Tag: Auto Industry

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.”

August 29, 2017

Perspective

WP – Texas flood disaster: Harvey has unloaded 9 trillion gallons of water – Matthew Cappucci 8/27

Worthy Insights / Opinion Pieces / Advice

Bloomberg Quint – Traders Ditch Risk as Dalio to Gundlach Warn on Emerging Markets – Ben Bartenstein 8/27

  • “More investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio in warning that risky assets are overvalued.”
  • “They point to rising global turmoil underscored by the recent terrorist attacks in Barcelona and the racially charged violence in Charlottesville, Virginia, as well as valuations that no longer compensate for potential flare ups in North Korea and Venezuela. That’s not to mention the unpredictability in the U.S., where President Donald Trump is feuding with members of Congress before a critical vote to increase the country’s debt ceiling.”
  • “Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt. Some of the world’s largest money managers, from Pacific Investment Management Co. to T. Rowe Price Group Inc., are advising investors to reduce risk by trimming holdings of developing-nation assets.”

FT – Big Tech can no longer be allowed to police itself – Rana Foroohar 8/27

FT – Why the oil market should not misread Venezuela – Nick Butler 8/27

  • Despite the political turmoil and the country on the verge of becoming a failed state, it is unlikely that oil supply disruptions will be permanent or significant enough to effect global oil prices materially.

Markets / Economy

WSJ – Slowing SUV Sales Could Signal a Turn in the Market – Mike Colias and Christina Rogers 8/26

Real Estate

TechCrunch – VC doors are wide open for real estate startups – Joanna Glasner 8/26

China

FT – China tech groups to demand ID verification for online posts – Yuan Yang 8/26

  • “The Chinese government will oblige tech companies to keep a record of the identities of people posting comments online, in an extension of this summer’s crackdown on internet speech.”
  • “Under the new regulations announced on Friday, all message board providers must authenticate users’ identities from October 1.”
  • “’Online comments . . . give rise to false rumors, filthy language and illegal messages, which damage the online environment,’ said a government spokesperson.”
  • “’This is a way of threatening the general population and media, especially online media,’ said Beijing-based historian Zhang Lifan. ‘It affects everyone.’”
  • “’They are using lots of different methods to restrict people’s ability to criticize or mock officials — this is not normal, even for China,’ Mr. Zhang added.”
  • “…The new regulations are being implemented under the aegis of China’s first cyber security law, which came into force in June and gives regulators the power to punish tech companies that disobey.”
  • “’Now there is a clear legal basis and a process,’ said a Beijing-based lawyer who wished not to be named. ‘This is the cyber space administration saying, ‘I’m going to monitor content, and I’m going to directly regulate tech companies’.”

August 18, 2017

Perspective

FT – Over $9tn of bonds trade with negative yields – Eric Platt 8/16

  • “Along with central bank interest rate cuts — including setting unprecedented negative rates in Europe and Japan — the bond-buying programs explain why $9tn still trades with a negative yield, and why sub-zero rates are a reality that investors likely have to contend with for years to come.”

Tax Foundation – Which States Benefit Most from the Home Mortgage Interest Deduction? – Amir El-Sibaie 8/10

WSJ – Daily Shot: The New Right-Wing Extremism: Unified, Tech-Savvy and Emboldened – Dan Frosch, Cameron McWhirter and Ben Kesling 8/16

