Tag: Debt

May 8, 2017

Worthy Insights / Opinion Pieces / Advice

FT – Puerto Rico: island of despair – Lex 5/4

Scientific American – High Ground Is Becoming Hot Property as Sea Level Rises – Erika Bolstad 5/1

  • “One of the great ironies of those historic housing patterns in Miami is that for decades under Jim Crow, laws and zoning restricted black people to parts of the urban core, an older part of the community that sits on relatively higher ground along a limestone ridge that runs like a topographic stripe down the eastern coast of South Florida. Now, many of those neighborhoods, formerly redlined by lenders and in some places bound in by a literal color wall, have an amenity not yet in the real estate listings: They’re on higher ground and are less likely to flood as seas rise.”

Real Estate

Visual Capitalist – Chart: The Downfall of Canada’s Largest Alternative Mortgage Lender – Jeff Desjardins 5/5

Energy

FT – Bullish bets on oil price fall to lowest since Opec output cut – Gregory Meyer 5/5

  • “A derivatives dealer who works with hedge funds said this week’s exodus was most severe in contracts for delivery in distant months such as December, rather than futures for imminent delivery, suggesting heightened concerns for the long-term price of oil.”

Finance

Investment News – LPL may have to refund up to $8 million to resolve New Hampshire REIT case – Bruce Kelly 5/3

  • “A third-party review found that 200 clients from the New England state bought nontraded REITs that violated LPL’s guidelines and are eligible for an average of $40,000 apiece.”

China

WSJ – China’s War on Debt Causes Stocks to Drop, Bond Yields to Shoot Up and Defaults to Rise – Lingling Wei and Chao Deng – May 5

  • “A wave of regulations aimed at cutting risk in China’s financial system is rippling through the country’s markets and sending banks and companies scrambling for funds.”
  • “During the past month, Chinese shares have fallen nearly 5%, draining almost half a trillion dollars out of the country’s markets. Bond yields have shot up to their highest levels in two years, and bond defaults hover at record levels. The uncertainty has also weighed on metals and commodity prices, already hurt by doubts around China’s growth momentum. The price of iron ore plunged 8% on Thursday, the daily trading limit.”
  • “Investors blame the volatility on a host of measures Chinese authorities have rolled out to curb runaway debt levels, from raising the cost of short-term funds to measures that are prompting banks to unwind hidden loans and securities. A particular target is high-risk, high-yielding investment products that banks have used to boost returns, but that regulators say may conceal dangerous amounts of risky lending.”
  • “The market turbulence will test Beijing’s resolve in tackling China’s snowballing debt, especially if it looks like regulators’ crackdown is jeopardizing short-term growth. If they can withstand the short-term squeeze and continue to push it through, the effort will help put China’s economy on a sounder footing longer-term.”
  • “Many economists and analysts say China’s economy has become so reliant on debt that leverage will have to keep growing to reach the leadership’s annual growth target, set at about 6.5% for this year. Recent official data show overall credit in China is still growing.”
  • “According to Fitch, total debt reached 258% of China’s GDP last year, a ratio it expects will grow this year and next. Beijing needs to keep interest rates at relatively low levels to not cause companies to default on their mounting debts, economists say.”
  • “’At most, the regulators can slow down the pace of leveraging,’ said Victor Shih, a professor at the University of California, San Diego who specializes in China’s politics and economy. ‘The day China sees true deleveraging is the day a financial crisis begins.'”

FT – Beijing chokes in Gobi desert sandstorm – Emily Feng 5/4

  • “A haze of sand has enveloped northern China, leading to extreme air pollution in Beijing as the country’s expanding deserts blow into cities hundreds of kilometers away.”
  • “Air quality index scores for PM10 – particulate matter with a diameter of 10 microns or less – for Beijing and surrounding cities hovered around 900-999, the upper limit for AQI apps, on Thursday. World Health Organization guidelines recommend a score no higher than 50.”

South America

FT – The implosion of the Venezuelan thugocracy 5/4

April 26, 2017

If you were to read only one thing…

WSJ – Another Bubble Bursts in Hong Kong – Jacky Wong 4/25

  • This one is the article in its entirety.
  • “Hong Kong’s stock market is becoming a byword for dangerous bubble-blowing.”
  • “The latest stock to burst is Fullshare Holdings, a Chinese property developer valued at around $7 billion. Its stock slumped 12% on Tuesday, before the company suspended trading in its shares. The plunge came after California-based short seller Glaucus Research, which has shorted Fullshare, published a report claiming the stock is ‘one of the largest stock manipulation schemes trading on any exchange anywhere in the world.’ Fullshare declined to comment, but said it would release a statement at a later point.”
  • “Glaucus’s claim, which is based on analysis of trading patterns and Chinese filings, may be hard to prove. But in truth, investors should have spotted problems at Fullshare a while back. The company, which was valued at an eye-watering ten times book value as recently as last autumn, has generated most of its profits recently from paper gains on its 8.2% stake in another developer Zall Group , whose share price tripled last year. The problem? Zall in turn earns most of its profit from a reciprocal 3.5% stake in Fullshare, whose shares doubled last year. The bubbles in both companies’ stocks have fed on each other, giving a false image of how their businesses are doing.”
  • “Zall declined to comment.”
  • “If that weren’t enough, trading in Fullshare has also shown some unusual patterns. Glaucus says the stock has shown abnormally high returns in the final hour of trading—a pattern that was seen in previous Hong Kong stock bubbles such as Hanergy and Tech Pro. A look at trading data from FactSet from January to April this year seems to confirm the thesis. An investor buying Fullshare’s stock one hour before the market close and selling it at close, would have made a 44% return over the period. A simple buy-and-hold strategy, however, would have lost the investor 14%.”
  • “More risky still is the way both Fullshare and Zall have loaded up on debt using their overpriced stocks. As of December, Zall had pledged all its Fullshare stocks in return for a loan. Fullshare had likewise pledged a large portion of its financial assets, which are mainly Zall shares. Zall’s chairman has also pledged 8% of the company’s shares to borrow money. If lenders to the companies are worried about the value of their collateral, they could dump the shares into the market, potentially leading to a stampede—similar to the recent fate of China Huishan Dairy, whose shares dropped 85% in an hour last month.”
  • “Who could suffer when the bubble finally pops? Passive funds that were forced to buy the company when MSCI added the stock to its indexes in November. Vanguard, for example, owns 1.4% while BlackRock has 0.9%, according to FactSet.“
  • “Fullshare’s stock price has never been sustainable given its high valuation and lack of a strong underlying business, but the latest report could be the final straw.”
  • Shenanigans…

Perspective

Economist – The tempest: Workers in southern Europe are stuck in lousy jobs 4/20

  • “Dead-end, fixed-term jobs have haunted southern Europe for decades. In 2015 over half of employed 15-to-29 years olds in Spain were on temporary contracts, compared to two-fifths in Italy and just under a quarter in Greece; the average across the European Union is 14%.”
  • Economist_European temporary employment_4-20-17
  • Economist_European changes in temporary employment_4-20-17

Worthy Insights / Opinion Pieces / Advice

The Reformed Broker – Contra Einhorn – Joshua Brown 4/25

  • “More importantly, when Einhorn asserts that ‘There was no catalyst that we know of that burst the dot-com bubble in March 2000,’ he’s not correct. There was one. It was a Barron’s article, published over the weekend leading into Monday, March 20th. That was the top for the Nasdaq Composite (the rest of the market – aka ‘Old Economy’ stocks had already begun selling off as no one wanted anything non-dot com).”
  • “The article was called ‘Burning Fast‘ by Jack Willoughby and it may have been the most important piece of investment journalism ever up until that time.”

NYT – The Low-Inflation World May Be Sticking Around Longer Than Expected – Neil Irwin 4/26

Markets / Economy

FT – The five markets charts that matter for investors – FT Reporters 4/26

  • “The problem the US now faces is it has to normalize interest rates, but with the smallest 50% of companies already spending 30% of profits (and at peak EBIT) on interest rate costs, any move upwards is likely to push up interest cost to dangerous levels.” – Andrew Lapthorne, Societe Generale
  • FT_Interest rate costs as percentage of earnings for US non-financial cos_4-26-2017

Real Estate

WSJ – Concern Over Manhattan’s One Vanderbilt Project Grows – Peter Grant 4/25

WSJ – Rising Home Prices Raise Concerns of Overheating – Laura Kusisto 4/26

WSJ_Rising US Home prices_4-26-17

Tech

Economist – Cloning voices: Imitating people’s speech patterns precisely could bring trouble 4/20

Asia – excluding China and Japan

Economist – The rise of intolerance: Indonesia has been mercifully resistant to extremism-until now 4/20

  • “A local election shows how the unscrupulous can manipulate religion to win office.”

Britain

FT – UK public finance: councils build a credit bubble – John Plender 4/25

  • “UK local councils are engaging in what is known in the financial jargon familiar to hedge fund managers as a carry trade – a form of arbitrage whereby they borrow at rates much lower than private sector borrowers can obtain in order to invest in property that shows a much higher yield. Money borrowed at 2.5% or so is typically going into property yielding 6-8% or more.”

China

NYT – Debt Crisis Shakes Chinese Town, Pointing to Wider Problems – Keith Bradsher 4/25

  • “The problem: Local companies had agreed to guarantee hundreds of millions of dollars of one another’s loans. When some of those loans went bad, the impact rippled across the city.”
  • “Zouping’s plight offers a sobering example of the problems that could lurk within China’s vast and murky debt load. A nearly decade-long Chinese lending spree drove growth but burdened the economy with one of the world’s heaviest debt loads, equal to $21,600 worth of bank loans, bonds and other obligations for every man, woman and child in the country. Debt in China has expanded twice as fast as the overall economy since 2008.”
  • “China, the world’s second-largest economy after the United States, has considerable firepower to address any financial crisis. But many economists worry that hidden debt bombs could expose the breadth and severity of the problem.”
  • “The Chinese government has begun an urgent effort to discourage companies from guaranteeing one another’s bank debts, ordering local banking regulators across the country to file comprehensive reports by the end of the month on the problem. But sussing out the extent could be difficult.”

FT – China’s steel battles with west set to intensify – Lucy Hornby 4/25

  • “China’s steel battles in Europe and North America are likely to be only a prelude of bigger future fights as softening domestic demand unleashes a flood of output on to world markets. “
  • “China’s steel industry is the world’s largest, by far: at 808m tons last year it accounted for half of global production.”
  • FT_World steel production 2016_4-25-2017
  • “About 90% of Chinese mill output to date has been absorbed at home — but domestic consumption peaked in 2013. As China’s economic growth slows and infrastructure and property construction hits saturation point, more steel is poised to flow to global markets.”
  • “Last year China exported 109m tons, or 14% of its output — more than the total output of ArcelorMittal, the world’s largest steelmaker.”
  • FT_China steel consumption and exports_4-25-2017
  • “Because China’s steel industry is so big, every increase of 1% in exports is almost the equivalent of the entire export market for American steel mills.”
  • “But China is not a big source of American steel imports. ‘They are actually more worried about competition in third countries. It’s not so much about the Chinese presence in the US market,’ said Mei Xinyu, a strategist for the Chinese ministry of commerce.”
  • FT_Source of US steel imports_4-25-2017
  • FT_China steel export destinations_4-25-2017
  • “A pick-up in Chinese consumption this year could stave off the deluge for now. But unless there is a drastic cut in Chinese output, the prospect of a flood of Chinese steel on to global markets is not going away.”

