Tag: Debt

August 14, 2017

If you were to read only one thing…

FT – China ‘granny gang’ jailed in lending clampdown – Emily Feng 8/10

  • “A Chinese court has sentenced 14 members of a roving band of elderly female debt collectors to as many as 11 years in jail, in the latest sign of the country’s clampdown on informal channels of lending.”
  • “A court in the mountainous province of Henan this week found that members of the ‘granny gang’, as local media dubbed them, used loudspeakers to publicly cajole and intimidate borrowers into paying up.”
  • “The women, aged 50 to 70, were found guilty of engaging in ‘provocative and disturbing behavior’ that resembled ‘participating in gangster-like organizations’.” 
  • “The women were largely unemployed and looking for work when local debt-collection agencies recruited them at outdoor dancing classes in 2013. In return for helping secure loan repayments, the ‘grannies’ received Rmb200 ($30) per day as well as meals.”
  • “’I had nothing to do every day. When I was asked to help, I did it as a kind of fun,’ Gao Yun, one of the women, told a local newspaper.”
  • “The grannies employed a variety of tactics, including hitting and spitting at borrowers. A more common method was to give debtors an aggressive verbal dressing down until they handed over the money.”
  • “On their most recalcitrant targets, the women took more creative measures. In one 2015 incident, eight of the women began stripping to intimidate male borrowers to pay up, according to an interview that a debtor surnamed Zhao gave to local media.” 

Perspective

Howmuch.net – Do You Want the Best Bang for your Tuition Buck? Check out this College Rankings – Raul 8/10

Bloomberg – Venezuelan Currency Madness Valued Local Bank More Than Apple – Christine Jenkins 8/11

  • “What does it take to surpass Apple Inc. as the world’s most valuable traded company? One way is to be listed in Venezuela, with its massively overvalued currency.”
  • “Venezuelan stocks are ascending the ranks of the most valuable companies on Earth, with lender Mercantil Servicios Financieros CA briefly topping Apple’s market capitalization last week, and now back in the No.2 spot. Five other top-20 companies are also Venezuelan, a mirage caused by currency controls combined with the world’s fastest inflation.”
  • “Most of the lender’s theoretical $775 billion market capitalization evaporates if you stop using the official exchange rate of 10 bolivars to the dollar. The value would be 0.1% of that at the black-market rate that most Venezuelans have to use if they want hard currency.”

Markets / Economy

FT – The credit crisis did not lead to deleveraging – Martin Sandbu 8/10

Real Estate

Why Department Stores Remain on the Down Escalator – Miriam Gottfried 8/10

Energy

Vox – Solar eclipse 2017: how the solar power industry is prepping for a huge sunlight blip – Annette Choi 8/9

  • “The total solar eclipse passing over the United States on August 21 is going to be disruptive. Authorities are predicting huge traffic jams, strained cellphone networks, and insufficient bathrooms for the masses driving to the center of the show.”
  • “But there’s another disruption that will be brought on by the eclipse: power.”
  • “Since the last total solar eclipse passed over part of the US in 1979, we’ve grown a lot more dependent on solar to electrify our homes and businesses. According to the Solar Energy Industries Association, solar energy has grown by an average of 68 percent per year in the past decade. The country now has about 45 gigawatts of solar capacity installed, with 260,000 Americans employed in the industry.”
  • “The solar eclipse will significantly diminish that capacity for a couple of hours on August 21, especially in California and North Carolina.”
  • “The federal Energy Information Administration expects 1,900 utility-scale solar photovoltaic (PV) power plants in all will be affected.”
  • “Solar facilities have long been anticipating this eclipse, mapping out step-by-step demand management for the day of and arranging substitute energy sources to dispatch depending on various demand scenarios. Thanks to the unusually wet winter in California, hydroelectricity is abundant this year, says Greenlee (Steven Greenlee, spokesperson for the California Independent System Operator – CAISO).”
  • “In the past few months, CAISO — which manages 80% of California’s electric flow — has been busy seeking advice from German solar facilities.”
  • “During a 2015 solar eclipse that passed over Europe, 80% of Germany’s sunlight was cut off. For a country whose electricity is 40% powered by solar, it was hit hard. But despite the dramatic seesawing of solar production, the eclipse came and went without major disturbance.”

August 2, 2017

Worthy Insights / Opinion Pieces / Advice

Politico – My Party Is in Denial About Donald Trump – Jeff Flake 7/31

  • “We created him, and now we’re rationalizing him. When will it stop?”

Markets / Economy

WSJ – Late Credit-Card Payments Stoke Fears for Banks – AnnaMaria Andriotis 7/31

Health / Medicine

Bloomberg Businessweek – Here’s Why Yellen’s Fed Cares About America’s Opioid Epidemic – Jeanna Smialek 7/19

  • “An estimated 2.7 million adults over the age of 26 were misusing painkillers as of 2015, while another 236,000 currently used heroin, based on test Substance Abuse and Mental Health Administration data. While opioid abusers account for a tiny sliver in a workforce of 160 million, they probably make up a greater share of the 7 million who are unemployed.”

Mexico

Bloomberg Businessweek – Dead Bodies Start Piling Up as Fuel Theft Booms in Mexico – Amy Stillman 7/25

  • “Gasoline theft costs Mexico’s state-owned oil company more than $1 billion a year. And the country stands to lose a lot more if investors are spooked by the growing violence.”

July 31, 2017

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – Sharif’s Ouster Is Bad News – Mihir Sharma 7/28

  • “Whatever one thinks of Pakistan’s former prime minister, the circumstances of his ouster are troubling.”

Markets / Economy

WSJ – Daily Shot: Total US Mortgages Outstanding as % of GDP 7/28

WSJ – Daily Shot: Total US Nonrevolving Debt as % of GDP 7/28

Bloomberg – New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring – Gabrielle Coppola 7/17

  • “Subprime auto financing has expanded quickly since 2009, and the strains are beginning to show in cases of fraud and rising delinquencies.”

