Tag: Corporate Profits

Some US Stock Market Perspective

Bloomberg – Don’t Expect the Roaring ’10s for Stocks to Repeat in the ’20s – Nir Kaissar 12/12/19

WSJ – Daily Shot: BlackRock – US Corporate Profits over the Business Cycle 1965-2019 12/12/19

December 20, 2017


Visual Capitalist – Visualizing the Money Made Per Second by Top Companies – Jeff Desjardins 12/18

NYT – A Bitcoin Hedge Fund’s Return: 25,004% (That Wasn’t a Typo) – Nathaniel Popper 12/19

  • “There are hedge funds with blockbuster returns. Then there is the Pantera Bitcoin Fund.”
  • “The fund — one of the first in the world to dedicate itself to virtual currencies — released its returns in a letter sent to investors on Tuesday. The figure for the life of the fund, which was set up in 2013, is eye popping: 25,004%.”
  • “A significant portion of the gains have come this year, thanks to the skyrocketing price of an individual Bitcoin, which hit $19,000 on Monday. (The fund’s 25,004% figure was actually counted back when Bitcoin was at $15,500, a week ago.)”
  • “Currently, the average price of one Bitcoin is about $18,007, according to Blockchain.info, a news and data site.”
  • “For comparison, the top performing hedge fund in the world last year returned 148%, according to Preqin, a hedge fund tracker. Since 2013, the Pantera Bitcoin Fund’s compound annual returns have been around 250%.”
  • “The Pantera Bitcoin Fund did not have to do much to get those returns. It just bought Bitcoins and held them as the price went up. Its performance is a reminder of the unprecedented gains that Bitcoin has experienced, with some analysts arguing that Bitcoin’s moves have been even greater than the movements of Dutch tulip bulb prices back in the 1600s.”

Worthy Insights / Opinion Pieces / Advice

WSJ – The Flawed Bull Case for Bitcoin – Aaron Back 12/19

  • “The bitcoin network can only handle a limited number of transactions per second, and is being overwhelmed by traffic.”

Real Estate

China’s HNA Group Seeking Sale of $6 Billion in Overseas Property – Wayne Ma and Julie Steinberg 12/18

  • “HNA, an airlines-to-hotels conglomerate that until a few months ago was aggressively scooping up assets around the world, is now trying to raise cash to pay off debt that helped fund over $40 billion worth of acquisitions since 2015. In recent weeks, the company’s liquidity has come under pressure and some of its borrowing costs have climbed.”
  • “HNA has earmarked roughly $6 billion worth of properties for sale, including prime office towers in Midtown Manhattan, London’s Canary Wharf and San Francisco’s Mission District, as well as resorts in French Polynesia and buildings in Australia, according to a person close to the matter.”
  • “The company owns about $14 billion worth of commercial real estate globally, according to Real Capital Analytics, and the assets being considered for sale make up a large portion of its overseas portfolio. HNA paid hefty sums for several of the properties as recently as 2016, such as the City Center, which also houses retail stores Marshalls and Brooks Brothers, as well as plots of land that Hong Kong’s old airport used to sit on.”
  • “HNA, which has assets of more than $140 billion and is based in the Chinese tropical island of Hainan, over the past two years has announced more than 80 deals, scooping up large stakes in Deutsche Bank AG, the Hilton hotel chain, and scores of other businesses. The group previously estimated it has over $100 billion in debt, about a quarter of which is coming due within a year.”
  • “HNA is looking to sell around 20 commercial properties, according to a person familiar with the matter. Some, such as an office building on Mission Street in San Francisco and 850 Third Avenue in New York City were bought as recently as 2016, according to Dealogic. Others, including a building at 1180 Avenue of the Americas in Manhattan that HNA earlier this year said it wanted to sell, have been in its portfolio for years.”
  • “Some market participants believe HNA overpaid for some of the assets, which could make it difficult to find buyers for the prices it wants. For example, HNA last year agreed to pay $3.5 billion for the plots of land at what used to be Hong Kong’s airport. One of the parcels was purchased at an 88% premium over a previous valuation.”
  • “The sale plans come as HNA’s borrowing costs have risen sharply and investors have grown concerned about the company’s ability to pay off tens of billions in debt coming due next year. While HNA Group is privately owned, the company has around a dozen listed subsidiaries and other units that have issued bonds. Shares and bonds of several HNA units have plunged in recent months, hampering their ability to sell new securities to raise funds.”
  • “Last week, the yield on a short-term HNA-related bond briefly surged above 20%, a worrying sign for the company and its investors.”


FT – ‘Retail apocalypse’ trade prompts contrarian bets – Miles Johnson 12/18


WSJ – The Worlds’ Top Banana Is Doomed and Nobody Can Find a Replacement – Lucy Craymer 12/18

  • The headline is a little over the top; however, the Cavendish banana is under threat from a fungus and finding a replacement or beefing up the Cavendish is no easy task.

Other Interesting Links

WP – This angry inventor has a special gift for package thieves: Revenge – Cleve R. Wootson Jr. 12/19

October 3, 2017


WSJ – U.S. Families’ Wealth, Incomes Rose, Fed Survey Says – Harriet Torry 9/27

WSJ – Daily Shot: International Labor Organization – Regional Prevalence of Modern Slavery 10/2

Economist – At least 58 people are killed and 515 injured in a shooting in Las Vegas 10/2

Economist – High-net-worth individuals 9/30

  • Those with at least $1m in investable assets, excluding their main home.

Economist – Obituary: Stanislav Petrov 9/30

  • “‘The man who saved the world’ was 77.”

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Taking Financial Advice From a Lottery Winner – Ben Carlson 10/1

FT – Rajoy faces huge task after Catalonia independence referendum – Tony Barber 10/1

  • “After Catalonia’s chaotic, disputed referendum on independence, Mariano Rajoy, Spain’s prime minister, will have to display political skills of the highest order. Sunday’s illegal vote has drastically polarized Catalonian society. It has fueled tensions between the region’s government and the authorities in Madrid to an intensity unseen since Spain’s return to democracy in the late 1970s.”
  • “Mr Rajoy faces an extraordinarily difficult task. He is adamant that it is his government’s fundamental duty to uphold the law and preserve the integrity of the Spanish state. Yet the police’s use on Sunday of batons and rubber bullets to disrupt the referendum risks deepening the confrontation and putting off the moment when Madrid and the Catalonian authorities sit down to find a way out of the impasse.”
  • “In principle, the most sensible way for Madrid and Catalonia’s authorities to defuse the tensions is to open a dialogue on an upgraded form of regional self-government. Luis de Guindos, Spain’s finance minister, hinted at such a solution two weeks ago when he aired the possibility of more financial autonomy for Catalonia. Yet he made it clear that the push for independence had to stop. It is a price many secessionists, for now, seem unwilling to pay.”

Economist – How digital devices challenge the nature of ownership 9/30

  • “In America this idea has already taken root in the ‘right to repair’ movement… In France appliance-makers must tell buyers how long a devices is likely to last – a sign of how repairable it is. Regulators should foster competition by, for instances, insisting that independent repair shops have the same access to product information, spare parts and repair tools as manufacturer-owned ones-rules that are already standard in the car industry.”

Markets / Economy

FT – Asia’s multinationals are hoarding cash like never before – Nikkei Asian Review 10/1

  • “Welcome to the slow-growth world, where China’s gross domestic product is expanding at the slowest rate in a quarter of a century and the global economy has stumbled through five subpar years. For eastern and western companies alike, finding good investments in this environment is anything but easy. Hence all the hoarding.”


WSJ – Why Chinese Are Diverting Their Consumer Loans to Real Estate – Grace Zhu and Chao Deng 9/30

  • “China’s government hoped more household borrowing would help the economy become more consumer-oriented. But instead of shopping, many Chinese are spending the money on real estate, undermining Beijing’s efforts to cool that market.”
  • “Chinese banks, encouraged by policymakers, have recently been lending more to households as companies sink perilously deep into debt. At first banks did this with mortgages; this year they have stepped up short-term consumer loans.”
  • “But signs are emerging that such loans, rather than funding such middle-class trappings as cars, household appliances or gadgets, are instead flowing to China’s stubbornly hot property market, padding home purchases when mortgage loans aren’t enough.”
  • “New short-term consumer credit surged 160% to 1.27 trillion yuan ($193 billion) in the first eight months of the year from the year-earlier period, according to data from the People’s Bank of China, the central bank. However, growth in consumption as measured by retail sales rose just 10.4% in August, in line with recent years.”
  • “E-house China R&D Institute, an independent Chinese research firm, estimates that at least one third of short-term consumer loans issued since March have gone toward property purchases.”
  • “With few investment options—domestic stocks are volatile and considered too risky, and China strictly controls capital moving out of the country—consumers see property as a fail-safe avenue for storing their wealth.”
  • “Mortgages form the lion’s share of household debt, which now accounts for the equivalent of 46% of China’s gross domestic product, compared with 17% in 2008, and 33% of outstanding bank credit, up from 18% a decade earlier.”
  • “China’s savings rate is still high compared with the West. However, Chinese households now owe the equivalent of 98% the average annual income, according to data from the Washington-based Institute of International Finance—on par with their counterparts in the U.S., the European Union and Japan, at 102%, 104% and 100% respectively.”


