WSJ – Daily Shot: Bitcoin 11/25/19
WSJ – Citi Research: Central Bank Net Asset Purchases – Ira Iosebashvili 11/24/19
Tag: Climate Change
Economist – Why WeWork doesn’t work yet – Daily Chart 9/17/19
Economist – Climate change could put insurance firms out of business 9/17/19
Insurance companies are uniquely exposed to these sorts (climate) of changes. Tens of millions of businesses buy policies every year to protect themselves from risks. As a result the industry is vast—last year the premiums paid for property and casualty insurance worldwide reached $2.4trn, according to Swiss Re, one of the big reinsurance firms on to which consumer-facing insurers pass the risk of mega-losses. Insurance companies spent $180bn on reinsurance premiums. Extreme events becoming the norm could force insurers to fork out ever greater payouts to policyholders, as well as lower the value of the assets they hold. The best case is that insurers reinvent themselves, helping the world cope—risk is, after all, how they make their money. The worst is that some fail and, more worryingly, that swathes of the global economy become uninsurable.
Already, insurers are seeing disasters of unprecedented scale. Earlier this month Hurricane Dorian, one of the two largest storms ever known to have made landfall in the Atlantic, battered the Bahamas and then the Carolinas. In July Hurricane Barry brought the heaviest rainfall ever measured to Arkansas. The Indian Ocean basin has seen three huge cyclones so far this year, one of which caused Mozambique’s severest flooding since 2000. Last November California saw wildfires over the largest area ever recorded.
Very costly disasters are becoming more frequent. Between 1980 and 2015 America saw an average of five events causing over $1bn in damage (in current prices) each year. Between 2016 and 2018 the yearly average was 15. In the 20th century, according to AIR Worldwide, a climate-modelling firm, a hurricane on the scale of Harvey, America’s costliest ever, would have been regarded as a one-in-2,000-year event. By 2017, when Harvey blew in, that frequency was estimated at one in 300 years. By 2100, says Peter Sousounis of AIR, it will be once a century, and tidal surges that used to be classed as once-a-millennium events will be expected to strike every 30 years.
Catastrophes are also getting harder to predict. Though newer models are starting to take account of climate change, most still rely on crunching numbers from the previous few decades, which are already obsolete. And insurers struggle to handle “compounding effects”—the mutually reinforcing impact on each other of events associated with global warming.
Adding to the losses is the growing number of properties being built in harm’s way, such as on flood plains and coasts. Average annual insured losses from catastrophic events have grown 20 times, adjusted for inflation, since the 1970s, to an average of $65bn this decade, with a peak of $143bn in 2017. That excludes knock-on effects such as business disruption. Last year the global figure totaled $85bn, the fourth-highest on record, even though it was a year without a mega-disaster.
Climate losses can also come from the other side of insurers’ balance-sheets: the investments they hold in order to cover potential payouts and park any spare funds. Insurers (including life as well as property and casualty) are the world’s second-largest institutional investors, with $25trn under management. They often place chunky bets on multinational firms, infrastructure and property—which are becoming riskier propositions as the climate changes. Moreover, structural changes in the economy, such as the move away from fossil fuels, could leave insurers’ portfolios exposed.
In the face of these threats, insurers are seeking to future-proof their businesses models. Part of this is about financial resilience. Most general policies are renewed annually, meaning firms can raise premiums promptly. And since a spate of mega-disasters caught them off-guard in the 1990s they have fortified their capital reserves. According to McKinsey, the policy holder surplus (crudely, the excess of assets over liabilities) available to pay claims in America’s property and casualty sector doubled in real terms over the last 20 years. In 1992 Hurricane Andrew sent 11 insurers to the wall. All survived the record hurricane season of 2017-18.
Regulators are doing more to prod insurers to hold sufficient capital—typically they aim to ensure they can withstand losses caused by the worst imaginable year in 200. But putting a figure on this is hard, because nobody has thousands of years of data. And the worst possible year is getting worse every year. The risks will keep rising long into the future, says Paul Fisher, a former supervisor at the Bank of England. A cataclysmic year could also hit markets, hurting insurers’ investments just when they need them most. Some could be forced to sell assets to cover giant payouts, pushing asset prices down further.
Most probably, payouts will continue to rise without capsizing insurers. But that still creates a problem. To absorb bigger losses, they must charge higher premiums. According to Marsh, a broker, global commercial-insurance prices rose by 6% in the second quarter of this year, compared with the previous quarter. That was the largest increase since records began. In America property rates jumped 10%; in the Pacific region they soared by nearly 18%. The rise is to meet the demands of reinsurers, which insure the insurers. Average reinsurance rates are set to rise by 5% next year, according to S&P Global, a rating agency—and in California, after the huge recent wildfires, by 30-70%.
A few calm quarters would probably see some of those increases unwound. But there is no doubt about the trend. And it cannot continue forever without causing at least some customers to rethink whether to buy insurance at all.
The global “protection gap” between total losses and insured losses is already wide and growing. The research arm of Swiss Re estimates that it more than doubled in real terms between 2000 and 2018, to $1.2trn. Half of last year’s losses from natural disasters were uninsured. Nine out of ten American homeowners have no flood insurance despite half of the population living near water, says Erwann Michel-Kerjan of McKinsey. The share of uninsured damage is especially high in developing countries, where infrastructure and risk-mitigation measures are not keeping pace with economic growth.
Where risks become uninsurable, states and firms may work hand-in-hand. In Britain, where a sixth of homes are at risk of flooding, government and insurers have set up Flood Re, a reinsurer of last resort that enables insurers to offer affordable premiums on 350,000 homes in flood plains. Every firm selling home insurance in the country pays into the scheme, spreading the costs across hundreds of thousands of policies. To avoid perverse incentives, houses built in high-risk areas after 2009 are excluded.
Developing countries are underinsured partly because the risks they face are poorly understood. And many are urbanizing fast, which means cities change from year to year, making the value at risk hard to track. More research would help deepen insurance markets, and making models publicly accessible would also enable officials and development financiers to evaluate mitigation measures. Above all, insurers need to take the lead in publicizing the growing risks posed by climate change, and the need for cover. According to Alison Martin of Zurich Insurance, often people do not take out insurance because they think the worst will not happen. Talking of one-in-2,000-year events is not very helpful, she says, “because many people would think we’re safe for another 1,999”.
Perspective
- Please note that the Y-axis base is 45% (still meaningful).
Worthy Insights / Opinion Pieces / Advice
A Wealth of Common Sense – The Best Free Investing Tools on the Web – Ben Carlson 6/25
Bloomberg – U.S. Housing Will Get Even Less Affordable – A. Gary Shilling 6/26
- “More investor-owned properties and rising construction costs are just two reasons homes are out of reach for many.”
Bloomberg – The ‘Deep Fake’ Threat – The Editors 6/13
- “High-tech forged videos could wreak havoc on politics. Policy makers must be ready.”
FT – Issues beyond Opec will drive oil prices in coming years – Nick Butler 6/24
- “US shale oil production is set to have a dramatic effect on the global market.”
WSJ – Has the Big Yuan Short Finally Arrived? – Nathaniel Taplin 6/26
- “As long as Chinese investors can make money gambling on housing – and companies can make money building or selling them – weakness in the stock and bond markets may not be enough to trigger a full-scale stampede out of the yuan.”
- “Panic or no panic, a weaker Chinese currency in the months ahead still seems likely.”
