Tag: Bonds

October 14 – October 20, 2016

The Chinese housing market is looking rather shaky. Investors are going to have to brush up on their social sciences. China is smarting from an aggressive push into developing world loans.

Headlines

Briefs

    • “The collective wealth of the world’s ultra-rich has fallen for the first time since the aftermath of the global financial crisis even as Asia, powered by China, continues to create a billionaire every three days, according to research published on Thursday.”
    • “Last year the world’s billionaires lost 5% of their fortunes, or $300bn, and their wealth growth failed to match stock market performance for the first time in two decades, according to a report by UBS, the world’s largest wealth manager, and PwC, the professional services firm.”
    • “Over the past 20 years billionaires have increased their wealth sevenfold – double the rate of global stock market growth – in what has been termed a second ‘Gilded Age’ for wealth creation.”
    • Easy for some to say.
    • “Among the causes for the fall in billionaires’ fortunes last year were transfers of wealth…, falling commodity prices and a rising US dollar, the currency on which the report is based.”
    • “But such vast wealth can prove fleeting. While 41 billionaires made the cut in the US for the first time last year’s UBS/PwC report, 36 dropped below that level. In China the situation was even more volatile: while Asia generated 113 billionaires last year, 80 dropped below that level, of whom 50 were Chinese. Their declining fortunes were attributed to fluctuating markets and a government crackdown on corruption and graft.”
    • “The new fund, dubbed the SoftBank Vision Fund, will be based in London and seeded with $25bn from SoftBank and up to $45bn from Saudi Arabia’s Public Investment Fund over the next five years, according to a statement from the Japanese telecoms group.”
    • “At $100bn, the new fund would be the same size as all funds raised by US venture capital firms over the past two and a half years, according to data from the National Venture Capital Association.”
    • “SoftBank said the fund would be investing over a five-year time horizon, which at $20bn a year would represent roughly a quarter of total annual investments in US-based venture-backed start-ups.”
    • According to Masayoshi Son, the fund will be “the biggest investor in the technology sector.” Quite a statement.
    • “China, long the world’s factory floor, is taking control of a bigger portion of the world’s supply chains as well, causing a shift in global trade patterns by buying less from abroad.”
    • “Exports to China, which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s. They are down another 8.2% this year, through September. The decline helped shave 0.3 percentage points off world trade growth last year, and is a big reason that growth is expected to slow to 1.7% this year from the 5% a year it has averaged over the last two decades.”
    • One of the reasons, simply Chinese companies have been using less product from foreign sources. “The proportion of foreign-made inputs in Chinese exports has been shrinking by an average 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data.”
    • wsj_china-to-world-we-dont-need-your-factories-anymore_10-18-16
    • “To build domestic capabilities on the high end, the Chinese government last year announced a plan to raise the domestic content of core components and key materials to 40% by 2020 and 70% by 2025. It has been spending large amounts on research and development: $213 billion last year, or 2.1% of gross domestic product, according to state media reports. In June it pledged more money for ‘technological innovation.'”

Special Reports / Opinion Pieces

Graphics

Twitter – Nick Grealy @RelmagineGas 10/10

Twitter_Nick Grealy @RelmagineGas_10-10-16

WSJ – Bleak Times at the Mall – Justin Lahart 10/14

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WSJ – China’s Property Frenzy Spurs Risky Business – Lingling Wei 10/19

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FT – Saudi Arabia’s $17.5bn bond sale has lessons for debt market – Elaine Moore and Simeon Kerr 10/20

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Featured

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

China’s Ballooning Mortgage Debt Built on Shaky Foundation. Anjani Trivedi. Wall Street Journal. 14 Oct. 2016.

A brief and well-articulated article on precarious position of the Chinese mortgage/housing market.

“Seeking to quell worries that China’s home-finance market has gotten out of hand, a banking regulator disclosed this week that the loan-to-value ratio in the housing market, or the ratio of the value of mortgage loans to the value of underlying property, was on average 55%.”

“But the absolute level may not matter as much as the pace of increase. UBS estimates the loan-to-value ratio of new-home purchases is even higher, closer to 70%, having surged from 15% in 2012. Much of that rise has happened in the past year.”

“As a comparison, U.S. mortgages before the housing bubble burst had a loan-to-value ratio of less than 60%… In any event, that basic number very quickly rose to over 90% when the bubble popped and prices dropped.”

“Because so many of China’s mortgages are of recent vintage, the value side of their loan-to-value calculation rests on the most recent surge in prices. Simplistically, should prices correct, say, 20%, LTVs would suddenly on average be at 70%. That doesn’t take into account individual markets where leverage and price increases might be higher. Nor does it factor in the vast market for shadow lending, which anecdotally has been helping buyers fund down payments, heaping leverage on top of leverage.”

Keep in mind, “home prices have a way of overcorrecting.”

Granted, with so much at stake for the Chinese economy, I would expect the government will do almost anything to keep the real estate cycle trending up as it moves to the right.

Investors are ill equipped for our unfathomable future. Gillian Tett. Financial Times. 13 Oct. 2016.

Ms. Tett does a good job of highlighting recent remarks by Axel Weber, former head of the Bundesbank and now chairman of UBS, at one of the International Monetary Fund meetings held recently.

Essentially, he sees three primary themes shaping the market today.

First, “the banking system today is much stronger than a decade ago as a result of post-crisis reforms.” Despite the effects of low-to-negative interest rates. So we have that going for us.

Second, “while the banking system looks healthier, markets do not.” Markets are no longer ‘markets’ in the traditional sense. There is too much distortion. For example, “in the government bond markets, where the central banks of Japan, US and eurozone currently hold a third, a fifth and a tenth of the outstanding local government bonds.”

“Central bank purchases are distorting the price of European corporate bonds and Japanese equities, with knock-on effects in numerous other asset classes. ‘I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention,’ Mr. Weber warned.”

Third, “these distorted markets are increasingly hostage to unfathomable political risk.”

“Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as Britain’s vote to leave the EU, herald a new protectionism?”

“Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science.”

China rethinks developing world largesse as deals sour. James Kynge, Jonathan Wheatley, Lucy Hornby, Christian Shepherd and Andres Schipani. Financial Times. 13 Oct. 2016.

Just because you want something to be so, doesn’t mean it will be.

Entering the world of international development finance about a decade ago, China has jumped in head first.  “With a loan portfolio larger than all six western-backed multilateral organizations put together. Outstanding loans form the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions, according to a recent study.”

ft_china-dominates-development-lending_10-13-16

Well, the thing is that when they entered the game, they backed a lot of risky players/countries.  As one Chinese official put it “China had no choice but to lend a lot to risky countries because they had the commodities we needed and because the western multilateral organizations already dominated the rest of the world.”

Of course the lesson is being learned. “These days we need viable projects and a good return. We don’t want to back losers.”

All told China has invested $65bn in Venezuela since 2007 in 17 tranches. Which “for context, $65bn is more than the World Bank has lent to any country – with the single exception of India – since 1945, data from the bank show.”

Now, in regard to Venezuela “China is no longer willing to ‘put good money after bad, unless it is the only way for it to avoid losing its entire position through the collapse of the regime.'” A possibility.

“Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the Paris-based OECD. By contrast, only two of the top 10 recipients of World Bank development finance fell into the same category.”

ft_china-loads-up-on-overseas-risk_10-13-16

Lesson learned. We’ll see how it works out.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – China’s uncannily stable growth versus the price of reform 10/19

FT – How the west has lost the world 10/12

FT – Snap: high altitude (Lex) 10/13

FT – Inflation fears cast shadows over long-dated bonds 10/13

FT – China escapes deflation but are rising global prices on the way? 10/14

FT – Didi Chuxing to be hit by rules on migrant drivers 10/15

FT – Investment in UK commercial property sinks after Brexit vote 10/17

FT – Time to buy ‘real assets’ in age of inflation – BAML 10/17

FT – IPOs brought down to earth amid market uncertainty 10/18

FT – Airbnb faces fight for survival in New York City 10/19

Reuters – Manhattan office market booming as asking rents set record: report 10/13

WP – NFL ratings plunge could spell doom for traditional TV 10/14

WSJ – SoftBank’s Elephant Gun Packs a Scare 10/14

WSJ – Immigrant Investor Program for Poor Neighborhoods Benefits Rich Ones More, Study Shows 10/19

WSJ – Here’s Just How Much Building It Would Take to Boost Big-City Affordability 10/20

 

September 16 – September 22, 2016

Chinese corporate debt…geez…Someone’s going to have to take a haircut. US pension crisis.