FT – India exporters struggle with Modi’s new tax system – Kiran Stacey 10/1

  • “Narendra Modi’s push to boost Indian exports is being undermined by the problems plaguing his government’s new tax system, companies have warned, with tens of thousands of exporters struggling to meet their short-term funding needs.”
  • “In September, it emerged that businesses lodged claims for tax credits worth nearly $10bn for the first month of the GST — far greater than ministers had been expecting.”
  • “As they look to increase tax revenues, officials have delayed paying credits to exporters, who have to pay their tax and then claim the cash back under the new system. Under the old regime, exporters did not have to pay tax at all on the supplies they bought.”
  • “‘Small and medium exporters are finding it especially tough, as they are not able to take out bank loans to fund their working capital while they wait for tax credits to be paid,’ Ajay Sahai, director-general of the Federation of Indian Export Organizations (FIEO), said.”
  • “Mr. Sahai estimates there are about 100,000 small and medium-sized exporters, up to 40% of which are now facing difficulties.”
  • “Meanwhile economic growth has also slowed, falling from 7% at the end of 2016 to just 5.7% for the quarter ending on June 30.”

September 27, 2017

If you were to read only one thing…

Bloomberg Businessweek – Ronaldo Is Hawking One of the World’s Riskiest Derivatives – Donal Griffin 9/20

  • The product: Contracts For Difference (CFDs)
  • “CFDs, called ‘a volatile form of gambling’ by an Irish judge in 2014, make up one of the last bastions of opaque, lightly regulated financial speculation in Europe. The contracts, which allow investors to bet on the direction of stocks, bonds, currencies and commodities without buying the underlying assets, aren’t traded on public exchanges and are largely prohibited for retail customers in the U.S. They’ve surged in popularity across Europe since 2010, triggering concerns of regulators, who say customers don’t grasp the risks involved.”
  • “Regulators from the Central Bank of Ireland to Polish markets watchdog KNF are now circling the CFD industry, and several countries have imposed leverage caps, limits on client losses and marketing restrictions. Cyprus (where most of the operators are based) introduced rules last year requiring CFD firms to offer a default leverage amount of no more than 50 times and limit client losses. Still, investors can get more if they ask for it and pass a firm’s ‘appropriateness test,’ according to a statement from the regulator, known as CySEC, which declined to comment further.”
  • “CFD users in Spain lose money 82% of the time, according to a study by the regulator that found about 31,000 traders in the country lost 142 million euros ($170 million) over a 21-month period ended in September 2016, including transaction costs. Other regulators have reported a similar percentage of losing bets.”
  • “Javier Paz, an analyst with Aite Group LLC in Boston who tracks the industry, estimates that European traders have lost about $2.1 billion on the derivatives over the past 15 years.”
  • “‘This is like a casino, and it looks very dangerous,’ Patricia Suarez, president of the Association of Financial Users in Madrid, which campaigns against abusive banking products, said of CFD trading.”
  • “One reason for the losses, regulators say, is the borrowed funds that CFD firms offer investors to magnify their bets. The leverage allows customers to deposit a small percentage of the total value of their trades. The CFD firm funds the remainder of the bet at a specified rate of interest. Trading this way can result in inflated profits, but the client can lose more than his deposit if the market moves even slightly in the wrong direction.”


Axios – The large parts of America left behind by today’s economy – Kim Hart 9/25

  • “U.S. geographical economic inequality is growing, meaning your economic opportunity is more tied to your location than ever before. A large portion of the country is being left behind by today’s economy, according to a county-by-county report released this morning by the Economic Innovation Group, a non-profit research and advocacy organization. This was a major election theme that helped thrust Donald Trump to the White House.”
  • Key findings:”
    • “New jobs are clustered in the economy’s best-off places, leaving one of every four new jobs for the bottom 60% of zip codes.”
    • “57% of the national rise in business establishments and 52% of employment growth from 2011-2015 were in prosperous areas.”
    • “Most of today’s distressed communities have seen zero net gains in employment and business establishment since 2000. In fact, more than half have seen net losses on both fronts.”
    • “Half of adults living in distressed zip codes are attempting to find gainful employment in the modern economy armed with only a high school education at best.”
    • “The healthier the economy, the healthier the person — people in distressed communities die five years earlier.”

FT – Millions mired in poverty as US upturn passes them by, study finds – Sam Fleming and Lauren Leatherby 9/25

  • “More than 50m Americans live in districts that are mired in a ‘deep ongoing recession’, with falling employment and a shrinking business base, according to a report that highlights the fractured nature of the US recovery.”
  • “According to research from the Economic Innovation Group think-tank, one in six Americans resides in a zip code it defines as a ‘distressed community’. These are areas with a falling number of businesses and in which the local population has low median income, poor labor force participation, high levels of poverty and low educational achievement.”

WSJ – Then and Now: The Big Shift at Work – Lauren Weber and Stephanie Stamm 9/2

  • “The biggest share of companies’ output still goes to workers, but that share is shrinking as companies spend less on both employee compensation and capital investment. Meanwhile, investors are getting three times the payout they did 30 years ago.”

Worthy Insights / Opinion Pieces / Advice

NYT – Tyranny of the Minority – Michelle Goldberg 9/25

The Registry – Leaving Retail – John McNellis 9/26

Markets / Economy

RIAA – U.S. Sales Database: Recorded Music Revenues by Format 9/25

VC – Economic Might by U.S. Metro Area – Jeff Desjardins 9/26

Real Estate

WSJ – E-Commerce Mania Spreads To Warehouse Market – Esther Fung 9/26

  • “E-commerce is setting off a scramble for industrial real estate near urban centers, giving landlords of once-unglamorous properties a chance to push up rents to record levels.”
  • “A well-located last-mile facility ‘has the functional equivalent of a high-end retail store,’ said Hamid Moghadam, chairman and chief executive officer of industrial real-estate investment trust Prologis Inc. Such facilities are productive for the tenant and reduce transportation and labor costs.”
  • “When a company is shipping to individual customers rather than in bulk to stores, most of their costs are in transportation and labor, and reducing them is a priority, said Eric Frankel, an analyst at real-estate research firm Green Street Advisors. Warehouse rent, by contrast, represents just 5% or so of costs in a supply chain.”
  • “Modest levels of new warehouse supply are coming onto the market at a time when some e-commerce companies are expanding rapidly. Amazon is now the largest tenant of Prologis, Duke Realty Corp. , Jones Lang LaSalle Income Property Trust and DCT Industrial Trust by percentage of rental revenue at year-end 2016, according to S&P Global Market Intelligence.”

Environment / Science

Bloomberg Businessweek – Climate Change Could Dampen Argentina’s Recovery – Jonathan Gilbert 9/19

Asia – excluding China and Japan

WSJ – Bali Volcano Eruption ‘Imminent,’ Nearly 50,000 Flee – Ben Otto 9/25

  • “The number of people fleeing a rumbling volcano no the Indonesian resort island of Bali rose to nearly 50,000, with the country’s disaster agency saying an eruption appears imminent after a half-century of calm.”


FT – WhatsApp messaging service hit by full blockage in China – Hannah Kuchler 9/25

  • “WhatsApp suffered a complete blockage in China this week, prompting suggestions the government was cracking down on the Facebook-owned messaging app ahead of the Communist party congress next month.”

Bloomberg Pursuits – The World’s Best Caviar Doesn’t Come From Russia Anymore – Kate Krader 9/18

September 2 – September 8, 2016

Whoa, that’s a lot of corporate debt… So, who is going to pay for China’s corporate debt balance? High Yield Bond Market decoupling from reality.



    • “The ‘Japanization’ of the global economy marked by transition to low growth and low inflation has started to attract investor attention as a phenomenon in recent years. There has been scarcely any nominal GDP growth over the past 20 years in the Japanese economy.” – Daiju Aoki, analyst at UBS Japan
    • “Demographics are triggering the lack of GDP growth. As a society ages, its population becomes more dependent on government services and less productive in terms of generating goods and services.”
    • Japan’s peak worker to dependent ratio was in 1990.
    • ValueWalk_UBS working-age population ratio_9-2-16
    • “Mr. Kuroda, governor of the BoJ since 2013, claimed the central bank’s policies ‘have contributed significantly to the positive turnaround in Japan’s economy’ and said there was no chance of reducing the level of monetary accommodation.”
    • “‘It is often argued that there is a limit to monetary easing but I do not share such a view,’ Mr. Kuroda told an audience in Tokyo. He said there was ample room for the BoJ to buy more government bonds, to cut interest rates further, or to buy other assets such as corporate bonds, equity and real estate funds.”
    • “Yet despite the high level of monetary stimulus, the latest date show a 0.4% fall in the consumer price index compared with a year ago, and a slowdown in inflation even excluding volatile food and energy prices.”
    • FT_Japan core inflation rate_9-4-16
    • “Mr. Kuroda argued that the failure to hit 2% inflation so far is because of three shocks: falling oil prices since summer 2014, weakness in demand after raising Japan’s consumption tax in April 2014, and a slowdown in emerging markets from summer 2015.”
    • “Given that, said Mr. Kuroda, ‘it is imperative for the Bank firmly to maintain its commitment to achieving the price stability target of 2% at the earliest possible time.”
    • “Please don’t buy so many bonds, Mr. Central Banker. It is rapidly becoming a case of ‘too much of a good thing’.” – Hans Lorenzen, credit strategist at Citi Research
    • FT_Citi - Central bank balance sheets_9-5-16
    • Private investors are being crowed out…
    • FT_Citi - Private investors being crowded out_9-5-16
    • And markets are being driven by macroeconomic policies more and more…
    • FT_Citi - Macro driven markets_9-5-16
  • Brian Blackstone and Tom Fairless of the Wall Street Journal posed the question: Could the European Central Bank start buying stocks?
    • As the European Central Bank (ECB) is running up against its self-imposed limits on how much of a country’s debt it can hold and since there simply aren’t enough bonds they can buy that qualify under their guidelines, the ECB is contemplating buying European equities.
    • “Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.”
    • The Bank of Japan holds ¥10.182 trillion (approx. $98 billion) of “individual stocks and exchange-traded funds as of Aug. 20, in terms of book value.”
    • Though “economists have been split over the costs and benefits. Some say that Japan’s capital market can no longer accurately price the value of stocks; too much BOJ money has flown into some specific companies. Others say it has helped prop up share prices, thus producing ‘wealth effects’ to help the economy fight deflation.”
    • Interesting times.
    • “Since Hanjin Shipping Co. of South Korea filed for bankruptcy protection there last week, dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world because of uncertainty about who would pay docking fees, container-storage and unloading bills. Some of those ships have been seized by the company’s creditors.”
    • According to Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen, “43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.”
    • WSJ_Hanjin shipping containers_9-7-16
    • All told about $14 billion worth of cargo is stranded at sea with the crews running short on rations…