Real Estate
Bloomberg Businessweek – The Modular-Home Maker That Could Make Housing Cheaper – Dina Bass 6/21
- “Katerra saves money by buying everything from wood to toilets in bulk and using software and sensors to closely track materials, factory output, and construction speed. Its architects use software to build a catalog of standard buildings, rather than starting from scratch on each project, and to ensure contractors aren’t making impulsive structural decisions. Each generation of buildings has become steadily more prefab, requiring less work on-site and speeding construction.”
- “…but Katerra has a lot of serious worries. While there are only a few standard models of iMac or Xbox, apartments are beholden to 110,000 U.S. municipalities’ building codes, each with its own idiosyncrasies. Regional seismic and weather needs can vary widely. And Katerra’s aim to steadily cut labor costs, meaning jobs, won’t exactly endear it to the industry.”
WSJ – Luxury Real Estate Comes to Urban Chinatowns – Katy McLaughlin 5/31
- “High-end developments are appearing, attracting new residents as well as concerns about the displacement of the existing working-class.”
Energy
- “The shutdown of a key oil-sands facility in Canada is flipping the global oil market on its head and slamming shares of producers that depend on the plant.”
- “Just as OPEC and allied producers agreed to pour more oil into global markets, a transformer blast first reported by Bloomberg News last week cut power to Alberta’s giant Syncrude plant, which turns heavy crude into synthetic light oil for U.S. markets.”
- “As less oil flows from up north, traders are paying a record premium for crude at America’s biggest distribution hub in Cushing, Oklahoma. Globally, the gap between Brent crude and West Texas Intermediate is narrowing rapidly after widening for months. Goldman Sachs Group Inc. called the shutdown the most dramatic event in the oil market last week, as opposed to OPEC’s meeting in Vienna. Shares of Suncor Energy Inc., which controls the plant, plunged the most in more than two years.”
- “The 350,000-barrel-a-day facility, one of the biggest of its kind in the world, is going to be out of commission until the end of July, the company said.”
- “While Saudi Arabia’s push to make sure OPEC boosts supplies by close to 1 million barrels a day is strongly weighing down on Brent crude futures in London, the shortage in Canada is supporting U.S. prices. That’s helping narrow the gap between the two benchmarks, reversing months of widening when the focus was on record production from shale fields. It has global implications because the premium helps buyers around the world decide whether to ship crude from the U.S. or elsewhere.”
Tech
CNN – It’s true: Teens are ditching Facebook – Jordan Valinsky 5/31
- “A new study has confirmed what we’ve long expected: Facebook is no longer the most popular social media site among teens ages 13 to 17.”
- “The Pew Research Center revealed on Thursday that only 51% of US teens use Facebook. That’s a 20% drop since 2015, the last time the firm surveyed teens’ social media habits.”
- “Now, YouTube is the most popular platform among teens — about 85% say they use it. Not surprisingly, teens are also active on Instagram (72%) and Snapchat (69%). Meanwhile, Twitter (TWTR) followed at 32%, and Tumblr’s popularity (14%) remained the same since the 2015 survey.”
- “When it comes to the platform they access most frequently throughout the day, Snapchat is king.”
- “Although the study was only conducted among nearly 750 teens in a one month period starting this spring, the new numbers might be worrying for Facebook. The company recently rebounded from its first-ever decline in users in the US and Canada. But overall, its global growth has slowed. The two countries account for 185 million daily users.”
- “But Daniel Ives, chief strategy officer and head of technology research at GBH Insights, argues Facebook-owned Instagram-owned is more important to the parent company than Facebook itself when it comes to younger users.”
- “‘Instagram has captured that demographic better than anyone could have expected,’ Ives said. The numbers highlight ‘why Instagram is one of the best tech acquisitions done in the past 15 years.'”
Entertainment
WSJ – Comedies’ Misfortunes Are No Laughing Matter for Hollywood – Ben Fritz 6/25
- “Last year’s most successful adult comedy, Girls Trip, took in $117 million in the U.S. and Canada. The last time the year’s highest-grossing comedy grossed so little was 1995, when tickets cost 52% less on average.”
- “It wasn’t an anomaly. The five most successful adult comedies grossed an average of $141 million in 2013, $109 million in 2015 and just $85 million last year.”
- “So far in 2018, the biggest live-action comedy has been Game Night, which took in just $69 million. Melissa McCarthy’s Life of the Party, has grossed $52 million, her lowest-grossing comedy ever. Amy Schumer’s I Feel Pretty is finishing its box office run with $49 million, less than half of her debut hit Trainwreck. Action Point, from the producer and star of Jackass, has grossed just $5 million, compared with $117 million for Jackass 3-D in 2010.”
- “Just five years ago, things were quite different. In 2013, Ms. McCarthy and Sandra Bullock’s The Heat and the raucous R-rated We’re the Millers each grossed more than $150 million domestically. Another movie with Ms. McCarthy, Identity Thief, was close behind with $135 million. Grown Ups 2, Anchorman 2, Bad Grandpa, This is the End and even the widely maligned Hangover Part III all exceeded $100 million in domestic ticket sales.”
- “Now, the only major comedy hits are those made for children. Peter Rabbit, featuring computer-generated critters that outsmart real-life adults, grossed a healthy $115 million in February, and animated comedies like Despicable Me 3 and The Boss Baby were top grossers last year.”
- “The Incredibles 2, which mixes family-friendly action, comedy and drama, scored a massive $182.7 million in its opening weekend.”
- “Though certain subgenres like romantic comedy have nearly disappeared, most studios aren’t yet abandoning adult comedy. They have, however, slashed spending on them so that they can potentially become profitable on lower grosses than were needed in the past. No comedy stars earn the $20 million per picture that Messrs. Carrey and Sandler and Ms. Roberts sometimes did in the past.”
- “Tag is a recent example of the new approach. Made for just $28 million, it features no major comedy stars and was sold primarily on its concept, a real-life story about grown friends in a decades long game of tag that was based on a Wall Street Journal article.”
- “’There was a time when comedies were being made for $70 million. Then $45 million. Now the sweet spot is in the 20s,’ said Todd Garner, a producer of Tag who previously produced comedies starring Mr. Sandler.”
Environment / Science
Economist – Climate change is making the Arab world more miserable 5/31
- “Apathy towards climate change is common across the Middle East and north Africa, even as the problems associated with it get worse. Longer droughts, hotter heatwaves and more frequent dust storms will occur from Rabat to Tehran, according to Germany’s Max Planck Institute for Chemistry. Already-long dry seasons are growing longer and drier, withering crops. Heat spikes are a growing problem too, with countries regularly notching lethal summer temperatures. Stretch such trends out a few years and they seem frightening—a few decades and they seem apocalyptic.”
- “The institute forecasts that summer temperatures in the Middle East and north Africa will rise over twice as fast as the global average. Extreme temperatures of 46°C (115°F) or more will be about five times more likely by 2050 than they were at the beginning of the century, when similar peaks were reached, on average, 16 days per year. By 2100 ‘wet-bulb temperatures’—a measure of humidity and heat—could rise so high in the Gulf as to make it all but uninhabitable, according to a study in Nature (though its most catastrophic predictions are based on the assumption that emissions are not abated). Last year Iran came close to breaking the highest reliably recorded temperature of 54°C (129°F), which Kuwait reached the year before.”
- “Water presents another problem. The Middle East and north Africa have little of it to begin with, and rainfall is expected to decline because of climate change. In some areas, such as the Moroccan highlands, it could drop by up to 40%. (Climate change might bring extra rain to coastal countries, such as Yemen, but that will probably be offset by higher evaporation.) Farmers struggling to nourish thirsty crops are digging more wells, draining centuries-old aquifers. A study using NASA satellites found that the Tigris and Euphrates basins lost 144 cubic kilometers (about the volume of the Dead Sea) of fresh water from 2003 to 2010. Most of this reduction was caused by the pumping of groundwater to make up for reduced rainfall.”
