…An estimated 270m migrants around the world who will
send a combined $689bn back home this year, the World Bank estimates. That
figure marks a landmark moment: this year remittances will overtake foreign
direct investment as the biggest inflow of foreign capital to
Remittances were once viewed by many economists
as a secondary issue for developing economies behind FDI and equity
investments. Yet because of their sheer volume and consistent and
resilient nature, these flows are now “the most important game in town when it
comes to financing development”, says Dilip Ratha, head of the World
Bank’s global knowledge partnership on migration and development.
The number of people in the world who live outside
the country of their birth has risen from 153m in 1990 to 270m last year
according to the World Bank, swelling global remittance payments from a trickle
to a flood. As migration has increased, these financial snail-trails have
become one of the defining trends of the past quarter-century of globalization
– the private, informal, personal face of global capital flows.
For many developing economies, it is a lifeline.
“In times of economic downturn, natural disaster or
political crisis, private capital tends to leave and even official aid is hard
to administer,” says Mr Ratha. “Remittances are the first form of help to
arrive, and they keep rising.”
Remittance inflows help boost countries’ balance of
payments and therefore their credit ratings, lowering the borrowing costs
of governments, companies and households. In the Philippines, for example, this
year’s remittances inflows of $34bn will help reduce what would otherwise be a
current account deficit of more than 10% of gross domestic product to a deficit
of just 1.5% of GDP.
But remittances have economic downsides too. By
helping to subsidize low incomes at home they provide a cushion against the
impact of slow growth, which eases pressure on governments to reform their
And, by channeling capital into consumer spending,
remittances boost imports – which, some economists say, holds back the
development of domestic manufacturing.
Remittances are also one of the key transmission
mechanisms of global economic stress. People move in search of opportunities,
so emigration rises when an economy is doing badly. When their host country is
doing well and migrants prosper, they send more money home – a counter-cyclical
boost to the struggling economy at home.
But when host countries hit hard times, the shock is
transmitted back to migrants’ families in the form of lower remittances. This
can export the slowdown to the recipient country, fueling economic instability
on a global scale.
One example is the recent fall in oil prices. It was
a blow not only to oil producing countries but also to families across
south-east Asia and elsewhere who have breadwinners working in the Gulf.
It proved to be a structural shock for Lebanon, a
small economy in which families and the banking system are heavily dependent on
inflows from the diaspora.
“We’ve been watching Lebanon closely because
remittances have really declined in the past decade, by almost 12% of GDP,”
says Frank Gill of S&P Global, one of the big three rating agencies. “This
is a key source of funding for the public sector and it’s a major worry for a
rating agency, for obvious reasons.”
In May S&P lowered its outlook for Lebanon’s
sovereign rating to negative, citing slowing inflows from non-residents as a
threat to the country’s fiscal stability.
Although remittances have become one of the chief
characteristics of the current era of globalization, political shifts including
the rise of populism raise the question of whether their economic importance
will prove short-lived.
The backlash against globalization is growing
and anti-immigration sentiment is rising in many developed countries.
So it is possible that both migration and the capital flows that it drives
could begin to ebb.
But the World Bank expects 550m people to join the
work forces of low and middle-income countries between now and 2030. And the
gaping income disparity between developed and low-income countries – $43,000 a
year per capita in the former, and $800 a year in the latter – is set to
That means job opportunities abroad will continue to
And the push from poor countries will be met by a
pull from rich ones.
“The western world is ageing, and it’s going to be
increasingly reliant on imported labor,” says S&P’s Mr Gill. “I don’t see
why that isn’t going to continue.”
“China formalized existing measures to curb outbound investment, underscoring persistent capital-outflow pressure faced by Beijing.”
“The government must restrict overseas investment in sectors such as property, hotels, cinema, entertainment and sports teams, the State Council said in guidelines released on the main government website Friday.”
A cannon was just fired through the hallway.