Special Reports / Opinion Pieces


Fidelity – Five scenarios for stocks – Jurrien Timmer 8/25

Fidelity_Five scenarios for stocks_8-25-16

FT – Emerging markets on track to set sovereign debt record – Elaine Moore 9/4

FT_Emerging market sovereign bond issuance_9-4-16

FT – Brazil hopes gambling will reverse its fortunes – Samantha Pearson 9/5

FT_Gambling losses per resident_9-5-16

WSJ – Now Companies Are Getting Paid to Borrow – Christopher Whittall 9/6

WSJ_European investment grade corporate debt_9-6-16

FT – Why emerging market bonds are not the answer for the yield-starved – Jonathan Wheatley 9/6

FT_Emerging market sovereign debt yields_9-6-16

FT_Amount of tradable external debt_9-6-16

FT – Inflation-linked gilt returns have gone through the roof – Joel Lewin 9/6

FT_Inflation-linked gilt returns_9-6-16

FT – Three things that could derail the eurozone’s recovery – Mehreen Khan 9/7

FT_Probability of US recession_9-7-16


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

China: the former EM darling. James Kynge. Financial Times. 1 Sep. 2016.

“For most of the last 15 years, China was a darling for emerging market investors as its demand for commodities lifted the economic fortunes of countries in Latin America, Africa and Asia. But now, as China struggles with the hangover from its debt-fueled boom, fund managers are increasingly shunning Asia’s giant.”

“The main deterrent is China’s corporate debt. Although this issue has been well-flagged in recent years, disquiet over its size and sustainability is deepening. A recent report by S&P Global Ratings, the rating agency, estimates that China’s total outstanding corporate debt in 2015 was $17.8tn, or 171% of GDP, making China’s corporate debt mountain by far the world’s largest in both absolute and relative terms.”

“Not only is the ratio of Chinese company debt to GDP more than double that in the US and eurozone, it is projected to grow far more quickly as an increasing number of heavily-indebted corporations ramp up their borrowing simply to repay debts that are coming due. By 2020, China’s outstanding corporate debt will be $32.6tn, while its share of global company borrowings will have risen to 43% from 35% last year, according to S&P estimates.”

FT_Chinese companies carry the riskiest debt load_9-1-16

“The S&P report estimates that $13.4tn, or nearly half, of total credit demand in China by 2020 will be for refinancing purposes.”

FT_Chinese company debt_9-1-16

While there are many differences of opinion as to how this shakes out, with either a major meltdown or some internal growing pains (and everything in between), we shall see.  Either way, keep an eye on this one.

Does It Matter If China Cleans Up Its Banks? Michael Pettis. Mauldin Economics. 31 Aug. 2016.

This article really follows the one above and I highly recommend reading the whole thing.

Let me try and paraphrase: imagine you’re a new company and you want to take on debt to help you grow the business. Okay, sounds good and it works.  The additional debt allows you to buy assets that help you to become more productive and hence grow sales/profits faster than the amount of debt and its associated servicing costs.  Boom, you’re a hero and making lots of money.

So you do this some more and some more and some more. Eventually, your rate of productivity slows for every piece of debt you take on.  Oh and did I mention that because you’ve been rolling over the debt to really juice growth, now your debt balance is quite a bit bigger than your total sales.

Fortunately, your cost of debt is low and you can keep on operating, but your lender is no longer willing to extend you credit, so you start talking to your suppliers to provide you with “credit-like” loans – meaning, hey why don’t you front me some money to buy more products from you and I’ll pay you back once I sell the goods to my customers.

Okay, this keeps on working, but eventually you’re running out of good options so you start looking for your highest possible rate of return projects regardless of the risk… ‘Come on lucky number 7.’

Oh and as to the debt, well, you’ve accumulated so much of it that it has become the lender’s problem and it’s such a big problem that it’s also their depositors’ problem (your mom and pop savers).

So what do you do and who is going to take the ‘haircut’…

The High Yield Bond Market Has Never Been This Decoupled From Reality. Tyler Durden (alias). Zero Hedge. 3 Sep. 2016.

From JPMorgan’s Peter Acciavatti: “Recovery rates in 2016 are extremely low… for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%… As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%.”

Zero Hedge_JPM - High-yield bond recovery rate_9-3-16

From Edward Altman of NYU’s Stern School of Business: “Our approach to recovery rates is not centered on sectors. What we’ve looked at carefully over 25 years is the correlation between default rates and recovery rates. As you would expect, when the former rise to high or above-average levels, you always observe the latter dropping to below-average levels. This strong inverse relationship is as much a function of supply and demand as it is of company fundamentals. So if we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default.”

Zero Hedge_High Yield Recovery Rate and Pricing_9-3-16

“In the 30-year life of the so-called junk bond market, the chasm between reality and central-planner-created markets has never been wider.”

Bottom line, despite being able to collect less and less on defaulting debt (meaning you would ordinarily be less eager to buy more high yield debt or at least want greater compensation for the risk), pricing for high yield debt continues to rise…

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Another Sign Manhattan Real Estate Is Feeling the Pain 8/31

Bloomberg – Saudi Arabia Said to Weigh Canceling $20 Billion of Projects 9/6

CoStar – Blackstone’s New Non-Traded REIT Begins Selling Shares 9/7

Economist – That 2008 comparison (again) 9/6

FT – Pension solution lies in long-term thinking 8/30

FT – HK property developer hangs hopes on art market 9/3

FT – Shanghai divorces highlight China’s property conundrum 9/4

FT – Why negative interest rates sometimes succeed 9/5

FT – Bank of Japan: great expectations 9/5

FT – Analysts laud ‘remarkable’ pick-up in emerging markets 9/5

FT – China banks shed staff and slash pay in cost-cutting drive 9/6

FT – Rocket’s writedown raises red flags 9/6

InvestmentNews – Ex-CFO at REIT formerly controlled by Nicholas Schorsch indicted 9/8

NYT – Sonia Sotomayor and Elena Kagan Muse Over a Cookie-Cutter Supreme Court 9/5

NYT – Subprime Lender, Busy at State Level, Avoids Federal Scrutiny 9/6

WSJ – Bank of Japan’s New Unease With Negative Rates 9/5

WSJ – The Problem With Dividend Stocks 9/5

WSJ – Why Chinese Bank Stocks Can’t Fly Too High 9/6

WSJ – How China Insurance Crackdown Could Rain on Deal-Making Parade 9/7

WSJ – Europe’s Bond Market: Even Further Through the Looking Glass 9/7

WSJ – Goldman Sachs Has Started Giving Away Its Most Valuable Software 9/7


August 26 – September 1, 2016

A novel way of paying off debt – issue more of it, the savings are already accruing. It’s official, Nigeria is in a recession.



    • “Stock valuations rise and fall, but when an important factor driving market performance is mathematically unsustainable, it is worth a closer look.” Specifically corporate dividends.
    • “Aswath Damodaran, a professor at New York University’s Stern School of Business, sees this as the market’s biggest risk. Mr. Damodaran, who is considered an authority on valuation, says S&P 500 companies through the first two quarters of the year collectively returned 112% of their earnings through buybacks and dividends. That is the highest since 2008 and well above the 82% average over the past 15 years, he said in a blog post last week.”
    • “Mr. Damodaran, who likes to be provocative, says with rates this low, traditional valuation metrics are distorted. Instead, the inability of companies to keep paying off their investors will cause the next downturn. ‘This is the weakest link in this market,’ Mr. Damodaran said in an interview. ‘We know cash flows will go down. What we don’t know is what the market is pricing in.'”
    • WSJ_S&P 500 corporate dividends_8-28-16
    • “The rise of third-party mobile payments in China at the expense of credit and debit cards is threatening commercial banks’ access to the customer data viewed as crucial to newly emerging financial and consumer business models.”
    • Further UnionPay, the state-owned settlement network, and other rank and file banks are missing out on the merchant fees that these third-party platforms are redirecting.
    • “The move by more Chinese consumers to switch from swiping plastic cards to scanning QR codes with mobile wallet apps knocked $20bn from banks’ fee income in 2015, according to Kapronasia, a Shanghai-based fintech consultancy.”
    • While the fees hurt, the key is that third-party payment providers are “depriving lenders of valuable data on consumption patterns.”
    • FT_China payments moving online_8-28-16
    • China’s big-state lenders are making a shift in their lending portfolios from commercial loans to property.  “China Construction Bank (CCB) this week reported residential mortgage lending rose almost 30% in the first half of this year compared with the same period last year. Meanwhile corporate lending fell 2%. At Bank of China, mortgages rose by more than a quarter.”
    • “On the face of it, banks are moving away from risky lending. That helps their capital cushions because for every loan extended to a company, banks assign a 100% risk-weight. For residential mortgages, banks only have to set aside half that.”
    • Of course, it helps that residential prices are rising; however, “lending into the property market would make more sense if the mortgage loans weren’t going bad so fast. At CCB, while mortgage nonperforming loans accounted for only 6% of total NPLs, they rose 67% on the year compared with 26% for all loans. And that’s with prices rising nationally, and rising sharply in the biggest cities.”
  • Leo Lewis and Lucy Colback of the Financial Times covered an interesting development in how the Bank of Japan is distorting the Japanese stock indices through their massive fund flows.
    • “From July 29, when the Bank of Japan said it would nearly double its annual purchases of exchange traded funds from ¥3.3tn ($32bn) to ¥6tn, brokers in Tokyo have been selling stocks with a simple, unsettling message.”
    • “In an equity market where the central bank is the biggest whale, and where the government in various forms has become the biggest shareholder in a quarter of First Section Tokyo stocks, it’s time to buy the fund flows, not the fundamentals.”
    • FT_Stocks with highest indirect ownership by BoJ_8-30-16
    • “Goldman Sachs estimates that the doubling in BoJ buying coupled with the skew towards Nikkei weighting means that the central bank will own at least one-tenth of the equity in 32 companies by this time next year, up from five currently.”
    • “The BoJ, according to its current schedule, must buy an average of ¥70bn worth of ETFs every three trading days throughout the year.”
    • Helicopter money…