- “Climate change is making the region even more volatile politically. When eastern Syria was ravaged by drought from 2007 to 2010, 1.5m people fled to cities, where many struggled. In Iran, a cycle of extreme droughts since the 1990s caused thousands of frustrated farmers to abandon the countryside. Exactly how much these events fueled the war that broke out in Syria in 2011 and recent unrest in Iran is a topic of considerable debate. They have certainly added to the grievances that many in both countries feel.”
- “The mere prospect of shortages can lead to conflicts, as states race to secure water supplies at the expense of downstream neighbors. When Ethiopia started building an enormous dam on the Nile, potentially limiting the flow, Egypt, which relies on the river for nearly all of its water, threatened war. Turkish and Iranian dams along the Tigris, Euphrates and other rivers have raised similar ire in Iraq, which is beset by droughts.”
- “Politics often gets in the way of problem-solving. Countries are rarely able to agree on how to share rivers and aquifers. In Gaza, where the seepage of saltwater and sewage into an overused aquifer raises the risk of disease, a blockade by Israel and Egypt has made it harder to build and run desalination plants. In Lebanon there is little hope that the government, divided along sectarian lines, will do anything to forestall the decline in the water supply predicted by the environment ministry. Countries such as Iraq and Syria, where war has devastated infrastructure, will struggle to prepare for a hotter, drier future.”
FT – China’s carbon emissions set for fastest growth in 7 years – Lucy Hornby and Leslie Hook 5/29
- “China’s carbon emissions are on track to rise at their fastest pace in more than seven years during 2018, casting further doubt on the ability of the Paris climate change agreement to curb dangerous greenhouse gas increases, according to a Greenpeace analysis based on Beijing’s own data.”
- “The latest finding comes as climate researchers express concern over rising emissions in China, which accounts for more than a quarter of global carbon dioxide output.”
- “Global emissions were flat from 2014-16 but began rising again in 2017 as the Chinese economy recovered and as emission grew in the EU and the rest of Asia. Scientists are concerned the trend in China will continue this year.”
- “Although China has invested heavily in renewable energy such as wind and solar, a key reason for its emissions growth is rising demand for oil and gas due to increased car ownership and electricity demand.”
Agriculture
WSJ – Daily Shot: CBOT Corn (Dec) Futures 6/25
WSJ – Daily Shot: CBOT Soybean Futures (Nov) 6/25
Asia – excluding China and Japan
- “KPMG has said its annual audits of 1Malaysia Development Berhad from 2010 to 2012 were unreliable after information was withheld by former 1MDB managers, the scandal-hit fund said.”
- “’If the documents had been disclosed to the auditors, KPMG believed the information would have materially impacted the financial statements and the relevant audit reports,’ the fund said in a statement on Tuesday.”
- “The wealth fund, which was established in 2009 under then-prime minister Najib Razak, is the focus of a global corruption investigation, with authorities alleging that $4.5bn has gone missing.”
- “The allegedly omitted audit details came to light after the new government of Mahathir Mohamad — which won power in a stunning election victory in May — released an auditor-general’s report into 1MDB that had been classified under the previous administration.”
- “KPMG was sacked as 1MDB auditor at the end of 2013 after raising concerns about more than $2.3bn said to have been held in the Cayman Islands on behalf of the fund, according to an auditor-general draft report seen by the Financial Times in 2015.”
- “The accounting firm was unhappy because 1MDB would not share documents KPMG wanted to help it assess the fund’s financial activities linked to the Caribbean islands.”
Russia
Economist – Russia’s role in shooting down an airliner becomes official 5/30
- “It was an important demand, if one with little hope of success. On May 29th the Netherlands’ foreign minister, Stef Blok, insisted at the UN Security Council in New York that Russia ‘accept its responsibility’ in the downing of Malaysian Airlines flight MH17. The airliner was shot down by an anti-aircraft missile over Ukraine in 2014, killing 196 Dutch nationals, 38 Australians and 64 others. Last week a UN-mandated Joint Investigation Team (JIT), led by Dutch prosecutors, announced it had determined that the missile belonged to a unit deployed to the area by the Russian Army’s 53rd anti-aircraft brigade, presumably to help Russian-backed secessionists fighting the Ukrainian army.”
- “The Kremlin has always denied any involvement in the downing of MH17 or the war in Ukraine. (Asked about the JIT’s findings, Mr Putin responded, ‘Which plane are you talking about?’) Instead it has spread conflicting alternative theories blaming the Ukrainians, often backed up with demonstrably fake evidence. But the investigators’ dossier is voluminous. It includes photos and video taken by passers-by that track the convoy carrying the missile from its base near Kursk, in Russia, to the Ukraine border. The JIT also has the fuselage of what appears to be the missile itself, recovered near the crash site. The Netherlands and Australia now say they will hold Russia accountable for its role, and want negotiations on a settlement.”
If you were only to read one thing…
- “When oil collapsed in 2014 under the weight of US shale production, it ushered in a new-found belief that prices would remain ‘lower for longer’.”
- “The rampant new source of crude supplies was seen to be capable of meeting rising world demand almost single-handedly, obviating the need for extra Opec barrels ever again.”
- “As such, the concept of a ‘shale price band’ emerged of roughly $40 to $55 per barrel, reflecting the range within which the majority of US shale producers could turn a profit without the risk of the industry growing so fast that it would again flood the market. And for the better part of three years, from 2015 to 2017, oil prices traded in this range.”
- “But in 2018, this narrative has been slowly picked apart and is now in the process of disintegrating.”
- “While there has been breathless attention paid to prompt Brent prices climbing to $80 a barrel for the first time since 2014, what has received less attention is that the entire Brent forward curve is now trading above $60, including contracts for delivery as far out as December 2024.”
- “This development is an important psychological milestone for the oil market. The market is, in effect, saying that ‘lower for longer’ is dead.”
- “The reality is that US shale has been unable to meet rising global oil demand, which has averaged 1.7m b/d per year since 2014 — double the level at the start of this decade — and inventories have drawn down as a consequence, eliminating the buffer that had been built up.”
- “This inventory fall has been helped by strong demand growth and the Opec/non-Opec deal to curtail output since January 2017, which has since been superseded by rapid declines in Venezuelan and Angolan production and, more recently, non-Opec production outside of the US.”
- “The inevitable supply deficit is very worrying, with very limited spare production capacity available globally.”
- “Two main themes are now starting to impact investor thinking and drive the new-found interest in exposure to energy.”
- “First, recent supply data are finally reflecting the ill effects from under-investment due to the collapse in capital expenditure since 2015. The data are now showing accelerating decline rates across important suppliers such as Brazil, Norway and Angola.”
- “Second, the impressive strength in demand has been overshadowed in the past two years by the narrative dominated by electric cars.”
- “But slowly this has given way to a recognition that while electric cars will undoubtedly alter the trajectory for global oil demand in the long term, this trend will not reach critical mass in the medium term (the next five years) to sufficiently make up for the expected fall in oil supplies due to the lack of investment.”
- “So, even though expectations are for oil demand growth to slow from current levels, consumption will still be robust enough that — barring a major recession — the market will need new supplies to meet that growth.”
- “The physical oil market is only going to face greater strain ahead of the marine fuel specification change in 2020, which is set to boost demand for products such as diesel and ultra-low sulphur fuel oil by 2m to 3m b/d.”
- “As a result, we believe that oil prices may spike to above $100 per barrel, a price forecast we have held for the latter half of 2019 for three years now.”