Environment / Science

NYT – It’s Not Your Imagination Summers Are Getting Hotter. – Nadja Popovich and Adam Pearce 7/28

Middle East

WSJ – Daily Shot: Saudi Arabia Bank Lending Growth 7/28

July 12, 2017

If you were to read only one thing…

Bloomberg News – Shoppers Can Buy Bad Debt on China’s Equivalent of Ebay – 7/11

  • “Used by millions of Chinese to buy everything from clothes to food and electronics, the platform (Taobao), known for its bargains, typically markets more than 1 billion yuan of soured assets a day, according to Bloomberg calculations. Recent listings include a portfolio of 118 non-performing loans from some companies in Yunnan province, a villa seized by a bank in the southern canal city of Shaoxing, and a property in central Beijing that’s also in default.”
  • “China’s embrace of e-retailing is helping it tackle another byproduct of the country’s rapid economic evolution: the rise of bad debt.”
  • “Slowing growth and an uptick in corporate defaults has fueled the market, with NPLs at commercial banks more than doubling over the past two years to 1.6 trillion yuan as of the end of March. As Beijing pushes lenders to find market-oriented ways of dealing with soured loans, interest in distressed debt has climbed, spurring banks and asset managers to look beyond traditional venues like auction houses and exchanges to dispose of the assets.”
  • “China Cinda Asset Management Co. — one of the country’s biggest distressed asset managers, and the firm marketing the steel company’s debt — said last month that it’s collaborating with Alibaba to set up a special section on Taobao to auction its wares.”
  • “Following Taobao’s lead, more than 50 other websites marketing their services to banks and other sellers of bad loans emerged in China in the first half of last year, according to a March report from PricewaterhouseCoopers LLP. More than 20 financial institutions are listed as partners on Taobao’s auction platform for soured assets, including Shenzhen-based Ping An Bank Co., Beijing’s China Minsheng Banking Corp. and China Citic Bank Corp.”
  • “E-commerce platforms provide access to more investors and the lender has garnered interest for assets marketed on Taobao that failed to yield inquiries offline. But while they can bring a level of transparency to bad loan trading, sites like Taobao also attract individual investors who don’t typically have the skills needed to do full due diligence on an NPL deal…”

Perspective

WSJ – Daily Shot: FRED – 2015 Median Household Income Adjusted by RPP 7/11

Bloomberg – America’s Pension Bomb: Illinois Is Just the Start – Laurie Meisler 6/30

  • “We’ve been hearing it for years: America’s public pensions are a ticking time bomb. Well, at long last, the state of Illinois is about to expose just how big this blowup could be. As of the 2015 fiscal year, Illinois had promised its employees $199 billion in retirement benefits. Right now, it’s $119.1 billion short. That gap lies at the center of a years-in-the-making fiscal mess that’s threatening to drop the state’s credit rating to junk-bond status. But Illinois is hardly alone. Connecticut and New Jersey—states that, to most of the world, seem like oases of prosperity—are under growing financial strain, too.”

Worthy Insights / Opinion Pieces / Advice

NYT – How We Are Ruining America – David Brooks 7/11

  • “Over the past generation, members of the college-educated class have become amazingly good at making sure their children retain their privileged status. They have also become devastatingly good at making sure the children of other classes have limited chances to join their ranks.”

Bloomberg Businessweek – The Next Job Humans Lose to Robots: Real Estate Appraiser – Joe Light 7/11

  • “Advances in big data at Zillow and elsewhere are helping automation creep into knowledge-based professions.”

Silicon Beat – World’s 10 least affordable housing markets include San Jose (least affordable in the US) and SF – Richard Scheinin 7/10

  • Using the Median Multiple (median house price / median household income), the Demographia International Housing Affordability Survey (2017) has ranked the following cities as the least affordable in the world.
  1. Hong Kong
  2. Sydney, Australia
  3. Vancouver, Canada
  4. Auckland, New Zealand
  5. San Jose, USA
  6. Melbourne, Australia
  7. Honolulu, USA
  8. Los Angeles, USA
  9. San Francisco, USA
  10. Bournemouth and Dorset, UK

Markets / Economy

WSJ – Daily Shot: FRED – US Consumer Credit as Percentage of GDP 7/11

WSJ – Daily Shot: FRED – US Student Loans Owned by Federal Govt 7/11

  • “Student loans owned directly by the government now total $1.1 trillion, representing about 30% of the overall consumer credit. Note that this figure does not include student debt that is guaranteed but not directly owned by the federal government.”

WSJ – Daily Shot: FRED – Nonrevolving Consumer Loans owned by Credit Unions 7/11

  • “Starting in 2013, credit unions have built up a sizeable auto loan portfolio. This is quite a bet on the US consumer for these small lenders.”

Real Estate

WSJ – Daily Shot: Calculated Risk – Number of Negative Equity Mortgages 7/11

China

FT – China trial paves way for ‘unhackable’ communications network – Yuan Yang 7/10

  • “Success of Jinan project points to commercial application for quantum communications.”

WSJ – Here Comes Another Chinese Company on a Buying Binge – Jacky Wong 7/10

  • “China wants its biggest, most acquisitive, highly leveraged companies to tone it down — apparently by selling assets to other big, acquisitive highly leveraged companies.”
  • Case in point, Sunac’s purchase of 76 hotels and 13 theme parks from Dalian Wanda.
  • “But the deal won’t reduce the overall risks in China’s financial system. Sunac has been loading up on debt over the past year as it bought land aggressively. Its net debt, including perpetual securities, had more than tripled in 2016 to $7.8 billion — more than twice its shareholders’ equity.”
  • “Sunac has just enough cash, including restricted cash, to finance the Wanda purchase, but that would more than double its net debt. This seems to defeat the purpose to contain runaway debt within China’s financial system. But unlike Wanda, Sunac has raised all debt to buy domestic land and properties, important drivers for China’s economy, instead of splurging on overseas assets.”
  • “Capital outflows, instead of leverage, are Beijing’s real worry.”

WSJ – Dalian Wanda Rides China’s Financial Merry-Go-Round with Latest Deal – Anjani Trivedi and Jacky Wong 7/11

  • “When it comes to managing debt burdens, Chinese companies know how to keep it all between friends.”
  • “In a maneuver that will reduce the need for external financing, Wanda is lending some 29.6 billion yuan ($4.4 billion) to Sunac to buy its own assets.”
  • “The structure of the loan is a typical example of so-called entrusted lending, a common form of shadow banking in China in which one company lends money to another. Because that isn’t strictly legal, such loans are arranged via a bank that acts as a middleman, often earning a cut of the deal for its pains. Entrusted lending has ballooned to account for some 10% of credit in China, led by cash-rich state-owned companies that have branched out to loans as they struggle to find growth in their core businesses.”
  • “With the current Sunac-Wanda deal, Sunac should book the loan as debt, although it could bury it in one of its many joint ventures. Wanda will presumably record the loan as an asset, meanwhile. The ultimate effect is that most of Wanda’s debts haven’t been dealt with; they have just been shifted elsewhere within China Inc.”
  • “Wanda is lending the cash cheaply too. The three-year loan will be at the benchmark lending rate, now around 5%. Typically such loans are priced at a premium, especially those to indebted borrowers like Sunac, which has an eye-popping net debt-to-equity ratio of over 160%.”
  • “Still, if one of your friends is helping you out, it is rude to make them pay over the odds.”