“Officials have warned against rising risks in such investment over the past year, but it is the first time the cabinet has publicized such controls in the form of official guidance.”
“Establishment of equity-investment funds and any investment platforms that aren’t linked to any specific projects are also restricted by the government, according to the measures jointly drafted by the country’s top economic planner, Commerce Ministry, central bank and Foreign Ministry.”
“Authorities must also step up oversight of investment projects that aren’t considered to meet the technology, environment and security standards required by the governments of the destination countries, according to the guidelines dated Aug. 4.”
“The government is setting up a list to track down and penalize offenders, the cabinet said.”
“China’s outbound direct investment outside the financial sector declined 44.3% over the first seven months from a year earlier, with investment in property and entertainment down by 81.2% and 79.1%, respectively, the Commerce Ministry said on Tuesday.”
“’Irrational outbound investment has been effectively contained further,’ the ministry said.”
“Venezuela’s already falling oil production will get worse, maybe much worse, before it gets better, potentially roiling global energy markets. The cash-strapped country has been unable to maintain its oil fields, meaning some of the production losses will be permanent.”
“The country now produces between 1.9 million and 2.2 million barrels a day, depending on whether one uses unofficial or official data, down from around official estimates of 2.5 million in late 2015 and 3.4 million before Hugo Chávez took power in 1999.”
“The decline in production is so dramatic that Venezuela, home to the world’s largest proven crude reserves, is actually importing barrels of light crude, which it needs to mix with its heavy varieties to make them usable.”
“The problem is cash, debt and production. Venezuela is struggling under $120 billion in debt, and it has pledged barrels of oil as repayment for Russian and Chinese loans. After supplying the domestic energy market and paying for crude imports, Venezuela only has 600,000 to 800,000 barrels a day left over to generate net cash flows, according to Columbia University’s Center on Global Energy Policy. The country earns some 90% of its foreign currency revenue from oil exports.”
“If the country can right itself, output might stabilize, but any rebound would be modest. Years of underinvestment may have done permanent damage to Venezuela’s conventional oil reservoirs. Reviving output would require substantial foreign investment, including in heavy-oil deposits. Now that Venezuela has burned not just western multinationals but also state companies from Russia and China, doing so will be a tall order without regime change.”
“China’s capital flow turned positive in the first half of 2017, a reversal from unprecedented outflows during the previous two years that sparked worries over financial stability.”
“Data released on Monday indicate that Beijing’s support for the renminbi and a crackdown on foreign deal making and other outflow channels have largely succeeded in curtailing capital flight.”
“China ran a $16bn surplus over the first half of this year, excluding central bank intervention, compared with a $417bn deficit in 2016, balance of payments data showed. The figures also showed that China added to its foreign exchange reserves on a valuation-adjusted basis in the second quarter for the first time since early 2014.”
“‘Hot money’ — short-term money movements viewed as a gauge of investor sentiment toward Chinese assets — continues to flow out of the country, albeit more slowly, according to FT estimates based on official data.”
“Hot money outflow was $126bn in the first half on a net basis, well behind the $891bn full-year pace for 2016. The FT uses a broad definition of the term, treating all money flows not related to goods trade or foreign direct investment as hot money.”
“That suggests investors are eager to take money out of China if they can skirt capital controls, despite recent tightening. Indeed, a Reuters poll of 60 forex analysts in late July showed that they expect the renminbi to erase most of this year’s gains over the next 12 months.”
“In a sign that the government remains vigilant despite the improvements, regulators have imposed new measures in recent weeks to prevent capital flight.”
“Last week, the foreign exchange regulator named and shamed nine banks for violating forex rules. The agency is also requiring lenders to issue daily reports on all foreign bank card purchases by customers worth more than Rmb1,000 ($149) beginning later this month.”