Headlines

Briefs

    • A recent study that was published in Environmental Research Letters, a top academic journal, indicated that the “toxic haze that spread across Southeast Asia from Indonesia forest fires last year caused the deaths of about 100,000 people across the region.”
    • “The death toll was concentrated in Indonesia, which had about 92,000 excess deaths from persistent haze that choked the region between July and October, according to researchers at Harvard and Columbia.”
    • “What the BIS (Bank for International Settlements) terms the country’s ‘credit gap’ is now three times higher than the typical danger level, the research shows.”
    • “The BIS rates a reading above 10% as cause for concern; China’s gap hit 30.1% in March.”
    • FT_China 'credit gap'_9-18-16
    • “The International Monetary Fund estimated in June that Chinese companies that had borrowed a collective $1.3tn did not have enough earnings before interest, taxes, depreciation and amortization to meet interest payments.”
    • “China first breached the 10% threshold in 2009 and has not yet experienced a crisis. Many analysts believe that the country’s low level of foreign currency debt and its government-controlled banking system make crisis less likely.”
    • “China Debt Default? To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled “China: Solving the debt problem” that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017.”
    • ValueWalk_China Leverage Ratio_9-14-16
  • Hudson Lockett of the Financial Times illustrated the scale of potential shadow finance losses that lurk in China.
    • “Losses from bad debt in China’s shadow financing sector could amount to 3.7% of GDP, according to a new analysis of off-the-books lending and investment.”
    • “The new report from CLSA also estimates shadow financing in China grew to Rmb54tn ($8.1tn) by the end of 2015 – equivalent to 79% of gross domestic product, with 64% of the total originating at or relating to mainland banks.”
    • “The firm also reiterated its May estimate for Chinese banks’ non-performing loan ratio of 15%, or Rmb11.4tn, assuming the same recovery ratio of 40%, which would entail potential losses of 10% of GDP. The total losses when combined with those from bad debt in shadow financing would come to 13.7% of GDP.”
    • FT_China full financing_9-19-16
  • Takashi Nakamichi and Rachel Rosenthal of the Wall Street Journal discussed the Bank of Japan’s recent bond-rate target in its policy revamp.
    • “The Japanese central bank, which has struggled for nearly two decades to bring about steady inflation, said Wednesday it wants to keep the yield on 10-year Japanese government bonds at zero, and will adjust the pace of its bond buying as needed to achieve that.”
    • “The long-term-rate target, the first in the BOJ’s century long history, challenged conventional wisdom that rates in the huge government-bond market are ultimately set by market forces and can’t be fully controlled by an official entity. Central banks are usually assumed to have much more control over short-term rates, and many around the world target rates for debt with a term of less than a year.”
    • “One worry: ‘In theory, they could be forced to buy an unlimited amount of bonds,’ said Marcel Thieliant, Japan economist at research firm Capital Economics in Singapore.”
    • “Mr. Kuroda called the new policy a ‘reinforcement’ of easing. The BOJ also took the unexpected step of saying it would aim for inflation to exceed 2% instead of merely hitting it, a nod to calls from some U.S. economists for a higher target.”
  • Peter Wells of the Financial Times highlighted that the universe of negative-yielding sovereign debt just fell to $10.9tn.
    • “The universe of negative-yielding sovereign debt fell to $10.9tn as of September 12, a drop of $1tn since June 27 largely due to yields on some longer-dated maturities moving back into positive territory, according to a new report from Fitch Ratings.”
    • “Of the countries afflicted by negative yields, Switzerland has 95% of its outstanding debt trading with a yield below zero.”
    • “Fitch also calculates that as a result of low and negative yields, investment income for sovereign investors globally are ‘prospectively earning nearly $500 billion less annually in investment income than they would have earned with yields available in 2011.’ The investment-grade sovereign debt market is $38bn.”
    • FT_Negative-yielding sovereign debt_9-21-16

Special Reports / Opinion Pieces

Graphics

WSJ – Japan’s Central Bank Splits Over Easing Program – Takashi Nakamichi 9/15

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Bloomberg – Money Is Pouring Into Property Deals Banks Won’t Touch – Sarah Mulholland and Heather Perlberg 9/18

Bloomberg_Nonbank RE lending_9-18-16

Economist – Chinese investment: A sponge wrung dry 9/17

Economist_China fixed asset investment_9-17-16

WSJ – China Capital Outflows Bubbles Below the Surface – Anjani Trivedi 9/20

wsj_china-capital-outflows_9-20-16

FT – Bond bubble brings with it an odor of rotting fish – Robin Wigglesworth 9/20

FT_Government bond yields_9-20-16

Bloomberg – Not for Sale: The Best Land in America 9/8

Bloomberg_Ability to buy house lots not so good_9-8-16

FT – China local governments revive off-budget fiscal stimulus – Gabriel Wildau 9/20

FT_China off-budget Local gov't debt_9-20-16

Featured

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

Who’s next? The science of Chinese corporate defaults. James Kynge. Financial Times. 18 Sep. 2016.

“A total of 41 default cases have hit China’s domestic debt markets in the year to mid-September, more than the previous two years combined, according to Wind Information, a Shanghai-based financial data company. Some 70% of defaults by end-July were by state-owned enterprises, according to IHS, a consultancy.”

“The big picture behind China’s local government debt problem is stark. The liabilities of well over 100,000 companies problem is stark. The liabilities of well over 100,000 companies owned by local governments across the country grew at an average annual rate of 14.1% from 2012 to 2015 to reach Rmb35.4tn ($5.3tn), according to Moody’s research.”

FT_China locally owned SOE debts_9-18-16

“These are treated as contingent liabilities – or potential liabilities – because although local governments do not guarantee the debts of their corporate subsidiaries, they nevertheless are responsible for generating local economic growth, employment and public services so they would be loath to let an important contributor to such goals go under.”

“But in recent years, some local governments have built up such hefty debt burdens that even if they would like to bail out an important local employer, they may not be able to. Total direct local government debt, according to Moody’s, was Rmb16tn in 2015. Thus direct and contingent liabilities come to Rmb51tn – more than the GDPs of Japan and Germany combined.”

FT_China locally owned SOE debts balances_9-18-16

As to which companies to let default… “Nicholas Zhu, vice-president at Moody’s, describes a clear hierarchy of debt vulnerability. The most likely to default would be lossmaking, indebted companies owned by lower-tier governments – at the prefectural, city or county level – that have little revenue and large debts. The problem, however, with lower-tier administrations is that they often publish sparse statistics, so it is difficult to know the true state of their financial health.”

Nomura First Major Bank To Predict China Default Calculates Total debt to GDP at 309%; BIS Sounds The Alarm. Mark Melin. ValueWalk. 18 Sep. 2016.

“Nomura, which estimates China’s total debt – government and corporate debt – is Rmb211.8 trillion or 309% of GDP. The vast majority of this debt is corporate, which from a leverage perspective looks better. Non-financial sector accounted for Rmb158.5tn (231% of GDP, up by 92pp from 2007) and the financial sector for Rmb53.3tn (78% of GDP, up by 49pp).”

ValueWalk_China total debt-to-GDP_9-18-16

“The debt is up nearly 141% since 2007, which leads Nomura to conclude “a rising default rate is inevitable.”

ValueWalk_China debt-to-GDP options_9-18-16

“What this all means is that interest rates are likely to head near zero – the place at which such defaults can find their most advantageous environments. And of course, when interest rates fall, so, too, does the currency values. In the end, it is likely to become one big mess that might have global implications.”

ValueWalk_China debt warning signs_9-18-16

US building up to pension crisis. Robin Wigglesworth and Barney Jopson. Financial Times. 20 Sep. 2016.

“The number are severe. According to the National Institute on Retirement Security, nearly 40m working-age households – 45% of the total – had no retirement savings whatsoever in 2013, whether an employer-sponsored 401(k) plan or an individual retirement account (IRA).”

“If you look for the black hole in the pension system, this is it. And these are the most vulnerable people in society.” – David Hunt, chief executive of PGIM, Prudential Financial’s asset management arm.

“Indeed, while younger people are less likely to have some sort of a retirement nest egg than older Americans, the biggest factor is income. Households with a retirement account have a median income of $86,235, while those without one have a median income of $35,509, according to the NIRS.”

FT_US retirement savings by age_9-20-16

“We have a crisis unfolding here. We’re asking people to set aside precious resources they don’t have… For millions and millions of Americans, the only thing they’ll have is Social Security.” – Russ Kamp, a pensions consultant

Social Security “together with the Supplemental Security Income program account for over 90% of the income for the bottom quarter of retirees, according to the NIRS.”

FT_US household retirement savings_9-20-16

“But Social Security’s future is as uncertain as it is politically divisive. When it was set up, retirees would only have to be supported for less than 13 years on average. These days the average American can expect to draw Social Security for almost two decades, and unlike traditional public sector pension plans, it operates on a pay-as-you-go basis.”

“Citi estimated earlier this year that the unfunded liabilities were over $10tn.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Civil Beat – Kirstin Downey: Here’s What Hawaii’s Housing Crisis Looks Like 9/22

Contra Corner – Another Way of Looking at Household Income Shows Virtually No Gain 9/22

FT- Libor as a real alternative with money market rates at 2009 level 9/18

FT – China’s addiction to debt threatens the economy 9/19

FT – Monte dei Paschi shares drop below 20 cents as recapitalization stalls 9/20

InvestmentNews – Top hedge fund (Robert Citrone) forecasts biggest market correction since 2008 9/21

NYT – A Trump Empire Built on Inside Connections and $885 Million in Tax Breaks 9/17

WSJ – The Market Gets Caught in a Squeeze Play 9/18

WSJ – Why Global Rule Makers See Risks in European Banks 9/19

WSJ – The China Box-Office Boom That Wasn’t 9/20

WSJ – Bank of Japan Makes Yield Curve Maneuvers in the Dark 9/21

 

September 9 – September 15, 2016

It appears there is no “too big to fail” in South Korea. US inflation coming only from a few unproductive sectors. China’s credit hose targeted at housing.