- “The shale price band has been decisively broken and 2018 will be a watershed year: the market will realize that US shale alone cannot meet the world’s incremental demand growth and future prices must rise to re-incentivize long-cycle investments (or curtail demand).”
- “Nothing ever moves in a straight line, but the broader oil market is perhaps not prepared for what will happen to oil prices over the next couple of years.”
Perspective
Economist – Weather and violence displace millions inside borders every year – The Data Team 5/22
Worthy Insights / Opinion Pieces / Advice
- “The age of the unicorn likely peaked a few years ago. In 2014 there were 42 new unicorns in the United States; in 2015 there were 43. The unicorn market hasn’t reached that number again. In 2017, 33 new U.S. companies achieved unicorn status from a total of 53 globally. This year there have been 11 new unicorns, according to PitchBook data as of May 15, but these numbers tend to move around, and I believe the 279 unicorns recorded globally in late February by TechCrunch was the peak, where the start-up bubble was stretched to its limit.”
- “A recent study by the National Bureau of Economic Research concludes that, on average, unicorns are roughly 50% overvalued. The research, conducted by Will Gornall at the University of British Columbia and Ilya Strebulaev of Stanford, examined 135 unicorns. Of those 135, the researchers estimate that nearly half, or 65, should be more fairly valued at less than $1 billion.”
- “Don’t let the few recent successes in the 2017 IPO market fool you. After two years of stagnation in terms of the number of IPOs being filed in the United States — 275 IPOs (2014), 170 IPOs (2015) and 105 IPOs (2016) — deal counts have dropped to their lowest figure since 2012.”
- “Seventy-six percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to data compiled by Jay Ritter, a professor at the University of Florida’s Warrington College of Business, and recently featured in The New York Times. This is the largest number since the peak of the dot-com boom in 2000, when 81% of newly public companies were unprofitable.”
- “The current volatility and correction evolving in the private market will be amplified for companies that have yet to make money and are burning cash faster than they’re bringing it in. Growth at all costs will not weather an economic storm.”
- “Since the Snap IPO in March 2017 at $17 a share, when its shares surged 44% during its first day of trading, they have now declined to $11. Dropbox also went public. It had a first-day pop of 36%; however, with only 200,000 paying customers compared to its 500 million users, I would be hesitant to rush in to buy, even as it comes off that year-to-date high considerably. Another highly valued start-up, Blue Apron, went public at $10 a share in June and is now trading at $3. Remember Fitbit was a $45 stock in 2015 — it’s currently trading at just over $5.”
Economist – Markets may be underpricing climate-related risk 5/23
FT – Tanking currencies are bad news all round – Jonathan Wheatley 5/22
- “Currency wars give no edge to exporters but do cause economic harm.”
WSJ – Daily Shot: Bianco Research – Google Search Trends – Consumer Spending 5/23
WSJ – Daily Shot: Bianco Research – Google Search Trends – Consumer Difficulties 5/23
Markets / Economy
CNBC – Inflation is coming to the US economy on an 18-wheel flatbed – Jeff Cox 5/22
- “Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy.”
- “Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace. The measures are in the spot market, where vendors that don’t contract their deliveries find drivers for their products.”
- “Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain.”
- “Loads on the spot market in general are up 100% from the same period a year ago. Another measure, the flatbed load-to-truck comparison, which tracks the amount of vendors looking for flatbeds and is generally the highest of all truck types, is up 142%.”
- “The numbers by themselves, though, don’t indicate that inflation is ready to strike soon. Indeed, the most recent readings, such as the consumer and producer price indexes, show inflation pressures rising though relatively benign.”
- “But they do jibe with some other indicators showing inflation is rising beneath the surface.”
FT – US has more than 5,600 banks. Consolidation is coming – Ben McLannahan 5/22
- “The US’s banks have largely sat out the mergers and acquisitions wave of recent years. While deal records have fallen in almost every other sector, big banks have done almost nothing, shrinking rather than expanding. And merger activity among small and mid-sized banks — some 5,607 of them, at last count — has been subdued.”
- “But when Fifth Third Bancorp of Cincinnati revealed its $4.7bn swoop for Chicago’s MB Financial on Monday morning, shares in other Chicago-area banks began to move, too. Wintrust, a similar-sized bank based in Rosemont, Illinois, ended the day up almost 4%, while First Midwest of Itasca closed up 3%.”
- “The implications were obvious: after years of thin activity in bank M&A, this deal could mark a turn.”
- “The conditions for dealmaking look better than at any time since the financial crisis. Higher interest rates and lower taxes have pumped up bank profits, giving management teams stronger platforms from which to contemplate doing something radical.”
- “U.S. currency’s rally puts spotlight on weaknesses in a broad range of emerging-market assets.”
Real Estate
WSJ – Who Needs a Down Payment? Trade In Your Old Home Instead – Laura Kusisto 5/22
- “Opendoor offers to take the hassle out of selling an old home to buy a new one.”
WSJ – Daily Shot: John Burns RE – Home Builder Land Acquisitions 5/23
Energy
FT – The geopolitics of electric cars will be messy – Henry Sanderson 5/22
- “Oil has had a leading role in geopolitics over the past 100 years, sucking western powers into an often disastrous dependence on the Middle East.”
- “While black gold, as oil is sometimes known, is not always the overt cause of conflict, it is linked to between one quarter and a half of all interstate conflicts globally between 1973 and 2012, according to a 2013 study by Jeff Colgan of Brown University.”
- “But it would be a mistake to assume that geopolitical tensions will miraculously ease in a future in which renewable energy sources dominate. Building wind turbines and creating lithium-ion batteries requires metals and raw materials from those countries which are blessed, or potentially cursed, with them.”
- “And for some of these commodities, their high concentration in particular parts of the world sharpens the risks.”
- “A clean energy economy will require a staggering volume of metals to be prized from the ground.”
- “For example, Olivier Vidal of the University Grenoble Alpes estimates that to build the infrastructure for clean energy the amount of copper needed amounts to almost half the total mined since 1900.”
- “There is also the real risk that the age of the electric car will generate corporate monopolies, echoing those of Standard Oil whose founder John D Rockefeller cornered the oil market more than a century ago as the combustion engine took off.”
- “Glencore, the Switzerland-based and London-listed miner, is expanding its production of cobalt which is set to give it a 40% share of global supply by 2020.”
- “The production of lithium, a key ingredient for batteries in electric cars as well as smartphones, is controlled by just five companies.”
- “However, rather than tensions with the Middle East, the advent of the electric car will usher in greater friction with China. Beijing’s ambitions in clean energy are enormous.”
- “As part of the ‘Made in China 2025’ plan to advance high-end manufacturing, the government wants to establish a grip on the production of electric cars and clean energy technology.”
- “The rest of the year will provide further signs of the capital and scale that China is bringing to this competition.”
- “No one is giving China a free run at the metals that have emerged as central to electric cars.”
- “Trade tensions with US President Donald Trump are already brewing. This month his administration released a list of 35 minerals, including lithium and cobalt, that are ‘considered critical to the economic and national security of the United States.’”
- “Chile, which has the world’s largest lithium reserves, is looking to build battery components, while South Africa, a producer of vanadium, wants to produce electrolytes for vanadium batteries, which are used to store energy for the electric grid.”
- “Europe, too, is beginning to build its own giant battery factories to supply Germany’s car companies and the UK’s innovation agency has backed a study that uses satellites to look for lithium in Cornwall.”
- “The geopolitics of the era of the electric car are in their infancy. While it is unlikely to lead to military conflict, the tensions, especially with China, over who will control the resources and technologies that will underpin electric cars will be heightened.”
- “Over the long term, the winners are likely to be those countries and companies that can develop battery technology that relies on materials that are abundant rather than scarce. It might even help make the geopolitics a little less fraught.”