Other Links

WSJ – Growing Homelessness Problems Spur Interest in Tiny Houses – Zusha Elinson 4/26

April 18, 2017

Markets / Economy

Economist – Cash-strapped pensioners: America has a retirement problem, not a saving problem 4/18

Finance

WSJ – The Risk of Rising Consumer Borrowing – Aaron Back 4/17

China

Value Walk – If The China Property Bubble Bursts, Banks And Individual Wealth Likely More Impacted – Mark Melin 4/12

  • “The risk of the China property bubble bursting and impacting the macroeconomic environment ‘has become more pronounced,’ Moody’s analysis observes. In fact, if a property bubble does burst, its impact would be more diffuse, impacting not only the supply chain as it has in the past, but more significantly the banking system and consumer wealth effect.”
  • “The impact of home ownership on household wealth has been on the rise. In 2013, it represented 62.3% of all Chinese personal wealth and has steadily risen since. In 2015 it was 65.3% and in 2016 it grew to 68.8% of all wealth in the Asian nation.”

WSJ – The Danger in China’s Dual Debt Cycle – Anjani Trivedi 4/18

April 14, 2017

Finance

FT – Rise of private debt creates fears of a bubble – Robin Wigglesworth 4/13

  • “Banks have in recent years been forced to retrench their operations, tamed by financial crisis losses, bridled by shareholders and tethered by more onerous regulation. Lending to smaller and mid-sized companies has been one of the biggest victims, as banks have focused on servicing their blue-chip clients. But a swelling array of investors have stepped into the resulting breach.”
  • “But some industry insiders are beginning to worry that private debt is getting frothy, as billions of dollars roll into a once-niche market.”
  • “Private debt is a large and diverse ecosystem, made up of asset managers, private equity firms, pension funds, insurers, ‘business development companies‘ and hedge funds. The assets under management of private debt fund managers tracked by Preqin have increased fourfold over the past decade to $595bn at the end of last year, after another 131 funds raised $93bn in 2016. At the current growth rate, the data provider reckons the industry could reach $2.5tn in another decade — rivalling the private equity world.”
  • “The investor enthusiasm is palpable. More than 90% of investors polled by Preqin said their private debt returns met or exceeded their expectations, and 62% plan to increase their allocation over the long run. That made it a more popular asset class than more traditional alternative allocation stalwarts like real estate, infrastructure, natural resources and private equity.”
  • “But returns have been souring lately. Preqin’s latest median net internal rate of return — a popular industry measure of performance — for direct lending funds set up in 2010-14 has gradually dipped from 10.6% for the 2010 vintage, to 7.6% for 2014 vintage funds. One analyst says that while a private debt fund might reasonably expect to collect an interest rate of 10-12% five years ago, a similar loan would only pay 5% to 6% today, as a result of all the money gushing in.”
  • “The industry itself is becoming a little warier. Almost half of fund managers polled by Preqin said valuations were a big problem, with 31% citing deal flow and 27% highlighting fee pressure. On the other hand, only 3% due diligence on their lending was a ‘key challenge.'”
  • “It is too early to call time on the private debt binge. The economy is ticking along nicely, quelling any corporate distress, and the amount of money chasing potential borrowers will paper over many cracks. But when the business cycle inevitably at some point rolls over, many investors will discover that the interest rates they are now charging are inadequate compensation for the risks.”
  • “This is a story as old as capitalism itself. A promising new market proves phenomenally profitable, attracting more players and eventually some tourists. Returns are eroded, standards fall and eventually it ends in tears. Private debt has a vibrant future, but there will be some bumps along the way.”

China

Economist – A new mood of optimism infects investors in China’s banks 4/12

WSJ – China’s Trillion-Dollar Yuan Defense Puts Growth at Risk – Lingling Wei 4/13

  • “The greatest risk in 2017, is that China is forced to choose in favor of financial-system stability at the expense of exchange-rate stability.” – Gene Frieda, global strategist at Pacific Investment Management Co.

Germany

Economist – East Germany’s population is shrinking 4/15

  • “Despite an influx of 1.2m refugees over the past two years, Germany’s population faces near-irreversible decline. According to predictions from the UN in 2015, two in five Germans will be over 60 by 2050 and Europe’s oldest country will have shrunk to 75m from 82m. Since the 1970s, more Germans have been dying than are born. Fewer births and longer lives are a problem for most rich countries. But the consequences are more acute for Germany, where birth rates are lower than in Britain and France.”

North Korea

Bloomberg – China Warns of War Risk as Trump Rattles Saber at North Korea 4/14

  • “China warned that a war on the Korean Peninsula would have devastating consequences as the U.S. threatened military retaliation against North Korea if it proceeds with a nuclear test this weekend.”

Turkey

February 17 – February 23, 2017

US Baby Boomer generation making peace with less. Lots of US consumers are behind on their car payments. Banks are taking a step back from lending to the apartment market.

Headlines

FT – Norway plans shake-up of $900bn oil fund 2/16. The sovereign wealth fund of Norway – the largest in the world, “which already owns 1.3% of every listed company” –  is planning on upping its allocation to equities to 70% from 60%.

FT – China bans coal imports from North Korea 2/18. Apparently North Korea finally crossed a line when it recently assassinated Kim Jong Nam (older brother of North Korean ruler Kim Jong Un) in Malaysia – who by the way was under Chinese protection.

WSJ – Chinese Bank Cleanup Plan Could Leave a Mess 2/20. The growth in the use of wealth-management products by Chinese banks continues to surge so the People’s Bank of China is seeking ways to bring the products on to bank balance sheets to get a better handle of the risk in the system.

Special Reports / Opinion Pieces

Briefs

  • Clifford Krauss of The New York Times highlighted that while Texas oil fields are rebounding from the price lull, jobs are being left behind.
    • “Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30% of the total, while oil prices plummeted, at one point by as much as 70%. The job losses just in Texas, the most productive oil-producing state, totaled 98,000.”
    • “Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning.”
    • “And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10% from record levels.“
    • “Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53.”
    • “Pioneer Natural Resources, one of the most productive West Texas producers, has slashed the number of days to drill and complete wells so drastically that it has been able to cut costs by 25% in wells completed since early 2015. The typical rig that drilled eight to 12 wells a year just a few years ago now drills up to 16. Last year, the company added nearly 240 wells to its Permian Basin inventory without adding new employees.”
  • Gabriel Wildau of the Financial Times covered how the People’s Bank of China has launched a fresh new attack on shadow banking risk in the system.
    • “China’s central bank has drafted new rules to tackle risks from shadow banking, in a tacit acknowledgment that a host of measures in recent years to control off balance sheet credit have failed to control its risks.”
    • “New credit hit a record high in January, mostly due to lending by non-bank institutions. UBS estimates that China’s ratio of debt to gross domestic product hit 277% at the end of 2016, up 133 percentage points since the global financial crisis. Non-bank lending has grown the fastest.”
    • “Chinese banks’ off balance sheet wealth management products (WMPs) exceeded Rmb26tn ($3.8tn) by the end of 2016, up 30% from a year earlier, compared with 10% growth for bank loans, the PBoC said. Non-bank financial institutions like trusts, securities brokerages and insurers package loans into investment products, which banks sell to clients as a high yield alternative to traditional savings deposits.”
    • “The PBoC has circulated a draft policy framework in recent days that forbids off balance sheet WMPs from investing in illiquid loans known as ‘non-standard’ credit assets, Caixin, a respected financial news website, reported on Wednesday. ‘Standard’ assets refers to stocks, bonds and money market assets.”
    • “The guidelines also seek to end the implicit guarantees associated with many WMPs… [and] also set uniform leverage ratios for structured WMPs…”
    • “The rules also forbid WMPs from taking other WMPs as their underlying assets, a practice reminiscent of ‘synthetic’ collateralized debt obligations popular in the US before the 2008 financial crisis.”

Graphics

FT – It’s an issuer’s market in US corporate bonds – Stephen Foley 2/16

ft_us-corporate-bond-spreads_2-16-17

WSJ – Nascar, Once a Cultural Icon, Hits the Skids – Tripp Mickle and Valerie Bauerlein 2/21

wsj_nascar-viewership_2-21-17

WSJ – Daily Shot: Classic Rock Preferences Across America 2/20

wsj_daily-shot_classic-rock-preferences-america_2-20-17

WSJ – Daily Shot: US – Mortgage Origination By Credit Score 2/21

  • “Mortgage credit remains tight, with the borrowers’ median credit score still above 760.”

wsj_daily-shot_us-mortgage-origination-by-credit-score_2-21-17

Economist – A new paper finds China more unequal than France but less so than America 2/16

economist_income-inequality_china-us-france_2-16-17

WSJ – Daily Shot: U.S. Public Perception of crime rate 2/22

wsj_daily-shot_us-public-perception-of-crime-rate_2-22-17
FT – Chinese province’s GDP fall hints at extent of past exaggeration – Yuan Yang 2/22

ft_liaoning-province-nominal-gdp-growth_2-22-17

Featured

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

With $15 Left in the Bank, a Baby Boomer Makes Peace With Less. Timothy Martin. The Wall Street Journal. 16 Feb. 2017.

“People in the U.S. ages 65 to 74 hold more than five times the borrowing obligations Americans their age held two decades ago, according to an analysis of federal data by the Employee Benefit Research Institute, a nonpartisan, nonprofit policy researcher.”

“Paying it off won’t be easy. Median savings for U.S. households nearest retirement age has dropped 32% in the past decade to $14,500, according to an analysis of federal data by the Economic Policy Institute, a left-leaning think tank.”

“‘This is the first time where we have seen such a high degree of debt held by people at such a late stage of life,’ said Torsten Slok, chief international economist at Deutsche Bank AG.”

“As a result, many senior citizens will either have to work longer, move to less expensive places or pare back their spending – choices that economists say are likely to put a drag on the U.S. economy.”

wsj_american-net-worth-ages-55-64_2-16-17

“By the end of 2015, residents ages 66 to 70 had accumulated $99,700 in debt compared with $90,600 a decade before; 71- to 75-year-old residents had $73,400 versus $58,800 over the same period; and those ages 76 and older had $52,100 compared with $28,200, according to Equifax data.”

wsj_maturing-americans-aged-65-debt-burdens_2-16-17

One million US consumers behind on car loan payments. Alistair Gray. Financial Times. 16 Feb. 2017.

“More than a million US consumers have fallen at least two months behind on car loan repayments as the delinquency rate reaches its highest level since 2009, in the latest sign of stress in the $1.1tn market.”

“The proportion of soured car loans showed a 13% increase to 1.44% in 2016, according to data published on Thursday by TransUnion, the US credit bureau with an anonymized database of 220m consumers.”

ft_us-car-loans_2-16-17

“Delinquencies on credit cards also rose by about the same amount over the period to 1.79% – the highest since 2011.”

“The rise in bad loans comes despite persistently low borrowing costs and unemployment levels – suggesting lenders may be letting consumers take on bigger debt burdens than they can handle. Lending to consumers with weak credit scores has been one of the fastest growing parts of the industry.”

“Separate figures published on Thursday by the New York Federal Reserve showed the total amount of debt held by American households rose last year at the fastest clip since 2007. Increases in all the main categories, from mortgages to student loans, pushed the total up $460bn over the year to $12.58tn – only 0.8% shy of the peak reached in the third quarter of 2008, the height of the financial crisis.”

