led order.”

Markets / Economy

Business Insider – Someone deleted some code in a popular cryptocurrency wallet – and as much as $280 million in ether is locked up – Becky Peterson 11/7

  • “An estimated $280 million worth of the cryptocurrency ether is locked up because of one person’s mistake.”
  • “An unidentified user accidentally deleted the code library required to use recently created digital wallets within Parity, a popular digital-wallet provider, according to a security alert posted on the company’s blog on Tuesday.”
  • “The freeze affects all multi-signature wallets created on Parity after July 20.”
  • “Multi-sig wallets are especially popular among cryptocurrency startups and other groups because they require more than one person to agree before any currency gets moved around. It’s a safeguard against rogue employees who might want to run off with the money.”

WSJ – Clamor for Tech IPOs Reaches Fever Pitch in Asia – Saumya Vaishampayan and Steven Russolillo 11/8

  • “Nearly three quarters of the 66 tech floats in the first nine months of 2017 have been in Asia, and the companies have raised about 40% of the total $16.8 billion from the sector, according to a report by PricewaterhouseCoopers.”
  • “Shares of newly public companies in Asia, on average, have risen by 141% from their IPO prices this year through the end of October, according to Dealogic. That compares with an average 25% gain for U.S. IPOs and a 13% increase for new issues in Europe.”

WSJ – Daily Shot: FRED – US Student Loan Balance 11/8

Real Estate

WSJ – Republican Tax Plan Would Slam California Housing Market – Laura Kusisto 11/8

  • “Limits on mortgage-interest deduction would affect many buyers in coastal regions around the U.S.”

WSJ – Co-Working Trend Eats Into Office Demand – Peter Grant 11/7

  • “The co-working trend, popularized by startup businesses like WeWork Cos., has been attractive to entrepreneurs and small companies looking for communal office space and short-term commitments.”
  • “But it could turn out badly for landlords, according to a new report from Green Street Advisors. The report predicts co-working will detract from cumulative office demand through 2030 by about 2% to 3% as the shared working space approach spreads from small businesses to large ones.”
  • “The report estimates there will be about 14,000 co-working locations world-wide by the end of this year, compared with 600 in 2010. WeWork alone has more than 20 locations in London and is now among New York’s largest office tenants, it says.”
  • “’The most ominous prospect for landlords is that [corporate] users could ‘outsource’ big chunks of their headquarters and regional offices to co-working operators,’ the report warns.”
  • “Consider the new business that WeWork launched earlier this year that creates tailored WeWork centers for big companies that employ hundreds or even thousands of workers. Named Onsite Solutions, it is marketing itself to employers that have flexible office space requirements or who want to circulate employees through hipper environments than their traditional workplaces.”
  • “Mr. Reagan (Jed Reagan, Green Street analyst) said such initiatives have the potential to hurt office landlords because co-working facilities typically require less space: about 75 square feet per worker compared with 175 square feet in traditional offices. Also, co-working leases for big tenants tend to be six months to five years, much shorter than the common lease term of five to 15 years, he said.”
  • “’That could undermine the stability and security of cash flow for landlords and could create more churn among tenants,’ Mr. Reagan said.”

India

FT – One year on, jury is still out on India’s ‘black money’ ban – Amy Kazmin 11/7

  • “Economy has slowed and cash in circulation is 90% of previous level, data show.”

South America

FT – Venezuela’s debt struggle poses more questions for investors – Robin Wigglesworth 11/7

  • “Analysts and investors say there are more questions than answers surrounding Venezuela’s plans to ‘refinance and restructure’ its financial liabilities.”
  • “Venezuela has about $63bn of foreign bonds outstanding, according to Torino Capital, while the central bank estimates the country’s overall foreign debts at about $90bn. The real number say most analysts is much higher.” 
  • “PDVSA, the state oil company, has sold $28.6bn of bonds and owes billions of dollars more in ‘promissory notes’. Venezuela owes another $4bn or so to creditors that have taken it to the World Bank’s ICSID court. Stuart Culverhouse, chief economist at Exotix, thinks total public sector external debts range between $100bn and $150bn.”
  • “Even this is uncertain. Venezuelan president Nicolás Maduro has mentioned ‘refinancing’ and ‘restructuring’ the country’s external liabilities. But a refinancing usually implies something voluntary while a restructuring means forcibly ‘haircutting’ creditors. Crucially, US sanctions imposed this summer in practice means both options are off the table.” 
  • “That Mr. Maduro named vice-president Tareck El Aissami as the lead negotiator with bondholders complicates matters further. Mr. Aissami has himself been sanctioned by the US as an alleged narcotics trafficker, which means US investment groups — the biggest holders of Venezuelan debt — cannot enter talks with him.” 
  • “’The logistics seem almost impossible,’ notes Siobhan Morden, head of Latin American fixed income strategy at Nomura. ‘The cynical interpretation is that the impossible deadline for negotiations conveniently shifts the blame of default to bondholders for their unwillingness (inability) to negotiate.’”
  • “With a competent government and more orthodox economic policies, Venezuela could probably handle its debt burden. Although oil exports are declining, it still boasts the world’s largest proven reserves and prices are at their highest level for more than two years.”
  • “But chronic mismanagement by governments under Hugo Chávez and now Mr. Maduro and the oil slump has taken its toll. According to the IMF, the economy has shrunk by a third over the past five years.”
  • “The country’s options appear limited. Venezuela is overdue on the interest payments on bonds that mature in 2019, 2024, 2025 and 2026, demonstrating the ‘significant fiscal strain’ the country is facing, S&P notes. Foreign currency reserves are below $10bn — and much of this is in gold that will be hard to liquidate. China is wary of deepening its financial exposure to Venezuela while the country has already restructured some of its bilateral loans from Russia.”
  • “The price of Venezuela’s bond maturing in August next year has tumbled from 72 cents on the dollar to about 34 cents this week, as investors panicked after the restructuring announcement and bank traders pulled out of the market, causing prices to ‘gap’ lower.” 
  • “Russia could provide a loan secured by Venezuelan oil assets that the government could either use to pay creditors, or to buy back some of its bonds at their current big price discount.” 
  • “Venezuela could also seek to improve its fiscal space by separating PDVSA from the state, defaulting on the latter debts while staying current on the oil company’s bonds. That could in theory prevent creditors from interrupting PDVSA’s oil sales, while letting Venezuela’s sovereign creditors stew. Suing countries is much harder than companies with assets that can be seized.”
  • “Moreover, ringfencing PDVSA from the government will be tricky. Crystallex, a Canadian miner, is already suing Venezuela and arguing that PSDVA is the ‘alter ego’ of the state. If Crystallex wins, it opens the door for all creditors to try to seize Venezuelan and PDVSA assets interchangeably.” 
  • “The most likely outcome, investors and analysts say, is a protracted period of financial limbo, with a restructuring precluded by US sanctions and Venezuela facing a barrage of lawsuits that will tie it up for years to come.”