Finance
FT Alphaville – ‘Some of the worst covenants that we’ve ever seen’ – Alexandra Scaggs 5/21
Cryptocurrency / ICOs
Environment / Science
Axios – Next climate challenge: A/C demand expected to triple – Ben Geman 5/15
Construction
WSJ – Daily Shot: CME Lumber (Jul) Futures 5/22
Asia – excluding China and Japan
FT – Malaysia says it has been ‘bailing out’ 1MDB – Alice Woodhouse and Harry Jacques 5/22
- “Malaysia has paid almost RM7bn ($1.8bn) to service debt owed by 1MDB, the south-east Asian nation’s finance ministry said on Tuesday, as investigators ratcheted up their probe into the state investment fund from which $4.5bn is alleged to have gone missing.”
- “Two weeks after voters ousted the government of Najib Razak, the finance ministry said it had been ‘bailing out’ the 1Malaysia Development Berhad fund since April 2017, adding that another RM144m interest payment was due on May 30.”
- “The revelation ‘confirms the public suspicion that 1MDB had essentially deceived Malaysians by claiming that [the payments] have been paid via a ‘successful rationalization exercise’,’ the ministry said in a statement. ‘All the while it has been the MoF [ministry of finance] who has bailed out 1MDB.'”
- “Earlier on Tuesday, Malaysia’s new anti-corruption chief said he had been harassed and received a death threat after he pursued a 2015 investigation into 1MDB.”
India
FT – Oil price rise puts heat on Narendra Modi’s government – Amy Kazmin 5/22
- “In 2016 — as global crude oil prices fell to about $40 per barrel — India, which imports nearly 80% of its petroleum, levied new excise duties on petrol and diesel to stabilize prices and prevent a surge in demand.”
- “Since then, New Delhi has come to depend heavily on those revenues to shore up its fragile public finances, especially as receipts from the goods and services tax introduced last year have failed to stabilize at expected levels.”
- “But after global crude oil prices hit a four-year high of more than $80 per barrel last week, India’s fuel pump prices — for decades subsidized by the government and held artificially low — have jumped to among the highest in south Asia.”
- “Industry groups are pressing New Delhi to pare back excise duties on fuel, warning that the high prices will undermine an economy only now recovering from the successive disruption of a dramatic cash ban and the introduction of the goods and services tax.”
- “But any meaningful rollback to ease pressure on consumers will raise doubts over the ability of Mr Modi’s administration to meet its target of cutting the fiscal deficit to just 3.3% of gross domestic product.”
- “’India’s reliance on oil revenue has now surpassed the Malaysian government’s reliance on oil revenues — and Malaysia is an oil exporter,’ said Vikas Halan, senior vice-president at Moody’s Investors Service, the rating agency. ‘The government can always roll back excise duty — there is no one stopping them — but the issue is, how will they compensate for the loss of revenue?’”
- “Last year, excise duties on petroleum products, which are about a quarter of the retail price of petrol and diesel, accounted for 17% of New Delhi’s total revenue collection. For every R1 that the government pares back these excise duties, it will lose an estimated $1.8bn in revenues, or about 0.1% of annual GDP.”
- “Adding to the overall pressure is the recent weakening of the Indian rupee, which has fallen 6% this year to a 16-month low of Rs68.1 per dollar. Further depreciation will mean even higher local fuel prices. Bond markets are also jittery, with yields rising.”
South America
WSJ – Daily Shot: Black Market Exchange Rate – USD / Venezuelan Bolivar 5/23
Other Interesting Links
CNBC – The richest person in every state, according to Forbes – Emmie Martin 5/22
Worthy Insights / Opinion Pieces / Advice
Bloomberg – Middle-Class Doldrums Don’t Add Up to a Crisis – Noah Smith 5/9
- “The U.S. economy is back to normal again. Unemployment is low. Business investment is up. Wages are slowly rising. The traumatic memories of the Great Recession and the global financial crisis are finally beginning to fade.”
- “The absence of pressing crises means that it’s a good time to step back and take stock of deeper issues in the U.S. economic system. For several years, there has been a rising outcry over inequality… Adjusted for inflation, wages for production and nonsupervisory workers fell from their peak until the early 1990s, and haven’t yet climbed back to their former heights:”
- “But the story isn’t quite true. The average American has, in fact, seen modest gains since the early 1970s; the falling wages of production workers don’t tell the whole story.”
- “What explains the difference between wages and income? Two things. First, wages aren’t the only way Americans make money in the market. Income from assets, like retirement accounts and pensions, is increasingly important, as are nonwage compensation like employer contributions to retirement accounts. Second, the income numbers include government transfers, which have shifted more and more income from rich Americans to those who earn less in the market. These factors are all bigger than in the 1970s:”
- “Increased redistribution has been helping the poor as well as the middle class. Recent calculations by the Center on Budget and Policy Priorities show that child poverty in the U.S. has fallen to record lows once government assistance is taken into account.”
- “Meanwhile, gains in income haven’t come from increased toil. Despite women’s increased labor force participation, working-age Americans in 2014 tended to labor little more than their predecessors in the late 1970s:”
- “In fact, the working hours data makes the 2000s and 2010s look less awful in comparison to the ’80s and ’90s. Gains in those earlier decades came partly from women entering the workforce en masse. But those gains were preserved in recent decades despite Americans working fewer hours on average.”
- “It was during the early 1970s that total factor productivity growth began to slow down. It accelerated again in the 1990s and early 2000s, only to fall back to a crawl about the middle of that decade.”
- “It’s therefore possible to interpret the slower growth of Americans’ incomes as the result of slowing productivity. Inequality has certainly contributed as well, but increasing government transfers have helped cancel out some of that. But with slowing productivity growth, there’s simply less to redistribute than if productivity had maintained the torrid pace of the early and mid-20th century.”
- “Capitalism may not be in crisis, but it’s troubling that a few super-rich individuals have managed to amass vast fortunes even as productivity has stagnated. That is a phenomenon whose cause must be carefully investigated. For the typical American, gains in living standards have continued at a slow, steady pace. Increasing that pace should be a top priority.”
FT – Investors should be cautious of simplistic indices – Kate Allen 5/9
- “Poland’s upgrade to developed status shines a light on [an] outdated approach to classification.”
Markets / Economy
- “Germany’s Daimler and Japan’s three largest banks are set to become investors in SoftBank’s Vision Fund as the Masayoshi Son-led company looks to complete fundraising for its $100bn technology investment fund, according to people briefed on the matter.”
- “The Mercedes-Benz maker along with MUFG, Mizuho and Sumitomo Mitsui Banking Corp will be among the final investors in the fund, which is the largest ever created in private equity or venture capital, these people said.”
- “They added that other new investors will include Larry Ellison, the billionaire US co-founder of software group Oracle who is investing personally, and the sovereign wealth fund of Bahrain.”
- “Daimler and the Japanese banks are set to be among the smaller ones in the fund, alongside earlier participants such as Apple, Qualcomm, Foxconn and Sharp. About $88bn of the fund comes from SoftBank, Saudi Arabia and Abu Dhabi.”
- “Individuals close to the three Japanese banks said their decision to invest had a twin motivation: the quest for returns in Japan’s ultra low-interest environment and the desire to further strengthen their relationships with what is by far Japan’s most active corporate name.”
- “All the new investors will be participating under the terms of the fund’s unusual structure, which sees them receive 62% in preferred units paying out an annual coupon of 7% over the fund’s 12-year life cycle, and the rest with equity.”
- “SoftBank itself is the only investor that has full equity exposure, giving it the most upside to the fund’s investments in addition to the management and performance fees.”