“The yuan, which as recently as 2015 had overtaken the Japanese yen as the fourth most popular currency for global payments, now clocks in at No. 6, according to international-transaction service provider Swift, below the Canadian dollar and barely above the Swiss franc. Only 1.98% of international payments tracked by Swift were yuan-denominated in June 2017, down from 2.09% two years ago.”
“Given the scale of the bleeding in 2015 and 2016, China’s leaders likely had little choice but to close the drawbridge.”
Are High Home Prices Turning American Millennials Into the New Serfs? – Marc Faber
“Like medieval serfs in pre-industrial Europe, America’s new generation, particularly in its alpha cities, seems increasingly destined to spend their lives paying off their overlords, and having little to show for it. No wonder that rather than strike out on their own, many millennials are simply failing to launch, with record numbers hunkering down in their parents’ homes. Since 2000, the numbers of people aged 18 to 34 living at home has shot up by over 5 million.”
“Macau is tightening restrictions on the use of ATM cards by mainland Chinese customers as the casino enclave confronts fears that it is being used as a hub for capital flight and money laundering.”
“The government said that in the future, mainland users of UnionPay, China’s sole clearing house for bank card transactions, would have to insert their identity cards into ATMs and have their identity verified by facial recognition software to withdraw cash.”
“The move appears designed to target gamblers and middleman who have been flouting withdrawal limits by using multiple ATM cards registered to different customers.”
“Withdrawals by mainlanders in Macau are limited to Rmb10,000 ($1,450) a day and Rmb100,000 per year.”
“Vitaly Umansky, a Hong Kong-based analyst at Bernstein, the research house, said the new ATM measures would add to the headwinds facing junkets and some ‘premium mass’ gamblers.”
“He said that, after the recent rebound in fortunes, the ATM crackdown would make ‘investors again realize that Macau risks are largely tied to policy and the power of the government to limit growth has not been diminished.'”
“Depicting work in the platform economy as a mere ‘sharing of favors’ conveys an image of the gig economy as a sort of parallel dimension, where chores are amateurishly carried out as a form of leisure, with no relation to ‘work’. The reality, however, is different. For most workers, platform-based work is an essential source of income. The ILO recently surveyed workers on two important micro-task platforms: Amazon Mechanical Turk and Crowdflower. Forty percent of respondents answered that crowdwork constituted their principle source of income. Workers averaged 30 hours a week on the platform.”
“A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates with the ability of companies to cover interest payments at its weakest since the 2008 financial crisis by one measure, the International Monetary Fund has warned.”
“The big mystery of the year has been the disconnect between the chaos in Washington and the calmness in markets.” – Adam Sender, head of Sender Company and Partners, a hedge fund.
“In part, Vix (Chicago Board Options Exchange Volatility Index) has been becalmed because the US stock market has been remarkably placid. The S&P 500 recently enjoyed its longest run of avoiding big drops of more than 1% in over two decades. But the evaporation of volatility also reflects profound structural changes that have taken place since the financial crisis, such as the primacy of central banks and the big shift into exchange traded funds.”
“China’s restraints on capital outflows have started to discourage inbound investment into the country, the opposite of the intended effect of the measures.”
“Last year, Beijing began cracking down on outbound investments and stopping companies from remitting capital offshore in an attempt to preserve its rapidly deteriorating foreign reserves, which dipped below $3tn in January for the first time in five years.”
“World football’s governing body lost several major sponsor, including Sony and Emirates, when their deals ended at the end of the last tournament in 2014. For the 2018 tournament in Russia, Fifa has 10 companies signed up as sponsors, but before the last tournament in Brazil, the organization had 20 corporate partners on board.”
“Sales of soda drinks decreased about 1.2% in the United States in 2016, falling for the 12th year in a row, a report by trade publication Beverage Digest showed, as demand was hit by consumers choosing healthier options and a slew of sugar taxes aimed at stemming obesity and diabetes.”
“However, total sales dollars increased 2% to $80.6 billion as soft drinks makers aggressively pushed smaller packs at higher prices per ounce, while lowering emphasis on large discount packs, the Beverage Digest said.”