Banks Retreat From Apartment Market. Laura Kusisto. The Wall Street Journal. 21 Feb. 2017.

“Swelling supplies of apartment units are prompting big banks to pull back from new projects, forcing developers to scramble for capital, in a sign that the U.S. apartment industry is headed for a downturn.”

“The apartment sector, which contributes some $284 billion to the economy annually, has been a winning bet for investors since the housing crash, as the economy recovered and more renters sought out units. Since 2010, average U.S. apartment rents have increased by 26%, according to data tracker MPF Research, a division of RealPage.”

“But fresh supply is beginning to overwhelm demand. More than 378,000 new apartments are expected to be completed in 2017, a 30-year high, according to real estate researcher Axiometrics Inc. In the fourth quarter of last year, 88,000 units were completed but only 50,000 of those were rented by tenants, according to MPF.”

“Now banks are in retreat, forcing developers to look to nontraditional lenders and seek more expensive types of financing to complete projects, said apartment executives, industry analysts, mortgage brokers and bankers.”

“In congressional testimony last week, Federal Reserve Chairwoman Janet Yellen noted that banks have started pulling back from making commercial real-estate loans, which could be a sign of ‘some reduction in appetite.'”

“While a couple of years ago most could get loans for about 65% of the cost to build a project, today they are getting closer to 55%” according to Peter Donovan, executive managing director of multifamily capital markets at real-estate brokerage CBRE.

As Donovan put it, “we’re certainly seeing the pullback. It was almost as if all the banks got the same memo.”

“Adding to the risk for developers: Even as loans get more expensive, rent growth is slowing. Last year, average U.S. apartment rents rose 3.8%, a significant drop from the recent high of 5.6% year-over-year growth posted in the third quarter of 2015, according to MPF.”

“Rents in major cities, such as San Francisco, New York, Houston and San Jose, Calif., all declined about 1% in 2016 from 2015 levels.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – A Billion Barrels of Bets Backing Stagnant Oil Price: Chart 2/20

Bloomberg – Why Trump’s Immigration Crackdown Could Sink U.S. Home Prices 2/22

Bloomberg – Saudi Arabia’s Oil Wealth Is About to Get a Reality Check 2/23

CNBC – Manhattan condo market cracking, developers roll out big incentives 2/17

FT – Hedgies hope insurers will rush in where others fear to tread 2/17

FT – ‘Aggressive’ vulture funds swoop in on Irish property 2/18

FT – China to slash drug distribution groups in price drive 2/19

FT – Foreign buyers fire up South Korea commercial property market 2/19

FT – Investors snap up inflation-proof gilt at record negative yield 2/21

FT – Snap and the 21st century governance vacuum 2/22

FT – Private placements up next for China’s whack-a-mole regulators 2/22

NYT – A Push for Diesel Leaves London Gasping Amid Record Pollution 2/17

NYT – Where the Booze Can Kill, and Putin Is Deemed a ‘Good Czar’ 2/18

NYT – SolarCity’s Ties to Foreclosure Cases Raise Questions on Vetting Policies 2/22

ValueWalk – How The Slowing Shipping Industry Could Spark A Banking Crash in Germany 2/21

WSJ – How Saudis Cut Oil Output Without Really Cutting 2/16

WSJ – Mall Landlords’ Next Act: Apartments and Concerts 2/21

WSJ – The Inevitable Turn in World’s Most Important Property Market 2/22

WSJ – Office Landlords Struggle to Raise Rents 2/22

WSJ – Only a Market Crash Can Stop Warren Buffett From Winning This $1 Million Bet 2/23

WSJ – Luxury Home Sellers Slash Millions Off Asking Prices 2/23

February 10 – February 16, 2017

Venezuela having difficulties meeting its oil delivery commitments. REITs backing away from apartments. Chinese companies lending to the tune of $2tn where bankers have pulled back.

Headlines

FT – Alphabet opts to spell out its stock options 2/9. Google recently let slip that it will be treating stock based pay as a cost in its financials (normally relegated to the GAAP footnotes).

FT – Oil and gas discoveries dry up to lowest total for 60 years 2/12. As oil and gas companies have been pulling back on exploration it’s no surprise that new discoveries are down; however, they are yielding more from existing fields.

Special Reports / Opinion Pieces

Briefs

  • Jon Sindreu of The Wall Street Journal illustrated foreigner’s recent dumping of US debt, putting up a test for rates.
    • “Foreign buyers, led by China, are taking a smaller slice of debt issued by the U.S. and other major economies, a change that may test the long-held belief that overseas money has kept interest rates low in the developed world.”
    • “Foreigners are steadily pulling back: As of November, for the first time since 2009, less than 30% of the $20 trillion market for U.S. government debt was held overseas, according to the latest official data, released in January, from the Treasury Department and Federal Reserve. In the U.K., it is now 27%, compared with a record of 36% in 2008. In Germany, it is 49%, down from a peak of 57% in 2014.”
    • wsj_government-debt-held-by-foreigners_2-9-17
    • “In the longer term, the decline in foreign buyers might not matter so much. For countries that print their own currency, bond yields – and thus the price of bonds – are strongly determined by where investors believe central banks will set interest rates in the future. In theory, at least, bonds whose prices are pushed up or down excessively by supply-and-demand forces will eventually correct to correspond to interest-rate expectations.”
    • “In Japan, the central bank now directly fixes 10-year borrowing costs for the government at 0%. There, foreigners own just 9.2% of the government debt market; yet bond yields have stayed at record lows for decades, despite a government debt load amounting to 229% of Japan’s economy that has elicited repeated warnings from ratings companies.”
  • Adding on to Sindreu’s article, Brian Chappatta of Bloomberg discussed how America’s biggest creditors dump treasuries in warning to Trump.
    • “From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it’s the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world’s safest debt market seems less of a sure thing – particularly after the upswing in yields since November. And then there is Trump’s penchant for saber rattling, which has made staying home that much easier.”
    • bloomberg_selling-of-us-treasuries_2-12-17
    • “Nobody is saying that foreigners will abandon Treasuries altogether. After all, they still hold $5.4 trillion, or roughly 43% of the U.S. government debt market. (Though that’s down from 56% in 2008.) A significant drawdown can harm major holders like Japan and China as much as it does the U.S.”
    • “In December, Japanese investors reduced their investments in U.S. debt by 2.39 trillion yen ($21.3 billion) after a smaller pullback in November. While only a fraction of Japan’s $1.1 trillion of holdings, they were the first back-to-back declines since the start of 2014. China, which owns just over $1 trillion of Treasuries, has been selling since May. Its holdings are at a seven-year low.”
    • Bottom line there is too much unpredictability for many foreign investors right now, despite there being clear advantages in the rate spread between foreign and domestic markets.
  • Anjli Raval of the Financial Times highlighted that recently Opec beat oil output cut expectations.
    • “Opec countries drastically curbed their output in the first month of their new production agreement, in the clearest sign to date that the world’s biggest oil producers are committed to living up to the November pact to cut global supplies.”
    • “The limits adopted by the oil cartel in January have been ‘one of the deepest in the history of Opec output cut initiatives’, the International Energy Agency said on Friday.”
    • “The IEA said Opec crude production fell by 1m b/d to 32.06m b/d in January, surpassing expectations at the start of the six-month supply agreement…”
    • The Opec target cut is 1.2m barrels per day.
    • “‘Opec and Saudi get plaudits for month one but there are still five months of the  deal to run,’ said Bill Farren-Price, head of Petroleum Policy Intelligence. ‘It’s unlikely cuts are going to get deeper from here.'”
    • “Opec’s cuts drove a big drop in world oil supplies of 1.5m barrels a day in January. If the cartel maintains its level of compliance, excess inventories should fall by about 600,000b/d during the first half of 2017.”
    • “Even though stockpiles are falling, higher prices have driven an increase in drilling in the US as well as Brazil and Canada, where the IEA expects ‘significant increases in production.’ Non-Opec production, led by US shale oil supply, is forecast to grow by 400,000b/d in 2017 from last year.”
  • Sarah Krouse of The Wall Street Journal covered the milestone that Vanguard just passed $4 trillion in assets under management.
    • “Indexing pioneer Vanguard Group has climbed to $4 Trillion ($4.048tn) in assets for the first time, accentuating a loss of faith among investors in traditional money managers who handpick stocks.”
    • “Of the $533 billion of net flows into all mutual funds and exchange-traded funds last year, 54%, or $289 billion, went to funds managed by Vanguard, according to research firm Morningstar Inc. The fund company’s own tally for the year was even higher, at $322.8 billion.”
    • Similarly, “BlackRock topped $5 trillion in assets late last year for the first time. It has a larger international business than Vanguard.”
    • “Rival firms who have long been synonymous with their star pickers of stocks and bonds have been hurt by years of subpar performance and relatively high fees. Investors pulled a net $340.1 billion from U.S.-based actively managed funds last year, according to Morningstar, while pouring a record $504.8 billion into U.S.-based passively managed funds.”
    • For reference, “Vanguard crossed the $3 trillion threshold in August 2014.”
  • The Data Team over at the Economist illustrated the migration and labor shortages in Asian countries.
    • “Although Asia is home to half the world’s population, it provides only 34% of the total number of emigrants and host a mere 17% of immigrants. Just one-third of Asians who move abroad remain on the continent, and of those, most stick to neighboring countries. This makes it hard to fill jobs in many countries where they are needed, despite a surplus of labor elsewhere.”
    • “The imbalance of workers will only grow more dire as populations get greyer. For now, China is still a net exporter of labor. But during the next 30 years its working-age population is set to shrink by 180m, and it will need 20m more domestic workers. Overall, East Asia would have to import 275m people between the ages of 15 and 64 by 2030 to keep the share of its population at working age steady. Singapore, Malaysia, Vietnam and especially Thailand need workers, while Myanmar, Indonesia and the Philippines have too many. South Asia, meanwhile, could afford to lose 134m  laborers – India alone could send more than 80m abroad – without worsening its dependency ratio. China’s projected shortfall in 2030 is equivalent to 24% of its current working-age population; in Bangladesh the likely surplus is 18%.”
    • economist_asian-migration-and-labor-shortages_2-10-17
  • Kiran Stacey of the Financial Times covered how the number of deaths by air pollution in India is set to surpass those in China.
    • “India is on the verge of overtaking China as the country with the most deaths caused by air pollution, the world’s biggest environmental killer, according to research published on Tuesday.”
    • “In 2015 both countries suffered about 1.1m premature deaths as a result of polluted air, with India just 18,000 behind China, the US-based research organization Health Effects Institute found, making air pollution the fifth-highest cause of death among all health risks.”
    • ft_indias-air-pollution-deaths-to-exceed-chinas_2-14-17
    • “Worldwide, air pollution caused 4.2m deaths in 2015, a 7.5% jump from a decade earlier. Toxic air now kills almost as many people as high cholesterol and even more than excessive sale or being overweight, according to the study.”
  • Laura Kusisto of The Wall Street Journal highlighted a current measure being put forth in Los Angeles that would seek to ban major real-estate developments – at least for a few years.
    • “The second-largest U.S. city is considering a measure that would effectively halt major real-estate projects, the most extreme example yet of a revolt against development breaking out across the country.”
    • “The moves threaten to further constrict a tight supply of housing. Housing starts dropped 2.6% in January, the Commerce Department said Thursday. The number of single-family and multifamily starts per 1,000 households last month was about 36% below the 50-year average, according to Ralph McLaughlin, chief economist at Trulia.”
    • “In Los Angeles, residents in early March are set to vote on a ballot initiative that, if passed, would suspend for two years any development that requires a modification to the city’s existing planning rules.”
    • “‘People feel the system is rigged,’ said Michael Weinstein, president of the AIDS Healthcare Foundation, which has poured some $3.7 million into promoting the measure. ‘It’s all about billionaires getting what they want.'”
    • If you’re wondering why the AIDS Healthcare Foundation is spending donation money on this initiative, it’s because “many of the patients served by the AIDS Healthcare Foundation are struggling with rising housing prices.”
    • “San Francisco in June passed a ballot initiative that puts a 25% on-site affordable-housing requirement on most new residential buildings…”
    • “In Oregon, the Portland City Council in December unanimously passed a similar ordinance requiring buildings with 20 units or more to set aside 20% of units for affordable housing…”
    • “Despite complaints in Los Angeles about a deluge of development, housing construction now is at only a fraction of the rate of the mid-20th century, before strict zoning rules were put in place. From 1950 through 1959, about 250,000 units of new housing were added in the city of Los Angeles, according to an analysis of the census data by advocacy group Abundant Housing LA. From 2010 to 2015, the figure was 25,000, though the city issued permits for about 50,000 units in roughly the same period.”
    • “In the middle of the last century, zoning regulations were such that there was enough capacity in the city to build housing for 10 million residents, according to David Waite, a local planning lawyer.”
    • “The adoption of ‘community plans’ in the 1970s and a ballot initiative in the mid-1980s knocked that down to 4.5 million people, meaning Los Angeles is now almost at full capacity.”
    • “The proposed rule up for vote in March, called the ‘Neighborhood Integrity Initiative’ and referred to as Measure S, would require the city to update all community plans.” Essentially, if passed, development would be put on hold while the neighborhood plans are updated with input from the community.