Headlines

Briefs

    • “Yields on “junk”-rated euro-denominated debt hit a record low of 3.35% last week.”
    • “Traditional signals of risk aren’t as reliable as they might be in markets that have been so distorted by central-bank policies.”
    • “Take the developments in junk bonds. Ultralow yields and issuance of PIK (payment-in-kind) notes might usually suggest a market that is too bullish for its own good. Demand was so strong for Schaeffler’s (bearings maker) sale that it was able to sell €3.6 billion of debt in euros and dollars, versus an originally planned €2.5 billion; in the process it refinanced debt that carried rates ranging from 5.75% to 6.875% with notes paying from 2.75% to 4.75%. Moreover, it Ardagh’s (packaging group) case, some of the proceeds were used to pay a dividend to shareholders, another sign that borrowers have the upper hand.”
    • “Retail sales in Hong Kong fell by 10% in the first seven months of the year, compared with the same period in 2015, with purchases of jewelry and watches declining by 22%.”
    • “‘Our customer flow has dropped 60-70%’ since the peak of Chinese luxury spending in 2013, says manager (Kingdom Jewelry) Jacky Sze. ‘I don’t have much hope for the rest of this year, or next.'”
    • First there was the failed coup d’etat on President Recep Tayyip Erdogan, now there is the purge of detractors and then sum…
    • For those not familiar, the coup is being blamed on the Gulen community, aka the cemaat, an Islamist sect that promotes an interchange/dialogue with science.  The imam that founded the movement is Fethullah Gulen who now lives in Pennsylvania.
    • Over 100,000 Gulen sympathizers have been rounded up so far.
    • “According to one minister, the state has seized more than $4 billion-worth of Gulenist assets.”
    • And following on the maxim to ‘never waste a good crisis.’ President Erdogan is also targeting Kurdish minorities.
    • However, for a little bit of context, the “secular Turks (of which President Erdogan is one) have no love for the Gulenist, who targeted them in their own purges in the 2000s.”
  • Also in the Economist was a piece on how shipping profits are going overboard.
    • “Of the biggest 12 shipping companies that have published results for the past quarter, 11 have announced huge losses. Several weaker outfits are teetering on the edge of bankruptcy.”
    • “The industry could lose as much as $10 billion this year on revenues of $170 billion, reckons Drewry, a consultancy.”
    • Essentially, two primary forces are at play 1) world trade is down/slowing and many multinationals are creating manufacturing operations near their customers, and 2) there is overcapacity in the industry from the recent commodity boom.
    • As a result, “sending a container from Shanghai to Europe now costs half of what it did in 2014.”

Special Reports / Opinion Pieces

  • FT – The twisted logic of negative interest rates – John Kay 9/9
    • “All told, the primary effect of monetary policy since 2008 has been to transfer wealth to those who already hold long-term assets – both real and financial – from those who now never will. This week’s debt sale reinforces this. Henkel and Sanofi are not borrowing at negative interest rates to invest in new productive facilities. Both companies have large cash piles, and the cash generated from their operations far exceeds their investment needs.”
  • FT – Mongolia: Living from loan to loan – Lucy Hornby 9/12
    • “Mongolia was a darling among emerging markets during the commodities boom. Foreign miners flocked to exploit the mineral wealth under its grasslands and deserts, pushing up growth in gross domestic product by 17% in 2011. But after a debt-fueled spending spree at the peak of the cycle, the landlocked country is now one of the worst hit by the downturn.”
    • “Mongolia’s efforts to extricate itself highlight the dangers of the ‘resource curse’ – the notion that countries blessed with tremendous natural resources find themselves at the mercy of wealth-destroying boom-bust cycles.”

Graphics

FT – Air pollution deaths cost global economy $5tn annually – Shawn Donnan 9/8

FT_Welfare losses from air pollution_9-8-16

Bloomberg – San Francisco Housing Frenzy Shifts Across the Bay to Oakland – Alison Vekshin 8/22

Bloomberg_Oakland in demand_8-22-16

WSJ – Paradise Lost: Why the Good Times Are Over for Global Bonds – Richard Barley 9/14

wsj_ten-year-government-bond-yields_9-14-16

FT – Vantage to break famine for energy IPOs – Eric Platt and Ed Crooks 9/14

FT_Surge of equity sales by US oil and gas cos_9-14-16

Featured

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

Seoul signals tougher stance with Hanjin demise. Song Jung-a. Financial Times. 11 Sep. 2016.

“Hanjin’s move to seek bankruptcy protection last month was the first time a big container shipping line had done so for 30 years, and it caught out many in the industry. As recently as a couple of months ago, shipping executives considered the failure of Hanjin Shipping – the world’s seventh-largest container line and South Korea’s largest – unthinkable.”

“Hanjin Shipping and its rival Hyundai Merchant Marine handled the bulk of South Korea’s exports, which account for more than half of the country’s $1.4tn economy.”

“Until now, Seoul has spent decades keeping lossmaking companies afloat with cheap state loans. In the case of its embattled shipbuilders, it has injected billions of dollars, despite next to no progress in turning them around.”

“How Seoul ultimately handles Hanjin Shipping’s collapse will set the tone for future restructuring of Korea Inc.”

“Many of the country’s smokestack industries – including steel, chemicals and construction – are similarly suffering from overcapacity.”

“The government has set up the principle that it will no longer support ailing companies with taxpayers’ money just because they are too big.” – Yoo Il-ho, South Korea’s finance minister

Alphaville – Least productive sectors only thing keeping inflation going. Matthew C. Klein. Financial Times. 12 Sep. 2016.

Since 1990 “…the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88% of the total rise in the price level boils down to four sectors of the US economy.”

1) Healthcare services, 2) Housing, 3) Education, and 4) Prescription drugs

FT_Where all the inflation came from_9-12-16

“In January 1990, those four product categories only accounted for 30% of the money spent on consumption by the average American.”

And within education the main culprit has been the textbook.  Akin to prescription drugs, supply in both industries is tightly controlled by regulation.

“By contrast, thanks to astounding technological innovation, television prices have plunged at an average rate of 12% each year since 1990 and computer prices have fallen more than 18% per year.”

“In general, the prices of durable goods are about a third lower now than in 1990, while the prices of nondurable goods excluding commodity products (food, drinks, and fuel, which tend to rise at the same rate as the broader price level over time) and excluding prescription drugs, have also fallen, albeit not by as much. Inflation outside of healthcare and education has generally been modest, with the notable exception of a few small professional services such as tax preparation, lawyers, and funeral homes.”

China’s Credit Fire Hose Floods Housing Market. Anjani Trivedi. Wall Street Journal. 15 Sep. 2016.

“More than 70% of new loans in August were to households, much of that in the form of mortgages, going by historical averages, a remarkable shifting of the fire hose of credit. It also helps explain why China’s property market has raced higher despite broader economic worries.”

“China’s stock of mortgages stood at 16.9 trillion yuan ($2.5 trillion) as of June 30. Almost a quarter of that was built up in just the past year, according to ANZ. Mortgage loans outstanding now account for 18% of total loans, the highest since at least 2008.”

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“Local regulators are imposing clampdowns on mortgage lending and property speculation in the hottest cities such as Shanghai and Shenzhen. They are right to do so, as this leg of China’s multi-decade property bubble is clearly being fueled by leverage in a way that it wasn’t in the past.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – How Big Sugar Enlisted Harvard Scientist to Influence How We Eat – in 1965 9/12

Bloomberg – What’s Wrong With America’s Dream of City Living 9/14

Economist – Why does Thailand keep changing its constitution? 9/12

FT – When will the ECB run out of bonds to buy? 9/8

FT – China infrastructure investment model under fire 9/10

FT – Twitter and tech: hardly working 9/11

FT – What investors should know about R star 9/11

FT – Oil market braces for Kashagan field’s October debut 9/12

FT – The Swiss and negative rates: how is the experiment going? 9/12

FT – Philippines pivots away from the US 9/13

FT – Japan opens door to temporary foreign workers 9/13

FT – Manias make markets dance to a different tune 9/13

FT – Mythbusting Uber’s valuation 9/13

FT – China retail: shops will drop 9/14

Trepp – Non-Traded REITs on slowest capital-raising pace in 12 years 9/9

WSJ – Bank of Japan Has Enlarged Target in Corporate Bonds 9/12

Yahoo Finance – The internet is creating a demographic ‘seismic shift’ that is too big to ignore 9/12

Yahoo Finance – Billionaire Paul Singer warns of the ‘biggest bubble in the world’ 9/13

 

August 19 – August 25, 2016

It’s getting hot out there. When picking your emerging market investments, be mindful of its exposure.