“Venezuelans are suffering privation previously unheard of in what was once South America’s richest country. According to a study by three universities, 82% of households now live in poverty. That compares with 48% in 1998, when Chavez came to power. The rise in poverty follows Venezuela’s biggest-ever oil windfall. Of the $1tn the regime received in oil revenue, perhaps a quarter was stolen by insiders, according to the International Crisis Group, a think-tank. Infant mortality is rising, and Venezuelans are needlessly dying because of the shortage of medicines. Those who can, leave; perhaps 2m Venezuelans now live abroad.”
“To remain in power, Mr. Maduro’s state-socialist regime is extinguishing democracy.”
“His new hardline vice-president, Tareck El Aissami, heads a ‘national anti-coup command.'”
Resulting from capital controls in China, Chinese property developer “Country Garden has closed its showrooms in mainland China for its flagship $100bn Forest City development” at the southern tip of Malaysia.
The project which is scheduled to have its first move-ins next year, is projected to take two decades to develop and will house 700,000 people. The hiccup is that mainland Chinese have accounted for 70% of the buyers to-date.
To give a sense of the marketing message, “above the main reception desk [in Shanghai], the project appealed directly to investors looking to move money abroad with the slogan, ‘Preferred selection for overseas asset allocation. Forest City, adjacent to Singapore.'”
Bottom line, “capital control measures appear to be having an impact. Outbound foreign direct investment from China tumbled by 36% in January, including an 84% decline in outbound real estate investment by companies.”
“Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing program, but have so far provided few details.”
“Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”
“The Fed unveiled its mortgage-backed assets scheme at the height of the crisis in November 2008 and began the purchases soon after. Its MBS holdings have since swelled to account for almost a fifth of the entire $8.9tn market. Every month the central bank still buys billions of dollars worth of MBS as it reinvests the proceeds of maturing securities.”
Michael Fratantoni, chief economist of the Mortgage Bankers Association expects “all things being equal, just the removal of the ongoing purchases would push up mortgage rates relative to Treasury yields by at least 10 basis points.”
It is to be seen how the Fed unwinds itself and how the markets react – get ready.
“Apartment rents in cities such as New York and San Francisco will need to fall as much as 15% for a glut of high-end developments to be absorbed, according to billionaire real estate investor Richard LeFrak.”
“New York landlords are already feeling the pinch as renters take advantage of a flood of new buildings to negotiate concessions and price cuts. Rents fell last month for Manhattan apartments of all sizes, the first across-the-board decline in at least four years, as property owners compromised to keep units from going empty.”
“Desperate homebuyers, take a two-year breather. Housing speculators, take warning.”
“Toronto’s house-price juggernaut is two years away from the sort of peak it reached in 1989, when a housing bubble burst in the city, BMO Economics says.”
“‘At the rate we’re now going with 20% year-on-year price increases, assuming stable mortgage rates and continued income growth, we’ll be at 1989 valuation levels in about 24 months,’ senior economist Robert Kavcic wrote in a note last week.”
Presumably that would imply that Toronto will get there faster if mortgage rates rise and income growth slows/flatlines.
“Toronto’s average house price jumped 27.7% in February from a year earlier, to $859,186. Single-family homes soared to $1.57 million on average, a jump of nearly 30% in a year.”
“The 1989 housing market peak led to a seven-year period of house price declines in Toronto, with prices falling 39% from their 1989 peak by 1996.”
“The most common explanation given by real estate industry insiders for Toronto’s rising house prices is that there is a shortage of housing supply in the quickly-growing city. That’s the argument used by the Ontario Real Estate Association to call for looser density requirements and looser restrictions on urban sprawl.”
However, looser restrictions won’t relieve pressure in the short-term. At this point “house prices are being driven upwards not by a real shortage but by ‘powerful expectational dynamics’ – the belief that prices will continue rising, causing people to rush buying homes.”
