Tag: Banks

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

August 30, 2017

Perspective

WSJ – Daily Shot: Houston is on some the nation’s least absorbent soil 8/29

Worthy Insights / Opinion Pieces / Advice

NYT – Harvey, the Storm That Humans Helped Cause – David Leonhardt 8/29

FT – A happier Japan is a concern for investors – Leo Lewis 8/28

  • “A record 74% of Japanese are satisfied with their lives, and, for the first time in two decades, a majority are content with their income, says a Cabinet Office survey.”
  • “The trouble with all this reported satisfaction, from a market point of view, is that it has happened too early.”
  • “One of the biggest fears is that a too-easily-pleased Japan will lose its hunger for serious reform and salary increases after a couple of years of superficial tinkering. That would undermine many of the big thematic investment cases that have been in place since 2013 — corporate governance reform, womenomics, unwinding of cross-shareholdings and inducing Japanese households to take more investment risk.”
  • On top of that Japanese corporates are basking in the limelight again. “The danger is that, in the glow of public satisfaction they are tending back to the investor-repellent habit of hoarding cash away from the pockets of both their shareholders and employees.”

FT – China’s tech groups are building too much power – Henny Sender 8/28

  • “There is no Silicon Valley comparison to the dominance of Alibaba and Tencent.”

Markets / Economy

FT – US home ownership fall hits young and minorities hardest – Lauren Leatherby 8/28

Energy

WSJ – Harvey’s Lessons for America’s Stretched Energy Infrastructure – Spencer Jakab 8/28

  • “For more than 40 years, the U.S. has worried about the security of its oil supply. Hurricane Harvey is another reminder that the infrastructure that processes and delivers oil is in many ways more important.”
  • “The U.S. has 141 operable oil refineries today, which is 79 fewer than 30 years ago. Those refineries have nearly 30% more capacity and are used much more heavily, about 90% on average over the past 12 months. The heaviest concentration is along the Gulf Coast where the industry has deep roots and has been allowed to expand. Harvey has temporarily knocked out about 15% of U.S. refining capacity.”

Finance

FT – Wall St’s top bankers sell own groups’ shares as Trump rally reverses – Ben McLannahan 8/27

  • “Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening.” 
  • “Executives and board members at the top six US banks have been consistent sellers of their own banks’ shares this year, according to an Financial Times analysis of disclosures tracked by Bloomberg.” 
  • “Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett’s big dumping of shares in Wells in April, to avoid tripping over rules capping ownership by a non-bank, sales by insiders outnumber purchases by about 14 to one.” 
  • “That is an unusually long streak of net sales, across each of the big six. Last year, for example, insiders at JPMorgan, Citigroup and Bank of America bought more shares than they sold.”

Environment / Science

FT – Blue dogs of Mumbai expose poor pollution controls – Simon Mundy 8/28

  • “Roaming packs of stray dogs are an established part of the landscape of Taloja, an industrial district to the north-east of Mumbai. But when a group of them turned blue this month, environmental activists sounded the alarm at this vivid evidence of industrial failure to adhere to proper standards of pollution control.”
  • Photo from National Geographic
  • “Investigation of the phenomenon by Mumbai’s pollution control board (MPCB) led it to a more prosaic explanation: the dogs had wandered into the grounds of a factory run by Ducol Organics, a local paint and plastic producer.”
  • “The outcry over the colored dogs reflects rising concerns about pollution in India. A study in February by the US-based research group Health Effects Institute found that India was poised to overtake China as the country with the most deaths caused by air pollution.” 
  • “A study this year by researchers at the Indian Institute of Technology in Mumbai estimated premature deaths due to air pollution in Mumbai rose 62% to 32,014 between 1995 and 2015, outstripping the 41% population increase in the same period.”
  • “In New Delhi — which according to some estimates has the worst air of any major city in the world — the estimated death toll rose 147%, to 48,651.”