Headlines

Briefs

    • The nontraded REIT industry is having a hard look at itself.  Inland is eliminating its transaction fees and new entrant to the sector – but definitely not to institutional real estate investment – Blackstone Group has not committed to a specific yield – the primary attribute for selling these investments.
    • The thing is “Cap rates, a key valuation measure for real estate, have decreased dramatically since the credit crisis, while valuations of quality properties have increased. That means commercial real estate is simply too pricey to generate the promised returns (generally 6-7%) brokers need to pitch nontraded REITs to clients.”
    • “The math of these programs is much more challenging today. Cap rates are lower and I think the dividend yields have to come down. The publicly traded REIT market is paying a 3.5% dividend yield, on average.” – Allan Swaringen, president and CEO of JLL Income Property Trust
    • And with a lower fee structure I might add…
    • One thing to be mindful of in investing in nontraded REITs are their dividend coverage ratios.  “That ratio, a REIT’s cash flow versus its dividend, or distribution, is one of the most important metrics for investing in nontraded REITs, which often resort to returning investor cash to pay for or cover the 6% or 7% dividend. Any return of investor money diminishes the REIT’s ability to perform in the long term.”
    • Bottom line, “nontraded REIT sponsors and advisers who sell them can say au revoir to the product’s most important marketing component: the promise of generating annual returns of 6% or 7% to yield-starved investors.”
    • “Trends that slammed profit in the first quarter – a stronger yen, negative interest rates and slumping China growth – haven’t reversed. At stake is a second straight year of earnings decline that could buy Prime Minister Shinzo Abe’s push for companies to boost capital spending and raise wages to spur economic growth.”
    • “With negative interest rates grinding away bank profits and a stronger yen bearing down on carmakers, aggregate operating income plummeted 17% in the June quarter, the biggest quarterly decline since 2011. That’s the year an earthquake in Fukushima and subsequent tsunami caused the yen to gain and stocks to drop.”
    • Bloomberg_Japan Inc profit slump_8-21-16
    • Airbnb has changed the short-term rental business in a big way. The company “now operates in 34,000 cities around the world and was recently valued by investors at $25.5 billion.”
    • On top of that, Airbnb has created an ecosystem of other companies that help landlords rent, maintain, and operate their units…
    • Well one of the recent companies created, Host Compliance, is the ‘tit for tat.’  Rather than assist people to attain the most out of their Airbnb listings, the company actually is set up to help cities and municipalities in the policing of their short-term rental regulations by sifting through the vast amount of listings data and providing reports on violations.
    • No surprise, most governments are overwhelmed and not truly set up to properly track abuses to their rules, hence they’re always playing catch up to tech innovators.  I suppose it won’t be long that other tech innovators will pop up to “check-in” on other tech disrupters…
  • Eliot Brown of the Wall Street Journal focused his spot light on the real estate market of San Francisco and the effects of the surging tech market.
    • As the tech industry continues to boom, its companies continue to crowd out other businesses from San Francisco’s office market, ultimately reducing the city’s “economic diversity, giving it an enormous concentration in an industry that is particularly prone to economic swings.”
    • “Tech companies now occupy more than 29% of the city’s occupied office space, according to real-estate-services firm CBRE Group Inc. That is roughly double what the industry occupied in 2010 as well as the height of the dot-com bubble in 2001, CBRE said.”
    • “What’s more, the bulk of those occupying that office space are startups or those that recently went public, typically unprofitable companies that are considered some of the most volatile.”
    • “Looming in the minds of many in San Francisco is the city’s experience after the dot-com bust of 2001. Even though the tech sector was centered more in Silicon Valley to the south, the local economy was pummeled. Office vacancies soared above 20% from less than 4%, according to Cushman & Wakefield.”
  • Gabriel Wildau of the Financial Times reports that it was only a matter of time that Chinese regulators would tighten the noose on the P2P market.
    • China has just formalized new regulations for the Peer-to-Peer (P2P) market in the country. “Regulators and courts have previously issued many of the prohibitions contained in the latest rules in different forms, but the latest regulations mark the first comprehensive framework for regulating P2P lenders in China.”
    • “The rules, issued on Wednesday, forbid online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. They ban P2P platforms from securitizing assets or offering debt transfer mechanisms that mimic securitization. Companies are prohibited from using P2P platforms to finance their own projects.”
    • “Their fundamental nature is information intermediation, not credit intermediation.” – banking regulator
    • “Outstanding loans from 2,349 P2P platforms totaled Rmb621bn by the end of June, the banking regulator said in a statement on Wednesday. But an additional 1,778 ‘problem platforms’ have also been established, equal to 43% of all platforms.”
    • “The latest rules also prohibit P2P groups from operating ‘fund pools’ in which investor funds are not matched with specific loan assets. The banking regulator noted that ‘Ponzi schemes’ – in which inflows from new investors are used to finance payouts on maturing obligations – have been a problem for the industry.”

Special Reports

Graphics

CBO – Trends in Family Wealth, 1989 to 2013 8/18

CBO_Trends in Family Wealth_8-18-16

FT – Pensions: Low yields, high stress – John Authers and Robin Wigglesworth 8/22

FT_Pension liabilities growing faster than assets_8-22-16

FT – US charitable foundations hit by plunging returns 8/23

FT_US charitable foundations investment returns struggle_8-23-16

Featured

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

Think It’s Hot Now? Just Wait. Heidi Cullen. New York Times. 20 Aug. 2016.

“July wasn’t just hot – it was the hottest month ever recorded, according to NASA. And this year is likely to be the hottest year on record.”

“Fourteen of the 15 hottest years have occurred since 2000…”

NYT_Heat Map of US - 1991-2010_8-20-16

NYT_Heat Map of US - 2060_8-20-16

NYT_Heat Map of US - 2100_8-20-16

NYT_Number of Days over 95 degrees_8-20-16

Silver lining…good for solar.

As China nears exhaustion investors must look elsewhere. James Kynge. Financial Times. 24 Aug. 2016.

As yield is vanishing from developed world economies – there is $13tn in negative-yielding debt outstanding at the moment – emerging market economies have seen a lot of interest of late… however, try to see it in context.

“The drive behind this intense demand for EM has nothing to do with EM. The one thing that emerging markets have that everyone wants right now is not raw materials or cheap labor, it’s yield. When you have negative interest rates in Europe and Japan, and zero rates everywhere else, the politics and economics of these countries becomes irrelevant.” – Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch

“Thus, emerging markets are flattered by a perception they are the least bad option for investors.”

However, investors need to be wary of the exposure that many EMs have to China.

China is having ever greater difficulty in producing economic growth – at least of the levels of the past few decades (which is to be expected).  “Before the global financial crisis in 2008, China needed just over one dollar of credit to deliver one dollar of gross domestic product growth, the ratio is now six to one, according to Morgan Stanley.”

“Although the economy is said to be growing at 6.7%, investment growth by private companies slowed to 2% in July, demonstrating that the most potent force in the Chinese economy sees scant hope of a return.”

“Scarcity of opportunity amid an abundance of growth defines China’s enervated state. So generous have banks, capital markets and shadow financial institutions been to virtually anyone who wishes to borrow that almost every industry is in a state of oversupply, slashing profits.”

“Standard & Poor’s, the credit rating agency, is the latest to raise the alarm. The anemic profits of Chinese companies is likely to intensify their need to borrow more merely to repay maturing debts, helping to drive global corporate debt levels to worrying levels by 2020.”

“Corporate debt is set to expand by half to $75tn over the next five years, according to S&P. China’s share of this debt is likely to rise to 43% in 2020 from 35% in 2015, the rating agency said, largely through companies borrowing to repay debts that are coming due.”

Bottom line, don’t throw out your fundamental analysis models just yet…

Other Interesting Articles

The Economist

Bloomberg – Why It’s So Hard to Build Affordable Housing: It’s Not Affordable 7/26

FT – We must protect shareholders from executive wrongdoing 8/18

FT – Retailers reveal why US earnings season was fundamentally weak 8/18

FT – Paul Singer says bond market is ‘broken’ 8/18

FT – Venezuela’s problems can no longer be ignored 8/18

FT – Is greed good? No, it’s seriously bad for your wealth 8/19

FT – Hackers expose holes in road for smarter cars 8/19

FT – Oil company dividends: flare-up ahead 8/21

FT – #fintech Sidelining the mobsters in China 8/22

FT – Forget Fed rate calls – be ready for the return of inflation 8/22

FT – China close to launching credit default swap market 8/22

FT – Mongolia tightens belt as debt payments loom 8/24

FT – The canary in the coal mine for China’s currency 8/24

IPE – Redemption requests begin to build among core US property funds 8/24

National Real Estate Investor – Drop in 10-year Treasury Gives Real Estate Pricing a Lift 8/24

NYT – Chilling Tale in Duterte’s Drug War: Father and Son Killed in Police Custody 8/19

NYT – More of Kremlin’s Opponents Are Ending Up Dead 8/20

NYT – The Housing Market Is Finally Starting to Look Healthy 8/23

WSJ – Chinese Bank Shows How To Move Risks Around 8/19

WSJ – One Policy to Rule Them All: Why Central Bank Divergence Is So Slow 8/22

WSJ – China’s Online Lenders Face Peer-to-Peer Pressure 8/25

WSJ – What to Learn From the ECB’s Great European Corporate Bond Squeeze 8/25

 

August 12 – August 18, 2016

Coming to a bank near you – fees on big deposits

Headlines

Briefs

    • “Almost half of the shadow banking products that have fueled China’s credit boom carry an ‘elevated’ risk of default, the International Monetary Fund has warned in its annual review of the world’s second-largest economy.”
    • “‘Wealth management products’ that allow banks to channel credit to local governments, property developers and industries struggling to access normal bank loans grew almost 50% to Rmb40tn ($6tn) last year, according to the IMF’s annual ‘Article IV’ review.”
    • “While the IMF noted that China’s big four state banks have relatively small exposure to wealth management products, it added that ‘several other listed banks and [unlisted banks] in aggregate have exposures that are several times their capital.’ Just over Rmb15tn of China’s outstanding wealth management products are held by banks, accounting for 8% of their assets and more than 90% of the capital buffers that protect them from losses.”
    • It’s not all bad, just part of the process of the downshift.
    • “All told, there have been 188 settlements since 2009, costing $219 billion, according to KBW, an investment bank. “
    • “Eleven firms have paid fines in excess of 10% of their market capitalization, with Bank of America having spent the most in absolute terms ($77 billion) and in relation to its net worth (50%).”
    • Economist_Bank settlements_8-13-16

Special Reports

Graphics

FT – Banks look for cheap way to store cash piles as rates go negative – Claire Jones and James Shotter 8/16

FT_Negative rates in Europe_8-16-16

FT_How to store the cash_8-16-16

The Economist – Purchasing power: More bang for your buck 8/13

Economist_US purchasing power by state_8-13-16

Bloomberg – Norway Oil Fund Looks Into Trimming $520 Billion Stock Portfolio – Mikael Holter and Sveinung Sleire 8/17

Bloomberg_Norway SWF flows_8-17-16

Economist – The world’s most liveable cities 8/18

Economist_World's most liveable cities_8-18-16

Featured

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

German bank charges negative rates on large deposits. James Shotter. Financial Times. 11 Aug. 2016.