One of the offshoots of globalization is that while capital flows generally where it will attain its best return, it also flows to where it feels safe.
“In some places, foreign investment has led to a construction boom. In Miami apartments are being built in numbers not seen since the financial crisis, financed in part by Venezuelan money. Australia lets foreigners invest only in new-build properties, and they do: 26,000 new flats are due on the market in Sydney and Melbourne over the next 18 months. In London 45,000 homes have been built since 2014 – the highest rate in ten years – but locals grumble many are pads for footloose foreigners.”
“In many of these countries affordability looks stretched. The Economist gauges house prices against two measures: rents and income. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable. By these measures house prices in Australia, Canada and New Zealand look high. In America as a whole, housing is fairly valued, but in San Francisco and Seattle it is 20% overpriced.”
“Haven investors may disregard affordability measures. Property can either be a bolthole [place where you can escape to and hide] or earn an income; in many supply-constrained cities its value may rise rapidly; even if not, the risks may be lower than at home… A study in 2016 found that increased political risk in places such as Greece and Syria explained 8% of the variation in London’s house prices since 1998.”
“Policymakers may well scratch their heads [and they do]. It is difficult both to make housing more affordable for a country’s own citizens and to encourage foreigners to buy. Britain has in fact tried to curb foreign enthusiasm with higher taxes, and by publishing a registry of 100,000 British homes owned by foreign companies – a potential embarrassment for some.”
“But unintended consequences lurk. After a 15% levy on purchases from abroad was introduced in the Canadian city of Vancouver last August, the number of foreign buyers dropped by 80%. That helped dampen house-price inflation there but pushed up demand in nearby Victoria. It also deterred highly skilled immigrants. The levy will soon be amended to exclude foreigners on skilled-work visas.”
At times it can be hard to understand how property markets can continue to rise despite a seeming lack of buyers at price points necessary to bring new product to market. Bottom line, people have different motivations for the things they do and spend their money on (even if it means losing some of it).
The insurance industry in China has been good business – too good. What is the magic number for China’s foreign exchange reserves? What gives – why haven’t the share buybacks by US corporates juiced returns (passive investing)?
FT – China capital crackdown threatens wave of overseas buyouts 2/27. Dalian Wanda’s $1bn acquisition of Dick Clark Productions is in question even though the argument can be made that it is strategic to its cinema business (AMC, Carmike Cinemas, Odeon & UCI theatres, Legendary Entertainment) and even though it is being made by one of China’s most connected and richest individuals.
WSJ – London’s ‘Cheesegrater’ Sold to Chinese Firm for $1.4 Billion 3/1. Hong Kong property tycoon Cheung Chung Kiu’s CC Land Holdings just stumped £1.15bn up for the Leadenhall Building in London – recently appraised at £915m at the end of September. Well, the office yields in London at around 4.6% are near double the 2.6% in Hong Kong and the yuan is up 12% on sterling since the Brexit vote.
“While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”
“The Bank of Japan published detailed schedules of planned asset purchases for the first time on Tuesday as it seeks to prove its commitment to a zero per cent cap on 10-year government bond yields.”
“Japan’s central bank said it will buy a minimum of ¥1.375tn and a maximum of ¥2.175tn of government bonds during March, giving a series of dates and estimated sizes for its planned bond auctions at different maturities.”
“The BoJ gave a strong hint that its announcement is meant to signal a minimum plan for purchases, rather than a maximum, saying it ‘may increase the frequency as needed.'”
“Japan’s 10-year yield is currently trading at 0.04%, having reached 0.11% at one point earlier this month before the BoJ stepped in and offered to buy in unlimited quantity to prevent it from rising any higher.”
Bottom line, the BoJ is all-in on maintaining 0% yields and the market can be assured of that.