FT – Sunac receives fresh ratings warning after $9.3bn Wanda deal – Nicholas Megaw 7/11

June 29, 2017

Perspective

FT – Samsung set to eclipse Intel as world’s number one chipmaker – Song Jung-a 6/27

  • “Samsung Electronics is expected to overtake Intel as the world’s largest chipmaker in the current quarter, for the first time ever, on the back of strong demand for chips for mobile devices and data servers.”
  • “Intel has been the number one chipmaker since 1993 after releasing the Pentium CPU (central processing unit) for personal computers. However, the rapid adoption of mobile devices around the world has enabled Samsung to close the gap in chip sales in recent years.” 
  • “Samsung is estimated to have generated $15.1bn in chip sales for the April-June quarter, surpassing Intel’s estimated sales of $14.4bn, according to Nomura. Samsung is also expected to displace Intel as the industry leader for the full year, unless memory chip prices fall sharply in the second half. Samsung’s 2017 chip sales are forecast at $63.6bn, versus Intel’s estimated $60.5bn.” 

Real Estate

The Lead Left – Private Debt Intelligence: North America Real Estate Debt 6/26

WSJ – Has America Built Its Last Major Mall? – Esther Fung 6/27

  • “Appetite for building enclosed malls of more than 800,000 square feet has dried up. Department stores, once dependable foot-traffic generators, are closing locations amid stiff competition from off-price retailers and the growth of online shopping.”
  • “A mall construction spree in the 1970s and 1980s has left in its wake aging properties at a time when there is little capital available for upgrades. As anchor stores close, more mall space sits idle and foot traffic wanes, hastening the march toward death.”
  • “In all, there are roughly 1,200 malls in the U.S., and some analysts see the figure bottoming out at 500 to 800.”
  • “As of the current quarter, there were 612 so-called superregional malls, which typically have a gross floor area of 800,000 square feet or more, only two more than there were in 2010. Between 2002 and 2009, there were 37 such malls built. The number of smaller enclosed malls of 400,000 to 800,000 square feet stands at 599, up by 16 since 2010. Between 2002 and 2009, 40 such malls were constructed.”
  • “But other categories of retail are flourishing. The number of neighborhood shopping centers and strip centers has jumped by 2,303 since 2010 to 114,683. These centers typically offer a narrower range of goods and feature tenants such as grocery stores, laundromats and other necessity-based services that cater to nearby residents.”
  • To be sure, not everyone is hurting.
  • “Grade A malls in dense neighborhoods with above-average household incomes are still doing well, and their landlords argue that consolidation in the industry works in their favor.”

WSJ – Labor Shortage Squeezes Real-Estate Developers – Peter Grant 6/27

  • “About two-thirds of the contractors who are struggling with the labor shortages gripping the construction industry say it has become a challenge to finish jobs on time, according to a new survey.”
  • “More than one-third of contractors said they are being forced to turn work down and 58% said they are putting in higher bids, said the survey sponsored by USG Corp. and the U.S. Chamber of Commerce. Three-quarters of those who said they are having difficulty finding skilled labor said they are simply asking their employees to work harder.”
  • “Labor shortages are partly due to the increasing number of construction projects moving forward. During the first four months of this year, construction spending amounted to $359.5 billion, 5.8% more than the same period in 2016, according to the U.S. Census Bureau.”
  • “Also, tens of thousands of workers left the building trades during the economic downturn.”

Finance

WSJ – Daily Shot: US Leveraged Loan Issuance 6/26

WSJ – Daily Shot: Pension Partners – European High Yield Index – Effective Yield 6/26

Why… so much money chasing yield products.

WSJ – Daily Shot: Topdown Charts – ETF Assets in Yield Products 6/26

China

FT – China’s fake travel spending masks capital flight, warns Fed – Gabriel Wildau 6/28

  • “Capital flight disguised as overseas tourism spending has artificially cut China’s reported trade surplus while masking the extent of investment outflows, according to research by the US Federal Reserve.” 
  • “A significant share of overseas spending classified in official data as travel-related shopping, entertainment and hospitality may over a 12-month period have instead been used for investment in financial assets and real estate, the Fed paper argued.”
  • “Disguised capital outflows in the year to September may have amounted to $190bn, or 1.7% of gross domestic product, according to the paper.”
  • “Foreign exchange purchases by individuals are capped at $50,000 a year, with the money meant to be used for consumption purposes such as travel, foreign medical care and tuition.”
  • “Until recently, however, Chinese bank tellers rarely asked for documentation to prove how the foreign currency they sold to individuals was actually used. Clients typically ticked the “travel” box on bank disclosure forms, even when they intended to stash funds in foreign bank or brokerage accounts.”
  • “Those wanting to buy real estate or make other large investments could pool quotas from friends and family in a process known as “antlike house moving” — named after the way ants can transport an entire colony by carrying one small piece at a time.”
  • “The Fed’s suspicion was sparked by a sharp rise of so-called travel spending among Chinese tourists.”
  • “Previously, official data showed the scale of Chinese travel spending was consistent with other middle-income countries. But in 2014 this spending became “anomalously high”, the Fed paper argued, with per-capita travel spending as a share of per-capita GDP reaching the same level as the UK — where per-capita GDP is seven times higher.”
  • “Zhang Zhiwei, chief China economist at Deutsche Bank in Hong Kong, acknowledged the possibility of disguised capital outflow but suggests another explanation: the wealth effect from rising house prices. ‘It’s hard to pin down how much comes from each factor,’ he said.”

Europe

WSJ – Daily Shot: Bloomberg & BMI – Select European Country NPL Exposure 6/26

India

FT – Trump’s India property empire hit by tax shake-up – Kiran Stacey 6/27

  • Come July 1, there will be a national goods and services tax that is implemented. In anticipation of this, many retailers and developers are pushing their products through discounts prior to the deadline.

