Tag: Demographics

November 4 – November 10, 2016

Oil peaking in five years? Gig economy creating or cannibalizing jobs?

Headlines

Special Reports / Opinion Pieces

Briefs

    • “Yes, the company experienced three straight quarters of declining iPhone sales before registering an uptick in its most recently completed quarter. And its overall quarterly profit slid for the first time in 15 years. Even so, Apple accounted for a staggering 103.6% of the smartphone industry’s operating profits during the third quarter, according to a BMO Capital Markets analyst, Investor Business Daily reported.”
    • “Making it even more remarkable is the fact that Apple has actually been losing market share. In the third quarter of 2016, Android captured a record 88% of the global market, according to Strategy Analytics. Meanwhile, Apple’s iOS share slipped to 12.1% in the same period, from 13.6% the year prior.”
  • Kiran Stacey of the Financial Times covered how smog levels in Delhi are driving out some of its middle-class residents.
    • Pollution is bad in India’s political hub. Really bad with particulate levels last week reaching more than 30 times the World Health Organization limit recommended for safe habitation.
    • “The economic consequences of Delhi’s pollution are already being seen in the property market – often a leading indicator of what will happen to the rest of the economy.”
    • “In the past three years, property prices in Delhi have fallen 21.7% according to the MagicBricks property index. And estate agents say the decline is accelerating.”
    • “‘Rents have really fallen in the last year – on average by more than 30%,’ said Kajal Makhijani of Mak Realtors, a broker who works in particular with the expatriate community. ‘Expats are getting really worried about the pollution and deciding not to come, or to work outside the city. Recently we have seen those concerns start to be shared by Indians as well.'”
  • Illustrated in the Daily Shot in the Wall Street Journal on November 8…
    • “Consumer debt (excluding mortgages) rose more than expected – shown as a percentage of GDP below.”
    • daily-shot_fred-us-consumer-credit_11-8-16
    • “A good portion of this increase was from student loans. The chart below shows student debt directly owned by the federal government, which has now exceeded $1 trillion. Note that the total student debt outstanding (including debt that is guaranteed by the government) is about $1.4 trillion.”
    • daily-shot_fred-us-student-loans_11-8-16

Graphics

FT – In charts: America’s growing state of disunion – Shawn Donnan, Sam Fleming, and Lauren Leatherby 11/7

ft_widening-political-ideological-gap-in-us_11-7-16

WSJ – Daily Shot: November 8, 2016

daily-shot_us-earthquakes_11-8-16

Featured

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

Will oil peak within 5 years? Nick Butler. Financial Times. 3 Nov. 2016.

“On November 2 Simon Henry, the chief financial officer of Royal Dutch Shell and one of the most respected figures in the industry, told analysts on a conference call for the Shell results presentation that he believed ‘oil demand will peak before supply and that peak may be between five and 15 years hence.'”

Why…

“Oil demand in the developed OECD world has already peaked and is 9% below the level reached in 2005. In Europe, oil demand is down 17% over the same period.”

“All the indications are that in the developed world demand has further to fall. Oil use is now heavily concentrated in the transport sector. Electric vehicles have only a fractional share of the market but the numbers are growing month by month. Technology is improving, reducing costs and expanding sales. Tesla gets most of the publicity but those wanting to understand the impact of EVs on the oil market should look at China where 188,000 new electric and hybrid vehicles were sold in 2015. This year that number is expected to more than double to around 450,000.”

“As EVs proliferate, their costs will fall until they are the natural purchase everywhere.”

The implications for the oil companies are plateaued-to-falling demand and corresponding pressure on oil pricing.

With the biggest challenge facing the “producing countries, especially those that have failed to diversify their economies, such as Russia, Nigeria, Algeria, Venezuela and, of course, Saudi Arabia. Some have such a low production cost base that they should be able to keep their market share. But with the prospect of a decline in oil use in mind many will want to maximize production quickly to extract as much revenue as possible as soon as they can. In a declining market the expectation will be that prices will stay low or fall further, removing any remaining incentive to keep oil in the ground.”

“The 20th century was the age of oil. The 21st will not be and the adjustment process for those involved could be very disruptive – destroying rentier economies built on oil revenues, changing the pattern of trade and adding another challenge to unstable and dangerous parts of the world.”

Is the Gig Economy Cannibalizing or Creating Jobs? Here’s Some Early Evidence. Mark Muro. Wall Street Journal. 3 Nov. 2016.

“Does the so-called gig economy of app-based freelancing for platforms like Uber or TaskRabbit complement or ‘cannibalize’ more conventional payroll work? Given the sketchiness of the data available, it’s been hard to tell.”

wsj_change-in-nonemployer-firms-transportation-industries_11-3-16

“All in all… the online freelance marketplaces may well gain workers at the expense of competing payroll businesses in some industries, particularly where incumbents are struggling in weaker markets or fail to respond with better service.”