“…Pressure on corporate bonds poses risks to Wealth Management Products (WMPs). One could argue that these offerings are a form of Ponzi scheme because when investors redeem their holdings, managers rely on other money to come into the product. If more people redeem than invest, the managers will be forced to liquidate and it’s not clear there will be enough to repay the last guys out.”
WSJ – Daily Shot: Chinese Bank WMP Deposit Percentage 2/23
WSJ – Daily Shot: FRED – US Home Price Index v Avg. Hourly Earnings 2/23
“China’s fourth richest man [Yao Zhenhua, chairman of Baoneng Group] has been banned from the country’s insurance industry for 10 years, in the most aggressive move yet by regulators to tame borrowing and hostile corporate takeovers by insurers.”
“Much of the funding for Baoneng’s…investments came from investments gathered by its life insurance unit, Foresea Life Insurance, which Mr Yao also chairs.”
“Foresea quickly scaled the premium rankings of China’s life insurance industry by selling so-called ‘universal insurance’ products, which are essentially wealth management vehicles with a small protection component.”
“Insurers are able to offer higher yields than those available on comparable vehicles from banks and other fund managers because they have the freedom to invest in a wider range of assets. Anbang Insurance Group has also relied on sales of universal insurance products to fund a high-profile global shopping spree.”
“But analysts have warned against the strategy. Such products essentially force insurers to seek out risky, high-yielding assets in order to meet future payouts. Analysts are also concerned by a liquidity risk when short-duration products are matched to long-term illiquid assets such as real estate or large equity stakes.”
“Rarely seen in public, Mr Yao was China’s fourth richest man in 2016 with a fortune of $17bn, up more than ninefold from a year earlier, according to the Hurun Report. Local media say he started as a vegetable seller before making his first fortune as a property developer in the freewheeling city of Shenzhen in the 1990s.”
Previously, the China Insurance Regulatory Commission chairman Xiang Junbo had “warned that insurers cannot be ‘ATM machines’ for corporate raiders.”
“Mr Xiang also promised on Wednesday to curb ‘aggressive’ pricing and ‘unreasonably’ high returns on some insurance products. He said insurers should not interfere with the management of listed companies. Instead, the industry should focus on its core function of providing risk protection.”
“China successfully curbed the flow of money cascading out of the country in January following the imposition of administrative controls, raising the potential for Beijing to prevail in its efforts to keep the renminbi stable against the US dollar this year, analyst said.”
“In January, capital outflows fell to $30bn from $55bn in December, according to estimates by Goldman Sachs, an investment bank.”
“This represented a considerable reduction on the monthly average in a country that has experienced a leakage of $1.2tn between August 2015 and January this year, yielding a monthly average of $71bn.”
“‘Given the still-large size of China’s reserves, this pace of outflows in unlikely to stop the central bank from pursuing its current exchange-rate policy, which can be sustained for another couple of years,’ said Long Chen, analyst at Gavekal Dragonomics, a research company.”
The reasons for the slow down are varied; however, where there is disagreement is on what would be considered a sufficient amount of foreign exchange reserves.
“China’s foreign exchange reserves fell $12bn in January to below the psychologically important $3tn level to $2.99tn, representing almost a $1tn reduction from its level of July 2014.”
“The issue of China’s reserves adequacy has arisen from applying the International Monetary Fund’s new reserve metric to the country.”
“Under this calculation, the proposed minimum reserves for China is $2.7tn…”
“But Brad Setser, senior fellow at the Council on Foreign Relations (CFR), a New York-based think-tank, said that China had ample room to defend its currency.”
“‘The world would be in a better place if there was a broad recognition that China can burn through another $1tn in reserves and, with $2tn still in reserves, be above nearly all metrics of reserve adequacy,’ Mr. Setser wrote in a CFR blog.”
“Jeremy Stevens, Asia economist at Standard Bank, holds a similar view. ‘It seems fair to argue that in terms of foreign exchange reserves, somewhere between $1.56tn and $2.2tn would be adequate for China’s working capital,’ he said.”