Special Reports / Opinion Pieces


FT – Puerto Rico: An island’s exodus –  Eric Platt 8/25

FT_Puerto Rico's exodus_8-25-16

Visual Capitalist – Which Countries Are Damaged Most by Low Oil Prices? – Jeff Desjardins 8/26

Visual Capitalist_Which countries hurt the most by low oil prices_8-26-16

WSJ – Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants 8/29

WSJ_Food price deflation_8-29-16

WSJ – China’s Private Investment Crash May Be Mirage, but Pain Is Still Real 8/28

WSJ_China fixed-asset investment_8-28-16

Visual Capitalist – Do Newly Built Skyscrapers Signal The Top of the Stock Market? – Jeff Desjardins 8/29

Visual Capitalist_Skyscraper curse_8-29-16


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

Falling bond yields save taxpayers $500bn. Eric Platt. Financial Times. 31 Aug. 2016.

“The collapse in sovereign bond yields has saved taxpayers more than $500bn in annual interest expenses, allowing countries to rein in budget deficits and continue government-backed programs that would have otherwise been shelved, according to a new report.”

As of the end of last week there was $13.2tn of debt with negative yields.

“Japan, France, Germany and Switzerland are now paid to issue short-dated sovereign bonds.”

“Benefits have effectively been transferred from global investors to sovereign issuers, as sovereign borrowing costs have dropped. Should rates remain low for an extended period, it would likely erode earnings power for many large investment institutions and pension funds.” – Robert Grossman, analyst with Fitch, a rating agency

The median 10-year government bond now yields 1.17%, down from 3.87% five years ago. Japan has saved more than $95bn a year as a result of the decline in rates, while the US, UK and Germany collectively pay $104bn less annually, the study estimates.”

“Central banks have cut interest rates more than 670 times since Lehman Brothers filed for bankruptcy in 2008, or roughly one reduction every three trading days of the year, according to JPMorgan.”

FT_Central bank stimulus weighs on sovereign bond yields_8-31-16

Nigeria falls into recession as economy shrinks in second quarter. Maggie Fick. Financial Times. 31 Aug. 2016.

Nigeria has slipped into recession for the first time in more than two decades as growth in Africa’s top oil producer shrank for the second consecutive quarter.”

“The economy contracted 2.1% in the three months to the end of June, worse than analysts expected, while inflation hit a 11-year high of 17.1%, underlining the depth of the west African nation’s crisis.”

“Nigeria, which depends on petrodollars for 70% of state revenues and 90% of export earnings, has been battered by the slump in oil prices. The economy shrank 0.4% in the first three months of the year and the International Monetary Fund is forecasting that growth in 2016 will contract 1.8%.”

“The central bank increased the main interest rate by 200 basis points last month in an attempt to combat inflation, but it rose for the ninth consecutive month in July.”

“The continent’s most populous nation was one of the world’s fastest growing economies during the oil boom, but Mr. Buhari (President Muhammadu Buhari) said this month that Nigeria ‘suddenly appears to be a poor country.'”

FT_Nigeria GDP growth_8-31-16

It’s currency is having difficulties as well, “in the official market, the naira is trading below N300 to the dollar, having lost more than 40% of its value since its peg was lifted in June (to ease the country’s quickly depleting reserves of hard currency), but on the black market the currency is far weaker – it has been trading at below N400 to the dollar this week.”

FT_Nigerian Naira currency to the USD_8-31-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – J.C. Penny Aims to Be King of the Mall as Rivals Retreat 8/25

CoStar – Disparity in Mall Values Driven by Powerful Combination of Forces 8/31

Economist – Grim employment prospects for young people around the world 8/26

FT – How the super-rich are making their homes ‘invisible’ 8/24

FT – Chinese banks braced over industrial restructuring 8/28

FT – Mexico spends $1bn to lock in oil export prices for 2017 8/29

FT – Apple’s EU tax dispute explained 8/29

FT – DBS sells $750m in cocos at record-low yield 8/30

FT – Chinese future looms for Hong Kong’s real estate sector 8/30

FT – China turns away from the market 8/31

Inhabitat – The world’s tallest timber building was just topped off ahead of schedule 8/26

National Real Estate Investor – 2016 Could Signal a Cyclical Peak in Commercial Construction 8/25

NYT – Today’s Inequality Could Easily Become Tomorrow’s Catastrophe 8/26

NYT – Crackdown on For-Profit Colleges May Free Students and Trap Taxpayers 8/28

Zero Hedge – “I’ve Never Seen Anything Like This Before” – The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing 8/28

WSJ – Which State Is a Big Renewable Energy Pioneer? Texas 8/29

WSJ – Housing Market: Why Millennials Are Getting Priced Out 8/29

WSJ – What Happens When a Central Bank Buys Property Stocks 8/30

WSJ – Shopping Malls’ New Product: Fun 8/30

WSJ – Chinese Cash Pours Into U.S. Real Estate 8/30

WSJ – Emerging Markets: Catch the Yield Where You Can 8/31

WSJ – Birth of the Index Mutual Fund: ‘Bogle’s Folly’ Turns 40 8/31


May 20 – May 26, 2016

Venezuela about to become a formal dictatorship. Container shipping industry going through one of its (if not the worst) downturns. A handful of US tech companies are flush with cash.



    • “The plunge in yields on corporate and sovereign bonds in Europe and Asia – the value of bonds with a negative yield is nearly $10tn, according to Fitch – has sent investors racing into the US market.”
    • “The hunt for yield is very high.” – Bob Michele, chief investment officer at JPMorgan Asset Management
    • “The inflows have suppressed corporate borrowing costs at a time when new debt issuance is accelerating…”
    • “More than $900bn of corporate bonds have been sold in 2016, including $411bn in the US, according to Dealogic. Seven of the 20 largest bond offerings of the year have been completed this month alone.”
    • “The latest figures for the loans-to-bonds swap, and the debt-to-equity swap initiated last year, show a subtle bailout is already under way.”
    • “Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.”
    • So far this year the number of swaps has hit $220bn at the end of April, up from approximately $120bn at the beginning of March, according to Wind Information.
    • “Up to Rmb1tn ($152bn) has also been approved for a debt-to-equity swap, which forces banks to write off bad debt in exchange for equity in ailing companies, according to Caixin, a respected business news website.”
    • “The Opec member’s gold reserves have dropped almost a third over the past year and it sold over 40 tones in February and March, according to IMF data. Gold now makes up almost 70% of the country’s total reserves, which fell to a low of $12.1bn last week.”
    • “The IMF forecasts the economy will shrink by 8% this year, and 4.5% in 2017, after a 5.7% contraction in 2015. Inflation is forecast to exceed 1,642% next year, fueled by printing money to fund a fiscal deficit estimated at about 17% of GDP.”
    • Remember that Venezuela has larger crude reserves than Saudi Arabia…
  • One of the articles from the print edition of the Economist this week profiled the rapid rise of the insurance industry in China and how the regulators are implementing measures to keep things from getting out of hand.
    • “Assets managed by insurers have doubled in less than four years to 13.9 trillion yuan ($2.1 trillion). Their revenues from selling policies have accelerated, climbing 42% year-on-year in the first quarter of 2016. Most remarkable has been the increase in their workforce. Over the past six months alone, they have added 2m to their sales force. They now employ some 7.2m people, up 120% since the start of last year. Put another way, roughly one in every 50 workers in Chinese cities is selling insurance products.
    • “The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products.”
    • In an effort to curb speculative behavior, regulators have “barred insurers from selling products with maturities of less than one year and began to phase out those with maturities of less than three years.”
    • “The heyday of rapid expansion by opportunistic firms is over, predicts Lee Yuan Siong of Ping An Insurance, one of China’s biggest providers. ‘The government saw the danger early enough before it got out of control.’ If the new rules work, insurers will need to focus on persuading people to buy their policies for protection rather than as an investment. That is a safer bet, but a harder sell.”

Special Reports


Selfstorage.com – Inside America’s Gig Economy (and how to work it) – Alexander Harris 5/17

Selfstorage.com_The Gig Economy_5-17-16

FT – Triple A quality fades as companies embrace debt 5/24

FT_Near extinction of the US AAA company_5-24-16

FT – US productivity slips for first time in three decades 5/25

FT_US productivity slips_5-25-16

Economist – Insurance in China: Safe or sorry? 5/21

Economist_Insurance in China_5-21-16


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

Venezuela: Trouble on the streets – The country is poised between chaos and dictatorship. Economist. 21 May 2016.

Over the next month, expect Venezuela to become a dictatorship or the current regime will be overthrown.

Currently the government forces are blocking all routes to the National Electoral Council (CNE) to keep any opposition/protestor group from being able to submit a petition that would initiate a process to recall the embattled president (Nicolas Maduro) through a referendum.