Worthy Insights / Opinion Pieces / Advice

Economist – The death of the internal combustion engine 8/12

  • “…electrification has thrown the car industry into turmoil. Its best brands are founded on their engineering heritage—especially in Germany. Compared with existing vehicles, electric cars are much simpler and have fewer parts; they are more like computers on wheels. That means they need fewer people to assemble them and fewer subsidiary systems from specialist suppliers. Car workers at factories that do not make electric cars are worried that they could be for the chop. With less to go wrong, the market for maintenance and spare parts will shrink. While today’s carmakers grapple with their costly legacy of old factories and swollen workforces, new entrants will be unencumbered. Premium brands may be able to stand out through styling and handling, but low-margin, mass-market carmakers will have to compete chiefly on cost.”
  • “Assuming, of course, that people want to own cars at all. Electric propulsion, along with ride-hailing and self-driving technology, could mean that ownership is largely replaced by “transport as a service”, in which fleets of cars offer rides on demand. On the most extreme estimates, that could shrink the industry by as much as 90%. Lots of shared, self-driving electric cars would let cities replace car parks (up to 24% of the area in some places) with new housing, and let people commute from far away as they sleep—suburbanization in reverse.”
  • “Even without a shift to safe, self-driving vehicles, electric propulsion will offer enormous environmental and health benefits. Charging car batteries from central power stations is more efficient than burning fuel in separate engines. Existing electric cars reduce carbon emissions by 54% compared with petrol-powered ones, according to America’s National Resources Defense Council. That figure will rise as electric cars become more efficient and grid-generation becomes greener. Local air pollution will fall, too. The World Health Organization says that it is the single largest environmental health risk, with outdoor air pollution contributing to 3.7m deaths a year. One study found that car emissions kill 53,000 Americans each year, against 34,000 who die in traffic accidents.”

Economist – The merits of going English – 8/10

  • “Why educationalists like the English system of tuition fees financed by loans on easy terms.”

LinkedIn – Acknowledging My Own Straight White American Male Privilege – Jim McCarthy 8/11

Markets / Economy

WSJ – Daily Shot: Bitcoin Valuation 8/16

Bloomberg – ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone – Adam Tempkin 8/15

  • “There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.”
  • “Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.”
  • “’We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,’ Chief Economist Amy Crews Cutts said in an email Tuesday. ‘In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.’”
  • “The reason for the increase, she posited, is that lenders have loosened underwriting requirements as more firms tap into a declining market for car loans, not that there are more customers with worsening credit profiles.”
  • “Cutts said Equifax data show that lenders are extending repayment periods and offering longer terms, with many starting to exceed seven years.”
  • “That’s not to say a repeat of the financial crisis is nigh. There might not even be cause for major concern over the auto loan market, Cutts said. Monolines and dealer-finance lenders accounted for just 4% of new originations in the second quarter.”
  • “Meanwhile, the overall rate of late payments exceeding 60 days on all types of auto loans came in at a still-healthy 0.91%, up just eight basis points from last year. The rate on prime loans was at 0.33%, an increase of three basis points.”
  • “’Risk in auto lending is actually very balanced,’ Cutts said. More than 90% of overall auto loans are made by banks, credit unions, and captive auto finance companies, and these entities have become increasingly conservative and discerning in their underwriting.”
  • “Still, the ‘rapid rise’ in deep subprime delinquencies should not go unnoticed, Cutts said.”
  • “’As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,’ Cutts said. ‘The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.’”

Real Estate

WSJ – Daily Shot: FRED – Multifamily Housing Under Construction 8/17

  • “Multifamily housing that is already under construction will be flooding the rental market in the months to come.”

WSJ – Daily Shot: Capital Economics – US National Home Price / Income Ratios 8/17

Finance

WSJ – Sale of Once Hot High-Frequency Trading Frim Reflects Industry Troubles – Alexander Osipovich 8/16

  • “These upstart firms use sophisticated computer algorithms to move in and out of stocks, futures and other positions in fractions of a second. Known as high-frequency traders, or HFT, they thrived in the years following the financial crisis by exploiting the markets’ big price swings.”
  • “But more recently, there have been fewer dramatic swings in stocks, commodities and other markets. The CBOE Volatility Index, a widely followed measure of expected U.S. stock-market volatility, has hovered near historic lows this year.”
  • “Now, one electronic trading firm’s deal to acquire a struggling rival shows how this persistently low volatility is upending the HFT world and forcing out weaker players.”

FT – Private equity fundraising hits post-crisis high – Attracta Mooney 8/16

  • “Private equity fundraising is at its highest level since the boom years in the run-up to the financial crisis, leaving companies in a ‘precarious position’ as they struggle to invest record sums.”
  • “More than $240bn has been raised across private equity and venture capital funds in North America and Europe in the seven months to the start of August, according to a report from Pitchbook, a data provider.”
  • “The company believes private market fundraising in 2017 could eclipse last year, when $344.8bn was raised. The last time private equity did this well was 2007, when managers attracted $419bn.”
  • “According to Pitchbook’s research, private equity funds are sitting on record ‘dry powder’ — sums that have yet to be invested — as managers struggle to find suitable businesses. Pitchbook estimates that the amounts were $739bn at the end of 2016, higher than in 2007-08.”