November 2, 2017

If you were only to read one thing…

WSJ – Backlog in EB-5 Immigration Program Creates Cash Hoard for Property Developers – Peter Grant 10/24

  • “A backlog in the controversial EB-5 immigration program, which enables foreigners who invest in the U.S. to get green cards, is making billions of dollars of new money available for investments in real estate and other businesses.”
  • “The backlog is primarily in China, where the EB-5 program has become so popular that applicants can face delays of more than 10 years from the time they make their investment of at least $500,000 to the time they get their visa.”
  • “The U.S. government limits the number of EB-5 visas to 10,000 a year, and per-country cutoffs can get imposed on countries like China where the application rate is high.”
  • “This had created a problem for applicants: 10 years is such a long time that some U.S. developers want to repay the investors’ money before visas are issued. But doing do would disqualify the EB-5 application.”
  • “The solution—which was spelled out by the U.S. Citizenship and Immigration Services in a June policy memo—is a process known as redeployment. Essentially, the government said, EB-5 applications remain in good standing if the repaid money is reinvested in an active business and remains ‘at-risk’.”
  • More than $16.6 billion is expected to become available for redeployment between now and 2020, according to NES Financial, of San Jose, Calif., one of the leading providers of EB-5 servicing and administration.”
  • “Investment companies have begun to position themselves to take advantage of billions of dollars now available for reinvestment. For example, in July, a venture of Greystone & Co., NES and Capital United LLC created a way for EB-5 money to be redeployed into a fund of real-estate bridge loans originated by Greystone.”
  • “The EB-5 program was created in 1990 and has been popular among U.S. real-estate developers, who have flocked to it as a source of low-cost financing. The program requires investments of at least $500,000 to create at least 10 jobs, making it appealing to city and state economic development agencies as well.”
  • “Now the redeployment of funds has raised new concerns about the EB-5 program, which is facing reauthorization by Congress. For example, the June policy manual ‘appears to allow’ developers to invest redeployed funds in projects that don’t get as much vetting as the original EB-5 project, according to Gary Friedland, a scholar-in-residence at New York University who has written about the program.”
  • More than 4,400 petitions for EB-5 status were filed in the third quarter of fiscal year 2017, which ended in June, according to Invest In the USA, a trade association. The number of pending petitions was up 11% from the second quarter to over 24,600, the group said.”
  • “There is no job-creation requirement on the redeployed funds. But the necessary jobs have been created after the original EB-5 investments are made, Ms. Berman (Allison Berman, head of Greystone’s EB-5 business) pointed out. ‘Each investor already has created at least those 10 jobs,’ she said.”
  • “Ms. Berman says the fund targets a 4% return after fees. Redeployment is good for the U.S. economy because it is keeping the EB-5 money ‘in commerce for longer than initially anticipated.'”

Perspective

WSJ – Chinese Banks’ Capital Cushion Isn’t So Comfy – Anjani Trivedi 10/26

  • “Prudent as Chinese banks’ capital-raising binge may seem at first blush, investors should keep an eye on what’s driving their buffer-building.”

Worthy Insights / Opinion Pieces / Advice

NYT – Expelling Immigrant Workers May Also Send Away the Work They Do – Eduardo Porter 10/24

  • “This is how the growers will respond to President Trump’s threatened crackdown on immigration: They will lobby, asking Congress to provide some legal option to hang on to their foreign work force. They will switch to crops like tree nuts, which are less labor-intensive to produce than perishable fruits and vegetables. They will look for technology to mechanize the harvest of strawberries and other crops. And they will rent land in Mexico.”
  • “There is one thing they won’t do. Even if the Trump administration were to deploy the 10,000 immigration agents it plans to hire across the nation’s fields to detain and deport farmhands working illegally, farmers are very unlikely to raise wages and improve working conditions to attract American workers instead.”
  • “’Foreign workers will always be harvesting our crops,’ Tom Nassif, who heads the Western Growers Association, told me. The only question for policymakers in Washington is whether ‘they want them to be harvesting in our economy or in another country.’ If they choose the latter, he warned, they might consider that each farmworker sustains two to three jobs outside the fields.”
  • “Most of what we know about the effect of immigration on American-born workers is based on studies of what happens when immigrants arrive. Almost 30 years ago, the economist David Card found that the Mariel boatlift of 1980, in which more than 100,000 Cubans fleeing the island landed in Florida, did little damage to either the employment or the wages of the Americans they competed with.”
  • “A flurry of research since then has tried to find fault with that counterintuitive conclusion. Yet despite the claims from the Trump administration that immigrants have decimated the working class, Mr. Card’s analysis has emerged pretty much unscathed: With few exceptions, economists agree that even less-educated natives suffer little when immigrants arrive.”
  • “What if the shock goes the other way, though? We know less about what happens when immigrant workers are kicked out. But a series of studies over the past year are also coming to something of a consensus: Expelling immigrants does not open opportunities for workers born in the United States, either. Rather, the shock leaves them worse off than when the immigrants were here.”

NYT – America Is Not a ‘Center-Right Nation’ – Eric Levitz 11/1

The Republic – Mafia in our midst: A mob soldier turned Phoenix businessman – Robert Anglen 10/31

  • A very thorough and salacious report on Phoenix businessman Frank Capri (formerly a mobster by the name of Frank Gioia Jr.).
  • “Frank Capri, who persuaded developers to give him millions to build Toby Keith restaurants, had a violent history…”

WSJ – The Morningstar Mirage – Kirsten Grind, Tom McGinty, and Sarah Krouse 10/25

WSJ – WeWork’s Lord & Taylor Deal: Savvy Move or Top of the Market? – Dan Gallagher and Justin Lahart 10/24

Markets / Economy

WSJ – Daily Shot: Bitcoin 10/31

FT – Subsidies help China sell the most electric cars – Charles Clover 10/23

  • “Few countries have done more than China to push towards an electric future for the car industry. Beijing announced last month that it was looking at when to implement a ban on petrol and diesel cars, following announcements by France and Britain, which said they would ban traditional fuel vehicles by 2040, and Germany’s parliament, which has called for a ban by 2030.”
  • “Beijing also announced wide-ranging regulations forcing carmakers to start to meet steadily increasing production quotas for battery-powered cars, beginning in 2019.”
  • “Reactions to the announcement illustrate how China has managed to grow so quickly to become such a significant market for electric vehicles. China uniquely possesses the means to implement its will — it is the world’s largest car market, meaning it has unprecedented leverage over the global car industry, and also has a massive central planning mechanism.”
  • “Electric vehicles (EVs), both fully electric and hybrids, are part of a new industrial policy known as Made in China 2025, by which year Beijing wants to have national champions in 10 high-tech industries, including robotics, semiconductors and electric vehicles.”
  • “To achieve this, local and central governments have allotted subsidies that last year were worth up to Rmb100,000 ($15,000) per vehicle, according to Yale Zhang of Auto Foresight, a Shanghai consultancy specializing in the car industry.”
  • “Fitch, the rating agency, has found that average electric vehicle subsidies in China are the second most generous in the world after Norway.”
  • “China has also introduced a preferential vehicle licensing system in several cities. License plates are given out either by auction, lottery or after payment of a high fee in an effort to halt car congestion, but EV buyers get license plates free and without a wait in at least six Chinese cities. These centers account for 70% of domestic EV purchases, Fitch says.”
  • “China’s national grid is investing in EV charging stations. It expects to put Rmb25bn ($3.75bn) into charging stations by 2020; there are already 171,000 nationwide according to Xinhua, China’s official news service. This compares with 45,000 charging outlets and 16,000 electric stations in the US, according to official data.”
  • “In response to Beijing’s measures, the industry has boomed: sales of electric vehicles and hybrid vehicles were up 53% in 2016 to 507,000, according to the China Association of Automobile Manufacturers, which estimated that the number accounted for 45% of all such vehicles sold worldwide in that year.”

Real Estate

WSJ – Daily Shot: Homebuilder Index Relative Performance to S&P 500 10/31

WSJ – Chinese Property Shopping Spree Fades as Beijing Hits the Brakes – Dominique Fong and Esther Fung 10/31

  • “Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens.”
  • “Outbound capital from China into foreign properties and development sites reached a record $36.8 billion in 2016, according to data firm Real Capital Analytics. Volume for the first three quarters of this year was $19.7 billion. In the U.S. real-estate market, capital from China slowed to $5.1 billion in the same nine-month period, down from a total of $14.8 billion in 2016, said Real Capital. These are deals that are $10 million and greater.”
  • “Real-estate companies based in Hong Kong also appear to be less affected by the capital controls. Companies based in Hong Kong this year bought two high-profile London buildings, nicknamed the ‘Cheesegrater’ and ‘Walkie Talkie’.”
  • “But increasingly, firms are toeing to the party line. ‘Investors with capital already outside of China will continue to show strong interests allocating capital to U.S. real estate…though those in this category, even ostensibly private companies, are progressively less free to ignore what goes on in China,’ said Andrew Levy, senior counsel at law firm DLA Piper.”