“Almost 70% of Venezuelans want Mr. Maduro to leave office this year, according to a recent poll… Venezuela is suffering the world’s deepest recession.”

“After the May 18th protests he (Maduro) threatened to supersede the current economic state of emergency (announced five days earlier) with a ‘state of internal commotion'” which would give the government the “…ability to impose something closer to military rule across the country.”

“Mr. Maduro has already indicated that he will govern without regard to the National Assembly, which came under the control of the opposition after elections last December. ‘It is a matter of time before it disappears,’ he said blithely at a press conference on May 17th.”

The thing is that while opposition politicians are seeking to appeal to the military’s sense of deference to the constitution, Maduro and his predecessor Chavez make sure and made sure that the military is generously compensated while the rest of the country suffers.

“Venezuela’s neighbors are appalled by the prospect that the country might implode. They may not be able to stop it.”

Container shipping lines mired in crisis. Robert Wright. Financial Times. 19 May 2016.

“The industry (container shipping), a vital link in the world’s supply of manufactured goods, is suffering what could well turn out to be the deepest and longest downturn in its 60-year history.”

FT_Container shipping earnings_5-19-16

“Container shipping lines have made a series of investments in new, giant vessels, and this glut of capacity has sent freight rates tumbling. The Shanghai Containerized Freight Index – one of the few public sources of information on what lines are charging to ship a container – last month reached the lowest level since its inception in 1998.”

“Over the next few years, [container shipping is] a sector that’s going to really get slammed,” says Ron Widdows, a shipping consultant and former chief executive of Neptune Orient Lines, the Singapore-based line.”

Consolidation and cooperation (alliances) are common place as container lines are seeking to achieve better efficiencies to cut costs.

FT_Container shipping alliances_5-19-16

“This month, three Japanese lines – Mitsui OSK, K Line and NYK – outlined plans to form a new alliance with Hapag-Lloyd, South Korea’s Hanjin Shipping and Taiwan’s Yang Ming, to be known as The Alliance.”

“CMA CGM announced last month it was forming a new partnership, called the Ocean Alliance, with China Cosco, Taiwan’s Evergreen and Hong Kong’s Orient Overseas Container Line.”

This is all to compete against the P2 Alliance of the two largest container fleets of Maersk Line and Mediterranean Shipping Company.

“In the first quarter of 2016, Maersk generated $1,857 of revenue for each 40ft container it carried on its ships, 25% less than one year earlier, and $203 below the average cost of moving each box.”

FT_Container shipping expanding faster than trade_5-19-16

US companies’ cash pile hits $1.7tn. Eric Platt. Financial Times. 20 May 2016.

“Apple, Microsoft, Alphabet, Cisco and Oracle had amassed $504bn of cash by the end of 2015, nearly a third of the total $1.7tn held on the balance sheets of US non-financial companies, according to a new report from rating agency Moody’s.”

FT_US corporate cash_5-20-16

“It is the first time the top five cash hoarders have been made up exclusively of tech groups, an industry that generates more of its sales abroad than any other sector and one that has been embroiled in tax disputes in both the US and Europe.”

“The ever increasing amount of cash also highlights how US boardrooms are reticent to invest in their businesses, choosing instead to increase dividends, in a sign of the continued anxiety that economic activity could still slow at home or in China.”

“Apple accounted for more than a tenth of the total cash reserves, holding $216bn, 93% of which is overseas.”

FT_US Top 20 cash rich cos_5-20-16

“But the rising cash piles mask a rapid increase in debt.”

“Total debts rose nearly $850bn last year to $6.6tn, a separate report from S&P showed, which put overall cash levels in the US at a slightly higher $1.8tn. While cash had increased by about $600bn over the past five years, obligations surged by $2.8tn.”

“While the top 25 cash hoarders hold cash in excess of their obligations, the cash-to-debt ratio fell to 12% for low-rated junk companies. In 2010, that figure stood above 20%.”

“‘Companies aren’t exactly flush with cash,’ S&P analyst Andrew Chung added. ‘As the credit cycle ages, rates rise and macroeconomic growth slows, that’s when companies in the bottom 99% who levered up [could have] funding issues.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Sugar Is So Scarce in Venezuela That Coca-Cola Will Stop Production 5/23

FT – Elizabeth Warren slams Uber and Lyft 5/19

FT – China reopens securitized bad-debt market 5/19

FT – Hanergy founder resigns one year after stock plunge 5/20

FT – Liquid alternative mutual funds leave investors disappointed 5/22

FT – Negative interest rates fuel record Japan share buybacks 5/23

FT – Triple A quality fades as companies embrace debt 5/24

FT – Regulators accuse Swiss bank BSI over 1MDB scandal 5/24

FT – Investing in China debt? Do not forget to factor in the politics 5/24

FT – US fracking bust sparks surge in car debt 5/24

FT – Olivier Blanchard and Adam Posen believe a recovery is on track 5/25

FT – Viacom’s battle is a warning to Silicon Valley 5/25


April 22 – April 28, 2016

Even Apple isn’t immune to Chinese oversight. China debt load is piling high. Retailer existential crisis.



    • Despite the growing number of bond defaults in China, “the fact is that China has the tools to manage these ‘defaults’ one way or another. As UBS’s Wang Tao has said, ‘the country’s high domestic saving, under-developed capital markets, government ownership  of banks and many larger borrowers, and relatively closed capital account mean that no one can easily ‘pull the plug’ on its credit cycle.'”
    • “More broadly, not much has changed in China in recent months…it remains a big, slowing economy, with a lot of debt, and all other things equal remains a deflationary force on the global economy (keeps commodity prices much lower than recent years). And most likely China continues to follow Japan in 1990s…periodically nasty for global financial markets but most of the time domestic policy keeps any problems local, and as with Japan it very rarely has a big negative impact on global growth. Latter changes of course with a genuine credit crunch.” 
  • While Keohane has a point, it doesn’t mean that toxic debt is anything other than that as Anjani Trivedi points out in the Wall Street Journal Why China Will Struggle to Turn Toxic Loans into Beautiful Bonds.
    • “The People’s Bank of China said recently one of its top priorities for the year is to advance a program to let banks securitize toxic loans into asset-backed securities, a type of bond. Unlike subprime bonds that triggered the financial crisis in the U.S., the banks openly acknowledge the loans are terrible before the bond is created.” 
    • “The last rub is that the banks will be managing the loans that make up these new securities. If they couldn’t work them out when they were on their balance sheets, investors should wonder what will make them be able to when they are packaged in a bond.”
  • Further, don’t forget about accounts receivables… Gabriel Wildau with the Financial Times highlights the growing amounts of unpaid bills from receivables.
    • “Listed companies had to wait a median 70 days to receive payment last year, the longest delay in 14 years, as cash flows tightened amid slack final demand. That compares with a median 60 days in 2014 and 46 days in 2011, according to Wind Information, a Chinese financial database.” 
    • “Ms Yu (Shanghai Caison Color Material Chemical) says that an increasing share of customers now insist on paying with a bankers’ acceptance rather than cash. Similar to a postdated check, bankers acceptances are a kind of IOU from a company and its bank. Ms Yu says that a few years ago, 5 to 10% of her sales were paid this way, but that has now risen to 20 to 30%. Most cannot be cashed for 90 or 180 days.”
    • “It looks like liquidity is very ample, but a lot of that is being used to help the real estate sector refinance. It’s not circulating widely through the economy.” – Shao Yu, economist at Oriental Securities in Shanghai.
  • Sorry if it feels like I’m harping on China here…not intentional.  Edward Wong of the New York Times points to a new set of rules that will restrict operations of foreign Non-Government Organizations (NGOs) in China starting January 1, 2017.
    • “More than 7,000 foreign nongovernmental groups will be affected, according to state news reports.” 
    • “Foreign groups working across Chinese civil society – on issues including the environment, philanthropy and cultural exchanges, and possibly even in educations and business – will now have to find an official Chinese sponsor and must register with the police.
    • “Those organizations that do not receive official approval will be forced to stop operating in the country. Many groups will probably curtail or eliminate programs deemed politically sensitive, such as training lawyers, in order to remain.”
    • “The new law is the latest in a series of actions taken by Mr. (President) Xi against the kind of Western influences and ideas that he and other leaders view as a threat to the survival of the Communist Party, such as an independent judiciary and media.”
    • “The most draconian aspect of the earlier drafts remained, despite widespread outcry from foreign groups and governments. It requires that foreign nongovernmental organizations register with the Ministry of Public Security and allow the police to scrutinize all aspects of their operations, including finances, at any time.”
    • “The law states that any employee of such a group can be interrogated at any time.”
  • Back to the U.S… John Authers of the Financial Times drew attention to the rising use of debt by U.S. corporates over the past few years for stock buy-backs and acquisitions that are starting to be more of an issue now that earnings are stalling.
    • “According to Andrew Lapthorne of Societe Generale, the reality is that “US corporates appear to be spending way too much (over 35% more than their gross operating cash flow, the biggest deficit in over 20 years of data) and are using debt issuance to make up the difference.” The decline in earnings and cash flows in the past year has accentuated the problem, and brought it to the top of investors’ consciousness.” 
    • “A further issue is the uses to which the debt has been put. As pointed out many times in the post-crisis years, it has generally not gone into capital expenditures, which might arguably be expected to boost the economy. It has instead been deployed to pay dividends, or to buy back stock – or to buy other companies. Shifts in these uses of cash are now affecting markets.”

Special Reports

  • Knowledge @ Wharton – PIMCO’s Former CEO Mohamed El-Erian on the ‘Delusion of Liquidity’ 4/21
    • “In a world where you’re facing this T junction, you need three things. You need resilience. You need agility. And you need optionality. And I go through them in the book – resilience, agility, and optionality. The only thing that gives you these three things is cash. So suddenly cash becomes a part of the strategic asset allocation, which again is putting conventional wisdom on its head.” 