The longer negative rates stick around and the deeper they go, expect more of this to follow…

“A Bavarian bank has become the second German lender to say it will levy a negative interest rate on private customers’ deposits, in the latest sign of the strain that the European Central Bank’s monetary policy is putting on the country’s financial system.”

“In an effort to boost the eurozone’s flagging economy, the ECB has slashed interest rates to record lows, and, since March, has charged a 0.4% fee on excess deposits left with it by eurozone banks.”

“The co-operative bank in Gmund am Tegernsee, a small municipality about 50km south of Munich, said that from September 1, it would levy a ‘custodian charge’ of 0.4% on deposits above €100,000.”

“The decision follows a similar move by Skatbank, a small German co-operative bank in the east of the country, which introduced negative interest rates for private clients on balances above €500,000 in 2014.”

“German banks are considering a variety of strategies in response to the low interest rate environment. These range from introducing fees for services previously offered for free, such as paper account statements, to keeping cash in vaults rather than parking it with the ECB.”

Other Interesting Articles

The Economist

Bloomberg – Barrack Says U.S. Real Estate Market Is Getting ‘Bubblicious’ 8/15

Contra Corner – The Daily Data Dive: Since 2007 Stocks Up 54%, Industrial Production Up 0.6% 8/18

Economist – Vladimir Putin’s powerful right-hand man steps down 8/12

FT – Investors stockpile cash to offset economic despair 8/11

FT – Record-breaking US stocks are a sideshow next to bond bonanza 8/12

FT – ‘Irrational exuberance’? Beware Bond Tantrum II – BAML 8/12

FT – London rents fall for first time in six years 8/15

FT – The end of deflation in China will be felt around the world 8/15

FT – Irrational exuberance begins to surface in US stock market 8/17

FT – Dollar hedging costs rise for yen and euro investors 8/17

FT – Hedge fund investors push for ‘hard hurdles’ 8/17

FT – If peak oil (demand) arrives, investors will need to get smarter 8/18

FT – South Korea in show of power as tensions rise with North 8/18

GlobeSt.com – SL Green Sells Stake In Midtown South Office Tower 8/11

NYT – Trillions in Murky Investments Could Rock China’s Economy 8/12

Reuters – Billionaire investors turn bearish as U.S. stocks hit record highs 8/15

WSJ – Pumped Up: Renewables Growth Revives Old Energy-Storage Method 7/22

WSJ – How Junk Bonds Can Look Attractive and Scary at the Same Time 8/17

 

August 5 – August 11, 2016

It’s a low-growth world for us…instead of high returns, we get zilch… Thus it is no surprise that funds are being pushed back to emerging markets in a big way.

Headlines

Briefs

    • Blackstone Group ($356bn in assets) is getting into the nontraded real estate investment trust business. Its first nontraded REIT – The Blackstone Real Estate Income Trust Inc. – was just registered on Wednesday.
    • The REIT is looking to raise $5bn and its manager “will receive a fee of 12.5% of the REIT’s total return after meeting a 5% hurdle.”
    • “Capped at close to 9%, the cost structure of the new Blackstone REIT is clearly different than the traditional full-commission nontraded REIT sold mainly by independent broker-dealers such as LPL Financial and Ameriprise Financial Services Inc. Such REITs typically carry loads of 12%, including a 7% (fee) to brokers at the time of sale. Nontraded REITs have been routinely criticized for their high fees and opaque cost structures.”
    • “Look for Blackstone to shun the traditional marketplace of independent broker-dealers and turn to wirehouses such as Merrill Lynch and Morgan Stanley, with whom they already have business relationships…”
    • “Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result.”
    • “The pull to par has become a drag: a buy-and-hold investor is guaranteed to lose money, even before taking inflation into account. The only way to make money is to find another buyer willing to pay a higher price – but that implies a bigger loss down the road.“
    • “Germany now has more than €160 billion of zero-coupon bonds in issue. All of its two-year notes pay no interest, along with three of its five-year notes; all of them trade above face value.”
    • WSJ_German bonds becoming pricier_8-10-16
    • “The crucial thing to understand is that these instruments are no longer bonds – at least not in the traditional sense. With no income attached to them, they are simply bets on the price another investor is willing to pay. They will also be more volatile: the long wait for repayment means small changes in yield will have a big effect on current prices.”
  • Liyan Qi of the Wall Street Journal added context to China’s efforts to reduce the population of Beijing.
    • In an effort to reduce the problems from rapid growth and overpopulation, Beijing is seeking to push out residences to neighboring provinces such as Hebei and Cangzhou (see map).
    • WSJ_Cutting China’s Capital Down to Size_8-10-16
    • “Despite the city’s efforts to keep a lid on population growth, greater Beijing now has almost 22 million people, an increase of some 6 million in a decade, official data show. The central area, comprising of six districts grew at an average rate of 414,200 a year over the same period to about 13 million.”
    • “Municipal leaders’ latest five-year plan aims to keep greater Beijing’s population under 23 million and to shrink the urban center by 15% by 2020, effectively pushing out some 2 million people – roughly equivalent to excising more than the population of Manhattan from New York City and dispersing those people elsewhere.”
    • “The strategy is to move low-end businesses such as wholesale markets, to Hebei-the province surrounding Beijing where growth has flagged-and coax people to follow.”
    • Just think what will happen to real estate prices when you push out that much demand…but then again, the laws of economics are generally suspended in China.

Special Reports

Graphics

WSJ – Companies Routinely Steer Analysts to Deliver Earnings Surprises – Thomas Gryta, Serena Ng and Theo Francis 8/4

WSJ_Managing earnings expectations_8-4-16

FT – Best coast tech is top and looking to the clouds for growth – Richard Waters 8/4

FT_Rise of the tech giants_8-4-16

Bloomberg – Manhattan Luxury-Condo Glut Ends Developer Rush for Land Deals – Sarah Mulholland and David M Levitt 8/3

Bloomberg_Manhattan Land Deals_8-3-16

FT – US economy: Decline of the start-up nation – Sam Fleming 8/4

FT_US Startup density_8-4-16

FT_20 counties generating new business_8-4-16

FT_Fewer young companies_8-4-16

WSJ – American Paradox: It’s Never Been Cheaper for Cities and States to Borrow Money…And They Refuse to Do It – David Harrison and Heather Gillers 8/7

WSJ_US Municipal borrowing_8-7-16

WSJ – Are Negative Rates Backfiring? Here’s Some Early Evidence 8/8

WSJ_Negative rates having unintended effects_8-8-16

WSJ – Productivity Slump Threatens Economy’s Long-Term Growth – Ben Leubsdorf 8/9

WSJ_Declining US Labor Productivity_8-9-16

FT – US bonds: where credit is due – Lex 8/11

FT_Credit Statistics for US debt issuers_8-11-16

Featured

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

We’re in a Low-Growth World. How Did We Get Here? Neil Irwin. New York Times. 6 Aug. 2016.

“Slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2% a year from 1947 through 2000 – but starting 2001 has averaged only 0.9%. The economies of Western Europe and Japan have done worse than that.”

NYT_Growth lower than projected_8-6-16

According to a new analysis by the McKinsey Global Institute, 81% of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97% in Italy, 70% in Britain, and 63% in France.”

NYT_Annual per capita GDP over preceding 10yrs_8-6-16

“An entire way of thinking about the future – that children will inevitably live in a much richer country than their parents – is thrown into question the longer this lasts.”

Bottom line, people are working fewer hours and there is less “economic output being generated for each hour of labor.”

Investing: The great escape. Jonathan Wheatley and James Kynge. Financial Times. 7 Aug. 2016

“The latest growth forecasts from the International Monetary Fund offer some optimism. It expects the pace of gross domestic product growth in emerging markets to increase every year for the next five years while developed markets stagnate.”

“But in truth emerging markets are growing from a shrunken base and a big part of the upturn is not due to things getting better but to things no longer getting worse. Big economies such as Russia and Brazil, for example, in deep recession for the past two years, are finally heading back to growth.”

FT_Investors flood into EMs_8-7-16

“Fund flows to EMs have gone through the roof, but this is best described as [the result of] push factors rather than pull factors.” – Peter Kinsella, head of EM research at Commerzbank

“The EM bond rally is really a global fixed income rally.” – David Hauner, head of EM strategy at Bank of America Merrill Lynch

BlackRock’s ($4.6tn money manager) Sergio Trigo Paz, head of emerging markets fixed income, “who changed his view on EM bonds in February, describes what is happening now as a ‘capitulation’ – a realization by big institutions that they can no longer afford to ignore the returns on offer in emerging markets, which have been as high as 13% in the year to date.”

“The impact of such flows on EM sovereign bond prices, which have risen 15% this year, has been amplified by the fact that the asset class is small. An estimated $12tn of developed market government bonds now offer yields of less than zero, while their emerging market equivalents add up to about $800bn, so their ability to offer an alternative is limited.”