WSJ – Driverless Cars Could Slam Brakes on Self-Storage Sector – Peter Grant 10/24

  • “The approaching transportation revolution is going to have major repercussions in the commercial real-estate sector as driverless vehicles and ride-hailing services such as Uber and Lyft gain more widespread adoption.”
  • “The property type expected to be hurt the most: Self-storage. Because people will own fewer cars, they will have more storage spaces in their garages, so they won’t need to rent it.”
  • “That is one of the conclusions of a new report on the future of transportation and real estate by the Urban Land Institute and real-estate investment research firm Green Street Advisors. The report says ride-hailing services already are having a big effect on consumer behavior and predicts that ‘mass adoption’ of driverless vehicles will begin around 2030 and be completed about 15 years later.
  • “…transportation revolution could be a mixed bag for industrial space. Demand from e-commerce should explode, the report says, but driverless trucks will improve efficiency.”
  • “’Goods should spend less time sitting idly in warehouses, likely resulting in a drag on industrial real-estate demand,’ the report says.”
  • “The report points out that investors need to be savvy about the impact of transportation trends because valuing a property today depends heavily on the long-range future. Because issues that go beyond seven years ‘are usually ignored, mispricing can result,’ the report states.”
  • “The opportunity is significant for investors who can figure out these trends now. ‘But, uncertainty is huge, so humility is in order,’ the report states.”

WSJ – Big Law Firms Look to Shrink Their Office Space Use – Esther Fung 10/24

  • “Of the 14 million square feet of office space leased to law firms between the first quarter of 2016 and the second quarter of 2017, 40% was the result of a contraction by the tenant, according to a CBRE Group study of 26 markets.”
  • “On average, the law firms reduced their leased space by 27%.”
  • However, “top law firms that lease more than 50,000 square feet of office space are more likely the ones that are reducing their physical office space, rather than their smaller peers.”

WSJ – More People Think Renting Is a Better Deal Than Buying – Laura Kusisto 10/24

  • “A growing percentage of renters believe it is cheaper to rent than to buy a home, which helps explain why the homeownership rate remains persistently low nearly a decade after the housing crash.”
  • “In the Freddie Mac survey, the view that renting is more affordable increased significantly across all age groups. Some 76% of millennials said renting is an affordable option, up more than 10 percentage points from a year ago. Roughly 82% of baby boomers said they view renting as a more affordable option, up 11 percentage points from a year ago. And the share of Generation Xers who see renting as more affordable jumped to 75% from 56%.”
  • Never forget that these surveys or comparisons are a snap shot in time. At times renting is more affordable than buying (it should always be more affordable than buying); however, once you buy (of course coming up with the down payment is no easy accomplishment) you generally have fixed your cost of occupancy (increases in property taxes and maintenance costs will get you in either case). Further, the forced savings element of a mortgage is hands down one of the best ways to build wealth. I recognize that it helps to have a relatively stable life to do this. However, if you’re renting, that cost will NEVER go away, and don’t forget the power of compounding costs – which will eat your savings eventually once you’re no longer making money, or stop receiving raises.
  • Rent if you have to or while your life is in transition, but homeownership is the goal (unless, if governments make property taxes prohibitively expensive and/or push to a model where the state owns all housing).

WSJ – Commercial Property Transactions Dry Up as Sellers Hold Out for Better Prices – Esther Fung 10/24

  • “Big U.S. real-estate companies have been selling assets at a slower pace this year, as the gap widens between their views on what their properties are worth and buyers’ willingness to pay high prices.”
  • “After an eight-year bull run for commercial real estate, some investors have been anticipating a correction. But that hasn’t happened yet, and there is little consensus on how much longer the bull market has to run.”
  • “Buyers, facing tighter lending conditions and slower income growth, are expecting lower prices and bidding accordingly, but sellers, including publicly traded property owners, are holding out for better deals.”
  • “Listed real-estate investment trusts have sold $46.7 billion in assets as of Oct. 23 this year compared with $71 billion in assets sold in all of 2016, according to data from Real Capital Analytics. Acquisitions, on the other hand, have been at a roughly similar pace at around $44.6 billion as of Oct. 23 this year compared with $47.9 billion in 2016. There have been fewer major transactions especially in the office and retail real-estate sector.”
  • “Unlike previous cycles, property owners aren’t overly leveraged and are still able to access the debt markets rather than be compelled to sell at unattractive prices.”
  • “For REITs, there is the added burden of making sure any sales proceeds can be deployed for other uses quickly, given their inability to hoard cash. These landlords are hesitant to sell in part because of the lack of attractive assets to buy as well as a general reluctance to do share buybacks.”
  • It should be noted that one major buyer of assets from listed REITs has been having issues in its fund raising mechanisms. That is the public non-traded REIT.

Energy

FT – US oil producers: Shale safe – Lex 10/23

  • “From Silicon Valley to the shale patch, the fundamental laws of corporate finance have been suspended for years. Such a calculus only works, however, if investors are willing to shoulder heavy losses on uneconomic investment in the hopes that pricing power ultimately ensues. Reality may have begun to weigh upon US oil producers. A renewed focus on spending within cash flow is taking hold in 2017.”
  • “Shareholders have turned off the funding spigot, with US E&P companies raising only $6bn in equity this year compared with more than $30bn in the same period last year. The perverse practice of tying oil executive compensation to production growth, not profits or cash flow, has also finally received the attention it deserves.” 
  • “The acreage obsession in the energy industry was always predicated on the idea that somebody else’s company would succumb before one’s own. But last man standing no longer beats cash is king as a mantra.”

FT – US shale investors tire of ‘growth at any cost’ model – Ed Crooks 10/22

  • “In a recent presentation at the New York Stock Exchange, Doug Suttles, chief executive of Encana, spelt out the new reality for North American oil and gas producers. The industry had gone, he said, from ‘resource capture’ to ‘value maximization’.”
  • “This is a profound change. Since the shale oil revolution began in the late 2000s, management teams have mostly focused on growth at any cost, and investors have mostly been prepared to back them.”
  • “This year, however, investor sentiment has shifted. Shareholders are less dazzled by the excitement of the shale boom, and more interested in orthodox measures of success including returns on capital and cash generation.”
  • “The whole shale industry is being pushed in the same direction. If companies fail to improve shareholder return, says Stephen Trauber, global head of energy at Citi, ‘investors will start to question what management is doing’.”
  • “For the past eight years, the US exploration and production industry has outspent its cash flows in drilling costs, requiring a constant inflow of debt and equity financing to keep going. But the industry has given shareholders very little in return.”
  • “Given those numbers, it is unsurprising that investor interest appears to have waned. US exploration and production companies raised $34.3bn from share sales in 2016, making it a record year, but just $5.7bn in the first nine months of 2017, according to Dealogic.”
  • “The pressure from investors for more discipline — a word used 17 times by Encana in its presentation — already seems to be having an effect. The number of active rigs in the US drilling the horizontal wells used for shale oil production has been dropping since the beginning of August.”
  • “Jamaal Dardar, an analyst at Tudor Pickering Holt, says just six months ago he would have expected US oil and gas producers to go on outspending their cash flows into next year at least. He now expects that in 2018 the larger exploration and production companies will in aggregate earn positive free cash flow, after capital spending but before dividend payments.”
  • “’We all like growth, but it must be profitable growth,’ Mr Holt says. ‘They might be able to grow at 5 or 10% per year, but not at 20%.’”
  • “If companies bow to that pressure from investors, it could work out very neatly. Slower oil production growth in the US would help push crude prices higher, making it possible for the industry to deliver the returns that shareholders want.”
  • “But Citi’s Mr Trauber warns the history of the oil industry shows it rarely delivers such tidy outcomes.”
  • “’We have been here before,’ he says. ‘At times over the past 30 years, investors have demanded discipline from the industry. But then as soon as the oil price picks up again, they have forgotten all about it and the industry has rushed back to growth again.’”