 

June 28, 2017

If you were to read only one thing…

FT – Xi Jinping’s war on financial crocodiles gathers pace – Minxin Pei 6/25

  • “In late April, President Xi Jinping convened a politburo meeting specifically focused on stability in the financial system. Foreshadowing the crackdown, he ordered that those ‘financial crocodiles’ that destabilize China’s financial system must be punished.”
  • “While Mr. Xi did not name those financial crocodiles, it is not hard to find Chinese tycoons fitting this description: those who have borrowed recklessly and bought expensive overseas assets with abandon. A crackdown on such behavior is not only long overdue, but also can serve multiple purposes. As the Chinese saying goes, you slaughter a chicken to warn the monkeys.”
  • “Making an example of China’s wealthiest tycoons can have an instant and powerful deterrent effect and rein in overly aggressive business practices endangering the stability in China’s overleveraged and under-regulated financial sector. But the political benefits of a clampdown on Chinese tycoons, so far overlooked by most observers, are likely to be even more significant.”
  • “A large number of these tycoons had made their immense fortune before Mr. Xi’s ascent to the top in late 2012. As good relations with government officials are critical to business success, it is reasonable to assume that many, if not most, Chinese tycoons have cultivated close personal ties with members of China’s ruling elite.”
  • “Carrying out such a purge is relatively easy. Since many Chinese tycoons depend on state-owned banks for funding, the simplest way of pushing them under is to order the banks to cut off credit. This could force overleveraged tycoons into a liquidity crisis and even bankruptcy. Even those with healthier balance sheets will not be safe. The Chinese authorities will have no difficulty finding them to be in breach of some rule or other, ensuring that a politically motivated purge can be passed off as tough regulatory enforcement action.”
  • “A broader campaign to subdue Chinese tycoons will also help eliminate a longer-term threat to the Chinese Communist party in general, and the authority of Mr. Xi in particular. Under his leadership the party has methodically neutralized threats to its rule — from rival factions, corrupt officials, the media and liberal activists. But one powerful group, business tycoons, has remained largely untouched — until now.”
  • “This crackdown will be discriminating. A large number of Chinese tycoons will be sitting ducks because of their enormous wealth and questionable political allegiances. Others will be left alone or forced to prove their loyalty. When it is over, we should expect a complete re-ordering of China’s economic oligarchy.”
  • “The move against Anbang, Dalian Wanda and others is only the opening shot in this campaign.“

Perspective

WSJ – China’s All-Seeing Surveillance State Is Reading Its Citizens’ Faces – Josh Chin and Liza Lin 6/26

  • “Facial-recognition technology, once a specter of dystopian science fiction, is becoming a feature of daily life in China, where authorities are using it on streets, in subway stations, at airports and at border crossings in a vast experiment in social engineering. Their goal: to influence behavior and identify lawbreakers.”
  • “China is rushing to deploy new technologies to monitor its people in ways that would spook many in the U.S. and the West. Unfettered by privacy concerns or public debate, Beijing’s authoritarian leaders are installing iris scanners at security checkpoints in troubled regions and using sophisticated software to monitor ramblings on social media. By 2020, the government hopes to implement a national ‘social credit’ system that would assign every citizen a rating based how they behave at work, in public venues and in their financial dealings.“
  • “A world where everyone can be tracked by their face wherever they go is still a long way off, and will require much better algorithms and cameras than currently exist, said Anil Jain, the head of Michigan State University’s Biometrics Research Group.”
  • “China is moving in that direction, abetted by a vast surveillance network. Industry researcher IHS Markit Ltd. estimates China has 176 million surveillance cameras in public and private hands, and it forecasts the nation will install about 450 million new ones by 2020. The U.S., by comparison, has about 50 million.”

WSJ – Daily Shot: Data is Beautiful – World’s Highest Paid Athletes 6/27

Worthy Insights / Opinion Pieces / Advice

The Registry – Is Macy’s Amazon’s Next Target – John McNellis 6/23

  • Don’t sell the cow for the magic beans just yet. McNellis is great at providing perspective.

WSJ – Ties Between Chinese Banks and Deal Makers Run Deep – Anjani Trivedi 6/26

Motherboard – Amazon Is Trying to Control the Underlying Infrastructure of Our Economy – Stacy Mitchell 6/25

FT – A family coup in Saudi Arabia – Nick Butler 6/25

FT – Why Italy’s €17bn bank rescue deal is making waves across Europe – FT Reporters 6/26

FT – Italian bailout: too small to fail – Lex 6/26

  • “Blame central bank printing presses, and a consequent hunt for yield, for mispriced risks. By using public funds, European regulators have done nothing to dispel the notion that the ultimate costs of financial stability will continue to be borne by taxpayers.”

Markets / Economy

FT – Advertising agencies squeezed by tech giants – David Bond 6/25

  • “The industry has benefited from the growth in online publicity but it is starting to feel the impact of disruption.”

WSJ – Daily Shot: FRED – US Commercial & Industrial Loan Growth 6/26

WSJ – Daily Shot: FRED – US MZM Money Stock Growth 6/26

Real Estate

Bloomberg – Why Can’t They Build More Homes Where the Jobs Are? – Patrick Clark 6/23

  • “In a logical world, builders would rush to put up homes in the U.S. regions adding jobs at the fastest pace. In reality, it’s not so simple.” 
  • “San Francisco’s metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.”
  • “You can see the imbalance in this chart, based on one that Lawrence Yun, chief economist for the National Association of Realtors, uses to explain the shortage of for-sale homes across the country. For each metro, it compares net new jobs created from 2012 to 2016 with the number of new housing units authorized over the same period. Historically, one new housing unit for every two jobs created is considered normal, Yun said.”
  • “Nationally, builders have added fewer new units in the 10 years ending in 2016 than in any 10-year period since 1990. Low vacancy rates have led to rising rents. House hunters are sweating it out in seller’s markets, in which homes go quickly—and often above the listing price.”
  • “There are two ways to ease the inventory crunch, Yun said in an interview: ‘Either the builders build homes, or real estate investors unload homes onto the market.’”
  • “Why aren’t builders swinging into action? One reason may be a mismatch between the places people want to live and the places where buildable land is available. Plus, builders have had a hard time filling open positions, which boosts labor costs and slows the pace of construction. Zoning rules often prevent greater population density, pushing builders to erect single-family homes on the peripheries of big cities, instead of apartment buildings closer to job centers.” 
  • “Regulatory costs play a role, too. On average, they account for 24% of the expense of building a new home, according to a 2016 study from the National Association of Home Builders. In San Diego, they drive 40% of the cost of a new home, according to a report by a local housing group.”

Bloomberg – These Are the U.S. Cities Where It Costs Too Much to Build – Patrick Clark 6/26

  • “The U.S. needs more new housing.”
  • “Existing homes are in short supply for both buyers and renters, from bustling coastal metropolises to smaller inland cities. Home seekers are bidding up prices and historically low ownership rates mean more people are renting, triggering fierce competition for leases. There are signs that rent growth is slowing—it’s just not slowing quickly enough.”  
  • “A new report published by the National Multifamily Housing Council and the National Apartment Association—two trade groups for landlords—seeks to quantify just how much rental housing is really needed in cities across the U.S.—as well as how difficult it is for real estate developers to actually deliver.”
  • “The first chart seeks to quantify the demand part of the equation. It looks across metropolitan areas, estimating future homeownership rates, household formation, demand for second homes, and attrition of older units—among other factors.”
  • Second chart…
  • “The bad news for cities on this chart is that rent is expensive all over. In seven out of 10 cities where it’s hardest to build, more than two-fifths of renters spend at least 35% of their income on rent. The worst on that count is Miami, where 54% of renter households spend more than one-third of their income to pay for housing.”