Economist – Louisiana fights the sea, and loses 8/26

  • “Between 1932 and 2010 the state [Louisiana] lost more than 1,800 square miles (470,000 hectares) of land to the sea, representing about 80% of America’s coastal erosion over the period. Recent losses have been especially severe because of an increase in big storms raging in from the Gulf of Mexico—such as Hurricane Katrina, in 2005, which led to the inundation of New Orleans and 1,836 deaths. Between 2004 and 2008 alone, Louisiana shrank by more than 300 square miles.”
  • For reference to the Hawaii readers, Oahu is 597 square miles and Maui is 727 square miles.
  • “According to a new report by RAND Corporation, a think-tank, infrastructure in the state worth up to $136bn could be threatened by land loss and increased storm damage, a related threat.”
  • “Starved of silt, and with less new organic matter to counteract its settling, coastal Louisiana is sinking back into its former watery state. Meanwhile, because of melting polar ice caps and thermal expansion, the sea level is rising. In the past decade the observed relative sea-level rise in coastal Louisiana—a figure that combines the effects of rising seas and subsiding land—was over a centimeter a year, or around four times the global average. The delta’s system of land creation has thus been thrown into reverse. In 1930, despite much engineering of the Mississippi’s channel, Louisiana was expanding by almost a square mile a year. Since then, an area the size of Delaware has been lost to the Gulf.”
  • One of the principal causes is due to the levees established by the Army Corps of Engineers along the Mississippi river to protect the flood basins back in the day. Trade-offs…
  • “The damaging effect of the levees was predicted. Weighing the benefits of engineering the Mississippi in 1897, a former president of the American Society of Civil Engineers, E.L. Corthell, noted the need to take into account ‘withholding by the levees…of the annual contributions of sedimentary matters” and, because of this, ‘subsidence of the Gulf delta lands below the level of the sea and their gradual abandonment.’ But while he warned that “the present generation should not be selfish,’ Mr Corthell assumed the economic benefits of protecting the flood zone would ‘be so remarkable that people of the whole United States can well afford, when the time comes, to build a protective levee against the Gulf waters.’”
  • “That illustrates two related weaknesses in much environmental policymaking: an assumption that future politicians will take a longer-term view than current ones, and an excessive willingness to discount the future costs of solving environmental problems caused today… In any event, it is doubtful such a scheme would be affordable or otherwise practical, considering the effects of rising sea levels and fiercer storms, both consequences of global warming…”

Britain

WSJ – Daily Shot: Datastream – UK Household Savings Ratio 8/29

  • “UK’s households are struggling. With real wage growth in negative territory, the household savings ratio is collapsing.”

China

WSJ – Evergrande’s Ever More Risky Bet on Chinese Housing – Jacky Wong 8/28

FT – China orders videotaping of retail investment sales – Tom Mitchell 8/29

  • “China’s banking regulator has issued new rules requiring financial institutions to make video and audio recordings of all investment product sales, saying they were needed to ‘further regulate market order and protect customer rights’.” 
  • “The recordings will also help state-owned banks and the government fend off compensation demands from retail customers when their investments turn sour.” 
  • “’If investors make irrational choices after sales staff have clearly explained the risks, then they will have to accept the consequences,’ said Zhao Xijun, a finance professor at Renmin University in Beijing. ‘In the event there is a dispute, the recordings can be used as evidence’.” 
  • “The new surveillance rules issued by the China Banking Regulatory Commission require financial institutions to preserve the recordings for six months after the relevant investment product has expired. Banks are also not allowed to market investments to customers who refuse to be recorded.” 
  • “The value of outstanding [Wealth Management Products] WMPs has soared from Rmb4.6tn ($690bn) at the end of 2011 to Rmb29tn last year, according to data from Wind Information. But year-on-year growth moderated in 2016 to 23%, compared to a 56% increase in the value of outstanding WMPs in 2015.” 
  • “Data for the value of WMP products sold this year are not yet available. In volume terms, Chinese financial institutions sold 43% more WMP contracts through August 25 compared to the same period a year earlier.” 

FT – Huarong chief warns of bubble in China’s distressed debt market – Don Weinland 8/28

  • “Bubbles in credit and real estate have led to a steady flow of bad debt in China for years. But now a bubble is forming in the market for the bad loans themselves, says the chairman of China’s largest state-controlled ‘bad bank’.”
  • “Banks in China are dealing with an onslaught of non-performing loans that have resulted from poor risk controls and years of loose monetary policy. Investors estimate that China’s stock of bad debt has risen to $3tn this year, in step with a decelerating economy. One prominent analyst said recently that the figure could be as high as $6.8tn.”
  • “As the pool of bad assets rises, so too has the number of Chinese investors willing to chase after bad debt portfolios.”
  • “But many of the newcomers had little experience investing in distressed debt and were pushing up prices for the assets at auctions, said Lai Xiaomin, chairman of China Huarong Asset Management, and a deputy to the 12th National People’s Congress.”
  • “Inexperienced investors presented the risk of creating new losses while also failing to resolve troubled loans, he said.”
  • “China has experienced steady deregulation in how distressed debt is bought and sold since the industry was launched 18 years ago.”
  • “Huarong, along with three other centrally controlled asset managers, was created by the ministry of finance in 1999 to absorb perilously high levels of bad debt from China’s largest commercial banks. At the time, the government directed banks to transfer $1.4tn to the four groups.”
  • “Since then, the asset managers have greatly expanded their businesses in China and globally, operating more like investment banks than bad debt investors. Huarong went public in Hong Kong in late 2015.”