- “SoftBank outlined on Wednesday in a presentation that it had spent $29.7bn of the Vision Fund since inception. It has placed bets on more than 30 companies including ride-hailing group Uber, shared-office provider WeWork and chipmaker Nvidia.”
Real Estate
WSJ – California Takes Big Step to Require Solar on New Homes – Erin Ailworth 5/9
Energy
FT – US oil producers battle to meet Iran shortfall – Ed Crooks 5/9
- “Pipeline constraints mean shale cannot come to rescue as sanctions push up prices.”
- “Inadequate transport capacity in the region is reflected in the soaring discount for oil in Midland, west Texas, compared with US benchmark crude. That discount hit $13 a barrel this week, meaning that while the easier-to-trade West Texas Intermediate was selling for about $70 a barrel, oil in Midland was just $57 a barrel.”
WSJ – Venezuela’s Brewing Oil Shock May Be Bigger Than Iran’s – Spencer Jakab 5/10
- “The oil headlines this week have all been about Iran, but the slowly unfolding disaster in Venezuela may be even more significant.”
- “Venezuela faces two risks that, if both come to pass, could cut its oil output by more than the biggest estimates of what could happen to Iran if sanctions were reimposed. The risks stem from Venezuela’s dependence on importing lighter varieties of crude to mix with the heavy oil it produces, and its need for products imported from the U.S. to enable its thick oil to be transported.”
- “The first situation is playing out in the Dutch-administered islands of Curaçao and Bonaire, where Venezuela’s state oil company owns refining and storage facilities. U.S. producer ConocoPhillips is attempting to take physical control of those facilities after winning an arbitration award against Venezuela for seizing its assets in 2007. Venezuela appears to be telling its suppliers not to ship oil to these facilities for fear ConocoPhillips will seize that too, potentially shutting down refining.”
- “The second situation would play out if the U.S. halts exports to Venezuela of a product called diluent, which allows the thick oil to be transported. Such a move would imperil half or more of the country’s remaining production. U.S. Vice President Mike Pence has already called the presidential election a sham.”
Finance
WSJ – Daily Shot: DISH Network Bond Price 5/19
Environment / Science
Economist – Climate change will affect developing countries more than rich ones – The Data Team 5/9
Construction
WSJ – Daily Shot: FRED – PPI Concrete Products 5/10
Asia – excluding China and Japan
Economist – Malaysia’s chance to clean up – Leaders 5/10
- “Elections in Malaysia are normally predictable. In fact, the United Malays National Organization (UMNO) and various allies had won all of them since 1955, until this week. Over the years UMNO has resorted to every conceivable trick to remain in power: stirring communal tensions among Malaysia’s ethnic groups, locking up critics, rigging the electoral system in its favor, bribing voters with populist handouts and threatening chaos if it lost. In the run-up to the election on May 9th it did all of that. It was testimony to the awfulness of the government of Najib Razak that the opposition was even in contention. And it is testimony to the good sense of Malaysian voters that the opposition won, convincingly, paving the way for Malaysia’s first ever change of government.”
- “For a country where politics has always been run along communal lines, the shocking upset holds out the prospect of a more meritocratic form of government. For the region, where rulers with authoritarian instincts have been steadily curbing political freedoms, it is a heartening victory for democracy. And for Mr Najib, who was accused by America’s Department of Justice of personally pocketing $681m looted from a Malaysian government agency, it is a welcome comeuppance.”
- “Sceptics note that it is led by Mahathir Mohamad, a former five-term UMNO prime minister who pioneered many of the underhand tactics to which Mr Najib resorted in his failed bid to remain in power. Dr Mahathir was also a champion of Malaysia’s odious system of racial preferences, which he expanded to keep Malay voters loyal to UMNO.”
- “Perhaps the new government will succumb to infighting and fail to get much done. But its very existence is a potent reminder to Malaysians and their neighbors that governments can and should, from time to time, change peacefully. With luck, Cambodians, Singaporeans, Thais and Vietnamese, among others, will begin to wonder if something similar might one day happen to them.”
China
FT – China credit spreads near 2-year highs on default worries – Gabriel Wildau 5/9
“China credit spreads hit their widest level in nearly two years this week following new regulations that undermined long-held assumptions about implicit guarantees on debt linked to local governments.”
FT – Hong Kong’s tycoons: handing over power in troubled times – Ben Bland 5/9
Perspective
WSJ – Daily Shot: Houston is on some the nation’s least absorbent soil 8/29
Worthy Insights / Opinion Pieces / Advice
NYT – Harvey, the Storm That Humans Helped Cause – David Leonhardt 8/29
FT – A happier Japan is a concern for investors – Leo Lewis 8/28
- “A record 74% of Japanese are satisfied with their lives, and, for the first time in two decades, a majority are content with their income, says a Cabinet Office survey.”
- “The trouble with all this reported satisfaction, from a market point of view, is that it has happened too early.”
- “One of the biggest fears is that a too-easily-pleased Japan will lose its hunger for serious reform and salary increases after a couple of years of superficial tinkering. That would undermine many of the big thematic investment cases that have been in place since 2013 — corporate governance reform, womenomics, unwinding of cross-shareholdings and inducing Japanese households to take more investment risk.”
- On top of that Japanese corporates are basking in the limelight again. “The danger is that, in the glow of public satisfaction they are tending back to the investor-repellent habit of hoarding cash away from the pockets of both their shareholders and employees.”
FT – China’s tech groups are building too much power – Henny Sender 8/28
- “There is no Silicon Valley comparison to the dominance of Alibaba and Tencent.”
Markets / Economy
FT – US home ownership fall hits young and minorities hardest – Lauren Leatherby 8/28
Energy
WSJ – Harvey’s Lessons for America’s Stretched Energy Infrastructure – Spencer Jakab 8/28
- “For more than 40 years, the U.S. has worried about the security of its oil supply. Hurricane Harvey is another reminder that the infrastructure that processes and delivers oil is in many ways more important.”
- “The U.S. has 141 operable oil refineries today, which is 79 fewer than 30 years ago. Those refineries have nearly 30% more capacity and are used much more heavily, about 90% on average over the past 12 months. The heaviest concentration is along the Gulf Coast where the industry has deep roots and has been allowed to expand. Harvey has temporarily knocked out about 15% of U.S. refining capacity.”
Finance
FT – Wall St’s top bankers sell own groups’ shares as Trump rally reverses – Ben McLannahan 8/27
- “Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening.”
- “Executives and board members at the top six US banks have been consistent sellers of their own banks’ shares this year, according to an Financial Times analysis of disclosures tracked by Bloomberg.”
- “Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett’s big dumping of shares in Wells in April, to avoid tripping over rules capping ownership by a non-bank, sales by insiders outnumber purchases by about 14 to one.”
- “That is an unusually long streak of net sales, across each of the big six. Last year, for example, insiders at JPMorgan, Citigroup and Bank of America bought more shares than they sold.”
Environment / Science
FT – Blue dogs of Mumbai expose poor pollution controls – Simon Mundy 8/28
- “Roaming packs of stray dogs are an established part of the landscape of Taloja, an industrial district to the north-east of Mumbai. But when a group of them turned blue this month, environmental activists sounded the alarm at this vivid evidence of industrial failure to adhere to proper standards of pollution control.”
- Photo from National Geographic
- “Investigation of the phenomenon by Mumbai’s pollution control board (MPCB) led it to a more prosaic explanation: the dogs had wandered into the grounds of a factory run by Ducol Organics, a local paint and plastic producer.”