Tech

FT – Uber crafts share sale plan to prop up valuation – Richard Waters 8/16

  • “Uber is planning a new round of fundraising that would at least match the $68bn peak valuation it reached before this year’s round of scandals — though investors who take part would be able to buy into the ride hailing company at a lower overall price than the headline number suggests.”
  • “The plan would include a secondary sale of shares by existing investors at a current market valuation that is likely to be some way below $68bn.”
  • “The fundraising plan is part of an attempt by Uber’s board to bring more stability to the company’s shareholder base as it tries to recover from the departure of founder Travis Kalanick as chief executive officer.”
  • “Pairing it with a secondary share sale would also give existing investors, including employees, a chance to cash in part of their holdings at a time when the chances of an initial public offering in the near-term appear to be receding.”
  • “It could also reduce the influence of venture capital firm Benchmark, which owns 13% of Uber’s stock and earlier this month mounted a high-profile lawsuit against Mr. Kalanick.”
  • “The sale by Uber itself would raise about $1bn and be set at or above the valuation Uber achieved in June last year, when it sold a 5% stake to Saudi Arabia for $3.5bn. The secondary share sale, on the other hand, would be for as much as $10bn, and would reflect a market price that took into account the company’s struggles this year.”
  • “To enable Uber to sell the higher-priced shares, investors who bought in would be offered the chance to buy the secondary stock on a pro-rata basis, resulting in an average price per share at a discount to the headline valuation.”
  • “The arrangement — showing that Uber itself could still raise some money at the $68bn valuation — would save face for Saudi Arabia, which otherwise would be seen as having overpaid for its stake in the company last year, according to one person familiar with the plan.”
  • “Another person said the structure would also save other Uber investors from being forced to write down the value of their existing holdings.”