“All of this is important because of the rise of online temping, freelancing and independent contracting has huge implications for the circumstances of workers and families in cities.”

“To begin with, the scale of the trend is enormous. In this regard, the spread of new, gig-based business models for linking workers to work isn’t just a limited scale, vanguard development. Instead, the changes affecting a few hundred thousand workers in the rides and rooms industries are a tiny part of a pervasive, economywide move toward nontraditional freelance, contract or temporary work arrangements in dozens of industries. And the number of workers involved is huge. Overall, there may be as many as 68 million ‘independent’ workers in the U.S., according to a new estimate by the McKinsey Global Institute. Within a decade, nearly half of all employed Americans may be employed this way. So the size of the trend alone underscores the need to pay attention.”

“Beyond that, the shift to alternative work arrangements matters for policy makers because it represents a fundamental reorientation of the social contract within which millions of Americans work. Most notably, the rise of online temping, freelancing and independent contracting means that millions of workers increasingly lack access to the once-ubiquitous labor standards that defined the ‘good jobs’ economy that came out of the New Deal era. Gig workers, for example, retain limited access to income security protections, such as unemployment insurance, workers’ compensation and disability payments. Minimum-wage and antidiscrimination laws may not apply to such contractors, nor do they often receive retirement benefits such as Social Security. And for that matter access to credit, training and credentialing becomes even more tenuous than elsewhere in the economy.”

“In short, the expansion of the gig economy-left to itself-is likely going to contribute to larger trends that are reducing the share of American workers that can achieve basic economic security through their work.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Banks Passed Up Uber Share Sale on Lack of Data 11/7

FT – The Cohen model of making billions loses its appeal 11/4

FT – China replaces finance minister Lou Jiwei 11/6

FT – Japanese investors grapple with wedding versus funeral bet 11/7

FT – Vices and virtues of Uber’s insolence 11/7

FT – What does China’s latest intervention mean for Hong Kong? 11/7

FT – The Hillary Clinton hate campaign has twisted America 11/7

FT – Mozambicans feel the pinch as ‘tuna bond’ debt crisis deepens 11/7

FT – Oil demand might peak in just over a decade, says Opec 11/8

FT – China card curbs stem cash flow to Hong Kong insurance plans 11/8

FT – Lessons from the Mozambique meltdown 11/8

FT – Sports rights: The fight to keep the fans on side 11/8

FT – Infineon breaks Rubik’s Cube world record 11/9

NYT – Young Adolescents as Likely to Die From Suicide as From Traffic Accidents 11/3

NYT – Turkey’s Post-Coup Crackdown Targets Kurdish Politicians 11/4

NYT – ‘We Almost Have Riots’: Tensions Flare in Silicon Valley Over Growth 11/4

WSJ – China Faces Looming Bulge in Currency Pressure 11/4

WSJ – Office Pileup Gets Worse in Houston 11/8

WSJ – Warning Light Flashes on Auto Loans 11/8

WSJ – With Financing Scarce, Chinese Developers Get Too Clever by Half 11/10

October 21 – October 27, 2016

Renewable energy sources overtake coal as the world’s largest source of power capacity. The effects of ageing on the markets.

Headlines

Briefs

  • Gavyn Davies of the Financial Times highlighted the importance of demographics on long-term interest rates.
    • In understanding the long-term direction for interest rates, Gavyn Davies, points to a couple key trends that are likely to imply low interest rates are hear to stay in developed economies.
    • First, the decline in the labor supply growth rate has led to an abundance of capital that doesn’t have a ready place to go, hence higher demand for what investment projects do exist and with capital competing amongst itself, rates go lower/stay low.
    • Second, an increasing dependency ratio (number of young and old people relative to the number of people in the labor force). Not enough savers… this should help raise interest rates considering that less capital is being accumulated; however, there is a nuance in point three.
    • Third, the increasing life expectancy of the population. Well, with people living much longer, people are reluctant to spend as they enter their later years.
  • Chris Newlands and Madison Marriage of the Financial Times covered a recent report that indicates 99% of actively managed US equity funds underperform.
    • According to S&P Dow Jones, “99% of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006. Almost 97% of emerging market funds have underperformed.”
    • Accordingly, “assets held in passive mutual funds have grown 230% globally, to $6tn, since 2007. However, assets held in active funds total $24tn.”
  • Sarah Mulholland of Bloomberg illustrated how rent hikes have been leading to increasing vacancies in retail real estate.
    • With retail lease rents at record highs, tenants are pushing back and vacancies are up. According to a recent report from Cushman and Wakefield, retail vacancy on Fifth Avenue in New York are up to 15.9% in the third quarter, up from about 10% a year ago.
    • As Richard Hodos, vice chairman at CBRE Group Inc, “property trades are being based on achieving ever-higher rents, and nobody every really looks at what retailers can afford to pay. In some cases, rents need to come down 30% or more for rents to be at levels where retailers are able to make sense of them again.”
    •  Bloomberg_Retail Rents on Fifth Avenue_10-25-16
    • The issue isn’t just limited to NYC. “Retailers are being squeezed across the U.S. In 2016, malls and other types of shopping venues have been hit by 280 major-brand store closures, totaling 12.8 million square feet (1.2 million square meters), data from Reis Inc show. Another real estate research firm, Green Street Advisors LLC, estimates that several hundred malls around the country will cease operations over the next decade.”