Graphics

Business Insider – Here’s how many people in every state don’t have health insurance – Bob Bryan 2/9

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Bloomberg – Demand for Treasuries Is Now a ‘Made in the U.S.A’ Phenomenon – Luke Kawa, Liz McCormick, and Tracy Alloway 2/7

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Economist – The world’s biggest gamblers – The Data Team 2/9

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NYT – Why Falling Home Prices Could Be a Good Thing – Conor Dougherty 2/10nyt_where-housing-costs-too-much_2-10-17

Bloomberg – China’s Zombie Province Shows Trouble With Its Bond Market – Bloomberg News 2/12

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Visual Capitalist – Visualizing the Tallest Building in Each State – Jeff Desjardins 2/13

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WSJ – Daily Shot: Moody’s Investors Service – Chinese Wealth Management Products – 2/13

  • “China’s WMPs (Wealth Management Products) continue to grow, with the asset-liability mismatch remaining elevated. Imagine a product that ‘guarantees’ a certain rate, gives you a 1-3 month liquidity, and invests in 5-year corporate bonds.”

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WSJ – Bond Buying Surges, Tightening U.S. Corporate Spreads – Chris Dieterich 2/13

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Business Insider – An ‘investment mania’ is propelling Canada’s home prices to their biggest gain since 2007 2/14
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FT – China Inc hits brakes on foreign property investment – Gabriel Wildau 2/16

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Featured

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

Venezuela falls behind on oil-for-loan deals with China, Russia. Marianna Parraga and Brian Ellsworth. Reuters. 10 Feb. 2017.

“Venezuela’s state-run oil company, PDVSA, has fallen months behind on shipments of crude and fuel under oil-for-loan deals with China and Russia, according to internal company documents reviewed by Reuters.”

“The delayed shipments to such crucial political allies and trading partners – which together have extended Venezuela at least $55 billion in credit (about $50bn from China and $5bn from Russia’s Rosneft)- provide new insight into PDVSA’s operational failures and their crippling impact on the country’s unraveling socialist economy.”

“Because oil accounts for almost all of Venezuela’s export revenue, PDVSA’s crisis extends to a citizenry suffering through triple-digit inflation and food shortages reminiscent of the waning days of the Soviet Union.”

“The total worth of the late cargoes to state-run Chinese and Russian firms is about $750 million, according to a Reuters analysis of the PDVSA documents.”


“At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms – with shipments delayed by as much as 10 months, according to the documents. It also failed to make timely deliveries of another 3.2 million barrels of crude shipments to China’s state-run China National Petroleum Corporation (CNPC).”

“A total of 45 cargoes bound for Russian and Chinese companies are late for a variety of reasons, according to internal operational reports about shipments of crude and refined products.”

“The problems include operational mishaps, such as refining outages and delayed cleaning of tanker hulls, and financial disputes with service providers owed money by PDVSA.”

For example, “… a company official said PDVSA was unable to deliver a 1.8 million-barrel cargo of fuel oil to PetroChina because Bahamas terminal Borco, where PDVSA rents storage space, has intermittently prevented the firm from using the tanks since 2016 due to lack of payment.”

“Another 2 million-barrel cargo of fuel oil bound for China in November was postponed because of stained crude tankers, which cannot navigate international waters due to environmental regulations.”

Adding salt to the wound… “the fall in crude prices has made the oil-for-loan agreements more onerous. Because loan payments were negotiated when crude prices were higher, the agreements require PDVSA to ship more oil in order to continue servicing the debts at the same rate.”

Which all of course “saps its ability to ship to other customers – such as India, or customers in the United States – who would pay in cash, which PDVSA desperately needs.”

As an anonymous trader that regularly buys Venezuelan oil so aptly put it “at this point, everybody is trying to collect pending debts from PDVSA by receiving cargoes, but production is not enough.”

In Echo Of ’07, REITs Back Away From Multifamily. Andrew Barnes, Jake Mooney, and Zach Fox. S&P Global Market Intelligence. 7 Feb. 2017.

“Amid concerns of a peaking multifamily market, publicly traded U.S. real estate investment trusts in 2016 were net sellers of multifamily properties for the first time since 2009.”

“In total, REITs sold $13.0 billion more multifamily properties than they bought. In the past 10 years, the only previous time REITs off-loaded more multifamily assets than they bought by such a large amount was in 2007, when sales dwarfed purchases by $21.11 billion.”

“REITs’ caution around making new property investments follows a long and steady escalation in apartment values, which have more than doubled since 2010, according to a national index from Moody’s/Real Capital Analytics. In recent months, a flood of new construction has depressed rents in coastal markets. New York and San Francisco, both key markets for the largest multifamily REITs, Equity Residential and AvalonBay Communities Inc., saw rent growth flatline in 2016.

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“‘Multifamily has just been overbuilt throughout the United States,’ said Jay Rollins, co-founder and managing principal at JCR Capital Investment Corp., which invests in properties valued at $50 million or less. ‘Everywhere. And it will decline everywhere.'”

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Despite rising interest rates and expectations of further rises “…sales data does not show property prices declining in response. According to data firm Real Capital Analytics, cap rates dipped to 3.9% for mid- and high-rise apartments nationwide in 2016 third quarter. In San Francisco, the average cap rate stood at just 2.7%, barely above the 10-year Treasury rate, but with considerably more risk.”

“Broadly, observers say, property buyers seeking near-term yield are avoiding coastal cities, leaving them to long-term investors like sovereign wealth funds and high-net-worth individuals. But whereas REITs have cooled on acquisitions nationwide, some prominent private equity firms have still pursued deals in the middle of the country, where ‘the math can still work,'” according to Drew Babin, an analyst at Robert W. Baird & Co. Inc.

“Most notably, Starwood Capital Group kicked off 2016 by buying 72 properties from Equity Residential for $5.37 billion, and said Jan. 19 that it will acquire Milestone Apartments Real Estate Investment Trust, a Canadian REIT that owns U.S. Sun Belt properties, for $2.85 billion.”

“Historically, apartments have been a relatively safe bet. Apartment buildings are one of the more stable real estate asset classes over time, Babin said – in part because they have the backstop of funding from Freddie Mac and Fannie Mae. Even for top-of-the market buyers, patience can be valuable. Apartment prices rose 62% over the decade beginning in November 2006, despite two years of sharp price declines that began in 2008, according to the Moody’s/RCA index.”

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Chinese Companies Rush In With Nearly $2 Trillion Where Bankers Fear to Lend. Rachel Rosenthal and Anjie Zheng. The Wall Street Journal. 9 Feb. 2017.

“Chinese companies are increasingly stepping in as lenders, as banks reduce their funding to struggling industries and the country’s mammoth bond market comes under strain.”

“Company-to-company loans in China jumped by 20% last year to 13.2 trillion yuan ($1.92 trillion), according to research firm CEIC. That is roughly double the size of the loan book at Wells Fargo & Co., the U.S.’s biggest lender. This entrusted lending, so named because banks serve as middlemen, is now the fastest-growing major component of the country’s elaborate system of informal, or shadow, banking.”

“The most recent surge came during the selloff in China’s $9.3 trillion bond market late last year. Big, cash-rich companies – mostly state-owned enterprises and some private companies – stepped in: New entrusted loans rose to 405.7 billion yuan ($59.02 billion) in December, more than double the month prior, according to data tracker Wind Information, and the highest monthly issuance in two years.”

“Instead of investing in their core business, companies can earn interest rates of up to 20% making entrusted loans, often with only cursory checks on borrowers’ creditworthiness. Such lending often props up companies in sectors like mining and property where Beijing wants to reduce excess capacity. It also adds to China’s $18 trillion corporate debt pile, already equal to 168% of gross domestic product, according to the Bank for International Settlements.”

“Some entrusted loans are between a company and its own subsidiaries, similar to how many big companies globally loan cash to different parts of their business. Still, between 2007 and 2013 more than 60% of entrusted loans were channeled to companies in industries with overcapacity, according to a study by the U.S.-based National Bureau of Economic Research.”

“‘It’s not a sustainable business model’ for the lending companies, said  Julian Evans-Pritchard, China economist at Capital Economics. ‘Their main operations are only staying afloat by acting like a shadow bank.'”

“Company-to-company lending took off in China in the 1990s when, after a period of rapid growth, many state-owned firms started generating large amounts of cash. With no private shareholders pushing for dividend payouts, many put that cash to work by lending it out.”

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“But entrusted lending is unusual. Banks are involved, but only as a middleman: Direct company-to-company lending is still legally prohibited. Banks can charge fees of up to 5% of the loan, according to BMI Research, but leave credit checks to the lending company.”