FT – SOE you think you can default? – David Keohane 4/21

FT_Source of Chinese bond money_4-21-16

FT_Accumulated shadow banking defaults - China_4-21-16

FT – China debt load reaches record high as risk to economy mounts – Gabriel Wildau and Don Weinland 4/23

FT_China debt woes - annual change_4-23-16

FT_China debt ratio_4-23-16

FT – Alphaville: “What if China lands hard?” they asked in 2013 – David Keohane 4/27

FT_Credit Expansion in China_4-27-16

FT – Unpaid bills add to China debt problems as receivables mount – Gabriel Wildau 4/26

FT_China accounts receivables_4-26-16

FT_China cash conversion cycle_4-26-16

FT – Alarm over corporate debt and stalled earnings 4/27

FT_Net Debt to Operating Cash Flow_4-27-16


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

Apple Services Shut Down in China in Startling About-Face. Paul Mozur and Jane Perlez. New York Times. 21 Apr. 2016.

Not only did Apple just have its first quarterly fall in sales in 13 years, but business is getting tougher for the corporate innovator in China – which is why legendary investor Carl Icahn just dumped his entire stake.

“Last week, Apple’s iBooks Store and iTunes Movies were shut down in China, just six months after they were started there.”

“China’s pushback against Apple shows that the company may finally be vulnerable to the heightened scrutiny that other American tech companies have faced in recent years.”

As reported by Xinhua, the state-run news service, President Xi is quoted as saying “China must improve management of cyberspace and work to ensure high-quality content with positive voices creating a healthy, positive culture that is a force for good.”

The news is the news.  Content is both good and bad…

“Since the Snowden leaks, China’s state media identified eight American companies that it has labeled guardian warriors and that it has said were too deeply established in the country’s core industries such as energy, communications, education and military.”

“Sales in China for those companies, including Cisco, IBM, Microsoft and Qualcomm, have slid as government oversight has increased. Some have grappled with raids, investigations and fines. Some have also been pressured to sell of holdings, hand over technology and work with local partners to expand their China business.”

“Though Apple is one of the eight, it has had a much easier time.”

“Apple’s recent battle with the F.B.I over unlocking an iPhone for a terrorism investigation is unlikely to help it in China. Chinese lawyers have pointed out that the country’s antiterrorism law requires companies to help with decryption when the police or state security agents demand it for investigating or preventing terrorist acts.”

China debt load reaches record high as risk to economy mounts. Gabriel Wildau and Don Weinland. Financial Times. 23 Apr. 2016.

In case you were wondering why Keohane felt the need to clarify why China has the tools to handle its debts, consider that “Beijing has turned to massive lending to boost economic growth, bringing total net debt to Rmb163tn ($25tn) at the end of March (237% of GDP according to the FT).”

“While the absolute size of China’s debt load is a concern, more worrying is the speed at which it has accumulated – Chinese debt was only 148% of GDP at the end of 2007.”

“New borrowing increased by Rmb6.2tn in the first three months of 2016, the biggest three-month surge on record and more than 50% ahead of last year’s pace, according to central bank data and FT calculations.”

“Economists say it is difficult for any economy to deploy productively such a large amount of capital within a short period, given the limited number of profitable projects available at any given time.”

For comparison, according to the Bank for International Settlements (BIS), Chinese debt at 249% of GDP, is “broadly comparable with the eurozone’s figure of 270% and the US level of 248%.”

“Economists widely agree that the health of the country’s economy is at risk. Where opinion is divided is on how this will play out.”

“At one end of the spectrum is acute financial crisis – a ‘Lehman moment’ reminiscent of the US in 2008, when banks failed and paralyzed credit markets. Other economists predict a chronic, Japan-style malaise in which growth slows for years or even decades.”

For those that believe in the likelihood of an acute financial crisis, a key concern is the amount of credit expansion that has occurred through high-yield wealth management products.  For the Japan-style scenario people point to the sheer amount of reserves the country has and the high savings rates of Chinese citizens.

Though, “it is wrong to assume that ‘too much debt’ is bad only if it causes a crisis, and this is a typical assumption made by almost every economist,” according to Michael Pettis, a professor at Peking University’s Guanghua School of Management.  Pettis points out “the most obvious example is Japan after 1990. It had too much debt, all of which was domestic, and as a consequence its growth collapsed.”

Department Stores Need to Cull Hundreds of Sites, Study Says. Suzanne Kapner. Wall Street Journal. 24 Apr. 2016.

Highlighting the existential crisis that the retail industry is facing is a report just put out by Green Street Advisors.  Essentially, “department store need to close hundreds of locations (roughly 800 or about 1/5 of all anchor space in U.S. malls) if they want to regain the productivity (sales per sq. ft.) they had a decade ago.”

“Sears Holdings Corp. alone would need to close 300, or 43%, of its Sears stores to regain the sales per square foot it had in 2006, adjusted for inflation, according to Green Street.”

WSJ_Department Store Excess Capacity_4-24-16

“Sales at the nation’s department stores averaged $165 a square foot last year, a 24% drop since 2006, according to company disclosures and Green Street estimates.”

But department stores are loathe to close physical locations considering many stores still make money, the physical locations facilitate their online sales within the same market, and when they do close stores it doesn’t mean that the same shoppers then migrate to their other retail channels.

“It may be unrealistic to expect that department stores could ever return to historical levels of sales or profits given the changing dynamics of retailing. Many retailers say they make less money selling goods online than they do in their physical stores. And with the Internet making it easier for consumers to comparison shop, discounts have become the norm.”

“The store glut has important implications for the country’s weaker malls, which rely on their anchors to drive foot traffic. ‘If department stores were to move forward and aggressively streamline their physical presence it could result in several hundred malls no longer being relevant retail destinations.’ – DJ Busch, senior Green Street analyst.”

Other Interesting Articles

The Economist

Bloomberg – Blackstone Weighs Opening Up Real Estate to Individual Investors 4/21

Bloomberg – Japan Post to Fight Negative Rates With Shift to Risk Assets 4/21

FT – China’s debt: not a cheap American copy 4/21

FT – Europe should forget Google and investigate its own shortcomings (Michael Moritz) 4/22

FT – Caterpillar says business in Brazil has ‘basically tanked’ 4/22

FT – US Reits: a sector to buy in May and then enjoy the summer 4/24

FT – Fund star Sudhir Nanda warns of threat to human role in finance 4/25

FT – Ant Financial raises $4.5bn in record fintech private placement 4/25

FT – China to unroll nationwide soil pollution survey 4/25

FT – Japan’s negative rate experiment is an alarm bell for the US 4/25

FT – Nigeria’s import curbs drain life from bustling Lagos ports 4/26

FT – Daniel Loeb warns of hedge fund ‘killing field’ 4/27

InvestmentNews – Schorsch’s AR Global looking to consolidate $10.5 billion of REITs 4/26

Mauldin Economics – Xi Jinping Takes Command of the People’s Liberation Army 4/25

NYT – Renewable Energy Stumbles Toward the Future 4/22

NYT – Fantasy Math Is Helping Companies Spin Losses Into Profits 4/22

NYT – Jimmy Buffett’s ‘Margaritaville’ Is a State of Mind, and an Empire 4/23

NYT – Don’t Blame Silicon Valley for Theranos 4/27

ValueWalk – Carl Icahn Dumps Entire Apple Inc. (AAPL) Stock, Blames China 4/28

WSJ – Everyone Wants a Raise – Except Investors 4/22

WSJ – Alphabet’s Next Big Thing: Building a ‘Smart’ City 4/26

WSJ – No One Believes It, but Inflation Is a Pretty Good Bet 4/27

WSJ – Chinese Property Giant Evergrande Invests in Financial Folly 4/28

WSJ – The U.S. Homeownership Rate Falls Again, Nearing a 48-Year Low 4/28

Zero Hedge – Why Goldman Expects The Japanese Yen To Collapse Within 12 Months 4/24


February 19 – February 25, 2016

China’s media censorship. Life insurance companies face a daunting future. S&P earnings not quite so. Commercial real estate values in limbo.

Some weeks I wonder if there will be enough quality material to post and then there are weeks like this one when there is a deluge.  I am going to focus on four themes, three that apply to everyone and one that is specific to commercial real estate.  1) The New York Times provided some great coverage this week highlighting Beijing’s increased censorship of the media, first in Edward Wong’s “Xi Jinping’s News Alert: Chinese Media Must Serve the Party” and second in Edward Wong and Neil Gough’s “As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush”, 2) was an article in The Economist “The fallout from low interest rates (2): The lowdown” that highlights the effect low and negative interest rates are having on life insurance companies, 3) is a must read by Justin Lahart “S&P Earnings: Far Worse Than Advertised” in The Wall Street Journal, and 4) for the commercial real estate professionals is Tracy Alloway’s Morgan Stanley Says U.S. Commercial Real Estate Price Growth Will Be Flat in Bloomberg.