Finance

WSJ – Wealthier Depositors Pressure Banks to Pay Up – Telis Demos and Christina Rexrode 10/24

  • “As the Fed has raised rates, banks have been reluctant to do the same on their deposits. But for wealth-management customers, that’s starting to change.”

FT – DRW leads high frequency trading charge into cryptocurrencies – Gregory Meyer and Joe Rennison 10/22

  • Having a hard time finding enough volatility to trade in the markets, some are now trading Bitcoin…

China

NYT – Xi Jinping Vows No Poverty in China by 2020. That Could Be Hard. – Javier C. Hernandez 10/31

  • For China’s – and the world’s – sake, I hope that they succeed.

NYT – China’s Entrepreneurs Squirm Under Xi Jinping’s Tightening Grip – Sui-Lee Wee 10/23

India

FT – Reality dawns on India’s solar ambitions – Kiran Stacey 10/31

  • “The country has one of the world’s biggest solar sectors, but now faces the risk of a bubble.”

NYT – The Uninhabitable Village – Geeta Anand and Vikram Singh 10/26

  • “Hotter temperatures are forcing families in southern India to decide: Try to survive here, or leave?”
  • A very unique way to report on a story. A video slide show with text.

Other Interesting Links

FT – Spot the difference: why lab-grown diamonds pose a threat to big miners – Henry Sanderson 10/30

October 11, 2017

Perspective

WSJ – Daily Shot: Spanish Empire at its Peak 10/10

  • “Since Monday was Columbus day, here is the size of the Spanish Empire at its peak (in 1790).”

WSJ – America’s Retailers Have a New Target Customer: The 26-Year-Old Millennial – Ellen Byron 10/9

VC – How Americans Differ by Age – Jeff Desjardins 10/10

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – How To Make $5,300 In Commissions on a $43,000 Retirement Account – Anthony Isola 10/9

  • If you are a teacher or have family or friends that are teachers, you should read this. Make sure you’re or they’re not getting fleeced.

NYT – The N.F.L Draft: A Study in Cockeyed Overconfidence – David Leonhardt 4/25/05

  • A worthwhile look at the research that Richard Thaler and Cade Massey did regarding overconfidence.

The Irrelevant Investor – The Price of Progress – Michael Batnick 10/10

  • “The economic machine that we’ve built in the United States has done extraordinary things and I can’t wait to see what we come up with in the future. But what do we do when progress leaves so many behind?”

Markets / Economy

NYT – China Hastens the World Toward an Electric-Car Future – Keith Bradsher 10/9

Economist – American entrepreneurs have not lost their mojo 10/10

  • “Business formation is down, but fast-growing startups are in high gear.”

Energy

FT – Saudi Arabia curbs oil exports to combat glut – Anjli Raval 10/9

  • “Saudi Arabia is allocating fewer barrels of crude for export next month and at a level below current demand, emphasizing the effort by global producers to reduce surplus inventories.”
  • “In a rare statement, the Ministry of Energy on Monday said contracted demand for Saudi crude for November was 7.7m barrels a day, but the kingdom has assigned just 7.2m b/d for export.”
  • “The disclosure of Saudi Arabia’s monthly allocations emphasizes a new focus on foreign sales, alongside production, that Riyadh deems vital to the effort by global producers to reduce surplus inventories.”
  • “’It is very interesting they are now trying to communicate to the market about exports,’ said Olivier Jakob at consultancy Petromatrix. ‘They have gone the extra step of putting out numbers on this, which is the first I’ve ever seen.’”

Finance

WSJ – Daily Shot: Hedge Fund Research – Hedge Fund Fees 10/10

WSJ – Daily Shot: Bitcoin 10/9

  • Bitcoin is rallying again.

WSJ – Daily Shot: Investing.com – Bitcoin Cash 10/10

  • “On the other hand, Bitcoin’s less fortunate twin called Bitcoin Cash has collapsed.”

India

FT – Modi’s pursuit of black money proves drag on India’s economy – Amy Kazmin 10/9

  • “For many Indians the powerful appeal of Narendra Modi, the prime minister, stemmed from his vows to tackle two issues of fierce public concern: the sluggish economy and entrenched corruption.”
  • “But India’s economy has faltered, with growth falling steadily since early 2016 to a three-year low of 5.7% in the second quarter of this year.”
  • “Now, some economists are suggesting Mr Modi’s two big goals are at odds, and that New Delhi’s zealous anti-corruption drive — which reached its apogee with a draconian cash ban — is sapping India’s economic momentum.”
  • “Though disruptive, demonetization failed to purge black money from the economy, because nearly 99 per cent of the cancelled bank notes were deposited or exchanged, rather than being furtively destroyed as forecast.”
  • “Now New Delhi is toughening its stance, with tax officials probing 1.8m individuals or businesses whose cash deposits after demonetization were out of sync with their past tax returns.”
  • “While the quest to unearth Indians’ illicit wealth remains politically popular, economists say it has come at a cost, souring business and consumer sentiment. It is considered one reason why private investment — which has driven past Indian booms — remains stubbornly flat.” 
  • “‘If you’ve got income tax authorities charged up and told to after black money, who is going to invest in a big way?’ said one economist who asked not to be identified given the issue’s sensitivity.”
  • “’The Chinese call this ‘the original sin’ problem,’ he added. ‘Every company has something buried in the past — a sin it has committed. If the government really wants to go after people, it can always find something.’”
  • “Demonetization severely disrupted the property market, previously a favorite parking place for black money and a big growth engine. Real estate prices and sales plunged and, though sales are picking up, there is a huge overhang of unsold inventory.”

Japan

NYT – Kobe Steel’s Falsified Data Is Another Blow to Japan’s Reputation – Jonathan Soble 10/10

  • “For decades, Japanese manufacturers of cars, aircraft and bullet trains have relied on Kobe Steel to provide raw materials for their products, making the steel maker a crucial, if largely invisible, pillar of the economy.”
  • “Now, Kobe Steel has acknowledged falsifying data about the quality of aluminum and copper it sold, setting off a scandal that is reverberating through Japan and beyond, and casting a new shadow over the country’s reputation for precision manufacturing, a mainstay of its economy.”
  • “Companies ranging from the automakers Toyota Motor and Honda Motor to aircraft companies like Boeing and Mitsubishi Heavy Industry said they were investigating the use of rolled aluminum and other materials from Kobe in their products. They also said they were trying to determine if substandard materials had been used in their products and, if so, whether they presented safety hazards.”
  • “Kobe Steel said on Sunday that employees at four of its factories had altered inspection certificates on aluminum and copper products from September 2016 to August this year. The changes, it said, made it look as if the products met manufacturing specifications required by customers — including for vital qualities like tensile strength — when they did not.”
  • “Kobe Steel added that it was examining other possible episodes of data falsification going back 10 years. It did not provide details about the size of the discrepancies it had discovered, making it difficult to immediately determine if they posed a safety threat.”
  • “Kobe Steel’s problem points to ‘a common organization issue,’ said Shin Ushijima, a lawyer who serves as president of the Japan Corporate Governance Network. He drew parallels between Kobe Steel and Takata and Mitsubishi, as well as with financial-reporting improprieties at Toshiba, which admitted to overstating profit in 2015.”
  • “’Boards aren’t doing their jobs,’ he said. ‘This isn’t an issue that can be solved by the president resigning. There needs to be wholesale change.’”
  • “He continued, ‘The Kobe Steel case is a test of whether we’ve learned anything from Toshiba and these other issues.’”