Graphics

WSJ – City Construction Set to Beat 2007 Peak – Josh Barbanel 10/25

WSJ_NYC building volume_10-25-16

Featured

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

Renewables overtake coal as world’s largest source of power capacity. Pilita Clark. Financial Times. 24 Oct. 2016.

“About 500,000 solar panels were installed every day last year as a record-shattering surge in green electricity saw renewables overtake coal as the world’s largest source of installed power capacity.” 

Granted capacity does not mean electricity generation – “the amount of energy a plant actually generates varies according to how long it produces power over a period of time.” Thus, traditional sources of power – which generates power constantly (regardless of wind and darkness) – i.e. coal power still generate the majority of the world’s power. “Coal power plants supplied close to 39% of the world’s power in 2015, while renewables, including older hydropower dams, accounted for 23%, IEA data show.” 

Regardless, “two wind turbines went up every hour in countries such as China, according to International Energy Agency officials who have sharply upgraded their forecasts of how fast renewable energy sources will keep growing.”

A large part of the growth has been a result of rapidly declining costs.

“Average global generation costs for new onshore wind farms fell by an estimated 30% between 2010 and 2015 while those for big solar panel plants fell by an even steeper two-thirds, an IEA report published on Tuesday showed.” 

“An unprecedented 153 gigawatts of green electricity was installed last year, mostly wind and solar projects, which was more than the total power capacity in Canada.” 

The agency now predicts that “renewables’ share of power generation to rise to 28% by 2021, when it predicts they will supply the equivalent of all the electricity generated today in the US and EU put together.”

However, there are still policy risks that could slow the advance of renewable energy.

Demographics and markets: The effects of ageing. John Authers. Financial Times. 25 Oct. 2016.

“The new Fed paper suggests that ‘demographic factors alone account for a 1.25 percentage point decline in the natural rate of real interest and real gross domestic product growth since 1980.’ This is a huge claim, as it implies that demographics – rather than fiscal or monetary policy, technology or other changes in productivity – are responsible for virtually all of the decline in economic growth over the past 35 years.” 

ft_financial-crisis-and-demographic-turning-points_10-25-16

ft_age-related-saving-and-consumption_10-25-16

“In short, low yields may be unavoidable and much of the current policy debate may be misguided.”

Fortunately, a reckoning can be delayed by encouraging and allowing workers to work later into their lives.

ft_workers-after-age-65_10-25-16

Other Interesting Articles

Bloomberg Businessweek

Bloomberg – N.Y. Governor Cuomo Signs Bill to Fine Illegal Airbnb Hosts 10/21

FT – Financing ‘trick’ boosts lucrative private equity fees 10/19

FT – Why bond yields are so low 10/19

FT – China’s housing frenzy starts to calm 10/20

FT – The 1890s and the end of the great bond bull market 10/23

FT – Exposure to air pollutants linked to high blood pressure 10/24

NYT – Living in China’s Expanding Deserts 10/24

WSJ – Park Hyatt Hotel Destined for Oceanwide Development in Los Angeles 10/24

WSJ – A Startup’s Pitch: Come Invest With Your Rich Uncle 10/25

WSJ – Blackstone Enters Nontraded REIT Sector 10/25

WSJ – China’s Latest Debt Crackdown Just Delays More Serious Action 10/26

WSJ – How to Get Out of Chinese Property When the Price Is High 10/27

 

June 3 – June 9, 2016

The volume of Chinese wealth-management products is becoming unwieldy. Banks have had enough of this negative interest rate nonsense.

Headlines

Briefs

    • “China today boasts roughly five workers for every retiree. By 2040, this highly desirable ratio will have collapsed to about 1.6 to 1.”
    • “At the same time, the number of Chinese older than 65 is expected to rise from roughly 100 million in 2005 to more than 329 million in 2050 – more than the combined populations of Germany, Japan, France, and Britain.”
    • “With the number of working-age Chinese men already declining – China’s working-age population shrank by 4.87 million people last year – labor is in short supply.”
    • “By hastening and amplifying the effects of this decline, the one-child policy is likely to go down as one of history’s great blunders.”
    • “As a result, by 2020, China is projected to have 30 million more bachelors than single women of similar age.”
    • “By the end of the century, China’s population is projected to dip below 1 billion for the first time since 1980. At the same time, America’s population is expected to hit 450 million.”
    • A May 26 auction of non-performing loans (NPLs) was met with tepid reception and was primarily an event of banks shuffling bad debt between each other.
    • Thing is, if this strategy doesn’t catch on with private sector investors, “a failure to purge lenders of their NPLs may fuel expectations for a government-led bailout, which Standard Chartered Plc estimates could cost as much as $1.5 trillion.”
    • According to Bloomberg Intelligence, “China has about $2.4 trillion of corporate debt at risk of default.”
    • Hopefully the debt products being sold become more transparent and easier to asses from a risk perspective so that the private sector can reasonably jump in.