Other items that are worth a mention (there is quite a bit this week):

  • World trade records biggest reversal since crisis in 2008. “The value of goods that crossed international borders last year fell 13.8% in dollar terms – the first contraction since 2009 – according to the Netherlands Bureau of Economic Policy Analysis’ World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies.”
  • Jamil Anderlini of the Financial Times wrote a great article around the theme of recessions following development of ‘the world’s tallest tower’ in The Chinese chronicle of a crash foretold.
    • “Today, some analysts describe the Chinese real estate market as the single most important sector in the global economy – and the biggest risk factor. This is less fantastic than it sounds when you consider that in two years – 2011 and 2012 – China produced more cement than the US did in the entire 20th century.
    • “The building boom of recent years has led to enormous excess inventory but the true scale is impossible to estimate because developers and local governments are offered incentive to under-report the problem.”
    • “An outright decline in real estate investment, which is surely coming, will also have profound implications for the rickety, debt-laden Chinese financial system. Analysts estimate that more than 60% of Chinese bank loans are directly or indirectly tied to real estate.”
    • “According to officials in several Chinese cities, their solution is to break ground on entirely new districts and to offer land to “better quality” property developers at marked down prices. The hope is that developers will abandon the existing empty blocks, and build higher quality apartments that can be sold to consumers for big discounts because of the lower land costs.”
    • Never mind the write offs and losses that would have to take place on the unused buildings. Question: are they completely uninhabitable or is really a matter of demand?
  • The Buttonwood column in The Economist does a good job of pointing out one of the larger problems of the weak markets.
    • “Since the crisis commercial banks seem to have retreated from their market-making role. The impact of this shift has been disguised by the huge amounts of liquidity injected by central banks. But as central banks scale back their support, the underlying investors (pension funds, insurers, hedge funds and the like) will have to rely on each other to act as willing buyers and sellers. That seems highly likely to result in more volatile markets than in the past, especially when the outlook for the economy is unclear. Buckle up.”
  • A good but somewhat sad read in the NYT, Reporting on Life, Death and Corruption in Southeast Asia.
  • If you want to scare yourself… China’s Ticking Time Bomb: A Runaway Banking System Bloated With Hidden Bad Loans and Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread
  • Lastly, all commercial real estate professionals, especially those on the retail side of the business should read Weak Holidays Force Retailers to Shrink, Rethink Web

Interesting graphics:

From The Economist, all is not well in Hedge Fund land.

Economist_Hedge funds_2-25-16

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

Xi Jinping’s News Alert: Chinese Media Must Serve the Party. Edward Wong. The New York Times. 22 Feb. 2016.

As China’s economy downshifts to a ‘new normal,’ the party heads in Beijing are finding the media to be a thorn in their side particularly when it relates to information that isn’t positive.  Thus…

All news media run by the party must work to speak for the party’s will and its propositions, and protect the party’s authority and unity” – Xi Jinping, according to Xinhua, the state news agency.

Mr. Xi also wants to curb the presence of foreign media companies. Last week, government agencies announced a regulation that would prevent foreign companies from publishing and distributing content online in China. That could affect Microsoft, Apple and Amazon, among others.”

Hardly seems sporting.

“An essay in China Daily, the official English-language newspaper, offered an explanation on Monday about why Mr. Xi was unveiling his policy now.

“It is necessary for the media to restore people’s trust in the party, especially as the economy has entered a new normal and suggestions that it is declining and dragging down the global economy have emerged,” the essay said.

“Some political analysts note that Mr. Xi’s attempts to impose total control over the media say as much about his personal insecurities as they do about any Marxist-Leninist ideological vision that he holds.

“The most important thing is for him to announce his absolute authority,” said Zhang Lifan, a historian. “He doesn’t feel effective and confident in dealing with problems, and he lacks a sense of security.”

Mr. Zhang added, “He worries the Chinese Communist Party will lose political power, and he also worries that his peers will shove him from his position.”

A subsequent and related article:

As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush. Edward Wong and Neil Gough. The New York Times. 25 Feb. 2016.

“‘Data disappears when it becomes negative,’ – Anne Stevenson-Yang, co-founder of J Capital Research, which analyzes the Chinese economy”

“In January data released last week, the Chinese central bank omitted or hid one key number and altered the parameters of another that gave insight into what the central and commercial banks were doing to prop up the country’s currency.”

When you go around and meet state-owned industry people, everybody laughs at the national statistics, so I don’t know why foreigners believe them,” – Ms. Stevenson-Yang.

Unfortunately, political control of the media is not unique to China (think Russia, Venezuela, etc.), the issue is how important to the global economy China has become and yet the country’s data is questionable at best making it difficult for other policy makers to ascertain appropriate steps to help the global economy along.


The fallout from low interest rates (2): The lowdown. The Economist. 20 Feb. 2016.

Subtitle: Insurers regret their guarantees

This article articulates the challenges that life insurers are facing (let alone banks, pensions, etc.) in the low-to-negative interest rate environment.

“Insurers tend to be prudent investors who like steady returns, which is why around 80% of their assets are in fixed-income securities. This served them well during the financial crisis, but today – with bond yields at historic lows, and even in negative territory-it hurts their investment income. This is particularly true for life insurers, which own over $21 trillion of the industry’s $28 trillion (of) assets, and rely heavily on this investment income to pay policy holders.”

“European insurers are especially exposed. Over two-thirds of life-insurance policies in force in the EU today offers some sort of guarantee.”

“Moody’s, a rating agency, reckons those most at risk tend to be in Germany, the Netherlands, Norway and Taiwan, where average duration gaps are especially large (14 years in Norway) or guaranteed rates are eye-wateringly high (4-5% in Taiwan).”

“The average returns promised to German policyholders are far higher than the yields on government bonds that insurers can now buy. Corporate bonds offer returns that are barely higher, which leaves two options: invest in riskier assets such as equities (which will require the insurer to put more capital aside), or face the fact that annual payouts to policyholders will outstrip income, a recipe for losses.”

“Faced with this prospect, life businesses are doing what they can to push risk back to the customer. In some countries, such as France, the promises made to existing policyholders have the built-in flexibility to be scaled back. But mostly the burden falls on new policyholders, who are no longer sold products with guarantees.

Ironically this de-risking creates a different danger: that the industry becomes irrelevant. By removing the key selling point of an insurer over a mutual fund – the assurance that a policy will pay out no matter what – the industry risks negating its business proposition to investors looking for security.”

“The classic model thrives on short-term interest rates of between 2-6%, government bonds yielding at least 4% and no worries about defaults.”


S&P Earnings: Far Worse Than Advertised. Justin Lahart. The Wall Street Journal. 24 Feb. 2016.

This article is an eye opener.

“With most calendar-year results now in, FactSet estimates companies in the S&P 500 earned 0.4% more per share in 2015 than the year before. That marks the weakest growth since 2009. But this is based on so-called pro forma figures, results provided by companies that exclude certain items such as restructuring charges or stock-based compensation.

Look to results reported under generally accepted accounting principles (GAAP) and S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower that pro forma figures – the widest difference since 2008 when companies took a record amount of charges.

The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren’t anywhere near what they think.”

WSJ_The GAAP Gap - 2-25-16

“Companies ostensibly provide pro forma figures to better reflect the underlying tenor of their operations… But companies have had a history of treating the ordinary as extraordinary when business conditions worsen.

Indeed, outside of 2008, the only other times the GAAP gap was as wide as last year was in 2001 and 2002. That was back when companies wrote off billions of dollars worth of dot-com bubble-era investments.”

“Companies sometimes will also look past charges that result from big swings in the value of their assets. Chesapeake Energy, for example, on Wednesday reported a full-year 2015 loss of $14.9 billion under GAAP.

But the company said that after adjusting for items “typically excluded by securities analysts in their earnings estimates,” it lost just $329 million. The major item Chesapeake and many other energy companies left out of their 2015 pro forma results were charges related to the steep decline in energy prices.”

About our oil reserves being worth tens of billions less, hey look at that squirrel over there…

“This is why skeptics tend to call pro forma figures EBBS, or earnings before bad stuff.”

“Energy companies registered some of the biggest differences between GAAP and pro forma earnings. In total, S&P 500 energy companies had an estimated GAAP loss of $48 billion. That stands in stark contrast to the $45 billion of income they reported on a pro forma basis.

Come again… that’s a $93 billion swing.

“Materials companies reported $13 billion in GAAP earnings compared with $30 billion in pro forma earnings. And health-care companies earned $104 billion under GAAP versus $157 billion pro forma.”

“And then there was tech: Under GAAP, S&P 500 tech companies earned an estimated $176 billion in 2015, $42 billion less than their pro forma earnings of $218 billion”

“Overall S&P 500 earnings under GAAP came to $787 billion last year, S&P Dow Jones Indices estimates. That is $256 billion less than the pro forma estimate of $1.04 trillion.”


Morgan Stanley Says U.S. Commercial Real Estate Price Growth Will Be Flat. Tracy Alloway. Bloomberg. 23 Feb. 2016.

“Morgan Stanley analysts last week predicted U.S. commercial real estate prices would grow by a big fat zero percent in 2016, replacing a previous forecast of 5% growth over the course of the year.”

“We recognize the very important role that the lending markets have played in the recovery in CRE prices,” the analysts write. “Indeed, our analysis shows that a 10 percentage point decline in the loan-to-value ratio (from 70% to 60%) requires 2.25 percentage annual net operating income growth to offset the lower leverage.”

“Throw in higher financing costs-U.S. financial conditions have already tightened following the Federal Reserve’s decision to raise interest rates back in December – and required income needs to increase even more.”

Bloomberg_CRE Price Sensitivity_2-23-16

This article ties well into the one above along with Weak Holidays Force Retailers to Shrink, Rethink Web.  If the tenants, users of space, are experiencing margin squeeze, how likely is it that they’ll be able to absorb meaningful rent growth?  At this point commercial real estate appreciation (on the whole) is reliant on the cost of financing equity and debt [described in the chart as Weighted Average Coupon (WAC)].  Fortunately, as a result of low-to-negative interest rates, life insurers and SWFs are looking for yield.  However, only for the best stuff as highlighted by the growing yields in BBB CMBS offerings due to declining demand.