Energy

WSJ – Shale Produces Oil, Why Not Cash? – Spencer Jakab 6/26

FT – Oil exporters face fall in foreign exchange reserves – Steve Johnson 6/26

Finance

WSJ – Daily Shot: Danske Bank – US Treasury SOMA redemption schedule 6/26

Environment / Science

NYT – Carbon in Atmosphere Is Rising, Even as Emissions Stabilize – Justin Gillis 6/26

China

FT – Anbang’s predicament amid bank-risk probe – Gabriel Wildau 6/25

  • “Last week China’s banking regulator ordered lenders to report their credit exposures to Anbang Insurance Group and three other private conglomerates that have been snaffling up overseas assets in recent years.”
  • “The move adds to the problems facing Anbang, which has become known for splashy purchases including New York’s Waldorf Astoria hotel.”
  • “Anbang’s rise over the past three years has been spectacular. Premium revenue reached Rmb504bn ($74bn) last year from only Rmb26bn in 2013, driven by sales of universal life insurance, a savings product.”
  • “Anbang is big, and its business model creates risks. Combined assets from Anbang’s life, property and casualty, and health units rose from Rmb163bn to Rmb2.5tn over the same period, making it China’s second-largest privately owned insurer behind Ping An Insurance Group.” 
  • “The group’s business model creates a potential for a maturity mismatch. It sells investment products with maturities as short as two years, but ploughs much of the revenue into assets that could be difficult to sell on short notice. That could leave it struggling to raise cash if many investors ask for their money back at once.”
  • “Anbang’s various subsidiaries own Rmb1.06tn worth of shares in mainland-listed companies, according to Wind Information. Anbang has also completed foreign acquisitions worth more than $11bn since 2014, according to Dealogic.”
  • “Premium revenue at Anbang Life Insurance plunged to just Rmb1.5bn in April from a monthly average of Rmb27bn last year and Rmb82bn per month in January and February, according to CIRC data.”
  • “Sam Radwan, partner at Enhance, a consultancy that advises Chinese insurers, says that many companies that sell short-dated universal life policies use cash from new product sales to help them meet payouts on maturing ones. That way they do not have to sell longer-dated investments. But a halt to sales would threaten that practice if it continues.”
  • “Analysts say regulators may face pressure to allow Anbang to resume at least some new product sales or arrange other temporary funding support. That would give the company more time to raise cash by selling assets or raising new equity.”
  • “Anbang’s last big equity injection, worth $9bn, was in 2014. Since then, Anbang has relied on leverage to fuel its rapid asset growth.” 
  • “The leverage ratio at Anbang Life Insurance — total assets divided by shareholders’ equity — rose from 3:1 to 17:1 from 2013 to 2016, according to Financial Times calculations based on the company’s annual report. State-owned China Life Insurance, which follows a more conservative strategy, has a ratio of 9:1.” 
  • “Anbang Life’s solvency ratio — a metric used to measure an insurer’s ability to meet promised payouts — fell from 150% at the end of last year to 129% three months later. It is still well above the 100% ratio that signals potential inability to meet obligations.”

Europe

Reuters – Italy winds up Veneto banks at cost of up to 17 billion euros – Silvia Aloisi and Steven Scherer 6/26

  • “Italy began winding up two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders’ good assets in the hands of the nation’s biggest retail bank, Intesa Sanpaolo.”
  • “The government will pay 5.2 billion euros to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of Popolare di Vicenza and Veneto Banca, which collapsed after years of mismanagement and poor lending.”
  • “Economy Minister Pier Carlo Padoan said the total funds ‘mobilized’ by the state would be for up to 17 billion euros – three times more than had initially been estimated to recapitalize the banks with public money.”
  • “The decree effectively means that the Veneto banks’ branches and employees will be part of Intesa Sanpaolo by Monday morning, a move designed to avoid a potential run on deposits that could have spread chaos across the whole banking industry.”
  • “Intesa Sanpaolo, Italy’s best-capitalized large bank, said last week it was open to purchasing the rump of the good assets for one euro on condition Italy’s government passed a decree agreeing to shoulder the cost of winding down the two banks.”
  • Well, good thing they waited. Now they were paid €5.2 billion for the good assets.

Other Links

FT – Sale prices for second-hand private jets fall 35% – Hugo Greenhalgh 6/24

  • “Rich find their planes are hard to sell because of glut created a decade ago.”

WSJ – Daily Shot: Car Ownership Cost Comparison 6/26

June 27, 2017

Perspective

Yahoo Finance – Business Insider: Here’s where Americans are moving to and from – Andy Kiersz 6/22

WSJ – For Consumers, Less Debt but Lots of Bills – Justin Lahart 6/23

  • “Americans’ finances are in the best shape they have been in years. As a group, U.S. households’ debt-to-income and debt-to-asset ratios in the first quarter fell to their lowest levels since the early 2000s. A prolonged period of low rates have made that debt easier to bear: The Federal Reserve this week reported that households’ overall debt-service ratio—the share of after-tax income going toward debt payments—are near historic lows.”
  • “But Americans face financial obligations beyond debt payments, such as rents and auto leases, and these are taking a bigger bite out of pay. Indeed, the Fed report shows the share of income going toward non-debt financial obligations is sitting near its highest level since the 1980s. It is a development that particularly for households at lower income levels may be crimping spending.”
  • “Commerce Department figures show the homeownership rate fell to its lowest levels in over a half-century in the years since the financial crisis, and it doesn’t look likely to recover anytime soon. That has tightened the supply of rental units, pushing rents up 18% over the past five years, according to the Labor Department, even as inflation away from housing has been nearly nonexistent.”
  • “So while many people who own their homes have benefited from rock-bottom mortgage rates, renters’ monthly nut has risen. Those renters tend to be poorer: The Fed’s most recent survey of consumer finances, conducted in 2013, showed the median annual income of families that rented was $27,800 versus $63,400 for families that owned.”
  • “Then there are the payments that aren’t included in the Fed’s data on financial obligations, but that consumers are nevertheless obliged to pay. Mobile phone and internet plans, for example, have moved to the essential spending bucket for most households, and they come with a monthly bill. The Labor Department estimates that spending on information and information processing services—a category that includes mobile telephone, landline telephone and internet services—now counts for 3.2% of the average consumer’s spending versus 2.3% in 2000.”