Special Reports

Graphics

FT – Argentina set to tumble 22 places on global wealth list – Steve Johnson 5/27

FT_Latin America GDP growth_5-27-16

Featured

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

Long Shadow Hangs Over China’s Banks. Anjani Trivedi. Wall Street Journal. 6 Jun. 2016.

“The growth of off-balance sheet WMPs (Wealth Management Products) is exploding, with issuance rising 7.3 trillion yuan ($1.1 trillion) last year, up nearly three-quarters from the previous year, according to Charlene Chu of Autonomous Research. That is equivalent to nearly 40% of China’s 19 trillion yuan credit growth in 2015, including debt issuance under a local government bond-swap program. And while customers are told most WMPs aren’t principal guaranteed, that distinction may be shaky in China’s financial system rich with moral hazard.”

While this isn’t the first time that debt issuance has surged from WMPs; however, “the structures this time around are increasingly complex. Investors in China’s interbank market – including banks – took up almost a third of WMP buying last year, up from 2% the previous year. Most of that is from WMPs essentially buying other WMPs, creating an opaque layering of obligations, Ms. Chu said, echoing the collateralized debt obligations made famous during the U.S. housing bust.”

“Then there is duration risk. Over three quarters of these investment products mature within six months, putting constant repayment pressure on banks. To meet these products’ yield demands, WMPs have been heavy buyers in China’s rip-roaring bond market. A sustained reversal of the bond market could trigger pain on WMPs.”

WSJ_Growth of WMPs in China_6-6-16

Negative rates stir bank mutiny. James Shotter and Claire Jones. Financial Times. 8 Jun. 2016.

“Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies, with one big German group going so far as to weigh storing excess deposits in vaults.”

“The central bank policies have hit bank profitability in both regions and German banks have been vocal in criticizing Mario Draghi, European Central Bank president, accusing him of punishing savers and undermining their business models. The policy cost German banks €248m last year, according to the Bundesbank.”

“Japanese banks have been more muted but Bank of Tokyo Mitsubishi UEJ has become the first leading lender to break ranks, confirming it is considering giving up its primary dealership status for sales of Japanese government bonds.”

“The more central banks think that they can violate the zero-bound, the more likely it is that banks will look at ways to limit their costs. And that means they will hold more cash if they can find efficient means to do so.” – Adalbert Winkler, professor at the Frankfurt School of Finance and Management.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – WeWork to Halt Hiring, Make Major Cuts to Staff 6/6

FT – Crisis-era tremors shake property funds 6/2

FT – Emerging markets to slow as convergence theory takes hold 6/2

FT – The period of maximum danger for bond investors is yet to come 6/6

FT – Saudi Arabia considers income tax for foreign residents 6/7

FT – Bank of Korea unexpectedly cuts rates to 1.25% 6/8

FT – Bill Gross warns over $10tn negative-yield bond pile 6/9

NYT – Toxic Fish in Vietnam Idle a Local Industry and Challenge the State 6/8

WSJ – Bank loans: Why it Feels Like 2008 All Over Again in Asia 6/6

WSJ – How to Time a Chinese Banking Tipping Point (2019) 6/7

WSJ – China’s Property Prices Rebound, but Stocks Tell Another Story 6/7

WSJ – Rock-Bottom Bond Yields in Europe Hit All-Time Lows 6/8

WSJ – REIT Surprise: How Real Estate Crushed the Stock Pickers 6/8

Yahoo Finance – JPMorgan: The odds of a recession starting in 12 months has hit a high 6/3

March 5 – March 10, 2016

Chinese exports plunge – and a glimpse of China in 2025.  $5 trillion of negative-yielding Japanese debt, but that’s only part of the problem.  Midstream energy companies feeling a bit exposed.