Mexico

FT – Mexicans hope earthquake will shake up corrupt system – Jude Webber 10/9

  • “There are disasters waiting to happen, says Eduardo Reinoso, a civil engineer who has studied compliance with building codes introduced after 1985. He blames not only corruption and incompetence but also a culture of impunity that has encouraged people to build or modify their homes without planning permission because of a belief they can get away with it.”
  • “As Gabriel Guerra, a former diplomat and government official, put it: ‘Our collective negligence and corruption is coming back to bite us where it hurts.’”

October 4, 2017

Perspective

USA Today – $5 to access your own money? ATM fees jump to record high and these cities are the worst – David Carrig 10/2

  • “Among the top 25 metropolitan areas, Pittsburgh residents encountered the highest fees. The top 25 metro areas with the highest average ATM fee, according to Bankrate.com:
    1. Pittsburgh: $5.19
    2. New York: $5.14
    3. Washington D.C.: $5.11
    1. Cleveland: $5.11
    2. Atlanta: $5.05″

Vox – These charts show Fox News really did ignore Puerto Rico’s crisis – Alvin Chang 10/2

Vox – Gun violence in America, explained in 17 maps and charts – German Lopez 10/2

VC – The Most Congested Cities in the World – Jeff Desjardins 10/3

Worthy Insights / Opinion Pieces / Advice

NYT – Nothing Will Change After the Las Vegas Shooting – Steve Israel 10/2

Bloomberg – Puerto Rico Governor’s Dire Warning: Millions May Flee the Island – Jonathan Levin 10/3

  • “You’re not going to get hundreds of thousands of Puerto Ricans moving to the states – you’re going to get millions.” Puerto Rican Governor Ricardo Rossello

Markets / Economy

WSJ – Hurricane Maria Packs a One-Two Punch for Insurance – Paul J. Davies 10/3

China

WSJ – China, With Methodical Discipline, Conjures a Market for Electric Cars – Trefor Moss 10/2

  • “In the U.S. and elsewhere, there is some skepticism about whether electric vehicles will be a significant market soon. China has made up its mind. One goal is to curb pollution and reduce reliance on foreign oil. China’s chief aim, though, is to use the emerging electric market to improve the patchy quality of its domestic auto makers. To that end, it is using industrial-policy measures to create a giant test bed for its companies’ designs and technology.”
  • “Already, Chinese-made models dominate. More than 100 electric models are on the domestic market. Sales of plug-in passenger vehicles reached 351,000 in 2016—nearly half the global total, according to EV-Volumes, a research group that tracks electric-car sales.”
  • “Foreign manufacturers were already making millions of gasoline cars in China annually, but they had held off building electric cars in the country until recently, and imports were discouraged by a 25% tariff. Bill Russo, a former Chrysler executive who is now managing director of auto consultancy Gao Fung Advisory Co. in Shanghai, said they had been reluctant to plunge into a market that didn’t yet offer significant scale.”
  • “Hints of scale are appearing. Sales of plug-in passenger cars in China have increased 40% this year, EV-Volumes said. They will make up 22% of Chinese auto purchases by 2025, projects Bernstein Research, up from 1% to 2% this year.”
  • “Volkswagen AG was firmly committed to diesel engines until it recently announced a sharp shift to embrace electric vehicles after its diesel-emissions scandal forced it to rethink strategy. China accounts for half its revenues, and VW Chief Executive Matthias Müller at last month’s Frankfurt auto show indicated China will help drive VW’s global transformation: ‘China and California are leading the way.’”
  • “Propelled by a China sales target of 1.5 million annual electric cars by 2025, VW will invest $83 billion rolling out 300 electric models world-wide by 2030, he said.”
  • “Some auto makers wonder if China’s electric-car demand growth will slow as the government dials back subsidies, as it has begun doing.”
  • “China began actively promoting electric cars in 2009 by introducing subsidies and setting sales targets. Sales began to take off in 2013. Electric vehicles took center stage in China’s industrial strategy with the 2015 launch of the Made in China 2025 plan, which calls for China to become a world leader in 10 future industries, including electric-vehicle production. China has provided $8 billion in subsidies so far.”
  • “China has gone a step beyond with its incentives. Authorities have guaranteed sales for Chinese makers, in part by buying vehicles for public fleets. Beijing’s municipal government has earmarked $1.3 billion to replace 70,000 city taxicabs with electric models.”
  • “China will have 4.8 million charging points by 2020, the government forecasts, up from 156,000 in March. The U.S. had 43,000 points in June, according to a University of Michigan study.”
  • “At those rates, China has roughly one charging point for every six electric cars, versus about one for every 17 in the U.S. and Norway.”
  • “Beijing’s most persuasive tool—and a reason foreign makers are eager to start producing in China—is restricting license plates for new gasoline-powered cars in seven cities. In Beijing, more than 11 million people typically enter a monthly lottery for 14,000 gasoline-car plates. Shanghai auctions them to the highest bidders. Electric-vehicle buyers in the cities can get tags almost instantly at no cost.”
  • Essentially, cars are going to happen. China has decided.

September 29, 2017

Perspective

NYT – Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue – Rachel Abrams 9/27

  • “As economists try to understand why wages have stagnated across the country’s economy, they are examining the cheap labor part of the equation closely. A few have zeroed in on an obscure clause buried in many fast-food franchise agreements as a possible contributor to the problem.”
  • “Some of fast-food’s biggest names, including Burger King, Carl’s Jr., Pizza Hut and, until recently, McDonald’s, prohibited franchisees from hiring workers away from one another, preventing, for example, one Pizza Hut from hiring employees from another.”
  • “The restrictions do not appear in a contract that employees sign, or even see. They are typically included in a paragraph buried in lengthy contracts that owners of fast-food outlets sign with corporate headquarters.”
  • “Yet the provisions can keep employees tied to one spot, unable to switch jobs or negotiate higher pay. A lack of worker mobility has long been viewed as contributing to wage stagnation because switching jobs is one of the most reliable ways to get a raise.”
  • “Defenders of the practice argue that the restaurants spend time and money training workers and want to protect their investment. But two lawsuits, filed this year against McDonald’s and Carl’s Jr.’s parent company, CKE Restaurants Holdings, contend that such no-hire rules violate antitrust and labor laws.”
  • “The no-hire rules affect more than 70,000 restaurants — or more than a quarter of the fast-food outlets in the United States — according to Alan B. Krueger, an economist at Princeton University and a chairman of the Council of Economic Advisers in the Obama administration who examined agreements for 40 of the nation’s largest fast-food companies.”
  • “The provisions, he said, were ‘ubiquitous’ among the companies and appeared to exist mainly to limit both competition and turnover, which can keep labor costs low.”
  • “The restrictions are different from what are known as noncompete agreements — clauses in employee contracts that keep an employee from jumping to a rival. Such agreements are typically described as a means of preventing employees from bringing trade secrets to a competitor.”
  • “’I think it’s very hard to make the argument that noncompetitive agreements are necessary for low-educated, low-wage workers because they have trade secrets,’ Professor Krueger said. ‘This practice does have the potential to restrict competition and significantly influence pay.’”

Worthy Insights / Opinion Pieces / Advice

FT – Uber: the triumph of wallet over spirit – Robert Shrimsley 9/27

  • “I am quietly pleased London has taken a stand because, frankly, I wasn’t going to…”
  • “Free markets are a general good but they need someone looking beyond instant gratification to the wider consequences because the bottom line is consumers are like children. We need to be told that convenience is not the only issue. We need to be told to eat our greens.”

NYT – With Tax Cuts on the Table, Once-Mighty Deficit Hawks Hardly Chirp – Thomas Kaplan 9/28

Economist – How China is battling ever more intensely in world markets 9/23

Economist – How the use of antibiotics in poultry farming changed the way America eats 9/21

Markets / Economy

Bloomberg Businessweek – Midsize U.S. Sedan Demand Stalls Out to Lowest on Record – Anne Riley Moffat 9/27

  • “Only about one in 10 new cars sold in the U.S. is a midsize sedan, a sharp decline for the best-selling vehicle segment in 20 of the last 27 years, according to data from car-shopping website Edmunds.”