“For now, the pressure on prices has all come from buyers and for those who got in early the returns have justified the risks. The trick will be to know when to head for what could quickly become a very crowded exit.”

Other Interesting Articles

The Economist

Bloomberg – Retail Outlets Are on the Outs 8/4

Bloomberg – There Are All Kinds of Signs of a High-End Real Estate Slowdown 8/10

Bloomberg – Blackstone Enters Nontraded REIT Market With $5 Billion Fund 8/10

FT – I’m from the central bank and I’m here to help 8/4

FT – Oil and gas downturn spells trouble for Singapore 8/7

FT – Demand drives $3bn Mexico bond deal at record rate 8/9

FT – Advisors quash Puerto Rico creditor differentiation 8/9

FT – China takes a gamble in scapegoating the west 8/11

InvestmentNews – Inland Real Estate Investment Corporation eliminates transaction fees on its nontraded REITs 8/9

NYT – New Photos Cast Doubt on China’s Vow Not to Militarize Disputed Islands 8/8

NYT – Chinese Tech Firms Forced to Choose Market: Home or Everywhere Else 8/9

WP – Venezuela’s death spiral is getting worse 8/8

WSJ – When Chinese State Support Evaporates on Investors 8/8

WSJ – New Rules and Fresh Headaches for Short-Term Borrowers 8/8

WSJ – WeWork Misses Mark on Some Lofty Targets 8/9

WSJ – The Typical Home in San Jose Now Costs More Than $1 Million 8/10

WSJ – Lopsided Housing Rebound Leaves Millions of People Out in the Cold 8/10

WSJ – Why China’s Bond Market Rally Is Risky Business 8/10

Yahoo Finance – Macy’s plans to close 100 stores, boost online investment 8/11

Zero Hedge – August Corporate Bond Issuance Breaks All Records Thanks to Relentless Demand For Yield 8/8

 

July 15 – July 21, 2016

Helicopter money coming to Japan? GMO on EU immigration and the Brexit. Hong Kong and China at a cross road.  ECB coming up against its quantitative easing boundaries.

Headlines

Briefs

    • China’s 2nd quarter gross domestic product came in at 6.7%, which is 10 basis points higher than forecast; however, the concern is where that growth has come from.
    • “Figures from the People’s Bank of China the same day showed that money supply growth was faster than expected, reaching levels last seen post 2008. New loans also rose by over $200bn, more than $50bn higher than economists’ estimates.”
    • Bottom line, “the reversion to state-led growth is unsustainable. Should China continue to shun reforms in favor of a quick fix, the short-term benefits of stabilized growth will be outweighed by the cost of persistent imbalances.”
    • The World Federation of Advertisers “estimates that between 10 and 30% of online advertising slots are never seen by consumers because of fraud, and forecasts that marketers could lose as much as $50bn a year by 2025 unless they take radical action. At that scale, the fraud would rank as one of the biggest sources of funds for criminal networks, even approaching the size of the market for some illegal drugs.”
    • “Global spending on online advertising has almost doubled in the past four years – reaching $159bn in 2015, according to research group eMarketer. This money underpins the internet economy and supports trillions of dollars of equity in media and technology.”
    • “Google, the biggest player in the online ad industry, generated revenues of $67bn from it last year.”
    • Bottom line, digital ad platforms and major buyers of online ads are emphatically building methods to track and prevent fraud and where they can and to the event that they can’t expect the federal government to step in.
  • Mark Heschmeyer of CoStar reported on Simon, WP Glimcher turning over the keys on two malls to their respective lenders.
    • Goes to show that just because a company is worth several billion dollars, doesn’t mean they pay back all their debts.
    • “While the overall retail property sector appears to be strengthening, a handful of loans for lower-quality shopping centers and malls financed at the height of the previous CRE cycle are coming due now and proving to be a thorn in the side of publicly traded REITs.”
    • “Simon Property Group and WP Glimcher both turned malls back over to the lenders this week, and Kimco Realty Corp. disclosed that it doesn’t expect one of its joint venture-owned malls will be able to refinance a loan set to come due this fall.”
    • “All three of the malls involved in the foreclosure actions were last financed in 2006 and securitized in mortgage backed bond conduits.”
    • As the saying goes, don’t hate the player, hate the game.

Special Reports

Graphics

FT – Do sovereign credit ratings still matter? 7/14

FT_Decline of AAA rating countries_7-14-16

FT_Declining government yields_7-14-16

FT – US oil rig count rises for third-straight week 7/15

FT_US oil rig count_7-15-16

FT – Auto sales and the oil price: the Great Unwinding continues beyondbrics – Paul Hodges 7/18

FT_Energy consumption in the US_7-18-16

Temporary work – How the 2% lives: Temping is on the increase, affecting temps and staff workers alike

Economist_US temporary employment_7-16-16

FT – Independent Chinese PMI gauge suspended indefinitely – Hudson Lockett 7/20

FT_China Minxin PMI vs official_7-20-16

Featured

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

Japan flirts with helicopter money. Gavyn Davies. Financial Times. 17 Jul. 2016.

“Whether or not they choose to admit it the Abe government is on the verge of becoming the first government of a major developed economy to monetize its government debt on a permanent basis since 1945.”

“There are many ways of defining helicopter money, but the essential feature is that it involves an increase in the budget deficit which is financed by a permanent increase in the central bank’s monetary base, not by the issuance of government debt.”

“This is different from quantitative easing, since QE involves the ‘temporary’ purchase of government debt, which is subsequently sold back into the market, at least in theory. And QE does not necessarily need to involve any increase in the budget deficit…”

While “the direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act.” It looks like the government is coming up with a work-a-round.

One method proposed is the issuance of perpetual bonds “…which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.”

Thing is, that “there is no doubt that the BoJ is now monetizing much of the increase in government debt needed to fund ¥10 trillion fiscal stimulus planned by the government. Since the market fully expects the BoJ’s debt purchases to be permanent, it is helicopter money by any other name.”

Why do this when the labor market is at close to full employment?  Basically the inflation expectations in Japan are REALLY low and the BoJ is seeking to reduce its vulnerability to “…any new deflationary shock, from China for example.”

The key point that helicopter money will confer is that debt sustainability (which is why the sales tax increases have been/are being implemented) is not the priority. Rather that Japan will live with whatever debt level it takes to achieve inflation.

“The key problem is that it might restore inflation far too well. It is very difficult to calibrate the amount of helicopter money that is needed to hit the inflation target.”

Expect the delicate dance to continue, which may fail to get Japan out of its deflationary rut.

Immigration and Brexit. Jeremy Grantham. GMO. Jul. 2016.

While this is piece is a commentary on immigration and the Brexit, I think it does a good job of presenting the scale of the immigration challenge that the EU is facing.  I will only highlight two specific items (the full commentary is a good read) for brevity.  1) Grantham’s stance on the markets “despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break…” and 2) some of his thoughts on immigration to the EU.

“The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.”

“They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.”

“This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.”

“For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population of 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman). Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.”

“I wrote two years ago that this immigration pressure would stress Europe and that the first victim would be Western Europe’s liberal traditions. Well, this is happening in real time as they say, far faster than I expected. It will only get worse as hundreds of thousands of refugees becomes millions.”

Hong Kong: One country, two economies. Ben Bland. Financial Times. 19 Jul. 2016.

Integration of Hong Kong with the Chinese mainland continues to be a delicate issue that is being stressed by a slowdown in the Chinese economy.

As Lily Lo, an economist at DBS, a Singaporean bank, put it “Hong Kong is really dependent on China and external trade. The Chinese economy is slowing down and this is a structural slowdown so we don’t think there will be a V-shaped recovery any time soon. There’s no quick fix.”

Further, as China has opened its economy more and more, Hong Kong is no longer the only or primary route to do business with China.  “Its container port, which was the world’s busiest in the 2000s, has fallen to fifth place, overtaken by Shanghai, Shenzhen and Ningbo.”

“Mr. Tsang (John Tsang, the financial secretary of Hong Kong) and Li Ka-shing, the billionaire whose interests in Hong Kong stretch from ports to property and retail to telecoms, have both warned that the economic outlook is worse than that faced during the Sars epidemic in 2003, which killed 299 people and prompted the last sharp slowdown.”

“Chow Tai Fook, the biggest jeweler in the world by market capitalization, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualized basis by 22% in the three months to the end of June.”

FT_Hong Kong retail sales_7-19-16 

“Yu Kam-hung, managing director of investment properties at CBRE, an estate agent, predicts that prices could fall up to 10% over the next year, and they are already 10 to 15% off their peak of 18 months ago.”

Then of course it doesn’t help that “there is a deep-seated animosity to (Chinese) mainlanders in Hong Kong. So why would they want to go somewhere they are not welcome when there are so many other choices.” – Shaun Rein, China Market Research in Shanghai

ECB faces QE dilemma after Brexit vote. Claire Jones and Elaine Moore. Financial Times. 20 Jul. 2016.

It wasn’t long after the Brexit referendum vote that government bond yields in the safest markets dropped even further (see graphic on Sovereign credit ratings above).  Problem is that the current structure in place within the European Central Bank (ECB) is reaching its limits.

Currently the ECB is buying €80bn a month in European member country debt to stimulate the overall European economy (aka Quantitative Easing or QE).

Well, “under current rules, the scale of purchases under QE match the size of a member state’s economy, meaning that Germany’s Bundesbank must buy around €10bn of government debt each month – more than any other central bank in the region.”