“In some cases, lending companies aren’t pulling back even when loans sour.”  Why, because they’re usually to subsidiaries…

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

A Wealth of Common Sense – Where You Live & the 50/30/20 Rule 2/14

Bloomberg – Yellen Sets High Hurdle for Reducing Fed’s Massive Bond Holdings 2/14

Business Insider – Paul Singer’s Elliott: ‘There is a deep underlying complacency which we think permeates global financial markets’ 2/1

FT – Take a deep breath: we must all help clean up London’s toxic air 2/3

FT – The importance of bubbles that did not burst 2/10

FT – Major Chinese bitcoin exchanges halt withdrawals after crackdown 2/10

FT – China’s Wanda circles Postbank in search of European bank assets 2/13

FT – Swiss signals that cash may no longer be king 2/13

FT – US labels Venezuelan vice-president a drug kingpin 2/13

FT – Down on China? Not Morgan Stanley (Alphaville) 2/14

FT – China’s top football team vows to phase out foreign players 2/15

FT – China returns as net buyer of US Treasuries 2/15

FT – What Chinese monetary tightening? 2/15

Investment News – Changing direction, FS Investments launching a nontraded REIT 2/14

NYT – Japan Limited Immigration; Now It’s Short of Workers 2/10

NYT – Amazon’s Living Lab: Reimagining Retail on Seattle Streets 2/12

NYT – India’s Air Pollution Rivals China’s as World’s Deadliest 2/14

Reuters – U.S. investors brace for mounting political risks as they decode Trump 2/14

ValueWalk – BCG: Hedge Funds Face Potential Doomsday Scenario 2/10

WSJ – Race to Revamp Shopping Malls Takes a Nasty Turn 2/14

WSJ – Bonds Tied to Dying Malls Could Be the Next ‘Big Short’ 2/14

WSJ – Retail Zombies Haunt Industry 2/15

WSJ – A Harsh Reality Is Hitting the Housing Market 2/15

 

 

February 3 – February 9, 2017

Chinese companies stashing cash ($110bn) in wealth management products. Italian banking sector depending on UniCredit?

Headlines

FT – Bank of Japan intervenes to buy 10-year JGBs 2/3. Well for now it appears that the Bank of Japan’s tolerance for the Japanese 10-year bond is about 0.11% – the point at which it just intervened in the market indicating it would buy an unlimited amount of bonds to keep them at that rate or less.

FT – Overseas Chinese acquisitions worth $75bn cancelled last year 2/5. “Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through.”

WSJ – U.S. Firms Slash Interest Tab in $100 Billion Refinancing Blitz 2/8. Borrowers are using investor demand for yield to impose rate reductions on their debt.

NYT – A Crack in an Antarctic Ice Shelf Grew 17 Miles in the Last Two Months 2/7. A rift in the Larsen C ice shelf (one of the largest) that started in late 2014 is about 2 months away from pushing a very large glacier into the sea and leading to an eventual collapse of the Larsen C – which is not good.

Bloomberg – Supply Is the Technical Factor Behind Global Rally in Markets 2/8. “In short, a world with excess savings is still struggling to sate its appetite for investable assets in public markets, amid a net shortage of new stocks and corporate bonds.”

Special Reports / Opinion Pieces

Briefs

  • Stephen Foley and Hannah Kuchler of the Financial Times elaborated on institutional investor anger over Snap’s decision to offer voteless shares.
    • Snapchat (Snap) is a first in pursuing an IPO that will issue shares to the market with NO voting power. “The two founders, Evan Spiegel, chief executive, and Bobby Murphy, chief technology officer, will control the company and continue to do so even if they step down.”
    • “The prospectus says a founder’s voting power will only be diluted if he cuts his stake substantially or ‘nine months after his death.'”
    • “Other technology companies, including Google and Facebook, have concentrated control in the hands of their founders, creating different classes of stock. But none has gone public with a class that has no votes whatsoever.”
    • The pros – management can focus on long-term value. The cons – management is not accountable to its outside shareholders.
    • The downside to index funds – “many funds will be forced to own Snap when it is included in major stock market indices…”
    • The concern is the precedent this could set…
  • Anne Richards of the Financial Times discussed the challenges posed to markets by long-term demographic trends.
    • “The global economy has now passed an important tipping point. For the first time in recorded history, children under the age of five no longer outnumber those aged 65 and above. We have arrived at ‘peak child.'”
    • “The United Nations has estimated that the global population will continue to age and, by 2050, more than 15% of the global population will be aged over 65. Economists often point to the challenges that Japan faces as the population ages; by 2050, most of the G7 will have a similar demographic profile as Japan does today, as will China, Brazil and Russia.”
    • “In a world where immigration policy reform is increasingly dominating political agendas, policymakers should recognize that gross domestic product largely reflects a demographic profile where more workers enter the workforce, who (if everything goes to plan) will then produce, earn and consume more than the previous quarter.”
    • “Naturally, as the workforce shrinks due to aging, the reverse will be true. However, it does not necessarily mean than an economy is underperforming if the trend rate of growth is falling to reflect a smaller workforce.”
  • Peter Grant of The Wall Street Journal highlighted that several large investors have cut back on their property exposure due to the bull market losing steam.
    • “Some prominent real-estate investors (i.e. Blackstone Group, Brookfield Asset Management, United Parcel Service Inc’s pension trust and Harvard Management Company) are reducing their holdings and getting more selective about new deals, in a sign that the eight-year bull market for U.S. commercial property is coming to a close.”
    • “Deal volume decreased by $58.3 billion, or 11% in 2016, the first annual decrease since 2009, according to data firm Real Capital Analytics.“
    • “Caution among investors in the $11 trillion U.S. commercial property sector is being driven by lofty prices, the length of the market cycle so far and the recent rise in interest rates, which makes bonds look more attractive compared with commercial property. Also, developers are adding new supply of some property types at the fastest rate since the recovery began.”
    • “For example, more than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real-estate tracker Axiometrics Inc.”
  • Lucy Hornby of the Financial Times covered the vow made by Beijing’s mayor to banish parts of the city to the provinces.
    • “Beijing’s new mayor has vowed to gut the city of all functions unrelated to its status as national capital, in an effort to push the growing population into the surrounding provinces.”
    • “Mr. Cai said he would reduce Beijing’s land zoned for construction and cap the city’s population at 23m.”
    • “Almost 22m people now live in Beijing or surrounding satellite cities, up from 4m in 1950 and 9m in 1980.”
  • Robin Wigglesworth of the Financial Times pointed US small-caps guru Henry Ellenbogen’s recent concerns over the post-election rally.
    • “US small stocks guru Henry Ellenbogen is concerned that the ferocious post-election equity rally could unravel unless the economy accelerates sharply to justify the frothy valuations, warning that most of the gains were powered by fickle inflows into exchange traded funds.”
    • “Over $20.6bn has gushed into US small-caps ETFs since early November, according to EPFR, while dedicated small-caps mutual funds have actually suffered some outflows, underscoring the role of passive investment vehicles in the move.”
    • “‘When you have those kind of flows into an illiquid asset class, you can really drive performance. Stuff that was outside the index has been roughly flat, while everything in the index has risen significantly,’ Mr. Ellenbogen said. ‘If there is a setback, the fund flows that drove small-caps higher will be just as aggressive on the way out.'”

Graphics

WSJ – Daily Shot: US Major Inflation Components 02/02

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WSJ – Daily Shot: US Cord Cutting 02/02

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WSJ – Daily Shot: FRED – Domestic Bank Demand for Commercial Real Estate Loans 02/06

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WSJ – Daily Shot: S&P Retail – S&P 500 Relative Performance 02/06

  • “US retail shares continue to underperform as investors question business models.”

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WSJ – Daily Shot: Domestic Water Use Per Capita by U.S. State 02/06

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WSJ – Daily Shot: FRED – US Student Loan Balance 02/07

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WSJ – Daily Shot: Statista – Lawsuits filed against US Administrations in first 14 days 02/07

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WSJ – Daily Shot: Global Skyscraper Construction 02/07

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FT – China forex reserves dip under $3tn to touch 5-year low – Gabriel Wildau 2/7

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FT – Investors pile into risky bonds in bet on Trump economy – Eric Platt 2/8

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WSJ – Daily Shot: EIA – US Electricity Production 02/08

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WSJ – Daily Shot: US Market Volatility 02/08

  • “Volatility is dead. We’ve now hit 85 consecutive days without a 1% drop in the S&P 500. The last time this occurred was in 2006.”

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Bloomberg – The Race to the Speed of Light Is Accelerating – John Detrixhe 2/8

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WSJ – For Chinese Home Buyers, Seattle Is the New Vancouver – Laura Kusisto and Kim Mackrael 2/7

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WSJ – Daily Shot: Pew Research – US Religiosity Index 02/08

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Economist – Emerging markets’ Trump tantrum abates, except in Turkey 2/4

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Featured

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

Chinese companies park record $110bn in wealth products. Don Weinland. Financial Times. 6 Feb. 2017.

“Cash-rich Chinese corporations are running out of places to invest.”

“As economic growth cooled and investment opportunities ebbed in China last year, listed companies moved a record $110bn of idle cash into financial products, mainly at banks, according to data from Wind Financial Information.”

“The flood of company funds into wealth management products – up some 40% on the previous year – was a sign that many groups in the country shunned risky corporate expansion amid the economic slowdown, instead preferring short-duration investments.”

“About $64bn of the cash companies invested in wealth products had been raised from investors through initial public offerings and private placements…” Why raise cash if you’re not going to use it?

“Over the past four years, Chinese regulators have leaned on listed groups to pay out regular dividends in the hope of bringing mainland bourses more in line with international standards.”

“The wealth management investments show that many state-held groups still refuse to return cash to shareholders.”

“‘The state still has strong holdings in many of these companies, often more than 50%. So institutional investors cannot put pressure on companies to pay out dividends,’ said Wong Chi-man, executive director at China Galaxy International Securities.”

Okay, so if all of these companies (which are traditionally where idle capital is sent to generate economic returns) are preferring to sit on cash for a lack of investment opportunities within their own business, how are the wealth management products being sold going to generate returns – especially at scale?

Is Italy’s financial future resting on UniCredit? Rachel Sanderson, Martin Arnold and Jonathan Ford. Financial Times. 6 Feb. 2017.

“Jean-Pierre Mustier, chief executive of UniCredit, has criss-crossed the world in the past two months seeking to cajole investors into buying €13bn in new shares – a major test of confidence not just for Italy’s largest bank but also the country’s teetering banking sector.”

“As UniCredit launched its bumper rights issue on Monday – at a steep 38% discount to its theoretical ex-rights issue price – bankers in the underwriting consortium said they were confident that it would be successful. It needs to be… Besides worries about profitability and governance, investors fear the industry’s €360bn mountain of doubtful loans, of which €200bn are in default.”

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“The offering comes at a tumultuous moment. The implementation of a government decree – earmarking €20bn to rescue several midsized banks, including Monte dei Paschi di Siena, the world’s oldest lender – remains up in the air.”

“The broader issue is whether a successful fundraising by UniCredit will help draw a line under concerns about Italy’s largest bank by assets, and in turn Italy’s banking sector.”

“Italian banks have long been burdened by a large stock of non-performing loans, which they have valued at prices higher than investors are willing to pay.”

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“Gross non-performing exposures measured €356bn, or 17.7% of total loans, according to the latest financial stability report. That is three times the amount that is normal in most European economies. The stock of gross sofferenze – the worst kind of defaulted loan – remains at about €200bn; net of provisions that the banks themselves have taken these amount to €85bn.”

“Mr. Mustier, speaking to the Financial Times in December, suggested that the problem of its NPLs (Non-Performing Loans) is deeper than many appreciate.”

“He said the issue stems from Italy’s double-dip recession but also from Italian companies’ practice of funding themselves with ‘hot money.’ The companies had ‘the wrong kind of balance sheet,’ he said. ‘They had not enough capital and they were managing their liabilities by having short-term liabilities to cover long-term assets.'”