- “The outcry over the colored dogs reflects rising concerns about pollution in India. A study in February by the US-based research group Health Effects Institute found that India was poised to overtake China as the country with the most deaths caused by air pollution.”
- “A study this year by researchers at the Indian Institute of Technology in Mumbai estimated premature deaths due to air pollution in Mumbai rose 62% to 32,014 between 1995 and 2015, outstripping the 41% population increase in the same period.”
- “In New Delhi — which according to some estimates has the worst air of any major city in the world — the estimated death toll rose 147%, to 48,651.”
Economist – Louisiana fights the sea, and loses 8/26
- “Between 1932 and 2010 the state [Louisiana] lost more than 1,800 square miles (470,000 hectares) of land to the sea, representing about 80% of America’s coastal erosion over the period. Recent losses have been especially severe because of an increase in big storms raging in from the Gulf of Mexico—such as Hurricane Katrina, in 2005, which led to the inundation of New Orleans and 1,836 deaths. Between 2004 and 2008 alone, Louisiana shrank by more than 300 square miles.”
- For reference to the Hawaii readers, Oahu is 597 square miles and Maui is 727 square miles.
- “According to a new report by RAND Corporation, a think-tank, infrastructure in the state worth up to $136bn could be threatened by land loss and increased storm damage, a related threat.”
- “Starved of silt, and with less new organic matter to counteract its settling, coastal Louisiana is sinking back into its former watery state. Meanwhile, because of melting polar ice caps and thermal expansion, the sea level is rising. In the past decade the observed relative sea-level rise in coastal Louisiana—a figure that combines the effects of rising seas and subsiding land—was over a centimeter a year, or around four times the global average. The delta’s system of land creation has thus been thrown into reverse. In 1930, despite much engineering of the Mississippi’s channel, Louisiana was expanding by almost a square mile a year. Since then, an area the size of Delaware has been lost to the Gulf.”
- One of the principal causes is due to the levees established by the Army Corps of Engineers along the Mississippi river to protect the flood basins back in the day. Trade-offs…
- “The damaging effect of the levees was predicted. Weighing the benefits of engineering the Mississippi in 1897, a former president of the American Society of Civil Engineers, E.L. Corthell, noted the need to take into account ‘withholding by the levees…of the annual contributions of sedimentary matters” and, because of this, ‘subsidence of the Gulf delta lands below the level of the sea and their gradual abandonment.’ But while he warned that “the present generation should not be selfish,’ Mr Corthell assumed the economic benefits of protecting the flood zone would ‘be so remarkable that people of the whole United States can well afford, when the time comes, to build a protective levee against the Gulf waters.’”
- “That illustrates two related weaknesses in much environmental policymaking: an assumption that future politicians will take a longer-term view than current ones, and an excessive willingness to discount the future costs of solving environmental problems caused today… In any event, it is doubtful such a scheme would be affordable or otherwise practical, considering the effects of rising sea levels and fiercer storms, both consequences of global warming…”
Britain
WSJ – Daily Shot: Datastream – UK Household Savings Ratio 8/29
- “UK’s households are struggling. With real wage growth in negative territory, the household savings ratio is collapsing.”
China
WSJ – Evergrande’s Ever More Risky Bet on Chinese Housing – Jacky Wong 8/28
FT – China orders videotaping of retail investment sales – Tom Mitchell 8/29
- “China’s banking regulator has issued new rules requiring financial institutions to make video and audio recordings of all investment product sales, saying they were needed to ‘further regulate market order and protect customer rights’.”
- “The recordings will also help state-owned banks and the government fend off compensation demands from retail customers when their investments turn sour.”
- “’If investors make irrational choices after sales staff have clearly explained the risks, then they will have to accept the consequences,’ said Zhao Xijun, a finance professor at Renmin University in Beijing. ‘In the event there is a dispute, the recordings can be used as evidence’.”
- “The new surveillance rules issued by the China Banking Regulatory Commission require financial institutions to preserve the recordings for six months after the relevant investment product has expired. Banks are also not allowed to market investments to customers who refuse to be recorded.”
- “The value of outstanding [Wealth Management Products] WMPs has soared from Rmb4.6tn ($690bn) at the end of 2011 to Rmb29tn last year, according to data from Wind Information. But year-on-year growth moderated in 2016 to 23%, compared to a 56% increase in the value of outstanding WMPs in 2015.”
- “Data for the value of WMP products sold this year are not yet available. In volume terms, Chinese financial institutions sold 43% more WMP contracts through August 25 compared to the same period a year earlier.”
FT – Huarong chief warns of bubble in China’s distressed debt market – Don Weinland 8/28
- “Bubbles in credit and real estate have led to a steady flow of bad debt in China for years. But now a bubble is forming in the market for the bad loans themselves, says the chairman of China’s largest state-controlled ‘bad bank’.”
- “Banks in China are dealing with an onslaught of non-performing loans that have resulted from poor risk controls and years of loose monetary policy. Investors estimate that China’s stock of bad debt has risen to $3tn this year, in step with a decelerating economy. One prominent analyst said recently that the figure could be as high as $6.8tn.”
- “As the pool of bad assets rises, so too has the number of Chinese investors willing to chase after bad debt portfolios.”
- “But many of the newcomers had little experience investing in distressed debt and were pushing up prices for the assets at auctions, said Lai Xiaomin, chairman of China Huarong Asset Management, and a deputy to the 12th National People’s Congress.”
- “Inexperienced investors presented the risk of creating new losses while also failing to resolve troubled loans, he said.”
- “China has experienced steady deregulation in how distressed debt is bought and sold since the industry was launched 18 years ago.”
- “Huarong, along with three other centrally controlled asset managers, was created by the ministry of finance in 1999 to absorb perilously high levels of bad debt from China’s largest commercial banks. At the time, the government directed banks to transfer $1.4tn to the four groups.”
- “Since then, the asset managers have greatly expanded their businesses in China and globally, operating more like investment banks than bad debt investors. Huarong went public in Hong Kong in late 2015.”
India
Economist – Undue reverence for company founders harms Indian firms 8/26
The shipping world is about to change with the opening of new Panama Canal locks. U.S. shale reserves: now you see me, now you don’t.
Headlines
- FT – Coal use plunges as China cuts back and US turns to gas 6/8. “Global consumption and production levels for coal plunged by the biggest amount since at least 1980, while prices fell about 20%.”
- FT – Struggling Chinese P2P lender offers to repay investors with baijiu 6/11. Chinatou.com which owes approximately $35m to 1,850 investors and is seemingly short on cash has offered to pay investors in baijiu (popular Chinese liquor) from an affiliated company.
- WSJ – German Benchmark Bond Yield Dips Below Zero 6/14. And that just happened… as of end of day Tuesday the German 10-year bund yield was just minus 0.008%.
- WSJ – China’s Suddenly Shrinking Corporate Bond Market 6/15. “China’s corporate bond market, one of the fastest growing sources of cheap credit, did something in May it hasn’t done in six years: It shrank.”
Briefs
- Kevin Buckland, Shigeki Nozawa, and Kazumi Miura of Bloomberg highlighted how many in Japan are taking to storing cash as the deflation mindset continues to nest.
- “About 40 trillion yen ($365 billion) in cash has piled up in homes across Japan, according to a Dai-ichi Life Research Institute estimate – equivalent to about 8% of GDP.”
- “What it means for 40 trillion yen to be sleeping under mattresses is that the deflationary mindset is deeply rooted, and Japanese have become hypersensitive to risk.” – Hideo Kumano, chief economist at Dai-ichi Life
- This of course has been a boon to safe manufacturers, with “sales of safes in March were up 86% from a year earlier, the highest level ever, according to government data.”