Real Estate

Fortune – The U.S. Housing Market Is Getting Squeezed. See Where Prices Are Spiking the Highest – Nicolas Rapp and Brian O’Keefe 9/15

WSJ – Blame Canada? Toronto, Vancouver Top Housing  Bubble Risks – Brian Blackstone 9/28

  • “Blame Canada?”
  • “It isn’t just the tune made famous by the South Park movie. It may become a motto among economists if frothy housing values around the world turn into a destabilizing bubble.”
  • “UBS published its latest global real estate ‘bubble index’ on Thursday, listing the major cities most at risk of housing bubbles. Canada took two of the top four spots, with Toronto on top and Vancouver at number four, and Northern Europe’s Munich and Stockholm sandwiched between.”
  • “U.S. cities featured pretty highly, with San Francisco and Los Angeles in ‘overvalued,’ but not bubble territory. New York was deemed fairly valued, and Chicago was the only city in the 20 listed that was undervalued.”
  • “UBS lists Boston’s real-estate market as fair-valued. Its uses sub-indexes such as price-to-income and mortgage-to-gross domestic product ratios to construct an overall index. Index readings above 1.5 are in bubble territory and the overvaluation scale slides down from there.”
  • “UBS noted that Toronto and Vancouver weren’t ‘dragged down’ by the global financial crisis, as a weaker Canadian dollar cushioned the blow. ‘Overly loose monetary policy, for too long, in addition to buoyant foreign demand, unmoored their housing markets from economic fundamentals—and both markets are now in bubble risk territory.’”
  • “’A strengthening Canadian dollar and further interest rate hikes would end the party,’ the report added.”
  • “In the U.S., housing prices in cities are still below their 2008 peak in inflation-adjusted terms, UBS said, except for San Francisco which ‘shows signs of overvaluation but no bubble risk, given its strong economic fundamentals amid the astonishing boom of tech companies.’”
  • “Turning to Europe, UBS said that ‘improving economic sentiment, partly accompanied by robust income growth in the key cities, has conspired with excessively low borrowing rates to spur vigorous demand for urban housing.’”
  • “In the Asia-Pacific region, Tokyo shows ‘moderate signs of overheating’ since the Bank of Japan launched its quantitative easing program in 2013, while residential prices in Hong Kong reached all-time highs mid-year ‘thanks to insatiable investor demand and speculative price expectations.’”

Finance

WSJ – Daily Shot: Danske Bank – S&P 500 Volatility 9/28

  • “For the first time since 2005, there hasn’t been a 2% daily move in the S&P 500.”

WSJ – Daily Shot: Reformed Broker – S&P 500 Maximum Drawdowns 9/28

China

Economist – China’s demographic divisions are getting deeper 9/21

September 8, 2017

Perspective

WSJ – Daily Shot: US Auto Fuel Efficiency 9/7

NYT – An Enormous, Urgent Task: Hauling Away Harvey’s Debris – John Schwartz and Alan Blinder 9/6

  • “Of all the challenges that southeast Texas faces after Hurricane Harvey, few will linger longer or more visibly than the millions of pounds of debris already crowding curbs and edging onto streets. The cleanup, needed from northeast Houston’s neighborhoods to the wealthy suburbs southwest of the city, will take months and cost billions of dollars.”
  • “At the same time, Houston officials are asking residents to separate their Harvey-related waste into five piles: appliances; electronics; construction and demolition debris; household hazardous waste; and vegetative debris. A look at these streets suggested that few people seemed to be heeding the city’s pleas.”
  • “Other cities have been through this battle with a storm’s leavings. After floodwaters inundated East Baton Rouge Parish, La., last year, crews collected about two million cubic yards of debris. Superstorm Sandy, in 2012, led to about six million cubic yards of debris in New York State — the equivalent of four Empire State Buildings, according to the Federal Emergency Management Agency. Katrina left behind 38 million cubic yards. Getting the stuff gone is a long process. It was only last month that Baton Rouge finished the debris removal process it organized in the wake of last year’s flooding there.”
  • “In Houston, where city officials say that some eight million cubic yards of debris will need to be hauled away, collection is farther along in some neighborhoods than in others.”
  • “The job of deciding how to move these mountains has been left to county and local officials, who hire debris removal companies to help them dig out. FEMA will reimburse the local governments for 90% of the cost.”

Economist – How government policy exacerbates hurricanes like Harvey 9/2

  • “The bad news is that storms and floods still account for almost three-quarters of weather-related disasters, and they are becoming more common. According to the Munich Re, a reinsurer, their number around the world has increased from about 200 in 1980 to over 600 last year. Harvey was the third ‘500-year’ storm to strike Houston since 1979.”
  • In regard to encouraging less than desirable behavior, “the National Flood Insurance Program (NFIP) has been forced to borrow because it fails to charge enough to cover its risk of losses. Underpricing encourages the building of new houses and discourages existing owners from renovating or moving out. According to the Federal Emergency Management Agency, houses that repeatedly flood account for 1% of NFIP’s properties but 25-30% of its claims.”

Worthy Insights / Opinion Pieces / Advice

Economist – Lexington: Our columnist bids farewell 9/7

  • “After five years, which included reporting trips to 46 states, this Lexington offers some parting thoughts on American politics.”

Economist – How to provide a protein-rich diet to a growing population 8/31

  • “What goes onto people’s plates matters. So does what gets fed to animals.”

Markets / Economy

WSJ – Daily Shot: Goldman Sachs – Ownership of US equity market since 1945 9/7

NYT – Milestone for BMI: More Than $1 Billion in Music Royalties – Ben Sisario 9/7

  • “The organization, whose hundreds of thousands of members include stars like Taylor Swift, Ed Sheeran and Sting, announced on Thursday that it had $1.13 billion in revenue and distributed $1.02 billion in royalties during its most recent fiscal year, which ended in June. BMI and other performing rights organizations, like its rival Ascap, collect money whenever songs are played on the radio, streamed online or piped into a restaurant.”

Real Estate

Bloomberg Quint – India Trumps Hong Kong as No. 1 for Home-Price Gains in Asia – Pooja Thakur 9/6

  • But when you look at the last 5 years…

Finance

WSJ – Daily Shot: Global High-Yield (HY) Corporate Bond Issuance 9/7

Bloomberg – Bennett Goodman Builds $95 Billion Credit Machine – Nabila Ahmed, Sridhar Natarajan, and David Carey 9/5

China

WSJ – China’s Bad Banks Show It Still Has a Big Bad Loan Problem – Anjani Trivedi 9/7

  • “There are Chinese banks and then there are China’s bad banks. To understand just how worrying the country’s bad-loan problem has become, it’s worth taking a look at the latter.”
  • “China Cinda Asset Management , the second-largest of four asset managers set up in the 1990s to clean up China’s then already large pile of souring loans, is still at it two decades on, managing and restructuring distressed assets offloaded by banks. The company’s latest results offer a lens into the rapidly deteriorating asset quality in China, that’s at odds with the relatively rosy picture of China painted for investors by its near-7% growth and corporate profits that have surged to multiyear highs.”
  • “The current pace at which Cinda is acquiring distressed assets is far outpacing the rate at which it can dispose of these assets. That has pushed down the price at which it can sell bad-loan portfolios to close to 20 cents on the dollar from 30 cents this time last year. Its income from disposing bad assets dropped 64% on the year, with returns on restructured assets falling to 8.7%in the first half from 10.6% a year ago. Losses from impairments on its assets more than doubled in the first half, driven by a more-than 10-fold increase in provisions.”
  • “These trends suggest China’s bad-loan problem is rather more severe than investors would guess from looking at the big banks’ results: The likes of ICBC and Bank of China actually reported improving nonperforming loan ratios in the first half. One reason they were able to do so is that they have been offloading bad assets to the likes of Cinda, which picks up around 60% of its distressed assets from the big banks.”