India

Economist – Undue reverence for company founders harms Indian firms 8/26

August 25, 2017

Perspective

FT – The great Silicon Valley land grab – Richard Waters 8/23

KFF.org – Medicaid and the Opioid Epidemic – Katherine Young and Julia Zur 7/14

Worthy Insights / Opinion Pieces / Advice

MarketWatch – Retailers aren’t hurting because people are buying ‘experiences’ instead of stuff – Rex Nutting 8/22

  • “The brick-and-mortar retail industry is in crisis. For many old-line retailers, sales and market share are plunging fast. The most obvious explanation for their distress is the rise of online shopping, but some analysts mistakenly point to another trend: ‘Shoppers are choosing experiences over stuff, and that’s bad news for retailers.’”
  • “Instead of purchasing a couch, we’re going to Paris! Or maybe buying avocado toast.”
  • “The reality is more mundane: We are spending a smaller portion of our budget at the mall, but the money we’re saving is mostly going for the most expensive health care in the universe.”
  • “If you’ve heard these stories about the shift away from material things and toward experiences, you might be shocked to learn that retail spending hit a record $1.4 trillion in the second quarter. Retail spending has increased in 30 of the past 33 quarters. We still love to buy stuff.”
  • “The problem for retailers is that prices are falling for many retail goods such as clothing, electronics, appliances, furniture, tools, luggage, toys and many other things. That is killing the bottom line for traditional retailers, who get less revenue per unit sale but still have to pay the fixed costs of rent and payroll.”
  • “For consumers, on the other hand, falling prices are a godsend, because we can buy even more stuff and still have some money left over to spend on other things.”
  • “It would be great if we really could afford to shift our spending from the boring things we need to the fun things we want, but in reality most of the money we are saving due to cheaper clothes and cheaper gasoline is going for goods and services that no one would call fun: hospital bills, financial services, rent, and prescription drugs.”
  • “Over the past 20 years, there has been a revolution in our spending patterns. Since 1997, Americans have shifted a significant portion of their spending from physical things like autos, clothing and petroleum to services like health care, rent and internet access.”
  • “At the margin, we are spending a little bit more on having fun than we did 20 years ago, but most of our money still goes for necessities, not experiences.”

Markets / Economy

WSJ – Global Economics Grow in Sync – Josh Zumbrun 8/23

  • “For the first time in a decade, the world’s major economies are growing in sync, a result of lingering low-interest-rate stimulus from central banks and the gradual fading of crises that over years ricocheted from the U.S. to Greece, Brazil and beyond.”
  • “All 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. It is the first time since 2007 that all are growing and the most countries in acceleration since 2010, when many nations enjoyed a fleeting snapback from the global financial crisis.”
  • “In the past 50 years, simultaneous growth among all the OECD-tracked countries has been rare. In addition to happening last decade, it has only happened in the late 1980s, and for a few years before the 1973 oil crisis.”

Finance

FT – What happened to the ‘too big to fail’ banks? – Patrick Jenkins and Ian Bott 8/23

China

FT – Back to the future for China tycoon sweepstakes – Gabriel Wildau 8/23

  • “To be a Chinese tycoon these days is to live with uncertainty: while some see their wealth and status rise meteorically, others fall out of favor with Beijing — with serious consequences for their wealth and freedom.”
  • “Led by chairman Hui Ka-yan, Shenzhen-based Evergrande has seen its share price almost quadruple this year. Shares in Sunac China, led by Sun Hongbin, have nearly tripled. The price rises have catapulted both up the ranks of China’s rich list.”
  • “By contrast, last year’s upwardly mobile tycoons, Wu Xiaohui of Anbang Insurance and Wang Jianlin of Dalian Wanda, who seemed to represent China’s future as a global investor as they snapped up foreign real estate and entertainment assets, are on the defensive.”
  • “’If you look at Sun Hongbin, he sells bonds offshore and brings the money onshore to build houses. It’s different from Wanda, which borrows from banks onshore to invest offshore. That’s much more sensitive,’ said Yang Guoying, researcher at China Financial Think Tank and a popular commentator on Weibo.”
  • “Offshore investors have a strong appetite for Evergrande’s high-yield debt, despite persistent warnings from analysts and short sellers that the group is highly leveraged. It is a high-risk bet that keeps paying off.”
  • “Evergrande’s net debt of $48bn at the end of last year was the highest among Chinese listed developers, according to data from Thomson Reuters.” 
  • “Tianjin-based Sunac ranked eighth with $8.8bn, and that was before its recent, largely debt-financed deal to buy 13 theme parks from Wanda for $6.5bn. Sunac has spent more than $17.5bn on acquisitions since the start of 2016, according to Dealogic.”
  • “’All these big private enterprises have something in common, which is that they’ve grown very big, very fast, and they’ve done it through debt sales and bank loans,’ said Ai Tangming, chief economics columnist for Sina Finance, a major domestic news website. ‘But Evergrande and Sunac have handled their government relations extremely well, and it’s paying off.’”

Europe

WSJ – Daily Shot: Euro Area GDP 8/24

October 28 – November 3, 2016

Declining global trade. Chinese bank loan loss provisions. Pending auto loan crisis?