Three articles that stood out this week are 1) Shawn Donnan, Chris Giles, and Gabriel Wildau’s “IMF issues warning on global growth as China exports plunge” in the Financial Times, which goes hand-in-hand with a special report that Daniel Rohr did for Morningstar “What Will China Look Like in 2025?”, 2) Kevin Buckland, Masaki Kondo, and Shigeki Nozawa’s “The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles” in Bloomberg, and related to this article is a bomb-shell of a report by Kevin Wilson of Blue Water Capital, “Japanese Policy Failure Means Disaster For Us All” that was featured in Mauldin Economics, and 3) is piece by Gregory Meyer “Pipeline investors shaken by bankruptcy ruling” in the Financial Times that points to a major concern for the mid-stream energy companies.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • Bottom line, the State Administration of Foreign Exchange (SAFE) has asked banks to reduce foreign currency transactions – verbally of course.  As Jean Francois Harvey, global managing partner at Hong Kong law firm Harvey Law Corp, puts it “There appears to be a real crackdown on money flowing out of China. Even normal business transactions which are ongoing are getting delayed.”
    • Seriously… somebody has a sick sense of humor.

Interesting graphics:

From the Wall Street Journal, U.S. real estate has become quite a bit more expensive for foreign buyers.

WSJ_Change in US home prices for foreign buyers_3-8-16

From Barry Ritholtz’s The Big Picture blog.

Ritholtz_Negative European Govt Bonds_3-10-16

From the Economist, bad things tend to happen when debt to GDP levels get too high.

Economist_Credit as % of GDP_3-10-16

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

IMF issues warning on global growth as China exports plunge.  Shawn Donnan, Chris Giles, and Gabriel Wildau. Financial Times. 8 Mar. 2016.

“The world faces a growing ‘risk of economic derailment’ and needs immediate action to boost demand, the International Monetary Fund warned on Tuesday as new figures pointed to the worst monthly collapse in Chinese exports since 2009.”

“Among the ‘most disconcerting’ signs of trouble in the world economy, he said, were ‘a sharp retrenchment in global capital and trade flows’ over the past year.”

The news that triggered this article was that “In dollar terms China’s exports fell 25.4% in February from a year earlier, the worst one-month decline since early 2009 and down from a 11.2% drop in January.”

The IMF has “already said it is likely to lower its 3.4% growth forecast for this year when it issues its next round of predictions in April.”

However, not all economists feel so downtrodden. Olivier Blanchard, former chief economist of the IMF, and his colleagues at the Peterson Institute of International Economics say that Fears on global downturn are overdone.

Though, here is a link to a Morningstar report by Daniel Rohr’s Morningstar’s on What Will China Look Like in 2025?  A very timely report that is worth the read.  Here is a little teaser.

“The country’s working-age population will shrink by 43 million by 2030, by which time China will have more seniors than the European Union, Japan, and the United States combined.”

 

The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles. Kevin Buckland, Masaki Kondo, and Shigeki Nozawa. Bloomberg. 7 Mar. 2016.

“The amount of Japanese government bonds in the market offering negative yields has doubled this year to more than 600 trillion yen ($5.3 trillion) and that’s a major headache for the finance industry.”

According to the Bank for International Settlements, “the experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are… Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”

FT_Japanese 30-year bond yield_3-8-16

And the bombshell of a report by Kevin Wilson of Blue Water Capital, Japanese Policy Failure Means Disaster For Us All…  This article was originally published in Seeking Alpha and does an excellent job at highlighting the precariousness of the Japanese economy and does so with many illustrative charts. I recommend reading the whole thing, but here are some of the highlights.

“…it seems to me that the Japanese economy, as noted years ago by author John Mauldin, is ‘a fly in search of a windshield.'”

“It was already evident that there was a problem with Abenomics even before the NIRP decision. The velocity of money has continued to fall, inflation has stayed stubbornly low or negative, household incomes were declining rather than rising, household spending declined sharply as the tax increases from Abenomics kicked in, and as a result, consumer confidence in Japan has been negative for years on end.”

Japanese Velocity of Money_Q3 2015

Japanese v US HH Incomes_March 2016

Due the hording of cash and bonds “…for Japanese investors, the total return on the JGB 30-year bond has beaten that from the MSCI Global Equity Index over the last 15 years.”

JGB 30y Bond vs MSCI Equities_March 2016

“Demand for cash in Japan, always relatively high, has increased since the NIRP decision, according to Naohiko Baba, Tomohiro Ota, and Yuriko Tanaka at Goldman Sachs. They not that demand for cash is now very sensitive to interest rates, even to the point that cash and deposits are nearly perfect substitutes.  Since deposit rates are so low now, there is little penalty or downside in holding cash. Not coincidentally, sales of household safes for storing (hoarding) cash have soared in Japan since the NIRP decision.”

“Hoarding is about the worst consumer outcome one can imagine, relative to the ultimate success or failure of Abenomics… The number of banknotes in circulation in Japan is extremely high relative to GDP and to other national economies, such as those of the USA, Switzerland, the eurozone, Denmark, and Sweden.”

Bloomberg_Japanese 10,000 Yen notes in circulation_March 2016

“Virtually every aspect of Abenomics is now in failure mode, and since the reform part of the package has never been enacted, it is unlikely that the government can regroup in a meaningful way under present conditions.”