WSJ – Daily Shot: WHO – Global Smoking use under age of 15 6/23

WSJ – Daily Shot: Axios – Number of US Payphones 6/23

Worthy Insights / Opinion Pieces / Advice

FT – Corporate governance minefield awaits China A-share buyers – James Kynge 6/22

  • “A corporate governance minefield awaits fund managers who will be obliged to pour billions of US dollars into Chinese equities after MSCI, the most influential indexer of emerging market equities, decided to include domestic Chinese A-shares in its main global indices.”
  • “Murky or undisclosed ownership structures, regular corruption scandals, exposure to unregulated shadow finance and a predominance of behind-the-scenes state influence over corporate decisions are just some of the governance challenges that global investors in the Chinese A-shares are set to encounter, analysts say.”
  • “A crucial feature of stock market governance is that investors exert influence over the board of directors, who in turn run the company to serve the interests of investors. But for state-owned companies in China, almost the opposite applies. Directors are appointed by the state to run the company for the benefit of state stakeholders who often shy away from engagement with portfolio investors.”
  • “Although the 222 A-shares slated for inclusion a year from now will represent only 0.73% of MSCI’s flagship emerging markets index, the cohort is far from insignificant. UBS, an investment bank, estimates that passive and active investors who track the index will be obliged to invest about $15bn in the Chinese shares.”
  • Caveat emptor.

13D Research – Has the meteoric rise of passive investing generated the “greatest bubble ever”? 6/16

  • “There is, really, no price discovery. And if there’s no price discovery, is there really a market?” – Steven Bregman, co-founder of Horizon Kinetics
  • “It seems algos are programmed with a bias to buy. Individual stocks have risen to ludicrous levels that leave rational humans scratching their heads. But since everything always goes up, and even small dips are big buying opportunities for these algos, machine learning teaches algos precisely that, and it becomes a self-propagating machine, until something trips a limit somewhere.” – Wolf Richter
  • “J.P. Morgan estimated this week that passive and quantitative investors now account for 60% of equity assets, which compares to less than 30% a decade ago. Moreover, they estimate that only 10% of trading volumes now originate from fundamental discretionary traders. This unprecedented rate of change no doubt opens the door to unaccountability, miscalculation and in turn, unforeseen consequence.”

The Atlantic – Power Causes Brain Damage – Jerry Useem July/August Issue

  • “How leaders lose mental capacities – most notably for reading other people – that were essential to their rise.”

Finance

WSJ – Stock Picking Is Dying Because There Are No More Stocks to Pick – Jason Zweig 6/23

China

FT – Alibaba taps user data to drive growth spurt – Louise Lucas 6/21

  • Data, data, data. The more I know about your customers, the more you’re willing to pay me to broker transactions. And the more I know about you (consumer), the better able I am to match you (sell you) with products you’d want.

FT – Big China companies targeted over ‘systemic risk’ – Lucy Hornby, Yuan Yang, Gabriel Wildau 6/22

  • “This is a game changer for Chinese M&A and could pretty much stop all outbound deal making in its tracks.” – Keith Pogson, EY’s senior partner for financial services in Asia.

FT – Beijing’s video-streaming ban lops $1bn off Sina Weibo market cap – Emily Feng 6/22

  • “Chinese regulators have ordered three major internet platforms to halt all video and audio streaming services, as the country ramps up its control over online content.”
  • “Microblogging site Sina Weibo was one of the three slapped with the streaming ban. Popular news portal site iFeng and video streaming platform ACFUN have also been ordered to stop streaming.”
  • “The three companies did not possess the necessary license to stream audio and visual content and were ‘not in line with national audiovisual regulations and propagating negative speech,’ according to an announcement posted on Thursday night on the website of the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), China’s media oversight body.” 
  • “Users would now have to apply for a license to continue video or audio streaming, according to a statement issued by the company.”
  • “The abrupt halt on video and audio streaming comes as China steps up its policing of internet content, particularly content it deems salacious. Earlier this month, more than 60 social media accounts, some on Weibo and including many celebrity gossip channels, were shut down for disseminating ‘vulgar content’ and ‘negatively impacting society’.”
  • “Meanwhile, a new cyber security law that took effect in June now mandates that any data relating to national security must be held on Chinese servers and large data transfers abroad must first be reviewed.”

Europe

Wolf Street – Two Italian Zombie Banks Toppled Friday Night – Wolf Richter 6/23

  • “When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!”
  • “It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.”
  • “The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.”
  • “In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they ‘were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.’”
  • “’Failing or likely to fail’ is the key phrase that banking supervisors use for banks that ‘should be put in resolution or wound up under normal insolvency proceedings,’ the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation.”

Japan

FT – Toshiba to be demoted to second ranks of Tokyo Stock Exchange – Leo Lewis and Kana Inagaki 6/23

  • “Struggling conglomerate leaves Nikkei 225 for first time since index launched in 1950.”

Turkey

NYT – Turkey Drops Evolution From Curriculum, Angering Secularists – Patrick Kingsley 6/23

  • “Turkey has removed the concept of evolution from its high school curriculum, in what critics fear is the latest attempt by President Recep Tayyip Erdogan’s government to erode the country’s secular character.”
  • What does one do when there is an inconvenient truth… deny its existence and keep future generations in the dark.

May 25, 2017

If you were to read only one thing…

WSJ – China’s Downgrade: It’s Not Just About the Government – Anjani Trivedi 5/24

  • “In a sign of the times, Moody’s has cut China’s credit rating for the first time in nearly three decades. Investors in China Inc. and its banks should heed the warning.”
  • “China’s sovereign rating is important because it helps other bond issuers in the country get a credit rating higher than they might otherwise be afforded.”
  • “Take China’s banks, for example. Moody’s gives the broader sector a baseline credit assessment of Baa3 based on indicators like loan-to-deposit ratios and counterparty risk. But because the government owns much of the banking system and—it is assumed—would provide it with support in a crisis, banks are in practice able to issue debt at higher ratings. Bank of China, one of the country’s big four banks, has a base rating of Baa2, but any debt it issues is rated at A1, four notches higher.”
  • “With a regulatory crackdown in force, Chinese companies and banks have been struggling with rising funding costs in home markets. They have also been hopping between onshore and offshore markets to issue debt wherever it is cheaper. The move by Moody’s may now make it more expensive to issue debt abroad as well. While the pain for China’s government from the downgrade is manageable, it could prove painful for the country’s debt-addicted bond issuers.”

Perspective

FT – A warning on Trump’s budget – Lawrence Summers 5/23

  • “The Trump team prides itself on its business background. This error is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenues while failing to account for the fact that the investments would actually cost some money to make. The revenue generated by the investments might exceed their cost (though the same is almost never true of tax cuts), but that does not change the fact that the investment has a cost that must be included in the accounting.”