- Gabriel Wildau and Tom Mitchell of the Financial Times recapped how much China has spent recently to maintain confidence in the renminbi.
- “The People’s Bank of China has spent about $473bn in foreign exchange reserves since it surprised global markets last August by changing the way it sets its daily guidance rate for the currency, according to Financial Times estimates based on official data.”
- As a central bank official so aptly put it “the most important factor is confidence, both globally and within China. The cost of intervention in terms of reserves has been high but this policy can’t be evaluated just in terms of numbers. Once confidence is lost it can’t be easily restored. Then a lot of bad things can happen.”
- Shawn Donnan and Tom Mitchell of the Financial Times highlighted how concern over China’s corporate debt balances is spreading, even to the likes of the IMF.
- “China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned.”
- “Mr. Lipton (David Lipton – the IMF’s number 2) highlighted the state-owned enterprises, which he said were responsible for 55% of the corporate debt pile despite representing 22% of economic output and which ‘are essentially on life support.'”
- “While concluding the issue is ‘manageable’, he warned that a recent IMF estimate that put the potential losses for China’s banks from bad corporate loans at 7% of GDP was a conservative estimate that excluded exposures in the ‘shadow banking’ sector.”
- With declining investment yields the world over and an abundance of negative government debt, Attracta Mooney of the Financial Times points to how sovereign wealth funds have been piling into real estate to boost returns. As an aside, Yahoo Finance drew attention to a recent Urban Land Institute PricewaterhouseCoopers survey that indicated that many U.S. real estate pros are not as enthusiastic about U.S. property as their foreign counterparts.
- “State-backed investment vehicles, which are used by countries either to save for a rainy day or to provide money for future generations, increased their allocations to property by 29% last year, according to research looking at 77 sovereign funds with $8tn in assets.”
- “The push into property comes as interest rates have reached record lows, forcing investors into alternative asset classes in the search for better returns.”
- “Sovereign wealth funds posted average returns of 4.1% last year, despite having a combined target of 5.9%, according to Invesco, the asset manager that carried out the research.”
- “The study did not provide a breakdown of returns by asset class, but Norway’s fund said in March it had achieved 10% returns from its investments in property last year. Fixed income, in contrast, returned just 0.3%.”
- On an allocation basis, there is plenty of room for increased real estate commitments “property still accounts for a tiny proportion of sovereign funds’ portfolios: 6.5% last year, up from 4.1% in 2014, according to Invesco.”
- Data is data. Sometimes it’s good and other times not so much. Further, interpretation varies and can be misleading as the Economist points out in why the weak jobs report belies the resilience of the American economy.
- Despite the weak jobs report, things aren’t that bad in America. “Personal consumption, adjusted for inflation, is up by 3% in the past year, having surged in April.”
- The University of Michigan’s consumer-confidence index has been exceeding the average held during the 2003-2007 boom. “According to a recent Fed survey, 69% of Americans say they are ‘doing okay’ or ‘living comfortably’, up from 62% in 2013.”
Special Reports
- Mauldin Economics – Hot Summer Economic Weirdness – John Mauldin 6/11
- Value Walk – George Friedman – China is like Japan in 1989 (economically); China lost its competitive edge – Steve Blumenthal 6/10
Graphics
FT – Stocks under pressure as bond yields rise 6/10
FT – China spent $470bn to maintain confidence in renminbi – Gabriel Wildau and Tom Mitchell 6/12
Mauldin Economics – Hot Summer Economic Weirdness – John Mauldin 6/11
WSJ – German Benchmark Bond Yield Dips Below Zero 6/14
The Big Picture – Foreigners selling US equities at record pace – Torsten Slok 6/15
WSJ – China’s Suddenly Shrinking Corporate Bond Market 6/15
Visual Capitalist – The Shift to a Cashless Society is Snowballing – Jeff Desjardins 5/17
Bloomberg – China Dumping More Than Treasuries as U.S. Stocks Join Fire Sale 6/15
Featured
*Note: bold emphasis is mine, italic sections are from the articles.
Panama Canal, the Reboot. Alex Nussbaum, Naureen Malik, and Christopher Cannon. Bloomberg. 2 Jun. 2016.
“Nine years of construction work, at a cost of more than $5 billion, have equipped the Panama Canal with a third set of locks and deeper navigation channels, improvements that will double its capacity. When the new locks slide open for the first time in late June, the reverberations will be felt at Asian gas terminals, on Great Plains farms, and in ports from Long Beach, Calif., to Santiago, Chile.”
Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven. Asjylyn Loder. Bloomberg. 14 Jun. 2016.
“Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues, it was worth almost $15 billion at its 2012 peak.”
“Then came the bust. Almost half of Ultra’s reserves were erased from its books this year. The company filed for bankruptcy on April 29 owing $3.9 billion.”
“Proven reserves – gas and oil resources that are among the best measure of a company’s ability to reward its shareholders and repay its debts – are disappearing across the shale patch. This year, 59 U.S. oil and gas companies deleted the equivalent of 9.2 billion barrels, more than 20% of their inventories, according to data compiled by Bloomberg. It’s by far the largest amount since 2009, when the Securities and Exchange Commission tweaked a rule to make it easier for producers to claim wells that wouldn’t be drilled for years.”
For reference, after the 2009 rule change “reserves surged 67%” in the following five years based on the 53 companies with records that far back. “Almost half the gains came from wells that existed only on paper.”
“Drillers face pressure to keep reserves growing. For many, the size of their credit line is tied to the measure.” Thing is that “there are two ways to increase reserves: buy more or find more. Fracking made it easier to do the latter, and the industry lobbied the SEC to count more undeveloped acreage as proved reserves…”
“The SEC agreed, with two key limits. First, the wells must be profitable to drill at a price set by an SEC formula. The companies got a temporary reprieve for 2014 because the SEC number was about $95 a barrel even though crude had plummeted to less than $50 by the time results were reported in early 2015.”
“That advantage has disappeared.”
“The SEC also requires that undeveloped wells be drilled within five years of being added to a company’s books.”
Other Interesting Articles
The Economist
- Wenzhou’s economy – It once was lost: A city renowned for its business acumen battles to recover from a financial crisis
- Unyielding: Quantitative easing in the euro area enters a new phase
Bloomberg – Earth’s Heat Extends Unprecedented Streak of Shattered Records 6/16
FT – Nigerian economy drops further into freefall 6/8
FT – Chinese tourists search far and wide for Japan’s rare whiskies 6/9
FT – The hedge fund fee structure consumes 80% of alpha 6/11
FT – Why hasn’t the productivity crisis caused a bear market (yet)? 6/12
FT – Tax rises on foreign homebuyers in Australia 6/13
FT – Japanese government bond yields fall to fresh lows 6/13
FT – MSCI A-shares denial sends Beijing clear message 6/15
FT – Gold is no safe port in this storm 6/15
FT – Uber points to profits in all developed markets 6/16
Herald News – Wood tower at the University of British Columbia a game-changer for construction 6/14
NYT – A Russian Cybersleuth Battles the ‘Dark Ages’ of the Internet 6/10
NYT – At the Birthplace of a Graft Scandal, Brazil’s Crisis Is on Full Display 6/10
NYT – The Overinflated Fear of Being Priced Out of Housing (Robert Shiller) 6/10
WSJ – These Chinese Developers Shed Property in Name Only 6/10
WSJ – China’s Banks: How Fixing Problems Can Make Them Worse 6/10
WSJ – China Economy: That Sputtering Sound Returns 6/13
WSJ – MSCI and China: Why There’s No Fear of Missing Out 6/15
Yahoo Finance – Real estate pros see recession by 2017, survey shows 6/16