“It has taken Mr. Mustier, a Frenchman who lived in London for 20 years, to call out the deeper cultural problems facing Italy’s banking sector. The question is whether his remedy will last beyond this month’s share sale.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – What are China’s 12345 hotlines? 2/7

Economist – Buttonwood: Bubbles are rarer than you think 2/8

Economist – Melania Trump’s “once-in-a-lifetime” opportunity to profit 2/9

FT – Snap: clickbait 2/2

FT – Shanghai shows changing face of FDI in China 2/3

FT – US protectionism and deglobalization spell inflation 2/5

FT – Foreign investors cut holdings of China bonds for first time since 2015 2/5

FT – IMF board split over bailout terms for Greece 2/6

FT – Facebook and Google team up to fight fake news in France 2/6

FT – Thinking the unthinkable on Germany going nuclear 2/6

FT – China credit flood set to persist despite PBoC rate rises 2/8

FT – Why is the eurozone back in crisis over Greece? 2/8

FT – South Korean court all but sinks Hanjin Shipping 2/9

FT – US inflation expectations slide 2/9

NYT – Steve Bannon Carries Battles to Another Influential Hub: The Vatican 2/7

WSJ – The Next American Farm Bust Is Upon Us 2/9

WSJ – Landlord Concessions Rising in Manhattan and Brooklyn 2/9

 

 

January 26 – February 2, 2017

There is a lot of money sloshing around between football (soccer) teams to trade players.  Chinese football club worth more than AC Milan?  Bad credit – no problem.

Headlines

FT – Rock-bottom rates squeeze German lenders 2/1. Interest rate sensitive German lenders continue to be squeezed by low-to-negative interest rates, if this keeps up, many are going to have a hard time making a profit.

NYT – Tesla Gives the California Power Grid a Battery Boost 1/30. Utility level electricity battery storage coming to a town near you.

FT – Microsoft issues biggest bond of the year in debt market boom 1/30. Microsoft just borrowed another $17bn on Monday as they and others seek to tap debt markets before pending rate increases – already $600bn has been issued in 2017.

Special Reports / Opinion Pieces

Briefs

  • Eric Platt of the Financial Times illustrated the drop in negative-yielding debt, now below $10tn.
    • “Roughly $9.6tn of bonds trade in negative territory, down from nearly $14tn four months ago and $10.7tn near the end of December, as rising inflation expectations and hopes of a rebound in economic activity propels yields higher.”
    • ft_negative-yielding-debt_1-27-17
    • “European and Japanese sovereign debt comprise the vast majority of negative-yielding securities, while some $514m of euro-denominated corporate bonds also trade with a yield below zero. That figure is down from $916m in September.”
    • “The declining value of debt trading with a negative yield also reflects a stronger US dollar, which makes foreign obligations appear smaller when converted back to the greenback.”
  • Don Weinland of the Financial Times covered the risks to Chinese banks from the One Belt, One Road initiative as reported by Fitch Ratings.
    • Fitch Ratings recently issued a report pointing to the risks that Chinese lenders are facing in funding the One Belt, One Road (Obor) initiative.  Indicating that “the investments have been driven more by China’s desire to exert global influence than focusing on real demand for infrastructure.”
    • “‘The lack of commercial imperatives behind Obor projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors,’ Fitch said on Thursday.”
    • Why… “credit ratings for countries where China has big infrastructure plans provide a gauge for the projects’ underlying creditworthiness, Fitch said. Most of the countries are of speculative sovereign-rating grade but several, such as Laos, are not rated at all.”
    • However, to be clear it appears that only Fitch is humbugging the Obor initiative whereas the other ratings agencies are praising it, especially as the U.S. appears to be getting out of global infrastructure investment business.
  • Tom Mitchell of the Financial Times illustrated the renminbi’s retreat as an international payment currency.
    • “The Society for Worldwide Interbank Financial Telecommunication (Swift) said the value of international renminbi payments fell 29.5% compared with 2015.”
    • “The renminbi was only the sixth most used currency in 2016 despite its formal recognition in October by the International Monetary Fund as a global reserve currency, alongside the dollar, euro, yen and sterling.”
    • “The Swift rankings are the latest sign that Beijing’s global ambitions for the renminbi have been put on hold as the People’s Bank of China focuses instead on stemming both the redbacks’s fall against the dollar and steady erosion of the country’s foreign exchange reserves, which have declined 25% to $3tn since 2014.”
    • ft_currencies-used-for-international-payments_1-26-17
  • Emily Cadman, Sharon Smyth, Dingman Zhang, Prashant Gopal, and Emma Dong of Bloomberg News highlighted how China’s army of global homebuyers is suddenly short on cash.
    • “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.”
    • “Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”
    • “Among other requirements, SAFE (State Administration of Foreign Exchange) said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subject to money-laundering investigations, SAFE said.”
    • “At The Spire in London, a 67-story tower with sweeping views of the River Thames and flats starting at 595,000 pounds ($751,901), prospective buyers were caught off guard by the new rules. Less than 70% of clients who signed purchase contracts last year have made their initial payments, with the rest now facing ‘problems,’ a press official at Greenland Holdings Corp., the project’s Shanghai-based developer, said on Jan. 12.”
  • Gabriel Wildau of the Financial Times pointed to the record $33bn of foreign real estate acquisitions by Chinese in 2016.
    • Prior to the new restrictions from SAFE, “overseas investment from China in residential, commercial and industrial property totaled $33bn in 2016, up 53% from a year earlier, according to global real estate group JLL, as Chinese buyers snapped up office buildings, hotels and residential land.”
    • ft_china-outbound-re-investment_1-28-17
    • “The biggest deal of the year was Anbang Insurance Group’s $6.5bn purchase of Strategic Hotels and Resorts from private equity group Blackstone.”
    • “A survey by the Hurun Report found that property is the most popular form of overseas investment for Chinese with $1.5m or more. Of this group, 60% plan to invest in property over the next three years, implying 800,000 prospective buyers.”
    • “‘Prices in major Chinese cities have risen so fast in the past year that an overseas house seems to offer good bang for your buck,’ Rupert Hoogewerf, chairman of the Hurun Report, said in October.”
  • Kim Slowey of ConstructionDIVE reported on another record year for the construction delivery of global skyscrapers.
    • “The Council on Tall Buildings and Urban Habitat’s annual review of the world’s tall buildings – 656 feet (200 meters) or higher – found that 128 were completed in 2016, the third straight year that the number of completed skyscrapers has broken the record.”
    • “In a country-by-country breakdown, China was home to the most tall-building projects (84) in 2016, followed by the United States (7), South Korea (6), Indonesia (5), the Philippines (4) and Qatar (4).”
    • “The tallest building completed in 2016 was the 1,739-foot-high Guangzhou CTF Financial Centre in Guangzhou, China, while the tallest towers built in the U.S. were both in New York City – 30 Park Place (926 feet) and 10 Hudson Yards (879 feet).”

Graphics

WSJ – Daily Shot: FRED Average Sales Price for New Homes Sold in US 01/26

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WSJ – Trump Orders Wall at Mexican Border – Laura Meckler 1/25

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FT – HK renminbi deposits fall at record pace in December – Hudson Lockett 1/27

ft_hong-kong-renminbi-deposits_1-27-17

WSJ – Daily Shot: Cost of Borrowing – Pan Europe 01/29

wsj_daily-shot_cost-of-borrowing-in-europe_1-29-17

MarketWatch – The most corrupt countries in the world – Shawn Langlois 1/28

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FT – US universities’ endowments shrink as investments lose money – Stephen Foley 1/30

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WSJ – Daily Shot: Japan 10yr Government Bond Yield 02/01

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It’s a mad, mad, mad, Maduro world – Venezuela’s leaders ignore reality – 1/26

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Featured

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

China spree pushes football transfer spending to record $4.8bn. Murad Ahmed. Financial Times. 26 Jan. 2017.

What happens when Xi Jinping decrees that he wants China to become a great football nation… entrepreneurs and politicians do their best to oblige.

“Chinese football clubs splashed out more than $450m in transfer fees (the fee one club pays to another club to poach talent) last year, a spree that helped global spending on the acquisition of players reach a record high.”

“According to Fifa’s Transfer Matching System, an arm of the sport’s world governing body, the total spent on transfer fees worldwide hit $4.8bn in 2016, a 14.3% increase compared with the year before.”

“Among the recent deals, Shanghai SIPG bought Brazilian midfielder Oscar from Chelsea for $63m.”

Granted, Chinese authorities have caught on to the reality that a lot of cash is leaving China in pursuit of football clubs, talent and media rights.  Hence, “Chinese sporting authorities have sought to crack down on spending on players,… with efforts such as cutting the number of foreign footballers allowed to play in each match from four to three per team.”

Regardless, the transfer fees paid by China are still behind that of England, Germany, Spain, and Italy – especially the English clubs that “spent $1.37bn on transfer fees in 2016, an 8.7% increase on the year. This included the world-record signing of Paul Pogba worth up to €110m, by Manchester United from Italy’s Juventus last August.”

Still it seems that the Spaniards have the best farming system (or acquirers of talent from an investment standpoint) in that they “were the largest seller of players, receiving $554.5m in transfer fees last year, more than the $508.7m they spent on players.”

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Chinese football club is worth more than AC Milan. Ben Bland and Murad Ahmed. Financial Times. 26 Jan. 2017.

More to the story about football in China.

“A football club in the Chinese Super League has been sold to a local property developer at an equity valuation of more than $800m, suggesting it is worth more than European giants such as AC Milan and Atletico Madrid.”

“The high price put on Beijing Guoan, the top team in the capital, underlines the investment surge in football in China, despite recent efforts by the government to crack down on what it called ‘irrational’ spending on foreign players.”

“Sinobo Land, a little-known property developer, is buying 64% of the club for Rmb3.6bn from current owner Citic, a state-owned investment group, giving it a valuation of Rmb5.6bn ($807m).”

“Football industry analysts said that the premium paid for the club, which finished fifth in last season’s CSL, could not be justified based on its sporting performance or immediate commercial prospects.”

However, the team is in Beijing, regularly attracts 40,000 attendees to each match, and President Xi Jinping has aspirations for China to host a World Cup and win.  So maybe it’s not too far of a stretch.

I suppose it’s less ostentatious than paying $400m for a 13% stake in Manchester City (Li Ruigang in 2015).

Risky corporate borrowers make hay as yields slide. Eric Platt and Joe Rennison. Financial Times. 26 Jan. 2017.

“The combination of rebounding commodity prices and hopes for faster US economic growth under Donald Trump is helping some of the riskiest corporate borrowers secure cheaper financing and underlines investors’ growing stomach for risk.”

“An expanding list of companies with a triple-C rating – deep within speculative territory – have been able to lock in borrowing costs below 7%, as yields have fallen over the past 10 months.”

“Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6%. Last February, triple-C paper traded with a yield of 18.57%, according to Bloomberg Barclays Indices. That figure has nearly halved to 9.36% today.”

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“‘It seems there is insatiable demand for yield,’ said Kevin Lorenz, a high-yield portfolio manager with TIAA CREF. ‘Triple-Cs are routinely pricing at 7% or less. The compensation you get paid to take risk is getting narrower and narrower, much like in 1997-98 and 2004-2006.'”