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics | Thoughts from the Frontline – The Great Reset: How Should We Then Invest? 5/22

  • “That the world is awash in debt is not exactly news. As of 2014, total global debt had risen to $199 trillion, growing some $57 trillion in just the previous seven years, about $8 trillion a year. The McKinsey Institute chart below shows 22 advanced and 25 developing countries that make up the bulk of the world economy. The chart illustrates how the debt is split among household, corporate, government, and financial sectors:”
  • “Since that 2014 report was published, global debt rose by $17 trillion through 3Q 2016. In fact, in the first nine months of 2016 global debt rose $11 trillion! After averaging a little over $8 trillion from 2007 through 2014, global debt growth is now accelerating. Global debt-to-GDP is now 325%, though it varies sharply by region and country.”
  • “More worrisome is that interest rates are slowly rising pretty much everywhere, so debt-servicing costs are rising, too.”
  • “The Congressional Budget Office estimates that every percentage point hike in rates will cost $1.6 trillion over the next ten years! And that’s without adding to the debt itself every year, by running budget deficits.”
  • “It is not just the US that faces a serious debt problem. Global GDP is roughly $80 trillion. If interest rates were to rise just 1% on our global debt, an additional $2 trillion of that GDP would go to pay that debt increase, or about 1.5% of global GDP. As we have discussed many times, debt is a limiting factor on future growth. Debt is future consumption brought forward. Repaying that debt requires either reduced future consumption or some kind of debt liquidation – those are the only choices.”
  • And then there are the unfunded liabilities…
  • “A Citibank report shows that the OECD countries face $78 trillion in unfunded pension liabilities. That is at least 50% more than their total GDP. Pension obligations are growing faster than GDP in most of those countries, if not all. Those are obligations on top of their total debt.”

Real Estate

NYT – Malaysian Money. Opulent Ideas. But Now, for Park Lane, a Forced Sale. – Charles Bagli 5/23

Health / Medicine

Economist – Fentanyl is the next wave of America’s opioid crisis 5/20

  • “Fentanyl is particularly attractive to criminals. Because it is so potent, with only 2mg of the stuff – enough to cause an overdose, it is easy to hide in letters and small packages that are sent by post. The rewards are enormous: 1kg of fentanyl costs around $4,000 to buy from China and yields profits of $1.6m on the streets. By contrast, 1kg of heroin costs around $6,000 but is worth a few hundred thousand dollars.”

Asia – excluding China and Japan

Economist – Malaysia’s system of racial preferences should be scrapped 5/18

  • “Income-based benefits would work much better.”

China

Bloomberg – China Whacks Another Mole With Developers’ Dollar Bonds in Focus – Carrie Hong, Lianting Tu, and Molly Wei 5/18

  • “After China’s tightening financial conditions made it harder to sell debt at home, the country’s junk-rated issuers dived into the offshore market, selling record dollar debt.”
  • “Now, regulators seem to be cutting off that channel as well, in another case of officials moving to quell risks that keep cropping up in China’s patchwork financial system. Applications for new offshore bond deals by Chinese real-estate companies and vehicles set up by local authorities haven’t received approvals from China’s National Development and Reform Commission since April, according to bankers familiar with the matter.”
  • “One major potential problem with those issuers: they lack natural sources of dollar revenue to use for servicing dollar debt. That didn’t stop developers selling $10.6 billion dollars of notes offshore last quarter, the most on record according to Bloomberg-compiled data. The offerings slowed in the second quarter, to $1.7 billion so far.”
  • “‘The main driver behind this move is to tighten the property market, as recent data shows housing inflation remains resilient,’ said Claire Huang, greater China economist at Societe Generale SA in Hong Kong. ‘In a broader context, the authorities — emboldened by positive economic growth momentum — look determined to see regulatory tightening through,’ she said.”

May 18, 2017

If you were to read only one thing…

NYT – Household Debt Makes a Comeback in the U.S. – Michael Corkery and Stacy Cowley 5/17

  • “It took nearly a decade, but debt has made a comeback.”
  • “Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse.”
  • “In the first quarter of 2017, consumer debt rose to $12.73 trillion, exceeding its peak in the third quarter of 2008. Student loans account for 10.6% of that total, up from 3.3% in 2003, while housing’s share, though still great, has fallen back to 2003 levels.”
  • “’This is not a marker we should be super excited to get back to,’ said Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth, a liberal think tank. ‘In the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.’”
  • “Since World War II, total household debt had been increasing with only a few interruptions. The financial crisis changed that steady upward march.”
  • “In late 2008, household debt began a decline that would last for 19 consecutive quarters, an unprecedented period of ‘deleveraging’ during which many Americans shied away from new borrowing. Total debt began to rise again in 2013, finally hitting a new high in this year’s first quarter.”
  • “Student borrowers today owe $1.3 trillion, more than double the $611 billion owed nearly nine years ago. About one in 10 student borrowers is behind on repaying their loans, the highest delinquency rate of any type of loan tracked by the New York Fed’s quarterly household debt report.”
  • “Still, the student loan market is nowhere near the size of the $8.6 trillion mortgage market, making student borrowing less of a threat to the global financial system than the bad housing loans that touched off the financial crisis in 2008.”

Perspective

BloombergBusinessweek – There Are Now More Indexes Than Stocks – 5/12

Real Estate

WSJ – Daily Shot: BMO – US Rent vs Income Growth 5/16

Bloomberg – Blackstone Sees End of Property’s ‘Great Run’ as Returns Fade – Joyce Koh and Pooja Thakur Mahrotri 5/16

  • “Blackstone Group LP, the world’s biggest private equity fund, told investors to dial back their expectations for property returns as the ‘great run’ of the past five years becomes harder to replicate.”
  • “Investors should ‘calibrate their expectations,’ Chris Heady, Asia Pacific chairman and head of Asian real estate, told a conference in Singapore on Tuesday. ‘They’re probably going to be lower over the next five years.'”

Energy

FT – Oil market rebalancing needs ‘much work’, says IEA – Anjli Raval 5/16

  • While Opec has been curbing supply, the rest of the world (specifically, US shale, Brazil, and Canada) is taking up the slack.

FT – US shale groups refuse to lie down and die – Ed Crooks 5/16

  • “Failures of North American exploration and production companies soared after oil prices started falling about three years ago, with 114 seeking Chapter 11 bankruptcy protection in 2015 and 2016, according to Haynes and Boone, the law firm. But like monsters in a horror movie, these businesses have proved exceptionally hard to kill off.”
  • “Of the 10 largest US exploration and production companies to have gone into Chapter 11, eight have emerged and are still operating, having shed billions of dollars of debt.”
  • “As Michael Watford, chief executive of Ultra Petroleum, which emerged from Chapter 11 in April, put it on a call with analysts this month: ‘In many ways, we are the same, but in other ways we are better.’”