Look at this demographic projection…

Japanese Demographic Chart_March 2016

 

Pipeline investors shaken by bankruptcy ruling. Gregory Meyer. Financial Times. 8 Mar. 2016.

“A judge has allowed a US oil and gas company to abandon pipeline contracts while in bankruptcy, in a first-of-its-kind decision that has rattled investors in energy infrastructure.

Sabine Oil & Gas, a shale energy producer under Chapter 11 bankruptcy protection, sought permission to break contracts with two pipeline companies so it could pursue better deals and save as much as $115m.”

“The decision has important implications for the midstream energy sector, which gathers, processes, transports and stores oil and gas. Income-hungry investors had flocked to midstream companies on the belief that their generous payouts were backed by long-term, immutable contracts with customers.”

The mantra has been over the past year or so as oil prices have plummeted, that ‘we’re fine, oil is still flowing through our pipes.’ We’ll just ask retail landlords across the country how that’s going with the whole Radio Shack, Blockbuster, Sports Authority, etc. lease.

“Haynes and Boone, a law firm, said 48 North American oil and gas producers filed for bankruptcy in 2015 and more will follow this year.”

Now expect more mid-stream companies (think MLPs) to be at risk.

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

Bloomberg – Blackstone’s Gray Sees Lower Real Estate Returns as CMBS Falters 3/4

Bloomberg View – Falling Earnings, Recession Warning 3/9

Bloomberg – Manhattan Luxury Rents Slide as Condo Buyers Seek Tenants 3/10

CFO – $300B Capex Lost in Recession Goes Unreplaced 3/9

FT – Macau’s annual GDP contracts by 14.4% in 4Q 3/2

FT – Commodity prices signal market bottom 3/4

FT – US high yield: back in the game 3/6

FT – Hong Kong and China ‘heading for bigger showdown’ 3/6

FT – Wall St in for a hawkish Fed surprise – Goldman 3/7

FT – Goldman Sachs says commodity rally is unlikely to last 3/8

FT – Long-term Japanese yields set new record lows 3/8

FT – Has the cold US-Sino trade war just got piping hot? 3/8

FT – Bombed pipeline to hit Nigeria oil output 3/8

FT – Re-assessing the classic risk-return trade off 3/8

FT – Moody’s to withdraw from Russian domestic market 3/9

FT – UL MLPs: courting disaster 3/9

FT – China provinces rail against Beijing plan to tackle overcapacity 3/10

FT – US Treasury market shows signs of stress 3/10

Mauldin Economics – The Roots of Trump’s Strength (George Friedman) 3/7

Nikkei Asian Review – China-related bankruptcies spike in Japan 3/5

NYT – Brazil’s Lula Detained in Corruption Probe; Rousseff Objects 3/4

NYT – In New Economic Plan, China Bets That Hard Choices Can Be Avoided 3/5

Project Syndicate – Is the Perfect Storm Over for Markets? (Mohamed A. El-Erian) 3/9

Value Walk – BDC Losses, MLPs and REITs – Slow Motion Melt (David von Leib) 3/10

WSJ – China’s Falling Reserves Catch a Break 3/7

WSJ – Shopping-Center REITs Are on Many Investors’ Lists 3/8

WSJ – What’s Twitter Worth? It’s Complicated 3/8

WSJ – Foreign Buyers Are Pulling Back, Realtors Say 3/8

WSJ – WeWork Targets Asia as Valuation Hits $16 Billion 3/10

WSJ – ECB Cuts Rates and Expands Stimulus – Recap 3/10

WSJ – The Most Expensive Cities in the World to Live 3/10

Special Reports

 

January 22 – January 28, 2016

Challenges of being born a millennial. Continued struggles for Energy & Mining companies. Zika virus.

While these postings cover articles from Friday – Thursday, I would be remiss not to mention the Bank of Japan’s move to lower the interest rate on excess reserves from 0.1% to minus 0.1% today.  Inflation has yet to gain traction in Japan (note that Q4 2015 GDP growth in the U.S. came in at a lower than expected 0.7% today as well), and so the policy makers are stepping up efforts.  While the negative interest rates in Japan only apply to a portion of deposits, the key in this is that as Aaron Back of The Wall Street Journal points out in “Japan’s Negative-Rate Plunge More Like a Toe in the Water” is that this policy directive is modeled on the Swiss and it is likely that there is more to come.  The world is at a challenging crossroads, desperately seeking economic growth central banks are trying to do their part resulting in monetary stimulus measures just trying to get something going.  Note that US interest rates continue to drop (the 30-year fixed rate mortgage rate as reported by Freddie Mac came in at 3.79% yesterday down from over the 4% reached after policy rates were first raised) as investors expect US policy rates to stay unchanged or even to revert back to zero.  Good for asset owners, but all this uncertainty continues to prove challenging for employees.