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“High-yield groups have raised $25bn in the US so far this year – up more than fivefold from 2016 – including $3.4bn from triple-C rated issuers, according to Dealogic. It marks the greatest haul from triple-C groups at the start of a year since 2011.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – How Stadium Development is Killing Loyalty in American Sports 2/1

Economist – India flirts with a UBI 2/2

Economist – How to get rich in America 2/2

FT – Shark antibodies join battle against Alzheimer’s 1/25

FT – German bond yields hit year-high in broad sell-off 1/26

FT – China spells out curbs on capital outflows 1/27

FT – Sleepy Saudi sovereign wealth fund wakes and shakes global finance 1/28

FT – Asia borrowing binge hits record high in January 1/29

FT – Bonds start year at breakneck pace, but higher rates loom 1/29

FT – Fitbit: huffing and puffing 1/30

FT – Renminbi internationalization remains elusive 1/30

FT – Are tougher times for Wall Street’s ‘Flash Boys’ here to stay? 1/30

FT – Chinese billionaire abducted from Hong Kong 1/31

FT – Xiao Jianhua, student leader who became an abducted tycoon 1/31

FT – Derivatives ‘Big Bang’ catches market off guard 2/1

FT – US university endowment woes put spotlight on hedge funds 2/1

FT – Chinese defaults: failing better 2/1

NYT – A Costly Drug, Missing a Dose of Disclosure 1/27

NYT – In America’s Heartland, Discussing Climate Change Without Saying ‘Climate Change’ 1/28

NYT – For Couriers, China’s E-Commerce Boom Can Be a Tough Road 1/31

WSJ – India’s Growth Doesn’t Have a Story 1/26

WSJ – Accused Ponzi Schemer Not Sleeping Easy 1/27

WSJ – Here’s What Can Drive the Economy Higher 1/27

WSJ – Suburban Offices Woo Millennials With Food, Fitness and Fun 1/29

WSJ – The Coming Squeeze on Profit Margins 1/30
WSJ – Young People Lose Confidence In Their Prospects as Homeowners 2/1

 

 

January 20 – January 25, 2017

San Francisco becoming a childless city. Now China is making it difficult for banks to move currency overseas.

This week’s post is going to be short a day – I’ll cover it in next weeks’ post – as me and my family are in the process of moving to Phoenix, AZ. Enjoy. 

Headlines

FT – China GDP hits 2016 target as Trump headwinds loom 1/19. Like clockwork.

Bloomberg Businessweek – Drug Cartels Are Looting Mexican Gas Pipelines 1/12. A reduction in fuel subsidies has caused the price of gas to jump about 20% in Mexico, a side effect – cartels and entrepreneurs are siphoning about $1 billion a year from Pemex (the state oil utility).

WSJ – BT’s Italian Scam Is Just One of Many Problems 1/24. British Telecom’s Italian subsidiary had some shady practices, specifically borrowing cash and disguising it as sales, about £500 million in sales actually…

CoStar – Blackstone’s New REIT Makes First Acquisition 1/25. Blackstone’s new non-traded REIT bought a hotel at UC Davis, more importantly are the different characteristics of Blackstone’s non-traded REIT versus the industry norms. Specifically, fees capped at less than 8.75% and a hurdle rate of 5% before Blackstone participates in the upside.

NYT – When Snap Goes Public, Some Shareholder’s Voting Rights May Disappear 1/24. Sounds like a good deal… for the founders.

Briefs

  • Yuan Yang and Xinning Liu of the Financial Times highlighted Didi Chuxing’s recent dramatic workforce cuts following Shanghai’s and Beijing’s new anti-migrant rules.
    • “Didi Chuxing, China’s dominant car-sharing company, is gutting its fleet of drivers in Shanghai to comply with the city’s new regulations restricting car-sharing platforms to the use of local drivers and locally-registered cars.”
    • “Less than 3% of Didi’s 410,000 drivers in Shanghai have a local hukou (household registration) that would allow them to continue picking up passengers via the platform, according to the company.”
    • “Compliance with the new regulations will further discourage Didi’s already-disgruntled drivers, who have seen subsidies plummet since Didi bought out its major competitor Uber in August. Last month, two Didi drivers were arrested in Fujian province for protesting the reduced subsidies. Drivers in Liaoning staged a similar protest.”
  • Leslie Hook of the Financial Times covered the recent $20m fine paid by Uber for misleading drivers about their potential earnings.
    • “Uber has agreed to a $20m fine to settle claims that it misled drivers with inflated promises about potential earnings, the latest in a series of fines and settlements the company has faced around the world.”
    • “According to the FTC (Federal Trade Commission) statement, Uber had claimed its drivers in New York had a median income of more than $90,000, while drivers in San Francisco made over $74,000. Instead, the FTC found that the drivers’ actual median income in those cities was just two-thirds of what Uber had claimed.”
    • “The suit over misleading earnings claims highlights a persistent complaint from many Uber drivers who say they barely make enough to cover their costs.”
  • Mehreen Khan of the Financial Times discussed rating agency Fitch’s recent report on economic growth in China being fueled by unsustainable stimulus.
    • “Responding to official government figures which showed the Chinese economy expanded by 6.8% in annualized terms in the fourth quarter, Fitch said developments in the Chinese economy are becoming a ‘significant risk to medium-term macroeconomic stability.'”
    • “In particular, the agency noted Beijing’s attempts to pump ‘direct fiscal expansion and quasi-fiscal stimulus’ into its state-owned enterprises (SOE’s), where the annual pace of investment growth climbed to 19.1% from 10.7% from 2015.”
    • “‘Outside of the SOE sector, fixed-asset investment growth slowed markedly, underlining the importance of stimulus in propping up demand and highlighting the risk that the economy might lack self-sustaining growth momentum,’ said Fitch.”
    • “It pointed to climbing credit growth, capital outflows, and depreciation pressures on the currency which could all combine to result in slowing growth. China should however avoid an ‘outright financial crisis’ due to the over-sized role of the state in managing economic decline, said Fitch.”
  • Esther Fung of The Wall Street Journal pointed out how many Mall Owners are divesting themselves of their less desirable malls by giving back the keys to the lenders.
    • “Mall landlords are increasingly walking away from struggling properties, leaving creditors in the lurch and posting a threat to the values of nearby real estate.”
    • “In the period from January to November 2016, 314 loans secured by retail property – totaling about $3.5 billion – were liquidated, 11% more loans than in the same period a year earlier, according to data from Morningstar Credit Ratings. The liquidations resulted in a loss of $1.68 billion.”
    • And it’s not just companies with financial difficulties. Retail landlords with billions in market cap and plenty of cash are walking away from properties, i.e. Simon Property Group and Washington Prime Group. But don’t you worry, their credit ratings haven’t been effected…
    • “Despite a strengthening economy in 2016, the delinquency rate for loans backing retail property rose by 0.6% point last year to 5.76%, according to Trepp LLC, a real-estate data service. Special servicers, which deal with troubled commercial mortgage securities, managed $3.1 billion worth of mall-backed loans last year, up from $2.9 billion in 2015, according to Trepp.”
    • “One reason mall owners struggle to restructure loans is that many were packaged into commercial mortgage-backed securities, and these bonds in turn are owned by numerous investors, making it difficult to negotiate new deals.”
  • Alan Rappeport of the New York Times reported on the recently released report by the CBO indicating that the Federal Debt is projected to grow by nearly $10 Trillion over the next decade.
    • “After seven years of fitful declines, the federal budget deficit is projected to swell again, adding nearly $10 trillion to the federal debt over the next 10 years, according to projections from the nonpartisan Congressional Budget Office. The numbers reveal the strain that government debt could have on the economy as President Trump presses to slash taxes and ramp up spending.”
    • “The deficit figures released Tuesday will be a major challenge to House Republicans, who were swept to power in 2010 on fears of a bloated deficit and who made controlling red ink a major part of their agenda under former President Barack Obama.”

Graphics

WSJ – Daily Shot: India’s Currency in Circulation 01/22

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WSJ – California Housing Crunch Prompts Push to Allow Building – Chris Kirkham 1/25

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Featured

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

San Francisco Asks: Where Have All the Children Gone?. Thomas Fuller. New York Times. 21 Jan. 2017.

“A few generations ago, before the technology boom transformed San Francisco and sent housing costs soaring, the city was alive with children and families. Today it has the lowest percentage of children of any of the largest 100 cities in America, according to census data…”

“As an urban renaissance has swept through major American cities in recent decades, San Francisco’s population has risen to historical highs… at the same time, the share of children in San Francisco fell to 13%, low even compared with another expensive city, New York, with 21%. In Chicago, 23% of the population is under 18 years old, which is also the overall average across the United States.”

“In an interview last year, Peter Thiel, the billionaire Silicon Valley investor and a co-founder of PayPal, described San Francisco as ‘structurally hostile to families.'”

“Prohibitive housing costs are not the only reason there are relatively few children. A public school system of uneven quality, the attractiveness of the less-foggy suburbs to families, and the large number of gay men and women, many of them childless, have all played roles in the decline in the number of children, which began with white flight from the city in the 1970s. The tech boom now reinforces the notion that San Francisco is a place for the young, single and rich.”

China clamps down on banks moving currency overseas. Tom Mitchell, Gabriel Wildau, and James Kynge. Financial Times. 22 Jan. 2017.

“Chinese regulators are stamping out moves by banks to shift renminbi out of the country as they attack one of the few loopholes remaining in the country’s strict new capital controls regime.”

“According to several people briefed on rules introduced this month, banks in Shanghai must ‘import’ Rmb100 for every Rmb100 they allow a client to remit overseas, ensuring no net outflows of the Chinese currency. Shanghai-based banks had been allowed to remit Rmb160 overseas for every Rmb100 they brought back into China.”

“The clampdown goes even further in Beijing where banks must import Rmb100 for every Rmb80 they remit overseas on behalf of clients, ensuring a net inflow into the capital.”

“Overseas banks, whose domestic market share in China is tiny, have been more affected by the clampdown because they derive a higher percentage of revenues from cross-border business. ‘This regulation is a bigger nightmare for foreign banks because we are more reliant on cross-border business than Chinese banks,’ one banker said.”

“Bankers have also complained that the central bank and Safe are only communicating regulatory ‘window guidance’ over the phone or during face-to-face meetings, rather than in writing.”

“They added that Safe (State Administration for Foreign Exchange) has instructed banks not to inform clients why their overseas remittances are being rejected and is checking their net renminbi flows on a weekly basis, compared with every month previously.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Hedge Funds Risk Treasuries Wipeout After Bearish Bets Soar 1/22

FT – ECB to buy bonds below deposit rate: but what does it mean? 1/20

FT – China’s ‘Kamikaze Squad’ hedge fund leader jailed for five years 1/22

FT – Hong Kong SFC to take legal action against Hanergy directors 1/23

FT – Hong Kong watchdog seeks disqualification of Hanergy founder 1/23

FT – Hedge funds’ bets on rising oil prices hit record high 1/23

FT – China corruption prosecutions drop for first time in five years 1/24

NYT – Doubts Arise as Investors Flock to Crowdfunded Start-Ups 1/24

NYT – In Its Third Month, India’s Cash Shortage Begins to Bite 1/24

WSJ – How Electric Vehicles Could End Car Ownership as We Know It 1/15

WSJ – The Mortgage Market’s $1 Trillion Pocket of Worry 1/19

WSJ – Amazon Expands Into Ocean Freight 1/25

 

 

January 13 – January 19, 2017

China’s maritime footprint. Judicial independence in China – don’t count on it. Music streaming to the rescue. 