May 16, 2017

If you were to read only one thing…

WSJ – China’s Debt Addiction Will Be Hard to Cure – Anjani Trivedi 5/15

  • “China is attempting cure itself of an addiction to debt. The problem is, that could just stoke yet more demand.”
  • “Take local-government debt, one of the biggest contributors to the overall growth in debt in recent years. A major concern has been off-balance-sheet ‘local-government financing vehicles,’ whose debt now represents around 10% of China’s $8 trillion bond market.”
  • “The money raised is supposed to finance infrastructure projects and the like. But much of it—around half, according to Wind Info—has been put to unproductive uses like paying down old debt and keeping moribund local companies alive. The debt is often issued in the guise of corporate bonds, and can be bought by banks.”
  • “Beijing is now trying to rein in the financing vehicles’ voracious debt appetite. Though the debt isn’t recorded on local governments’ books, there’s little doubt they will be on the hook if defaults start growing. As of 2016, local-government debt totaled 33 trillion yuan ($4.782 trillion), of which UBS analysts estimate a third is implicit or hidden liabilities.”
  • “Earlier this month, authorities issued a directive restricting local governments from guaranteeing debt issued by these financing vehicles and other public-private partnerships. It also prohibited injecting public assets such as land into these vehicles to improve their credit quality.”
  • “So far, so sensible. The problem is the likely cost in overall economic growth, a point China’s central bank acknowledged in its quarterly report this weekend. While bursting this particular debt balloon could reduce the amount of money being misused, it could also stymie genuine investment. Depending on how thoroughly the new directive is executed, it could drain 2 trillion yuan of infrastructure financing this year, according to UBS analysts, and leave local governments with a financing gap exceeding 1 trillion yuan. That’s more than 10% of annual infrastructure investment in China.”
  • “The last time Beijing tried to reduce this kind of debt—in 2014—the knock-on effect on investment and growth was so severe that it soon backed down: Issuance bounced back to record highs just months later.”

Perspective

WSJ – Amazon’s IPO at 20: That Amazing Return You Didn’t Earn – Steven Russolillo 5/14

  • “A $10,000 investment in Amazon.com Inc. 20 years ago would be worth $4.9 million today. Good luck finding an Amazon investor who can brag about a return like that.”
  • “Monday is the 20th anniversary of Amazon’s initial public offering. Its vertiginous stock chart is a reflection of the internet giant’s dominance. Shares have gone from under $2 on a split-adjusted basis to $961.35 at Friday’s close. The 36% compounded annual gain by buying Amazon at its first-day closing price earned an investor 155 times what would have been made in the S&P 500, including dividends. At $460 billion, Amazon now sports the fourth-largest market capitalization in the S&P 500.”
  • “’This massive outperformance has led to an explosion in hindsight bias, with investors fooling themselves into believing Amazon’s ascent was somehow obvious or inevitable,’ writes Michael Batnick, director of research at Ritholtz Wealth Management and author of the popular ‘Irrelevant Investor’ blog. ‘You had to be some sort of sociopath, void of any human emotions, to earn these monstrous gains.’”
  • “History shows stock investors regularly underperform the market’s returns. Volatility often triggers irrational behavior when investors almost always would fare better by ignoring the noise. Similar patterns are only exacerbated when focusing on individual securities.”
  • “As Mr. Batnick points out, Amazon shares have had daily declines of 6% 199 times. The stock has fallen 15% over a three-day span on 107 different occasions. And the damage was far worse over longer time horizons.”
  • “Amazon has suffered at least 20% pullbacks in 16 of its 20 years on the public markets. The drawdowns were more than 40% apiece in nearly half of those instances, including a 64% plunge in 2008 during the depths of the financial crisis. Worst of all, shares lost 95% of their value when the tech bubble burst from December 1999 through October 2001.”
  • “Most investors just couldn’t ride that out.”

Worthy Insights / Opinion Pieces / Advice

Zero Hedge – Hedge Fund CIO: “This Is Unprecedented… No Trader Has A Model For This” – Tyler Durden 5/14

  • “’Everyone buying assets today is building somewhat plausible arguments, but they’re really all just geared to decisions made in Beijing.’” – Eric Peters, CIO of One River Asset Management
  • “The most crowded trade in the world is cognitive dissonance on China. ‘We need persistent increases in debt relative to GDP for the world economy to function. And since 2011, 100% of global non-financial private-sector net credit creation has occurred in China. Across the western world, it’s been zero.’ Since 2008, non-financial private-sector credit has risen 20% per year in China. In the west, net credit creation occurred through rising government debt – but for that fact, our economies would’ve suffered profoundly. Instead, global asset and liability levels have grown inexorably, led by Chinese credit creation.”
  • “’At 20% annual credit growth, China’s asset (and liability) base doubles every 3.5 years.‘ Seven years ago China’s asset base was roughly $15tn. Then it doubled. And doubled again.”
  • “’China’s asset base today is roughly $60tn, on its way to $120tn sometime in 2020,’ he laughed, his spreadsheet sprouting trees, racing to the sky. ‘The US asset base is $90tn. They’ll pass us in 2yrs. When we were $60tn, China was $10tn.’”
  • “‘People believe they’re leveraged to all of these wonderful things happening in the world. But they’re simply leveraged to what happens in China.’”
  • “Oil prices, iron ore, copper, real estate, and today’s global cyclical recovery are all directly tied back to China. And this can all continue for a time. Or end abruptly.”
  • “’What makes this so difficult to model is that this’ll be the first cycle that ends based on decisions made in Beijing, not Washington or Frankfurt.’”

Markets / Economy

WSJ – How Big Are Mutual Funds’ Puerto Rico Losses? $5.4 Billion – Heather Gillers and Tom McGinty 5/14

  • “Those losses, which are both actual and unrealized, were tucked inside a wide range of funds managed by Franklin Resources Inc., OppenheimerFunds Inc., Vanguard Group, Goldman Sachs Asset Management, Western Asset Management Co., Lord, Abbett & Co., AllianceBernstein Holding LP and Dreyfus Corp., which is part of BNY Mellon Investment Management.”
  • The two companies with the largest losses are Oppenheimer and Franklin with losses as much as $2.1bn and $1.6bn respectively.

Real Estate

NYT – Real Estate’s New Normal: Homeowners Staying Put – Conor Dougherty 5/14

  • “‘Once mortgage rates climb to 5 or 5.5%, we are going to start to see the lock-in effect really take hold,’ said Svenja Gudell, chief economist at Zillow.”

WSJ – Daily Shot: Bloomberg – US Apartment Sales Volume 5/15

China

FT – China real estate investment rises as sales slowdown drags on – Hudson Lockett 5/14