Japan

Bloomberg – Japanese Companies Cut Bonuses, Pushing Overall Wages Lower – Yuko Takeo and Yoshiaki Nohara 9/5

Russia

FT – Russia seeks to close Ukraine’s window to the west – Jeffery Mankoff and Jonathan Hillman 9/6

  • “Last month, Russia completed a railway that bypasses Ukraine. The project was entrusted to a special military unit and completed a year ahead of schedule, underscoring its importance to the Kremlin. It is the latest of several Russian-led infrastructure projects that, coupled with the devastation wrought by the conflict with Russian-backed separatists in the Donbas region, risk turning Ukraine, historically a bridge between east and west, into an island.”
  • “Isolation from emerging east-west connectivity could be one of the most enduring and most damaging consequences of the war for Ukraine, one that both Kiev and its western partners need to pay more attention to overcoming.”
  • “A UN assessment in November 2014 found that 53 bridges, 45 road sections, and 190 railway facilities had been damaged. Altogether, infrastructure losses were estimated at $440m, and while some repairs have been carried out, funding constraints and security challenges have limited reconstruction.”
  • “For both sides in the conflict, altering patterns of trade and transit is a means of shaping Ukraine’s political and economic destiny. While military forces have destroyed critical infrastructure such as bridges and railways, the governments in both Kiev and Moscow are building new connections that will re-orientate trade flows.”

South America

WSJ – Daily Shot: Brazilian CPI YoY Change 9/7

  • “Brazil’s CPI was lower than expected, which solidified the expectations for another rate cut.”

September 5, 2017

Perspective

Howmuch.net – The Working Class Can (Not) Afford the American Dream – Raul 8/31

Howmuch.net – The Rising Costs of Sending Your Kids to a Private School – Raul 8/20

Howmuch.net – Status of US State Economies – Raul 8/15

Worthy Insights / Opinion Pieces / Advice

Bloomberg Businessweek – Why Private Equity Has $963 Billion in Dry Powder – Melissa Mittelman 8/31

  • “Investors give private equity managers their capital with the expectation that they’ll make it grow. But today these managers are sitting on a record $963.3 billion of dry powder, as they call money that they’ve raised but have yet to invest. The size of that pile, and the fact that it keeps rising, is making everyone antsy. A little dry powder is great if managers are holding out for better deals. But a lot can make for overly itchy trigger fingers, or can start to make investors wonder if there are cheaper ways to do nothing with cash.”

LA Times – Yes, ExxonMobil misled the public – Naomi Oreskes and Geoffrey Supran 9/1

NYT – To Understand Rising Inequality, Consider the Janitors at Two Top Companies, Then and Now – Neil Irwin 9/3

Bloomberg View – The Flaws in India’s Growth Model Are Becoming Clear – Mihir Sharma 9/3

  • “India has a way of confounding expectations. Analysts agreed that, months after Prime Minister Narendra Modi’s ill-fated decision to withdraw 86 percent of currency from circulation overnight, growth would bounce back. Economists polled by Bloomberg expected growth in the April to June quarter to be 6.5%; other estimates were even higher. So when the government’s official statisticians released the real number last week — 5.7% over the equivalent quarter of the previous year — there was general surprise, even shock.”
  • “India’s economy has been growing less and less healthy for awhile. GDP growth has now declined steadily for six straight quarters. This is a slowdown caused by factors deeper than the cash ban or any other temporary phenomenon. Something is broken in the Indian government’s policy mix.”
  • “…Government spending and low oil prices have deceptively boosted the growth numbers, masking the true state of the economy. In fact, if public spending is excluded, growth in the past quarter barely topped 4%. Export growth is terrible and industrial growth is the lowest in five years. And the government will struggle to keep investing at these levels; it started spending big unusually early in India’s financial year, which starts in April, and has already run through 93% of its budgeted fiscal deficit.”
  • “…Effective reform — and political will — is precisely what’s needed now. The government’s first task should be to clean up bad debts far quicker than it has so far — even if powerful people, including company owners, lose money in the process. Second: The government needs to stop chasing after foreign capital to replace shy domestic capital, if it means that the rupee stays high and exports struggle. And third: Officials must quickly fix those parts of the GST that are putting small companies and exporters out of business.”

Finance

Visual Capitalist – The Unparalleled Explosion in Cryptocurrencies – Jeff Desjardins 9/1

FT – University start-ups aim for the Facebook formula – Hugo Greenhalgh 8/31

  • Rather than watch their students leave University to pursue a worthwhile business start-up, Universities are getting in on the venture capital business seeking to support and nurture the talent within.

FT – Credit cards: dealing with delinquency – Lex 8/31

Tech

Fortune – Everything You Needed to Know About Overvalued Unicorns in One Chart – Anne VanderMey 8/24

Fortune – 5 Ways Businesses Are Already Using Blockchains – Jeff John Roberts – 8/21

Health / Medicine

NYT – The First Count of Fentanyl Deaths in 2016: Up 540% in Three Years – Josh Katz 9/2

  • “The first governmental account of nationwide drug deaths in 2016 shows overdose deaths growing even faster than previously thought.”
  • “Drug overdoses killed roughly 64,000 people in the United States last year, according to the first governmental account of nationwide drug deaths to cover all of 2016. It’s a staggering rise of more than 22% over the 52,404 drug deaths recorded the previous year.”
  • “Drug overdoses are expected to remain the leading cause of death for Americans under 50, as synthetic opioids — primarily fentanyl and its analogues — continue to push the death count higher. Drug deaths involving fentanyl more than doubled from 2015 to 2016, accompanied by an upturn in deaths involving cocaine and methamphetamines. Together they add up to an epidemic of drug overdoses that is killing people at a faster rate than the H.I.V. epidemic at its peak.
  • “It’s an epidemic hitting different parts of the country in different ways. People are accustomed to thinking of the opioid crisis as a rural white problem, with accounts of Appalachian despair and the plight of New England heroin addicts. But fentanyls are changing the equation: The death rate in Maryland last year outpaced that in both Kentucky and Maine.”

Canada

WSJ – The Underappreciated Risks to Canadian Banks – Aaron Back 8/31

  • “Americans looking north to Canada see a housing market that echoes their own before the financial crisis. While there are substantial differences that make Canadian lenders more resilient, investors still should be on guard.”
  • “Canadian housing prices have been rapidly rising for years, prompting local governments in frothy areas to take draconian measures such as a 15% tax on foreign buyers.”
  • “It isn’t all foreign cash—Canadian debt levels also have soared. Last year its households had debt equivalent to 176% of disposable income, according to the OECD. That compares to 112% in the U.S., down from a 2007 peak of 144%.”
  • “Canada’s banks, however, are showing no signs of stress. The country’s six biggest lenders that dominate this highly concentrated market have just reported solid quarterly earnings. Mortgage delinquency rates are remarkably low, at only around 0.2%.”
  • “It helps that most Canadian mortgages are ‘full recourse’ loans, making it much harder for borrowers to default and walk away. Around half of the mortgages written by the big six banks are also insured, directly or indirectly, by the Canadian government.”
  • “Nonetheless, the risks are substantial. Unlike in the U.S., where 30-year fixed rates are the norm, the standard Canadian mortgage rate resets every five years. In July, Canada’s central bank raised rates for the first time in seven years. Analysts expect more hikes, especially after Canada reported strong 4.5% annualized gross domestic product growth for the second quarter. That will make regular debt payments even more burdensome for Canadian households.”