“But because of the recent bond market shifts, more than 50% of German bonds previously eligible for QE have now become too expensive for the Bundesbank to purchase, yielding less than the ECB’s self-imposed floor of minus 0.4%, according to data from Bank of America Merrill Lynch.”

FT_ECB looking for more bond options_7-20-16

So, now the ECB is essentially faced with three primary options (there are other options – see “Five ways to change the rules within the article).

  1. Scrap the minus 0.4% floor. The “economists at Goldman Sachs calculate (this) would buy the ECB the most time, enabling the Bundesbank to keep buying for up to another 18 months.”
    • “The option, however, would expose the eurozone’s central banks to heavy losses, which they have until now avoided because the minus 0.4% floor mirrors the ECB’s deposit rate charged on banks’ reserves.”
  1. “Scrap the rule that bond purchases match the size of a member states’ economy.”
    • “But such a shift would open the way to buying more bonds from the most indebted countries, and would so be the most controversial of the fixes. Nowhere would it attract more criticism in Germany, where the change would be viewed as a bailout by the back door for profligate member states.”
  1. End QE.

Don’t know if the EU or the world is ready for that.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Blackstone Said to Plan Invitation Homes IPO for First Half 2017 7/17

CoStar – Internet Commerce Drives Strongest Surge in Demand for US Industrial Space Since 2001 7/20

FT – The chronic spin that blights China’s economy 7/14

FT – New wealth management products power Anbang and rivals 7/17

FT – Major cities drive China property price gains 7/17

FT – Trump leads the west’s flight from dignity 7/17

FT – Apple Watch sales fall 55% as consumers mark time on category 7/21

InvestmentNews – REIT with a twist – and a high commission – is new darling of independent brokers-dealers 7/14

NYT – The Risk of Building on Real Estate Funds’ Profitable Past 7/15

NYT – Why Land and Homes Actually Tend to Be Disappointing Investments 7/15

NYT – Vast Purge in Turkey as Thousands Are Detained in Post-Coup Backlash 7/18

WSJ – Surprise: The Economy Is Looking Much Better 7/14

WSJ – China Economy Tilts Further in Wrong Direction 7/15

WSJ – Japan and Helicopter Money: Fan Blades Aren’t Turning Just Yet 7/17

WSJ – Big Chinese Developers Push Into Hong Kong Market 7/19

July 1 – July 7, 2016

The bad debt in Italian banks is looking like a BIG problem. The world has become more reliant on Middle Eastern oil. Not looking so rosy for hedge fund reinsurers.

Headlines

Briefs

    • As yields the world over drop “the effective yield on 7-to-10 year investment-grade corporates was 3.19%, according to Bank of America Merrill Lynch.” But relative to everything else, that’s really quite attractive.
    • “Indeed, in the universe of investment-grade debt, U.S. corporate bonds are close to the only game in town for investors looking for any yield. BofA Merrill Lynch credit strategist Hans Mikkelsen calculates that U.S. corporate bonds account for around 12% of all investment-grade debt outstanding world-wide yet they now represent about 33% of investment-grade yield income. Put otherwise, U.S. corporate bonds generate one out of every three dollars paid out by the entire universe of investment-grade debt.“
    • “Almost 87% of Japanese government bond yields are now below zero.”
    • “Unlike other major central banks, the BOJ is a buyer at almost any price and mainly purchases government bonds, which represent almost two-thirds of negative-yielding global sovereign debt globally.”
    • “Further buying will only push yields lower. Cutting back, while helpful in the short- to medium-term, means that the BOJ has to find other Japanese securities. But, unlike Europe or the U.S., asset-backed securities and corporate bonds are hardly an option because of their relatively small market sizes.”
    • For reference, “the BOJ now holds almost 30% of its government’s bonds.”
  • Rich Miller and Steve Matthews of Bloomberg called attention to the challenge that Janet Yellen faces in regard to setting rates when the US economy is running short of labor.
    • “Seven years into the economic expansion, the U.S. is showing signs it’s running short of job seekers qualified to fill openings. The shortfall, which has been evident for some time for highly skilled workers, is spreading to workers with less education as unemployment falls further.”
    • “We are now close to eliminating the slack that has weighed on the labor market since the recession.” – Janet Yellen, Federal Reserve Chair on June 6
    • “At 4.7% in May, the jobless rate is around the level that most Fed policymakers consider to be full employment.”
  • Central Banks are putting a squeeze on the bond market according to Min Zeng and Christopher Whittall of the Wall Street Journal.
    • “A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower.”
    • “Central banks themselves are having trouble finding all the bonds they need. The ECB, for example, can’t buy bonds with a yield lower than its deposit rate of minus -0.4%. As of July 1, 58% of German bonds eligible for ECB purchases traded below that level, according to Frederik Ducrozet, a senior economist at Pictet Wealth Management.”

Special Reports

Graphics

FT – Government bond yields fall to fresh record lows led by UK Gilts 7/1

FT_UK 10 year gilt yield_7-1-16

FT_US 10 yr treasury yield_7-1-16

WSJ – Debt for Cheap: U.S. Companies Can Profit from Sinking Rates – Justin Lahart 7/1

WSJ_Debt for Cheap, U.S. Companies Can Profit from Sinking Rates_7-1-16

The Big Picture – China spends more on economic infrastructure annually than North America and Western Europe combined 7/4

The Big Picture_China economic infrastructure spending_7-4-16

FT – Bad-debt warnings triggers fresh fears for Italian banks 7/4

FT_Italian banks bad debt fears_7-4-16

Visual Capitalist – This Map Shows the Average Income of the Top 1% by Location 7/6

Visual Capitalist_Avg income of top 1%_7-6-16

WSJ – Central Bank Buying Puts Squeeze on Bond Market – 7/6

WSJ_Central bank holdings of govt bonds_7-6-16

Featured

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

Bad Debt Piled in Italian Banks Looms as Next Crisis. Giovanni Legorano. Wall Street Journal. 4 Jul. 2016.

“In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”

“Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.”

According to Lorenzo Codogno, former director general at the Italian Treasury, “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

“The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.”

“…impaired loans at Italian banks now exceed €360 billion – quadruple the 2008 level – and they continue to rise.”

“Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25% – implying an additional €40 billion in write-downs.”

“One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.”

“There is an epidemic, and Italy is the patient that is sickest… if we don’t stop the epidemic, it will become everybody’s problem… The shock of Brexit has created a sense of urgency.” – Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry

However, European officials are loath to let the Italians use the Brexit as an impetus to gain permission to bend the rules of the banking regime that were only just established at great pains.  The Italians though are concerned “about the €187 billion of bank bonds in the hands of retail investors that would be wiped out by a bank resolution under the EU banking rules.”

IEA warns of ever-growing reliance on Middle Eastern oil supplies. Anjli Raval and David Sheppard. Financial Times. 6 Jul. 2016.

“The world risks becoming ever more reliant on Middle Eastern oil as lower prices derail efforts by governments to curb demand, the west’s leading energy body has warned.”

“Middle Eastern producers, such as Saudi Arabia and Iraq, now have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.”

“Demand for their crude has surged amid a collapse in oil prices over the past two years that has cut output from higher-cost producers such as the US, Canada and Brazil.”

“Middle Eastern producers now make up 34% of global output, pumping 31m barrels a day, according to IEA data. This is the highest proportion since 1975 when it hit 36%. In 1985, when North Sea production accelerated, their share fell to as little as 19%.”

Further, the adoption of more fuel efficient vehicles has slowed since the cost of gas has come down significantly. “In the US, more than two-and-a-half times as many sport utility vehicles were being bought compared with standard cars.” – Fatih Birol, executive director of the International Energy Agency.

“Even more concerning for policymakers is China, where more than four times as many SUVs were bought, suggesting the country’s rapidly growing car culture has adopted America’s taste for larger more fuel-hungry cars.”

“Lower oil prices are proving to be bad news for efficiency improvements.” – Fatih Birol

Bottom line, “‘the Middle East is reminding us that they are the largest source of low-cost oil,’ said Mr. Birol. He said the region was expected to meet three-quarters of demand growth over the next two decades.”

“Mr. Birol said policymakers needed to impose stricter fuel efficiency targets to reduce demand, arguing it was not feasible in a world market to completely sever reliance on Middle Eastern oil.”

“US oil production will increase, but it is still an oil importer and will be for some time.” – Birol

S&P sounds alarm on hedge fund reinsurers. Alistair Gray and Miles Johnson. Financial Times. 6 Jul. 2016.

“So-called hedge fund reinsurers (HFRs) have failed to make a profit from providing reinsurance cover for more than four years, according to Standard & Poor’s.”

“S&P found that HFRs had performed considerably worse than traditional reinsurers, which have complained that the entry of new money into their sector has driven profitability down for all.”

“Conventional reinsurers tend to invest their income in conservative assets such as corporate bonds, since they do not know in advance how much they will need to pay out in claims.”

“In contrast, HFRs pursue what S&P described as ‘meaningfully risker’ investment strategies. Their assets are managed by their affiliated hedge funds. Allocations vary but include exposure to speculative-grade leveraged loans, private equity and short positions.”

“So-called combined ratio for the HFRs – claims paid and expenses incurred as a proportion of premium income 0 has been above 100 in every year since 2012, meaning a loss from underwriting.”

“Last year the ratio came in at 110.2%, compared with a profitmaking 88.6% for their conventional reinsurance peers.”