It is to be seen what China itself considers the ‘right’ amount of reserves. Regardless, part of the capital curbs have been aimed at encouraging more discretion by Chinese investors and companies in their foreign acquisitions.
“Pan Gongsheng, head of SAFE [State Administration of Foreign Exchange], was quoted as telling a Chinese newspaper this month that some overseas acquisitions by Chinese companies had been carried out with a ‘strong element of blindness.'”
In questioning whether corporate share buybacks have been on the whole a net positive, there has been a host of views presented. The concerns being that buybacks are short-sighted, returning cash to shareholders rather than pursuing growth initiatives. The implication being that these companies don’t have sufficient growth opportunities. However, in some cases companies simply have too much cash and recognize that they would do their owners a disservice by holding on to all of it.
“But perhaps the most notable thing about the buyback spree – more than $2tn of shares have been purchased in the past five years – is how it has arguably provided only a modest boost to equity prices, at least compared to the scale of the purchases.”
“Indeed, the share price performance of the most generous and consistent buyback companies paint a surprisingly muddied picture.”
“The S&P 500 Buybacks Index has rallied 96% over the past five years, outpacing the broader market’s 73% gain since. This is an outperformance of 2.8% annually. However, next to the sheer scale of the buybacks – the estimated $2tn spent is equal to a tenth of the S&P 500’s current value – it has underwhelmed.”
“Worse, the Nasdaq Buybacks index has even underperformed the broader Nasdaq Composite gauge over the past five years, with the former rising 86.3% and the latter by 90.3% – an annualized undershooting of 1.3%.”
“Goldman Sachs’s chief US equity strategist David Kostin has calculated that buybacks have been the single biggest source of demand for US stocks since the financial crisis, providing a vital pillar of demand at a time when domestic pension funds and foreign investors have largely been selling.”
“For example, last year overseas investors and US pension funds respectively offloaded $148bn and $127bn of American stocks. But US companies snapped up a record $644bn of their own shares, Goldman estimates.”
Further, “Goldman Sachs earlier this year  lifted its forecast for S&P 500 share repurchases from an already lofty $780bn to $800bn.”
So why the muddied outcome… Charles Cara, head of quantitative strategy at Absolute Strategy Research has an “…intriguing reason for what he calls the ‘buyback anomaly’ of share repurchases not proving as big an uplift as the sheer volume would suggest: the rise of passive investing.”
“Passive investment vehicles do not react to share price moves. As equity prices move so do their index weights by an equal amount, provided that the share count remains constant. In other words, if Apple’s shares rise by $10, then an exchange-traded fund need do nothing, as its existing holdings of Apple stock obviously rises by the same amount.”
“Buybacks reduce the numbers of outstanding shares. If those shares rise as a result of the buyback, then an ETF or index-tracking fund – which do not sell to companies buying back their stocks – will find itself overweight compared to its benchmark, and will be forced to sell some of the shares and buy the rest of the stock market to rebalance.”
As Mr. Cara puts it, “buybacks are a prop to the whole stock market, but have a subdued impact on individual stocks because there is a countervailing force from passive investors.”
WSJ – China Capital Outflows Bubbles Below the Surface 9/20. “China’s outflows this year are north of $400bn, which is reflected both in a $190bn decline in the country’s foreign-exchange reserves and a weaker yuan, down about 3% this year against the dollar and more than 6% against a basket of currencies.”
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.”
“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.”
“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.”
“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.”
“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.”
“No, I do not think China is going to massively implode, but the world is really not ready for a China that is only growing at 2% or 3% a year. (Even though 2-3% growth would sound pretty good if it was happening in the US.)”
“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.”
“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.”
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, 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).”
“The debt is up nearly 141% since 2007, which leads Nomura to conclude “a rising default rate is inevitable.”
“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.”
“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.”
“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.”
“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.”