Headlines

Special Reports / Opinion Pieces

Briefs

    • “Earlier this year, One Kings Lane, the online home goods retailer once worth almost $1 billion, sold itself to Bed Bath & Beyond, one of the companies it was supposed to displace, for just $12 million. Jawbone, the maker of sleek wearable fitness hardware once seen as a threat to Apple’s, has seen its value fall 50%. Since 2015, researcher CB Insights has counted 80 ‘down rounds,’ instances of a startup accepting a reduced valuation to raise more venture funding. ‘There was this fog hanging over Silicon Valley in 2001,’ says Botha (Roelof Botha, partner at VC firm Sequoia Capital) referring to the last big tech bust. ‘And there’s a fog hanging over it now. There’s no underlying wave of growth.'”
    • Yet at the same time VC funds are flush. “A few years ago, a big VC fund might have had about $500 million to play with. Today, ‘big’ means well over $1 billion. VCs raised $12 billion in the first quarter of 2016, which the industry’s trade group says marked a 10-year high. ‘The world has never seen an investment climate like this one,’ says Bill Gurley, a partner with Benchmark who led the firm’s investment in Uber. ‘It’s hard to express how much money is out there.'”
    • As Benchmark’s Gurley puts it “we’re in a slow correction. You might see a unicorn go down once a quarter.”
    • “Grocers are struggling to lure e-commerce-loving millennials into their aisles amid what experts say is a permanent shift in shopping patterns among consumers.”
    • “I don’t think we’ve seen shopping change so dramatically ever. Those things in the past that have been real drivers for grocery in terms of freshness and quality aren’t the key drivers for millennials.” – Marty Siewart, senior VP for consumer and shopper analytics at Nielsen
    • “Consumers between 25 and 34 years of age last year spent an average of $3,539 on groceries, about $1,000 less in inflation-adjusted dollars than people that age spent in 1990, federal data shows.”
    • Of course it doesn’t help that “the more than 75 million Americans born in the 1980s and 1990s are also delaying marriage and childbearing, milestones that traditionally lead people to start making big trips to the grocery store.”
    • wsj_grocery-slump_10-27-16
    • Austria just sold 70-year bonds at a yield of 1.5%. On the same day the country also sold 7-year bonds at a sub-zero yield.
    • ft_annual-sales-of-long-dated-debt_10-27-16
  • Peter Wells of the Financial Times pointed to the ‘real’ reason why AIA has a fall in insurance policies underwritten.
    • “UnionPay customers from the mainland (China) will only be allowed to use their credit and debit cards to buy accident, illness and tourism-related insurance policies in Hong Kong, the state-backed bank card provider said on Saturday through one of its subsidiaries.”
    • Why the sudden change…
    • “UnionPay said it ‘has observed a significant increase in overseas insurance transactions by cards issued from mainland China’ and is now preventing its mainland customers from buying insurance products that include ‘investment-related contents.'”
    • “The purchase of insurance products overseas, particularly in Hong Kong, had become a popular way to move money offshore, particularly after the devaluation of the renminbi in August 2015.”
  • Danny Hakim of the New York Times covered the new findings about genetically modified crops and how the results haven’t quite lived up to the promises.
    • The skinny: “genetic modification in the United States and Canada has not accelerated increases in crop yields or led to an overall reduction in the use of chemical pesticides.”
    • “An analysis by The Times using United Nations data showed that the United States and Canada have gained no discernible advantage in yields – food per acre – when measured against Western Europe, a region with comparable modernized agricultural producers like France and Germany. Also, a recent National Academy of Sciences report found that ‘there was little evidence’ that the introduction of genetically modified crops in the United States had led to yield gains beyond those seen in conventional crops.”
    • “At the same time, herbicide use has increased in the United States, even as major crops like corn, soybeans and cotton have been converted to modified varieties. And the United States has fallen behind Europe’s biggest producer, France, in reducing the overall use of pesticides, which includes both herbicides and insecticides.”
  • Mary Childs of the Financial Times discussed some of the changes afoot in the private equity business.
    • A new trend is taking place in the private equity world, one that is promising to hold investor money for longer periods in return for less returns.
    • Granted, “private equity has become a victim of its past success: its strong performance relative to other asset classes looks increasingly difficult to replicate as high valuations and stiff competition among private equity groups make new deals more expensive.”
    • Thus new funds are “offering investors vehicles that will run for 14 years or more, rather than the traditional 10 years, and offer 15% returns or less, lower than the 20% in a typical fund.”
    • “Already the industry’s average returns are slipping below the 20% mark: for 2015, buyout funds generated an average internal rate of return of 17.1%, according to data from Preqin.”
    • “Fund managers are deploying less money, sitting on a record $839bn of so-called dry powder at the end of the third quarter, according to Preqin. Many buyout chiefs say they are modelling potential investments with the expectation that they will be selling into a lower stock market.”
    • Speaking to the timelines of these new funds, the intent is to match investment returns to investor’s long-term liabilities and to avoid forced sales due to too-short investment time horizons.
  • Michael Hiltzik of the Los Angeles Times posted about a recent agreement between Dalian Wanda Group and the City of Beverly Hills on a real estate development that sets quite a precedent – good or bad depending on which side you’re on.
    • The benefits of being a city where entitled land is scarce and money flows abundantly… or a further sign that this real estate development cycle has been going on too long such that municipalities can continue to up the ante.
    • The City of Beverly Hills and the Dalian Wanda Group (large Chinese developer) just inked perhaps the most advantageous deal to a municipality – ever.  Granted, Dalian Wanda wouldn’t have done the deal if it didn’t make sense to them – at least on paper.
    • “The terms are still subject to approval by the Beverly Hills City Council, which will launch a three-day round of hearings on the development Monday. The terms include a doubling of the upfront payment from Wanda to the City from $30 million to $60 million; a quadrupling of environmental mitigation and sustainability fees to 1.25% from 0.45% of the sale of any portion of the development, including the condos, and an additional 2% of any subsequent sale; and hotel occupancy surcharge of 5%, on top of the city’s statutory transient occupancy tax of 14%.”
    • “The city says it expects the terms to yield $820 million in revenue over 30 years, an increase of $560 million over the previous terms.”