Headlines

NYT – Samsung Heir Faces Arrest on Charges of Bribing South Korea’s President 1/15. It appears that no one is ‘safe’ if the arguably the most powerful person in the country can be taken down – it’s like watching House of Cards.

NYT – Earth Sets a Temperature Record for the Third Straight Year 1/18. “The heat extremes were especially pervasive in the Arctic, with temperatures in the fall running 20 to 30 degrees Fahrenheit above normal…”

FT – China’s 2016 capital outflows estimated at over $700bn 1/18. A recent report from Standard Chartered puts the 2016 total at $728bn, slightly less than the record $744bn in 2015.

Briefs

  • Sue-Lin Wong and Lusha Zhang of Reuters highlighted the continued flow of credit by Chinese banks and the concerning increase in debt levels.
    • “China’s banks extended a record 12.56 trillion yuan ($1.82 trillion) of loans in 2016 as the government encouraged more credit-fueled stimulus to meet its economic growth target, despite worries about the risks of an explosive jump in debt.”
    • “In December alone, Chinese banks extended 1.04 trillion yuan in net new yuan loans, far more than economists had expected, central bank data showed on Thursday.”
    • “Analysts polled by Reuters had expected new lending would fall to 700 billion yuan from November’s 794.6 billion yuan.”
    • “New bank loans last year surpassed the levels of China’s massive credit-led stimulus during the global financial crisis in 2009, according to Reuters calculations based on central bank data. The 2016 total was some 8% above the previous all-time high of 11.72 trillion yuan set just the year before.”
  • Dexter Roberts of Bloomberg Businessweek brought attention to the crisis facing China’s aging rural poor.
    • “Unlike people in much of the rest of the world, China’s citizens spend less on their health as they grow older, not more, says Albert Park, an economist at the Hong Kong University of Science and Technology.”
    • Why, simply because they seek to avoid healthcare costs due to the cost relative to their incomes.“The average cost of a hospital visit is 50% of the annual income of a city dweller; for rural residents it’s 1.3 times annual income, according to Gerard La Forgia, the lead author of Healthy China: Deepening Health Reform in China, a joint report by the World Bank, the World Heath Organization, China’s finance ministry, and other government agencies.”
  • Onur Ant and Benjamin Harvey of Bloomberg Businessweek covered the purge that is paralyzing Turkey.
    • Following the failed coup in Turkey,“at least 100 media outlets have been closed and more than 36,000 suspected Gulenists detained.”
    • The markets are not amused.“The lira has tumbled more than 18% since the coup attempt, the largest depreciation among major currencies worldwide, data compiled by Bloomberg show. The Borsa Istanbul 100 index fell as much as 28% in dollar terms by early December.”
    • Further“on Dec. 12 the Turkish government released third-quarter numbers for gross domestic product, which contracted for the first time in seven years, by 1.8%.”
    • Bottom line, now is a terrible time to have any affiliation with Gulenists. If you do have any, be prepared to have assets seized.“If a seizure is endorsed by the courts, the Savings Deposit Insurance Fund, a government-backed fund that manages companies the government takes over, will prepare the underlying assets for sale. The fund estimates the collective value of all the companies seized to date at about $10 billion.”
    • As Sevket Pamuk, an economist at Bogazici University in Istanbul puts it“what I find most striking is how easily ownership rights are being ignored. Why would local businesses invest in such an environment?”
  • Art Patnaude of The Wall Street Journal illustrated the growing amounts of ‘dry powder’ being accumulated by real estate funds as for-sale supply has been limited.
    • “Investors are piling money into real-estate funds – but fund managers are finding it a challengeto spend it.”
    • “Global fund managers had a record $237 billion available to invest in commercial property at the end of last year, according to data firm Preqin, up from $229 billion at the end of 2015 and $136 billion at the end of 2012.”
    • “Global fund managers have raised $446 billion for commercial property in the last four years, on par with the total raised between 2015 and 2008 in the run-up to the global financial crisis, Preqin said.”
    • However, there simply has not been enough property to buy.  “One reason for the lack of property to buy: Landlords aren’t willing to sell. Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later, analysts said.”
    • Another are the“potential returns down the road. Strong levels of demand now suggest that if they wait, the value of their property could rise even more.”
    • Further, don’t forget that if they do sell, then there are the taxes to pay and what to do with the proceeds?
  • Tom Hancock of the Financial Times highlighted a recent acknowledgement by a Chinese provincial governor that they had been falsifying fiscal data.
    • “The Chinese province of Liaoning fabricated fiscal data for four years, a senior official has admitted, the latest blow to the already shaky reputation of China’s economic statistics.”
    • “Fiscal revenues in the province were inflated by at least 20% from 2011 to 2014, said provincial governor Chen Qiufa, according to Communist party mouthpiece The People’s Daily.”
    • “Economists and investors have long expressed doubts about Chinese economic data, particularly gross domestic product figures.Compared with other countries, China’s inflation-adjusted GDP growth rates are remarkably stable from quarter to quarter.”
    • “Following Mr. Chen’s admission, respected Chinese financial publication Caijing said it had already exposed Liaoning’s fake data in a 2015 report… that report dated the falsification of the data back to 2009, earlier than the 2011 date given by Mr. Chen, who became provincial governor in 2015.”
  • Yuan Yang of the Financial Times covered that China’s housing boom appears to have ended now that prices have fallen in its top cities.
    • “House prices have fallen across most of China’s hottest property markets for the first time in almost two years, marking an end to the enormous growth that saw prices rise as much as 40% last year.”
    • “Prices of newly built residential properties dropped between 0.1 and 0.4% in December from the previous month in 12 out of 15 ‘hotspot’ cities, according to data released by the National Bureau of Statistics on Wednesday.”
    • “Although many analysts expect property prices to fall at most 5% year on year in the current downturn, local governments are ready to move to avoid sharper crashes.”

 Graphics

WSJ – Daily Shot: China’s credit-driven Growth Model 01/12

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WSJ – Forecasters See Upside Risks to Their Economic Outlooks at Highest in More Than Two Years – Josh Zumbrun 1/12

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WSJ – Daily Shot: FRED Retail Department Store Sales 01/15

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FT – The problem with US healthcare in one chart – Federica Cocco 1/16

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NYT – How 2016 Became Earth’s Hottest Year on Record – Jugal K. Patel 1/18

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WSJ – Daily Shot: US Cost of Living Changes by Category 01/17

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Featured

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

How China rules the waves. James Kynge, Chris Campbell, Amy Kazmin, and Farhan Bokhari. Financial Times. 12 Jan. 2017.

“Investments into a vast network of harbors across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation – five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels.”

“China understands maritime influence in the same way as Alfred Thayer Mahan, the 19th century American strategist. ‘Control of the sea,’ Mr. Mahan wrote, ‘by maritime commerce and naval supremacy, means predominant influence in the world; because, however, great the wealth of the land, nothing facilitates the necessary exchanges as does the sea.”

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“‘There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,’ says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. ‘They are great for the soft projection of hard power.’“

“Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18% of all container shipping handed by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group.”

“In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010, according to FT research.”

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“And those ports handled 67% of global container volumes, up from 42% in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists.”

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“Rounding out a picture of China’s merchant fleet dominance is the country’s fishing fleet, which is by far the largest in the world, according to a recent paper by Michael McDevitt, a former rear admiral in the US navy and now a senior fellow a CNA Strategic Studies, a US think-tank.”

Bottom line, “analysts say that China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the South, a natural maritime barrier called the ‘first island chain’ within which China identifies its strategic sphere of influence.”

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China’s top judge denounces judicial independence. Lucy Hornby. Financial Times. 16 Jan. 2017.

“China’s top judge has fired a warning shot at judicial reformers by formally acknowledging that China’s court system is not independent of the Communist Party and rejecting attempts to make it so.”

“‘Bare your swords towards false western ideals like judicial independence,’ Mr Zhou told a gathering of higher court officials. Only two months before, he had said that party committees should not interfere in the judicial process.”

“‘This statement is the most enormous ideological setback for decades of halting, uneven progress toward the creation of a professional, impartial judiciary,’ said Jerome Cohen, an 86-year old American lawyer who has spent most of his career promoting legal exchanges between the US and China. ‘It has already provoked some of China’s most admirable legal scholars to speak out in defiance, and I fear not only for their academic careers but also for their personal safety.'”

“Mr. Zhou, once seen as a reformist, is one of the highest-ranking members of the Communist Youth League faction, which Mr. Xi moved to neutralize last summer ahead of a leadership reshuffle later this year.”

Further, “a crackdown on lawyers has intensified since 2015, ‘disappearing’ hundreds of lawyers. The most recent is Jiang Tianyong, a particularly active civil rights lawyer, who has been missing since November.”

How streaming saved the music industry. Anna Nicolaou. Financial Times. 16 Jan. 2017.

“Thanks to growth in Spotify and Apple Music, music streaming has passed the milestone of 100m paying subscribers worldwide, a feat few imagined possible a few years ago. The US music industry is on track to record a second consecutive year of growth – something that has not happened since 1999, the year Napster launched. Some analysts and executives are beginning to confidently predict a new golden age.”

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“It has been hard to imagine how the music industry could ever match its pre-Napster performance in the 1990s, when compact disc sales ruled. But now one monthly payment zaps 30m songs into your smartphone, tablet or desktop app, enabling artists like Drake to notch up streams by the billions. The Canadian rapper’s music was streamed more than 4.7bn times on Spotify alone last year. Every hour, his songs are streamed more than 500,000 times on the service.”

“Artists like Drake helped power Universal to profitability last year, earning the company $.1bn in streaming revenues in the first nine months – enough to offset the fall in sales of digital downloads and CDs.”

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“In a research note called Music in the Air, Goldman Sachs projected that streaming will help revenues double to $104bn by 2030.”

“Each year more people are buying access to digital music; Americans streamed 431bn songs on demand in 2016.”

Doesn’t mean there aren’t detractors – i.e. Taylor Swift – but the format continues to gain momentum.

As to control of this pipeline, “the music groups hold the leverage. The source of their power is…through ownership of the rights to… master recordings, Vivendi-owned Universal, Warner Music and Sony together control 80% of all recorded music, with Universal having a one-third share.”

Further, “streaming is a high-margin business. The labels no longer face the costs of hauling truckloads of CDs to Walmart. Instead of ownership, they are selling access to a digital music fortress.”

“This compares well with television studios, which have lost some grip over content as video streaming services like Netflix make shows and offer a limited selection of programs. Music fans, though, expect streaming services to offer more comprehensive digital back-catalogues, forcing them to cut deals with the labels. As one label executive puts it: ‘TV and film studios have to coexist with Netflix now. We haven’t made that mistake.'”
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However, the “one large thorn in the labels’ side is Google-owned YouTube, whose music draws more regular listeners than Spotify and Apple Music combined. Most music consumption on YouTube takes place on its free, ad-supported tier, a revenue stream vulnerable to the fortunes of the advertising market.”

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At this point “streaming is the industry’s latest white knight but after decades of grappling with pirates, new technologies and evaporating sales, music executives know there will be twists to come.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

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FT – China’s energy strategy: power and independence 1/15

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FT – Capital Group chief says post-Trump change in markets ‘is real’ 1/17

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