Other Interesting Articles

Bloomberg Businessweek

The Economist


Bloomberg – The U.S. States Where Recession Is Already a Reality 2/21

Bloomberg – China’s Debt Seen Rising Through 2019, Peaking at 283% of GDP 2/21

Bloomberg – Sovereign Wealth Funds May Sell $404 Billion of Equities 2/22

Bloomberg – Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread 2/22

Bloomberg – Can Things Get Any Worse for Russia? You’re About to Find Out 2/23

Contra Corner (Business Insider) – China’s Ticking Time Bomb: A Runaway Banking System Bloated With Hidden Bad Loans 2/19

CoStar – Four Major Property Sectors Showing Weaker CMBS Loan Underwriting 2/22

FT – China central bank moves to strengthen control of money supply 2/18

FT – Uber losing more than $1bn a year in China 2/18

FT – San Francisco: bubble fears fail to curb rush to build new condos 2/19

FT – Smart beta ‘could go horribly wrong’ 2/22

FT – Helicopter drops might not be far away 2/23

FT – South Korea household debt pile mounts 2/23

FT – Venture capital starts to tune out of on-demand services 2/24

FT – The Chinese chronicle of a crash foretold 2/24

FT – Exports from China to Brazil collapse as recession deepens 2/25

FT – World trade records biggest reversal since crisis 2/25

FT – Oil industry tormented by latest price slump 2/25

Investment News – FBI raids offices of Texas REIT (UDF) 2/18

NYT – In Zika Epidemic, a Warning on Climate Change 2/20

NYT – Reporting on Life, Death and Corruption in Southeast Asia 2/21

NYT – Indian Caste Protests in Haryana Choke Delhi’s Roads and Water Supply 2/22

NYT – Seas Are Rising at Fastest Rate in Last 28 Centuries 2/22

NYT – Once a Coup, Energy Transfer Deal Becomes a Nightmare 2/25

WSJ – IPO Market Dries Up as Investors Retreat 2/18

WSJ – U.S. New-Home Sales Fell Sharply in January 2/24

WSJ – Bank-Stock Bloodbath: The Cycle Financials Can’t Escape 2/24

WSJ – Weak Holidays Force Retailers to Shrink, Rethink Web 2/25


January 29 – February 4, 2016

Stagnant wages. Debt stress. Oh Venezuela.

Three key articles that stand out this week are 1) Patrick Gillespie’s “Wages fell in 80 of 100 biggest U.S. cities during recovery” in CNN Money, 2) Sally Bakewell’s “The $29 Trillion Corporate Debt Hangover That Could Spark a Recession” in Bloomberg, which goes hand-in-hand with Peter Eavis’ “Toxic Loans Around the World Weigh on Global Growth” in The New York Times, and 3) Ricardo Hausmann’s “It could be too late to avoid catastrophe in Venezuela” in the Financial Times.

Other items that are worth a mention:

  • Evergrande Real Estate is asking its bond holders to relax its borrowing limits despite the reality that it is paying out increasing dividends to its shareholders all the while having “reported negative operating cash flows over the past five years.”
  • ChemChina is acquiring Syngenta for $34bn should the authorities agree; it will be largest outbound acquisition by a Chinese company, but more importantly it appears to me that this will become a key method for wealthy Chinese to get around tightening capital controls for getting money out of China.
  • The liquid natural gas market should brace itself for a price war now that U.S. producers are sending their first shipments of LNG to Europe, Russia will be damn sure to make it unprofitable for U.S. companies like the Saudi’s have been doing to the Shale gas providers. Not so good for Cheniere…

FT_Gazprom production costs_2-3-16

  • Because I forgot to mention this last week, in case you were wondering, Malaysian Prime Minister Najib Razak was cleared by the newly appointed Attorney General (the last one was sacked) for the $680 million that was found deposited into his personal bank accounts. All a big misunderstanding.  The money was a personal donation by the Saudi royal family and all but $61 million has been returned.  Well the Swiss authorities are calling BS and have “found ‘serious indications’ that about $4bn was misappropriated” from Malaysia through the 1MDB investment fund.

Interesting graphics:

From Bloomberg Graphics, passive investment managers winning at the expense of active managers.

Bloomberg_Asset Manager Winners & Losers_2-3-16

From the Financial Times, US junk debt yields rated triple C and lower have jumped.

FT_High yield debt index_2-4-16

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

Wages fell in 80 of 100 biggest U.S. cities during recovery. Patrick Gillespie. CNN Money. 28 Jan. 2016.

This article really speaks to why for most people in the U.S. it does not feel that the economy is on firmer footing or is growing for that matter.  Bottom line, wages in most cities have not recovered in most cities and especially for minorities.

“American cities powered the U.S. economy out of the recession and into its recovery.  Out of America’s 100 largest metro areas, almost each one improved on some measure of economic growth, employment, productivity or average wealth per person. The one red flag: wages.”

“Median wages declined in 80 of those cities between 2009 and 2014, according to a new study released Thursday by the Brookings Institution. The wage declines were more pronounced among minorities than whites. Also, the wage gapes widened between races in cities with economies that ranked high overall.”

“Only eight cities out of the largest 100 saw median wages and employment rates rise while its poverty rate fell.”

“Denver, San Jose, Calif., Provo, Utah and Charleston, S.C. are among those few metro areas that saw economic inequality decrease overall… However, the median wages of white workers in Provo rose about 2% between 2009 and 2014. And the paychecks of black workers declined by nearly 20% in that time period.”

“Wage growth has been largely absent during the U.S. economic recovery, and it’s a big reason why many middle class Americans feel they haven’t benefited. Only in recent months has wage growth started to move in the right direction nationally.”


The $29 Trillion Corporate Debt Hangover That Could Spark a Recession. Sally Bakewell. Bloomberg. 28 Jan. 2016.

“There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.”

“Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.

“While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too… Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years.”

“Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009.”

“Much of the cheap credit accumulated by companies was spent on a $3.8 trillion M&A binge, and to fund share buybacks and dividend payments. While that tends to push up share prices in the short term, bond investors would rather see that money spent on strengthening the business in the long term.”

But… “S&P’s global credit market outlook is stable and analysts estimate earnings will recover this year. Investment-grade firms have accumulated record amounts of cash, which will insulate them from market turbulence, according to a report from Citigroup Inc. this month.”

“At about 3%, overall borrowing costs for companies around the world remain below the average of 4.5% in the preceding two decades even as spreads have widened.”

“As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysis.”

A somewhat more pessimistic outlook on this…

Toxic Loans Around the World Weigh on Global Growth. Peter Eavis. The New York Times. 3 Feb. 2016.

“Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.”

“Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.”

“In Europe, analysts say bad loans total more than $1 trillion.”

Bad loans are on the rise in the energy and commodities sectors, in Brazil and elsewhere…

“If you have a boom and then a bust, you create economic losses.  You can hope the losses one day turn into profits, but if they don’t, they are a drag on the economy.” – Alberto Gallo, head of global macro credit research at the Royal Bank of Scotland.

“China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.”

According to Chu, “the world has never seen credit growth of this magnitude over such a short time. We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

“Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22% of the Chinese financial system’s loans and assets will be ‘nonperforming.’  In dollar terms, that works out to $6.6 trillion of troubled loans and assets.”

Ms. Chu “estimates that the bad loans could lead to $4.4 trillion of actual losses.”


It could be too late to avoid catastrophe in Venezuela. Ricardo Hausmann. Financial Times. 3 Feb. 2016.

For those that haven’t been following the falling knife that Venezuela has become…

“Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”

“Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugh Chavez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111.”

“The year 2015 was an annus horribilis in Venezuela with a 10% decline in gross domestic product, following a 4% fall in 2014. Inflation reached over 200%. The fiscal deficit ballooned to 20% of GDP.”

“In the free market, the bolivar has lost 92% of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered.”

“As bad as these numbers are, 2016 looks dramatically worse.”

President Nicolas Maduro is at odds with the National Assembly (opposition candidates were recently elected despite the government controlling the media and many opposition members having been locked up as a matter of practice since Chavez and his successor have been in power) “…the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.

“The fallout for Venezuela’s neighbors and the global economy will be substantial… Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.

Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable.”

While the IMF was set up to help avoid situations like this, Venezuela “has not let the IMF in (the country) since 2004.”


Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Hong Kong Property Slump Worries Investors 2/1

Economist – GDP’d off: Weak American growth is probably a blip 1/29

FT – Nigeria asks for $3.5bn emergency loans 1/31

FT – Swiss wreck efforts by Malaysia to contain 1MDB scandal 1/31

FT – Putin lines up state sell-offs to plug budget hole 2/1

FT – Malaysia stifles dissent as public unrest grows 2/1

FT – China Vanke tale shows share class divide 2/1

FT – US millennials caught in the parent trap 2/1

FT – Global competitive easing leaves US alone 2/1

FT – ChemChina closes in on $34bn Syngenta deal 2/2

FT – Global gas market braced for price war 2/3

FT – Risk of US recession back on the agenda for markets 2/3

FT – US junk debt rated triple C yields 20% 2/4

NYT – China Company Accused of Fleecing Investors of $7.6 Billion 2/1

NYT – Walmart Sues Puerto Rico, Claiming an Unfair and Onerous Tax Burden 2/3

NYT – Xi Jinping Assuming New Status as China’s ‘Core’ Leader 2/4

Mauldin Economics – Tokyo Doubles Down 2/1

The Real Deal – Midtown (NYC) has more than 80 blocks of massive and very available office space 1/29

Reuters – Mid-tier Chinese banks piling up trillions of dollars in shadow loans 1/31

WSJ – Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan 1/31

WSJ – Credit Suisse, Barclays to Pay $154.3 Million to Settle ‘Dark Pool’ Investigations 1/31

WSJ – Japan’s Negative Rates Are Rocket Fuel for Property Stocks 2/2

WSJ – Amazon Plans Hundreds of Brick-and-Mortar Bookstores, Mall CEO says 2/2


Special Reports