 Graphics

FT – Spanish unemployment rate below 20% for first time in 6 years – Tobias Buck 10/26

ft_spain-unemployment-rate_10-26-16

Visual Capitalist – Prices Are Skyrocketing, But Only For Things You Actually Need – Jeff Desjardins 10/28

vc_inflation-chart_10-28-16

FT – Solar industry rollercoaster offers a bumpy ride – Ed Crooks 10/30

ft_solar-industry-returns_10-30-16

FT – US mobile advertising surges 89% – Anna Nicolaou 11/1

ft_us-online-ad-revenues_11-1-16

Daily Shot – Nigeria’s FX Reserves 11/1

daily-shot_nigeria-foreign-reserves_11-1-16

Economist – Angling for the future of TV 10/29

economist_time-spent-watching-traditional-tv_10-29-16

Bloomberg – What Rising Bond Yields Are Trying to Tell Us – Mark Gilbert 11/3

bloomberg_decline-in-negative-yielding-debt_11-3-16

FT – Millennials drive Chinese online consumer boom – James Kynge 11/2

ft_online-sales-of-fast-moving-consumer-goods_11-2-16

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

A Little-Noticed Fact About Trade: It’s No Longer Rising. Binyamin Appelbaum. New York Times. 30 Oct. 2016.

“…Trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8% in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.”

“It is the first time since World War II that trade with other nations has declined during a period of economic growth.”

Further, “the United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion.”

“In better times, prosperity increased trade and trade increased prosperity. Now that wheel is turning in the opposite direction.”

Worse, “there are also signs that the slowdown is becoming structural. Developed nations appear to be backing away from globalization.”

“The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.”

“During the 1990s, global trade grew more than twice as fast as the global economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted.”

“But those changes have played out. Europe is fraying around the edges; low tariffs and transportation costs cannot get much lower. And China’s role in the global economy is changing. The country is making more of what it consumes, and consuming more of what it makes. In addition, China’s maturing industrial sector increasingly makes its own parts. The International Monetary Fund reported last year that the share of imported components in products “Made in China” has fallen to 35% from 60% in the 1990s.”

“The result: The I.M.F. study calculated that a 1% increase in global growth increased trade volumes by 2.5% in the 1990s, while in recent years, the same growth has increased trade by just 0.7%.”

Now, there is excess capacity in the world’s shipping lines. “In 2009, the world’s cargo lines had enough room to carry 12.1 million of the standardized shipping containers that have played a crucial, if quiet, role in the rise of global trade. By last year, they had room for 19.9 million – much of it unneeded.”

Further, automation is making it difficult, if not impossible, for developing nations to follow in China’s footsteps. “Dani Rodrik, a Harvard economist, calculates that manufacturing employment in India and other developing nations has already peaked, a phenomenon he calls premature deindustrialization.”

It doesn’t help that the benefits of globalization were oversold and that now nativists and protectionists are overstating the downsides.

China banks in stand-off with regulators on loan loss provisions. Yuan Yang. Financial Times. 30 Oct. 2016.

“China’s banks are in a deepening stand-off with regulators over the level of provisions they must make to protect against loan defaults as bad debts continue to climb.”

Current provisions call for a loan loss provision ratio target of 150%.  As it stands at least two of China’s largest four banks are below the coverage ratio. As of the third quarter Industrial and Commercial Bank of China has a coverage ratio of 136% (down from 143% in the second quarter). And that’s based on officially recognized non-performing loans.

“Officially, 1.8% of all Chinese loans are non-performing, although the credit rating agency Fitch puts the true figure at more than 15%. Following a huge credit boom, the outstanding amount of non-performing loans doubled in the two years before June 2016, reaching Rmb1.4tn.”

Hence, will the banks have to raise their loan loss reserves or will the regulators reduce the target ratio?

As Zhang Yingchao, a banking analyst at NSBO China – an investment bank, aptly puts it “setting standards is a tussle between the banks and the regulators. Who gets the upper hand depends on the state of the economy. If increasing the credit supply is necessary to meet the growth target of 6.5-7%, then the regulators will need to relax standards.”

Fears rise over auto loan crisis as repo men see sales’ dark side. Joe Rennison. Financial Times. 1 Nov. 2016.

“Repossessions in the US hit 1.6m in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8m and 1.9m peaks seen in 2008 and 2009, respectively.”

“That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.”