“S&P said the HFRs’ investment performance had also been ‘rough’. Overall net investment income dropped 63% from 2014 to $247m last year.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – SMU, Yale Endowments Unload Real Estate Assets Due to Cooling Markets 7/1

Bloomberg – Blackstone Tenants Get a Shot at Buying Their Rental Houses 7/4

Bloomberg – Treasuries Deliver $700 Billion Windfall to World Safety Seekers 7/6

CNBC – This private equity giant wants to give landlords millions – here’s how 6/30

FT – Mexico raises interest rates to shore up peso 6/30

FT – Zenefits agrees to halve its valuation to $2bn 6/30

FT – Puerto Rico declares moratorium on debt payments 6/30

FT – Cash-starved Zimbabwe closes in on IMF deal to clear debts 7/6

MarketWatch – This economist thinks China is headed for a 1929-style depression 7/1

NYT – Italy’s Plan for Banks Could Roil Europe 7/6

Vanity Fair – Are We At The Start Of  A Tech World War? 7/6

Wharton – The Case for ‘Regrexit’: Why Britain Won’t Really Leave the EU 6/30

WSJ – Manhattan Apartment Sales Sputter 6/29

WSJ – Why Vanke Sank After Its Wake-Up Call 7/4

WSJ – Foreign Interest in U.S. Homes Cools 7/6

 

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

 

April 29 – May 5, 2016

Beware of ‘investments’ being peddled by Chinese banks. China no longer getting the same bang for the buck. Industry concentration tends to result less money going to employees.

Headlines

Briefs

    • “The economy in China’s industrial province of Liaoning contracted in the first quarter, making it the first region to register negative growth in seven years as a severe downturn in energy and heavy industry sectors hits hard in the country’s north-east.”
    • “China’s national growth clocked in at an annual rate of 6.7% in the first quarter, but that headline figure masks sharp discrepancies between provinces reliant on heavy industry, mining or oil, and the southern and eastern regions with more diversified economies.”
    • “Chinese newspaper 21st Century Business Herald reported this week that Liaoning would book a 1.3% contraction in real GDP for the quarter…”
  • Daniel Thomas of the Financial Times covered that Global smartphone sales fell for the first time.  It was bound to happen eventually.
    • “Global smartphone shipments fell for the first time as “iPhone fatigue” dragged down sales for Apple’s once-unstoppable franchise amid a general weakening in the market for new devices.”
    • “After close to a decade of stellar growth, analysts say a tipping point in the smartphone market has been reached as most people already have a phone, phablet or tablet device.”
    • “Apple popularized the smartphone market with the launch of the first iPhone in 2007. The US group said this week that it had suffered a 16% fall in unit sales in the first quarter and warned that the next quarter could be even worse…”
    • “Apple was not totally to blame, however, as global smartphone shipments fell 3% in the first quarter of 2016 to 334.6m, down from 345m units in the same quarter of 2015. The quarter was the ‘first time ever since the modern smartphone market began in 1996 that global shipments have shrunk on an annualized basis.'”
    • “As the China market matures, the appetite for smartphones has slowed dramatically as the explosion of uptake has passed its peak.” – IDC, a research firm.
  • For those of us in Hawaii, we’re quite familiar with the concept of leasehold property, and generally if you can avoid it for your primary residence you do.  Well in China all residential property is leasehold and some of those lease terms are rolling over in short order.  Lucy Hornby of the Financial Times discusses the angst this is causing.
    • “The simmering issue of property rights in China has burst into the open with the upcoming expiry of residential leases in several wealthy cities and a contentious plan to charge homeowners to renew them.”
    • When the Communist party entered into power in 1949 property ownership was abolished only to be renewed via a mixed bag of leasehold rights in the 1980s and 1990s.  Now these rights are “…in the spotlight with the upcoming expiry of 20-year residential land use rights in Wenzhou in eastern China… Leases granted in the 1990s will also soon come due in Shenzhen and other coastal cities, although the more common tenure of 70 years means most of the current generation of urban homeowners will hand the problem on to their heirs.”
    • “Wenzhou has asked homeowners to pay up to a third of their homes’ value to renew their rights, according to a city government document, sparking an outcry across China. The Property Law of 2007 says land-use rights can be renewed but does not specify the criteria for doing so.”
    • “Many Chinese bought their homes under the expectations that the long leases would be transformed into full ownership.”
  • Enough with all this bad news.  No really, as Lingling Wei reports in the Wall Street Journal, China is pressing Economists to brighten their outlooks.
    • “Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with the government’s upbeat statements, according to government officials and economic commentators with knowledge of the matter.”
    • As Scott Kennedy, a deputy director at the Center for Strategic and International Studies (a Washington think tank), puts it “vigorous debate among economists and public confidence in this conversation is critical if China is to successfully navigate the choppy economic waters. If the party and government only want to hear good news, then they’d be better off hearing nothing because the value of the words would be less than zero.”
    • “While restrictions on foreign media have always been tight, they are becoming tighter, with a growing list of foreign publications having their websites blocked from view within China, including The Wall Street Journal.”

Special Reports

Graphics

FT – Will duration risk rear its head for bond investors? 4/28

FT_Negative yielding bonds by country of origin_4-28-16

FT_Bond Duration_4-28-16

FT – Rise of the robots is sparking an investment boom – Richard Waters and Tim Bradshaw 5/2

FT_Rise of the robot economy_5-2-16

FT – US producers Ultra and Midstates fall victim to low oil price 5/3

FT_US high yield energy_5-3-16

Featured

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

Chinese banks disguise risky loans as ‘investments’. Yuan Yang and Gabriel Wildau. Financial Times. 28 Apr. 2016.

“Chinese banks are using complex financial engineering to disguise risky loans as ‘investments,’ rendering traditional risk metrics such as non-performing loan ratios virtually useless.”

“Analyst say most of these assets are in effect loans but are structured to appear as holdings of investment products issued by a third party. Such financial alchemy allows banks to evade regulations designed to limit risk.”

“Banks are required to set aside fewer provisions against ‘investment’ assets than traditional loans.”

“Because the investments are not classified as loans, defaults are not reflected in these banks’ non-performing loan ratio. Many analysts believe China’s official NPL ratio of 1.67% is all but irrelevant in assessing banks’ overall asset quality.”

“Fitch, the rating agency, believes this practice, also known as channel lending is used to provide credit to the likes of ‘cash-strapped property developers and local governments’ that cannot obtain formal loans.”

“Now that overcapacity sectors such as steel and cement are facing restrictions on formal borrowing, channel lending could become even more important to zombie companies.”

“Banks classify the assets they hold in these third parties as ‘investment receivables’ or ‘debt receivables,’ not loans.”

“Shadow lending in debt receivables increased 63% to Rmb14tn ($2.16tn) last year, according to an analysis of 103 Chinese banks by Wigram Capital Advisors, equivalent to 16.5% of the formal loan book.”

“Aggressive balance sheet expansion by midsized lenders has also increased their systemic importance to China’s overall banking system. The big four’s share of total banking assets has fallen from 51% in 2009 to 38% at the end of 2015, according to Wigram’s calculations.”

China’s fizz goes flat, even with far bigger credit stimuli. James Kynge. Financial Times. 4 May 2016.

Bottom line: “money is losing the power to energize important economic muscles. Asset prices in the all-important property market – which drove China’s recovery from the 2008 financial crisis – are now so high relative to household incomes that it is hard to envisage another sustained rally.”

“On average, it would take 25 years, 33 years, 36 years and 19 years of household income in Beijing, Shanghai, Shenzhen and Guangzhou respectively for a family to buy a 90 sq m (969 sq ft) apartment, according to calculations by Mizuho Securities in Hong Kong. By contrast, London house prices are 9.2 times average earnings for first-time buyers, according to Nationwide data.”

“The International Monetary Fund estimates that $1.3tn in corporate debt – or almost one in six of the business loans on Chinese banks’ books – was owed by companies that brought in less in revenues than they owed in interest payments.”

“So unleashing a new tide of credit to ease debt problems is ‘like smoking opium to look healthy,’ said Professor Li Weisen of Fudan University, according to the South China Morning Post.”

“China expanded total domestic credit by Rmb12tn, or 34% of gross domestic product, in the year to November 2009 – significantly less than the Rmb27.9tn, or 40% of GDP, in the year to February this year, according to Bernstein Research.”

“But while the 2009 stimulus reinvigorated growth from 6.1% in the first quarter to a full-year GDP growth rate of 9.2%, the flood of credit seen in the year to February has been accompanied by a gentle decline in GDP headline numbers.”

Rising Profits Don’t Lift Workers’ Boats. Peter Coy. Bloomberg. 5 May 2016.

“Big business is getting bigger, and workers’ slice of the economic pie is getting smaller. Those trends have bred resentment toward large corporations. Now research shows a surprisingly tight link between the two phenomena: The share of the pie that goes to workers has been shrinking most in precisely those industries where ownership is becoming more concentrated.”

“Increasing industry concentration ‘may explain one of the transcendent issues confronting the U.S. economy,” namely labor’s declining share and profits’ rising share of the value a company creates, Michael Feroli, the chief U.S. economist at JPMorgan Chase, wrote in an April 25 research note.”

Bloomberg_Tale of two payrolls_5-5-16

As an explanation of the trend, “Feroli says, is that industries with more concentrated ownership can charge higher prices. They pay out their extra profits to shareholders, or to the government in taxes, but not to workers.”

“One hopeful sign for workers: The share of national income going to wages and salaries has rebounded since 2012, erasing about 30% of its post-1997 decline.”

Other Interesting Articles

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