Construction

Economist – Efficiency eludes the construction industry – 8/17

  • “The global market is worth $10trn. Euler Hermes, an insurer, expects 3.5% growth this year. Yet more than 90% of the world’s infrastructure projects are either late or over-budget, says Bent Flyvbjerg of Saïd Business School at Oxford University. Even the sharpest of tech firms suffer. Apple’s new headquarters in Silicon Valley opened two years behind schedule and cost $2bn more than budgeted. Smaller projects have similar woes. One survey of British architects found that 60% of their buildings were late.”
  • “Construction holds the dubious honor of having the lowest productivity gains of any industry, according to McKinsey, a consultancy. In the past 20 years the global average for the value-added per hour has inched up by 1% a year, about one-quarter the rate of growth in manufacturing. Trends in rich countries are especially bad. Over the same period Germany and Japan, paragons of industrial efficiency, have seen nearly no growth in construction productivity. In France and Italy productivity has fallen by one-sixth. In America, astonishingly, it has plunged by half since the late 1960s.”
  • “Prices for building materials are not to blame. They are subtracted from measures of value-added (and have not risen in any case). The burden over time of complying with regulation—applying for permits, for instance—is only partly responsible. In America such rules account for one-eighth of the productivity lost since 1987, according to the Bureau of Labor Statistics.”
  • More culpable are two broader structural trends. First, the industry has become less capital-intensive, with workers replacing machinery. This shift is more understandable in countries with access to inexpensive labor. In Saudi Arabia, for example, it is cheaper to import workers from India or Pakistan than to buy machinery. In many countries, however, labor costs might be expected to spur firms to substitute workers with capital.”
  • Instead, volatility in demand for construction has trained builders to curb investment. ‘The industry has learned through bitter experience to prepare for the next recession,’ says Luc Luyten of Bain & Company, a consultancy. Capital-heavy approaches to construction bring high fixed costs that are difficult to cut in downturns. Workers, in contrast, can be fired.
  • The second big problem is that the industry has, for the most part, failed to consolidate. Efficient firms should theoretically squash laggards, yielding bigger, more productive companies. ‘But construction is an industry that appears to have defied Adam Smith,’ says Mr Luyten. That is partly because building codes differ not just between countries but within them, which makes it harder to reap the benefits of scale. The customized nature of most projects further limits the usual advantages of size. Because the designs of most projects differ, contractors have to start from scratch for each one.”
  • “America now has about 730,000 building outfits, with an average of ten employees each. In Europe there are 3.3m with an average of just four workers. Competition is fierce and profit margins are thinner than for any industry except retail. This fragmentation creates its own problems. Slim margins make investment even less likely. Often projects have more than a dozen subcontractors, each keen to maximize profit rather than collaborate to contain costs, says Thijs Asselbergs, a professor at Delft University of Technology.”
  • “The result is an industry that raises prices for clients and mostly ignores tools that might improve productivity. ‘While we are all using iPhones, construction is still in the Walkman phase,’ says Ben van Berkel, a Dutch architect. Many building professionals use hand-drawn plans riddled with errors. A builder of concrete-framed towers from the 1960s would find little has changed on building sites today, except for better safety standards.”
  • “Examples of how the industry might move forward are not hard to find. More builders could use computer-aided design, as is standard among architects. Other methods are in earlier stages, but show promise, such as remote-controlled cranes and self-driving bulldozers (Komatsu, a Japanese equipment-maker, is developing the latter). A few niches, such as maritime construction, have shown how investments in technology and mass production can boost efficiency.”
  • “On land, a few firms are mass-producing homes. BoKlok, a spin-off from IKEA, a Swedish flat-pack-furniture seller, does only one-fifth of its construction work on site; the rest is done in factories. Parts can be standardized and costs cut as a result. BoKlok reckons that it builds twice as quickly as the industry norm. An American firm called Katerra also builds prefabricated sections of apartments at a factory in Arizona. It helps that each firm does every stage of construction itself, rather than relying on a tangle of subcontractors.”
  • “However, such techniques remain unusual. For most firms, slim margins and the specter of future downturns continue to restrain investment. Even for companies that do adopt new methods, growth may be limited by doubts about the quality of new techniques. A few modular towers in China have seen water seep between units. In Britain, past attempts at mass-produced housing are a sour memory: poorly built modular social housing from the 1960s has been demolished. British mortgage lenders shun homes built with ‘non-traditional construction methods’. BoKlok and Katerra hope their buildings will last a century. But perceptions, like so much else in construction, can be slow to change.”

China

FT – Prominent China debt bear warns of $6.8tn in hidden losses – Gabriel Wildau 8/16

  • “One of the most influential analysts of China’s financial system believes that bad debt is $6.8tn above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked.”
  • “In her latest report, Ms. (Charlene) Chu (with Autonomous Research) estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34%, well above the official 5.3% ratio for those two categories at the end of June.”
  • “But Chen Long, China economist at Gavekal Dragonomics in Beijing, said this methodology implicitly assumes that an economic crash will eventually occur in China.”
  • “Mr. Chen argues that credit losses are highly correlated with economic performance: bad loans rise when growth slows. If China can prevent a sharp downturn, credit losses will be much smaller, despite the extraordinary increase in leverage.”
  • “Ms. Chu acknowledges that an acute crisis does not appear imminent. Government influence over both borrowers and lenders has allowed Beijing to delay problems much longer than would be possible in a more market-driven system.” 
  • “What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities. The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.” – Charlene Chu

WSJ – Cleaning Up China With a Mountain of Debt – Nathaniel Taplin 8/16

Economist – The Communist Party is redefining what it means to be Chinese 8/17

  • “For most of its history the Communist Party wanted to smash China’s past, not celebrate it. During the Cultural Revolution in the 1960s and 1970s it sought to overturn the ‘four olds’: old customs, old culture, old habits and old ideas. Temples, mansions and tombstones were ravaged, along with any artefacts or people associated with the bourgeois way of life. Small wonder that Communist ideology lost its appeal. The blistering pace of change in recent decades has kindled an anxiety that China is suffering from moral decay and a concomitant yearning for a revival of ancient values. The government is harnessing those feelings, using ancient rites and customs to spread favored values.”

India

WSJ – How India’s Debt Could Kill Its Growth – Daniel Stacey, Kara Dapena and Jessica Kuronen 8/17