This week there was a special feature in The Economist and the Financial Times did a good article on the challenges the current economic environment has had on millennials.  The brief from The Economist can be found in the Other Interesting Articles section below and I’ll go into Sarah O’Connor’s “Tragedy of the millennials is they are not entitled enough” in the Financial Times.  The other article I am going to cover is Christopher Adams, James Wilson, and Mark Vandevelde’s “Moody’s puts 175 energy and mining companies on downgrade watch” in the Financial Times that highlights the continued symptoms of the energy crunch.  Lastly, for those that haven’t been following the progress of the Zika virus, here are two good articles from The New York Times and The Washington Post to help you understand what’s going on and how quickly it’s spreading.  As a parent, this scares me… especially considering the “first case of the mosquito-borne virus in a birth on U.S. soil” was here in Honolulu.

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

Tragedy of the millennials is they are not entitled enough. Sarah O’Connor. Financial Times. 26 Jan. 2016.

Full disclosure, I like Sarah O’Connor am a millennial (granted, at the very front end of the generation).  Further, I always find it interesting when I hear or read ‘experts’ making statements that certain trends have changed forever because millennials have different tastes than their predecessors – millennials don’t want single family homes, they want to live in the city… millennials prefer flex work spaces rather than private offices… etc..   The thing is we’re not that different from those that have come before us.  Yes technology has enabled certain behaviors that our parents couldn’t tap into as easily, but bottom line, the reason certain buying and work habits haven’t taken hold yet is that the majority of millennials are 25 and for most of our working career the jobs economy has been shaky while asset prices have been shooting for the moon.  Buying habits have been simply delayed – maybe forever as some experts have stated, but not for reason of taste, rather out of a lack of ability.

From Ms. O’Connor, using the example of the U.K., but applicable in general.

The general consensus of millennials in the work place is that they “expect different things from employers than previous generations – rapid promotions, constant positive feedback, flatter corporate structures, a better work-life balance and a sense of purpose beyond profit. The press releases wrap up with a few quotes from experts urging companies to adapt to this new generation.”

“Most millennials – those born between the early 1980s and early 2000s – entered the labor force in the aftermath of a brutal downturn. It is almost a decade since the financial crisis, and global youth unemployment remains about 13%. Far from demanding that employers adjust to their needs, many young people have bent over backwards to persuade anyone to give them a foothold in the labor market.”

“While the income of the median UK household finally regained its pre-recession level last year, the income of the average 22-to-30 year old is still about 8% lower than in 2008.”

“…everyone should be rooting for the unlucky ones who had a tough start, since it will fall to them to pay for the pensions and healthcare of the generations ahead of them. This will be a heavy responsibility: the world has only three “super-aged” societies today (countries where more than one in five of the population is 65 or older) but by 2020 it will have 13. The more long–term the damage to young people’s careers, the less they will earn over their lifetimes and the less tax they will be able to pay.”

In regard to a speech by Minouche Shafik, a deputy governor at the Bank of England, “She was trying to figure out why wage growth is still so weak in Britain even though joblessness has fallen to pre-recession levels. This is a puzzle in the US and Japan too. Perhaps, she said, the crisis was so severe that it had a lasting effect on employees’ psyches and made them reluctant to push for pay rises or switch jobs in pursuit of higher salaries.

If this is true for the average worker, you can see why it might be particularly true for a young person who has never known a time when the economy seemed truly secure.”

Moody’s puts 175 energy and mining companies on downgrade watch. Christopher Adams, James Wilson, and Mark Vandevelde. 22 Jan. 2016.

While this article is from a week ago and oil prices have rebounded somewhat over the last week, the structural challenges remain.

“Several of the world’s biggest oil and gas groups – including Royal Dutch Shell, Total and Chesapeake Energy – are among 175 energy and mining companies at risk of rating downgrades following a collapse in crude and other commodities markets, Moody’s warned on Friday.”

“Moody’s has put on review for downgrades 69 US-based companies – including Schlumberger and Chesapeake.”

“Multi-notch downgrades are particularly likely among issuers whose activities are centered in North America, where natural gas prices have declined dramatically along with oil prices,” said the rating agency.”

“Moody’s notice for 120 energy companies and 55 miners is its largest single warning of potential corporate downgrades since the financial crisis.”

“China’s outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” said Moody’s.

This graph below is from a separate FT article, but it illustrates the rising stress in emerging market debt.