China

FT – Beijing’s uneasy deals with overseas car groups under strain – Charles Clover 8/31

  • “A spate of new foreign joint ventures in China’s car industry has revived debate about an often criticized three-decade-old policy of trading market access for technology.”
  • “This week, the Renault-Nissan alliance became the latest car group to sign a joint venture to produce electric vehicles with longtime partner Dongfeng Motor Corporation, based in Wuhan, following an announcement by Ford in August that it plans to partner with little-known Zotye Auto to make EVs.” 
  • “The Renault-Nissan Dongfeng partnership is significant because it goes further than other JVs and calls for the groups to share a common technological platform. It is not clear whether other overseas car groups will follow this course because of issues over trust on the sharing of technology.”
  • “The new EV joint ventures are part of a Chinese effort to master the technology for electric vehicles — and rely on a tried and tested model of working with the global car industry since the 1980s. In a nutshell, joint ventures are the only way for foreign groups to access the world’s largest and most lucrative market. China gives the overseas companies the right to sell cars in exchange for their technology, management expertise and a share of their profits.” 
  • “’China’s central planners said ‘how can we basically force global automakers to participate and bring their very best electric vehicle technology to China?’’ says Michael Dunne, president of Dunne Automotive, a Hong Kong-based car consultancy.” 
  • “Since 1984, starting with Jeeps, foreign carmakers have been allowed to produce cars in China — but only in concert with a local partner holding at least 50 per cent of the venture. In practice, this is almost always one of six anointed state companies.”
  • “The results of the three-decade-old policy have been mixed. Rather than transforming Chinese car companies into technology giants, the joint venture companies have arguably made Chinese carmakers complacent, according to Chinese policymakers. He Guangyang, a former minister of industry, controversially described the JVs as ‘like opium’ in an interview five years ago.”
  • “Bart Demandt of carsalesbase.com says this is a legacy of the joint ventures. ‘The state-owned companies, especially those which have 50/50 joint ventures with foreign automakers, have had little incentive to invest in their domestic brands as the profits have been pouring in from producing import-brand cars for their partners.’” 
  • “However, the Chinese government is still relying on this model, and recently set its sights on the nascent battery powered car industry. Last year it included EVs as one of 10 sectors that it wants to be internationally competitive by 2025 as part of a new industrial policy ‘Made in China 2025’.” 
  • “Foreign carmakers are wary of the new requirements and have pressed on China to delay the EV quotas by at least a year. But they have few alternatives. ‘The global automakers say ‘wow, this really has teeth, because if we want to grow in this market we don’t have a choice. There is no work around’,’ says Mr Dunne.” 
  • “The second prong of the policy is to pressure foreign carmakers to ‘localize’ their electric vehicle technology, meaning in practice to share it with their joint venture partners.” 
  • “Bill Russo, head of Gao Feng Advisory in Shanghai, calls this ‘a real game-changer for the multinational carmakers’.” 
  • “’They must comply with a new set of regulations for both component localization and credits for EV sales in order to be in the game. As carmakers will be required to pay fines if they are not selling EVs, they will be required to add EV production in order to sustain their existing business in China.’” 
  • “This has created fears that their proprietary technology could be stolen. Over the past two decades, foreign makers of everything from high-speed trains to fighter planes have licensed the technology to local Chinese partners only to find a few years later that their partner is a major international competitor.” 

FT – Anbang sells stakes in Chinese megabanks amid troubles – Gabriel Wildau 8/31

  • “Anbang Insurance Group, the Chinese conglomerate that captured global attention with splashy foreign acquisitions, sold stakes worth as much as $1bn in the country’s largest banks this year, as the company struggles with a sudden drop in premiums.”
  • “In May, China’s insurance regulator banned Anbang’s life insurance unit from selling policies for three months and accused the group of ‘wreaking havoc’ on the market with aggressive pricing.” 
  • “Anbang had relied on sales of high-yield investment products to fund foreign private-equity acquisitions as well as stakes in Chinese listed companies. Chinese investors flocked to so-called ‘universal insurance’, which combined high yields with short maturities and bore little resemblance to traditional insurance.” 
  • “But an industry-wide crackdown on universal insurance has caused premiums from such products to drop more than half in the first half of the year, according to data from the China Insurance Regulatory Commission. At Anbang, such premiums fell 98%, due in part to the CIRC ban.” 
  • “The sales of shares in China’s ‘big four’ state-owned commercial banks appear to suggest that, with cash inflows from product sales drying up, Anbang sold assets to meet payouts on maturing products. Anbang said the share sales did not reflect cash flow problems.” 
  • “Last month, a Chinese credit-rating agency downgraded Anbang’s Life Insurance, saying that ‘income has fallen substantially [and] the availability of debt financing is reduced’. The agency also noted that Anbang Life posted a net loss in the first half.” 
  • “Anbang dropped off the lists of the top 10 shareholders in three of China’s big four state-owned commercial banks in the second quarter, according to the banks’ financial statements released this week. In the fourth bank, Anbang also reduced holdings but remained in the top 10.” 
  • “Anbang is also not the only insurer to sell stakes in big banks in the second quarter. Ping An Insurance, the country’s largest insurer by assets, sold down in ICBC.”

NYT – As Bike-Sharing Brings Out Bad Manners, China Asks, What’s Wrong With Us? – Javier Hernandez 9/2

  • “There are now more than 16 million shared bicycles on the road in China’s traffic-clogged cities, thanks to a fierce battle for market share among 70-plus companies backed by a total of more than $1 billion in financing. These start-ups have reshaped the urban landscape, putting bikes equipped with GPS and digital locks on almost every street corner in a way that Silicon Valley can only dream of.”
  • “But their popularity has been accompanied by a wave of misbehavior. Because the start-ups do not use fixed docking stations, riders abandon bicycles haphazardly along streets and public squares, snarling traffic and cluttering sidewalks. Thieves have taken them by the tens of thousands, for personal use or selling them for parts. Angry and mischievous vandals hang them in trees, bury them in construction sites and throw them into lakes and rivers.”
  • “Such problems have raised questions about the sustainability of China’s bike-share boom. But the debacle has also led many Chinese to look for deeper explanations and ask if bike-sharing has revealed essential flaws in the national character, prompting a far-reaching debate about social decay and the decline of decorum and morality in the country.”
  • “Some say abuse of the bicycles reflects an every-man-for-himself mentality in China that has its roots in the extreme poverty of the last century. Others are bothered by what they see as a lack of concern for strangers and public resources. The transgressions have been chronicled in the local news media with a tone of disbelief, in part because Chinese generally see themselves as a law-abiding society and crime rates are relatively low.”
  • “In many cities, the supply of bicycles far exceeds demand, bringing chaos to sidewalks, bus stops and intersections and prompting grumbles that excessive competitiveness — seen as a national trait — is spoiling a good thing. In Shanghai, where officials have struggled to maintain order, there is now one shared bike for every 16 people, according to government statistics.
  • “In some places, the authorities have confiscated tens of thousands of bicycles and imposed parking restrictions. News outlets have documented the waste with astounding images of mountains of candy-colored bicycles, each hue representing a different bike-share company.”

FT – China’s migrant workers feel pinch as Beijing pulls back on wages – Tom Hancock 9/3

Europe

Bloomberg Businessweek – Germany’s Housing Market is Red Hot, But Don’t Call It a Bubble – Stephan Kahl and Andrew Blackman 8/21

  • A different way of engaging with rising real estate values…

South America

Bloomberg Businessweek – Brazil’s Lost Decade: The Invisible Costs of an Epic Recession – David Biller and Gabriel Shinohara 8/21

  • “Once the emerging-market darling of Wall Street, Brazil’s economy went from growth of 7.5% in 2010 to shrink by virtually the same amount in the last two years. Unemployment has risen to a near-record high, GDP per capita fell to 2009 levels and the budget deficit is hovering around 10% of GDP. There is no sign the Latin American giant will recover its investment-grade status any time soon.”
  • Fortunately…

FT – Brazil ends worst recession as GDP expands for second straight quarter – Joe Leahy 9/1

  • “Brazil’s gross domestic product expanded for the second consecutive quarter in the three months ended June, officially ending the worst recession in Latin America’s largest economy.”
  • “GDP grew just 0.2% in the quarter compared to the first three months of the year and 0.3% compared with the same quarter a year earlier, the state statistics agency, IBGE, said.”