However, one of the key differences between this cycle and last is that whereas many of the repossessions in 2008 and 2009 were from fraudulent schemes “people renting cars under a fake name and not returning them, for example,” this time there has been a boom in subprime auto loans and people just not able to repay their loans.

ft_growth-of-subprime-auto-abs_11-1-16

The auto market is booming and correspondingly or really as a result of the growth in the auto loan market. “The auto loan market has grown from $750bn in 2011 to $1.1tn at the end of June, according to data from the US Federal Reserve.”

According to Peter McNally, a senior analyst at Moody’s – the rating agency, “while we have seen a gradual loosening in underwriting in recent years it has gotten to a point now where it is becoming unstable.”

“The subprime auto ABS market has grown to $38.1bn, down slightly from its second quarter high of $41.2bn, according to data from the Securities Industry and Financial Markets Association. Fitch Ratings defines subprime ABS as a deal with expected net losses above 7%. Net losses across subprime auto ABS hit 9.29% in September, according to Fitch – 23% higher than a year earlier.”

ft_top-10-subprime-auto-loan-issuers-2006_11-1-16

“The fear is that if losses continue to climb, investors will stop buying bonds issued by less diversified companies. If their access to funding stops, it could impair the credit quality of the issuer itself, throwing doubt over the quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.”

ft_top-10-subprime-auto-loan-issuers-2016_11-1-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Apple’s profits in China down by almost a fifth 10/26

FT – China pension reform to send flood of cash into domestic equities 10/26

FT – China property developers feel chill as cooling measures bite 10/27

FT – Credit Suisse plans cost-sharing project with another bank 10/29

FT – Russia prepares for deep budget cuts that may even hit defense 10/30

FT – Japan insurers prepare for age of self-driving vehicles 10/30

FT – China’s strongman rule sets a test for the west 10/30

FT – Venezuela’s crisis comes to a head in the streets 10/30

FT – Shell and BP warn not to expect strong oil rebound in 2017 10/31

FT – Forget the IMF: global chemicals are your guide to future performance 11/1

FT – China’s corporate governance standards fall 11/2

FT – Egypt devalues currency and begins free float to secure IMF funds 11/3

NYT – China’s Communist Party Declares Xi Jinping ‘Core’ Leader 10/27

WSJ – The Worrying Weak Point for Super-Strong Bonds 10/28

WSJ – Why Everything Isn’t All Right With China’s Economy 11/1

WSJ – More Americans Leave Expensive Metro Areas for Affordable Ones 11/1

 

June 24 – June 30, 2016

Japanese banks wary of property risks. Negative-yielding sovereign debt jumps to $11.7tn.

This week all the media outlets were blanketed with coverage on the Brexit and of course the synopsis varied from catastrophe (a lot of money was lost in the equity markets around the world immediately – which have already made up a lot of lost ground), to concern over the survival of the European Union, to a general ‘meh.’  Remember, the world moves on.  Importantly, Britain is still part of the EU. No one has triggered Article 50 of the Lisbon Treaty yet and even when Britain does trigger the article, there is a two-year exit process with the EU.  As such, some even think that Britain may not eventually leave.  So for now as the Brits like to say, keep calm and carry on.

Headlines

Briefs

    • “Moody’s Investors Service is predicting that China’s property markets are facing a double-whammy of growing margin pressures for developers and tapering growth in home sales nationwide.”
    • “The rapid growth in land costs will raise the developers’ capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate.” – Dylan Yeo, Moody’s analyst
    • “The report from Moody’s follows a note from S&P Global Ratings last week reiterating expectations for growing bond defaults onshore in China, with those for property developers forecast to have the biggest potential impact.”
    • “Between 2005 and 2015 the world’s cities swelled by about 750m people, according to the UN. More than four-fifths of that growth was in Africa and Asia; specifically, on the fringes of African and Asian cities. With few exceptions, cities are growing faster in size than in population. Lagos, the capital of Nigeria, is typical: it doubled in population between 1990 and 2010 but tripled in area. In short, almost all urban growth is sprawl.”
    • “London took two millennia to grow from fewer than 30,000 people to almost 10m; Shenzhen in China managed that within three decades. And most African and Asian cities are growing more chaotically.”
    • “Like it or not, this is how the great cities of the 21st century are taking shape.”
    • “Shlomo Angel of New York University has studied seven African cities in detail: Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos, and Luanda. He calculates that only 16% of the land in new residential areas developed since 1990 has been set aside for roads – about half as much as planners think necessary. And 44% of those roads are less than four meters wide.”
  • Laura Kusisto of the Wall Street Journal highlighted that yes, today’s renters really are worse off than their parents.
    • “Inflation-adjusted rents have risen by 64% since 1960, but real household incomes only increased by 18% during that same time period, according to an analysis of U.S. Census data released by Apartment List, a rental listing website.”
    • “Renters fared the worst during the decade between 2000 and 2010, when inflation-adjusted household incomes fell by 9%, while rents rose by 18%, according to Apartment List.”
    • In regard to inflation “…housing still largely relies on U.S. labor and materials (and zoning restrictions), making it one of the few essentials that haven’t become cheaper with globalization.”
  • Claire Jones and James Shotter of the Financial Times reported on the IMF’s recent opinion that Germany do more to reform its banks.
    • “The International Monetary Fund has warned that ultra-low interest rates pose a threat to the profitability of Germany’s €13tn financial sector, as it steps up its call for the country’s banks and insurance groups to restructure.”
    • “The IMF has supported the ECB’s aggressive monetary easing and indicated that the onus was on German banks and their regulators and supervisors to reform.”
    • “Given its high share of savings and co-operative banks – whose business revolves around taking deposits from and making loans to local communities – the German banking system is highly dependent on interest rates.”
    • “A study by BaFin, the German financial watchdog, and the Bundesbank last year found that Germany’s 1,500 small and midsized banks expected profits to fall by an aggregate of 25% by 2019, mainly owing to the collapse in net interest income. The study projected that if rates fell a further 100 basis points, lenders’ profits would plunge at least 60% by the same date.”

Special Reports

Graphics

FT – Fed on alert for US economic recoil – Sam Fleming 6/24

FT_Fed funds futures curve_6-24-16

FT – Unicorns: Between myth and reality – Richard Waters and Leslie Hook 6/27

FT_Venture capital invested in US_6-27-16

Bloomberg – San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs – Alison Vekshin 6/28

Bloomberg_San Francisco Office Vacancies rise_6-28-16

Economist – Foreign direct investment 6/25

Economist_Foreign direct investment_6-25-16

WSJ – Today’s Renters Really Are Worse Off Than Their Parents – Laura Kusisto 6/29

WSJ_Today’s Renters Really Are Worse Off Than Their Parents_6-29-16

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Overheating Risk Makes Japanese Banks Wary of Property Lending. Tesun Oh Katsuyo Kuwako. Bloomberg. 27 Jun. 2016.

“Japanese banks are reining in their exposure to the property market on concern the central bank’s negative-rate policy is fueling overheating.”

“We’re watching the market carefully because we get a strong sense that the market is being pushed up mainly by a lot of lending.” – Michiya Fujii, head of the real estate finance department, Tokyo Star Bank, Ltd.

“Lending to the real estate sector rose to a record high in March, exceeding levels during Japan’s asset bubble in the late-1980s, according to Bank of Japan data.”

Bloomberg_Japanese real estate bank loans_6-27-16

When you look at the options for income investors you can understand why. “While the average expected yield for central Tokyo office property fell to 3.7% in the first quarter, its lowest since at least mid-2007, that is still 82 times the 0.045% yield an investor can earn from buying 20-year government debt. Ten-year yields have dropped 10 basis points this month to minus 0.22%.”

“Considering the downside risks, this is not a time when we can aggressively lend. What’s important is, when the time comes and the market turns, how much durability we’ve built into the portfolio.” – Katsumi Taniguchi, head of the planning team of the real estate finance department at Sumitomo Mitsui Trust

Additionally, while rates are low real estate investment trusts and large developers are taking advantage of the opportunity to lower their borrowing costs.  “Nippon Building Fund Inc., Japan’s largest REIT, sold 30-year debt this month at a coupon of 1%, while the largest developer Mitsubishi Estate Co. issued 40-year bonds at 0.789%.”

Negative-yield government debt surges $1.3tn to $11.7tn Adam Samson. Financial Times. 30 Jun. 2016.

“The universe of negative-yielding government debt has increased by more than $1tn in the last month to reach a high of almost $12tn in one of the most tangible results of Britain’s decision to leave the EU.”

“Low sovereign bond yields reflect gloomy economic outlooks and expectations of central bank stimulus. In turn a record $11.7tn of global sovereign debt has now entered sub-zero territory – an increase of $1.3tn since the end of May, according to data released by Fitch Ratings.”

FT_Gobal negative yielding sovereign debt rises to $11.7tn_6-30-16

“You have to look at the response by central banks after the Brexit shock. You’re seeing a ubiquitous tilt toward easing among G4 central banks (Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England).” – Ben Mandel, a global strategist at JPMorgan Chase

Because of this, “futures markets suggest investors saw a roughly 75% chance that the Federal Reserve will not raise interest rates over the next 12 months.”

FT_Government debt yields under pressure_6-30-16

Other Interesting Articles

The Economist

Bloomberg – China’s Idled Wind Farms May Spell Trouble for Renewable Energy 6/28

Economist – Why Brexit is grim news for the world economy 6/24

FT – The perfect financial crime 6/25

FT – South Korea plans stimulus boost in wake of Brexit 6/27

FT – Broad, deep and brutal – Asia’s Brexit reaction 6/29

FT – Brazilian bankruptcies create opportunities for debt investors 6/29

Project Syndicate – Brexit and the Future of Europe (George Soros) 6/25

Reuters – Post-Brexit global equity loss of over $2 trillion worst ever: S&P 6/26

The New Yorker – Why Brexit Might Not Happen at All 6/27

WSJ – Shareholder Fight Puts China’s Market Resolve on the Line 6/28

 

June 3 – June 9, 2016

The volume of Chinese wealth-management products is becoming unwieldy. Banks have had enough of this negative interest rate nonsense.

Headlines

Briefs

    • “China today boasts roughly five workers for every retiree. By 2040, this highly desirable ratio will have collapsed to about 1.6 to 1.”
    • “At the same time, the number of Chinese older than 65 is expected to rise from roughly 100 million in 2005 to more than 329 million in 2050 – more than the combined populations of Germany, Japan, France, and Britain.”
    • “With the number of working-age Chinese men already declining – China’s working-age population shrank by 4.87 million people last year – labor is in short supply.”
    • “By hastening and amplifying the effects of this decline, the one-child policy is likely to go down as one of history’s great blunders.”
    • “As a result, by 2020, China is projected to have 30 million more bachelors than single women of similar age.”
    • “By the end of the century, China’s population is projected to dip below 1 billion for the first time since 1980. At the same time, America’s population is expected to hit 450 million.”
    • A May 26 auction of non-performing loans (NPLs) was met with tepid reception and was primarily an event of banks shuffling bad debt between each other.
    • Thing is, if this strategy doesn’t catch on with private sector investors, “a failure to purge lenders of their NPLs may fuel expectations for a government-led bailout, which Standard Chartered Plc estimates could cost as much as $1.5 trillion.”
    • According to Bloomberg Intelligence, “China has about $2.4 trillion of corporate debt at risk of default.”
    • Hopefully the debt products being sold become more transparent and easier to asses from a risk perspective so that the private sector can reasonably jump in.

Special Reports

Graphics

FT – Argentina set to tumble 22 places on global wealth list – Steve Johnson 5/27

FT_Latin America GDP growth_5-27-16

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Long Shadow Hangs Over China’s Banks. Anjani Trivedi. Wall Street Journal. 6 Jun. 2016.

“The growth of off-balance sheet WMPs (Wealth Management Products) is exploding, with issuance rising 7.3 trillion yuan ($1.1 trillion) last year, up nearly three-quarters from the previous year, according to Charlene Chu of Autonomous Research. That is equivalent to nearly 40% of China’s 19 trillion yuan credit growth in 2015, including debt issuance under a local government bond-swap program. And while customers are told most WMPs aren’t principal guaranteed, that distinction may be shaky in China’s financial system rich with moral hazard.”

While this isn’t the first time that debt issuance has surged from WMPs; however, “the structures this time around are increasingly complex. Investors in China’s interbank market – including banks – took up almost a third of WMP buying last year, up from 2% the previous year. Most of that is from WMPs essentially buying other WMPs, creating an opaque layering of obligations, Ms. Chu said, echoing the collateralized debt obligations made famous during the U.S. housing bust.”

“Then there is duration risk. Over three quarters of these investment products mature within six months, putting constant repayment pressure on banks. To meet these products’ yield demands, WMPs have been heavy buyers in China’s rip-roaring bond market. A sustained reversal of the bond market could trigger pain on WMPs.”

WSJ_Growth of WMPs in China_6-6-16

Negative rates stir bank mutiny. James Shotter and Claire Jones. Financial Times. 8 Jun. 2016.

“Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies, with one big German group going so far as to weigh storing excess deposits in vaults.”

“The central bank policies have hit bank profitability in both regions and German banks have been vocal in criticizing Mario Draghi, European Central Bank president, accusing him of punishing savers and undermining their business models. The policy cost German banks €248m last year, according to the Bundesbank.”

“Japanese banks have been more muted but Bank of Tokyo Mitsubishi UEJ has become the first leading lender to break ranks, confirming it is considering giving up its primary dealership status for sales of Japanese government bonds.”

“The more central banks think that they can violate the zero-bound, the more likely it is that banks will look at ways to limit their costs. And that means they will hold more cash if they can find efficient means to do so.” – Adalbert Winkler, professor at the Frankfurt School of Finance and Management.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – WeWork to Halt Hiring, Make Major Cuts to Staff 6/6

FT – Crisis-era tremors shake property funds 6/2

FT – Emerging markets to slow as convergence theory takes hold 6/2

FT – The period of maximum danger for bond investors is yet to come 6/6

FT – Saudi Arabia considers income tax for foreign residents 6/7

FT – Bank of Korea unexpectedly cuts rates to 1.25% 6/8

FT – Bill Gross warns over $10tn negative-yield bond pile 6/9

NYT – Toxic Fish in Vietnam Idle a Local Industry and Challenge the State 6/8

WSJ – Bank loans: Why it Feels Like 2008 All Over Again in Asia 6/6

WSJ – How to Time a Chinese Banking Tipping Point (2019) 6/7

WSJ – China’s Property Prices Rebound, but Stocks Tell Another Story 6/7

WSJ – Rock-Bottom Bond Yields in Europe Hit All-Time Lows 6/8

WSJ – REIT Surprise: How Real Estate Crushed the Stock Pickers 6/8

Yahoo Finance – JPMorgan: The odds of a recession starting in 12 months has hit a high 6/3