FT_Troubled EM Debt_1-25-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Saudi Arabia’s Secret Holdings of U.S. Debt Are Suddenly a Big Deal 1/21

Bloomberg – So Yes, the Oil Crash Looks a Lot Like Subprime 1/25

FT – The tiny shifts that can signal huge changes 1/21

FT – A history of betrayal that leads to Donald Trump 1/24

FT – Investors rush online to ditch stakes in China rural lenders 1/24

FT – Emerging markets’ stressed debt reaches record levels 1/24

FT – US junk-rated energy debt hits two-decade low 1/24

FT – Capital controls may be China’s only real option 1/25

FT – Currency risk matters for China’s property sector 1/25

FT – Pay attention to long-term debt cycle (Ray Dalio) 1/25

FT – China mouthpiece warns Soros against shorting renminbi 1/26

FT – South Korea export growth slows to trickle as China demand wanes 1/26

FT – China’s toughest test is within its walls 1/26

FT – Protectionism at play in Sharp takeover drama 1/26

NYT – African Economies, and Hopes for New Ear, Are Shaken by China 1/25

NYT – El Salvador’s Advice on Zika Virus: Don’t Have Babies 1/25

NYT – Inquiry in China Adds to Doubt Over Reliability of Its Economic Data 1/26

Vanity Fair – Hedge Funder John Paulson Puts Up His Own Fortune to Save His Firm 1/26

WSJ – What’s Wrong With The Producer-Price Index? Rent Is Too Damn High 1/14

WSJ – China Cinema Companies Produce Box-Office Hype 1/25

WSJ – Vacant Office Spaces Pile Up in Houston 1/26

WSJ – Tougher Times for Mall Owners 1/26

WSJ – China Sharpens Efforts to Halt Money Outflow 1/27

WSJ – Malaysia Antigraft Agency Asks for Review of Decision to Clear Najib Razak 1/27

WSJ – Heeding Softer Market, Extell Development Furnishes One57 Condo for Sale 1/28

 

November 20 – November 26, 2015

Time to load up on Emerging Market equities? Are you aware of the global demographic trends…

Happy Thanksgiving!  This week I’m only going to cover two articles. First was an article discussing whether or not now is the time to get back into emerging market equities by Steve Johnson in The Financial Times “Emerging market equity valuations slide to record low,” and second and of more importance was ““How Demographics Rule the Global Economy”” by Greg Ip in The Wall Street Journal as part of its multimedia 2050 Demographic Destiny collection of articles this week.

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

Emerging market equity valuations slide to record low. Steve Johnson. The Financial Times. 19 Nov. 2015.

So the saying goes, when there is blood in the street buy real estate… essentially, the simple (yet emotionally challenging) formula of buy low and sell high. Therefore, now that emerging markets (EMs) have taken a beating, is it time to load up?

“Emerging market equities have delivered a total return of minus 2.1% since the start of 2010, compared with the 69.1% return of developed markets.” 

“The latest leg of correction leaves emerging markets as the unambiguously cheap segment of global equity on a fundamental basis [but], with the exception of Russia, valuations simply haven’t become cheap enough,” says George Iwanicki, emerging market macro strategist at JPMorgan AM.”

“The MSCI Emerging Markets Index fell to a valuation of just 12.8 times 10-year average earnings at the end of September, according to calculations by JPMorgan AM, taking it below the previous nadir of 13.5 times during the 1997-1998 Asian financial crisis.” 

“The cyclically adjusted price-to-earnings multiple is now barely half its long-term average of 25 times average 10-year earnings.” 

“In contrast, the US S&P 500 index is trading at 23.4 times cyclically adjusted earnings, within a whisker of its long-term average of 23.6. The MSCI Europe Index is at 15.1, against an average of 20.6.” 

However, “…emerging market earnings have been elevated for much of the current millennium by high commodity prices and rapid growth in both China and global trade.”

Seemingly it would be a good time to jump in, but…

“The asset class is currently trading on a multiple of 1.43 times book value… While this is below the long-run average of 1.8 times, it is above both the cyclical low of 1.28, recorded in late August, and the all-time low of 0.94 in August 1998.” 

Basically, give it a little more time and no matter what, make sure you have the stomach for it.

How Demographics Rule the Global Economy. Greg Ip. The Wall Street Journal. 22 Nov. 2015.

One of the most powerful immutable forces in our world is demographics, importantly demographics shape trends…

“Next year, the world’s advanced economies will reach a critical milestone. For the first time since 1950, their combined working-age population will decline, according to United Nations projections, and by 2050 it will shrink 5%. The ranks of workers will also fall in key emerging markets, such as China and Russia. At the same time the share of these countries’ population over 65 will skyrocket.” 

“Previous generations fretted about the world having too many people. Today’s problem is too few.” 

“This reflects two long-established trends: lengthening lifespans and declining fertility. Yet many of the economic consequences are only now apparent. Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers. As a population ages, what people buy also changes, shifting more demand toward services such as health care and away from durable goods such as cars.” 

“Demographic forces are assumed to be slow-moving and predictable. By historical standards, though, these aren’t, says Amlan Roy, a demographic expert at Credit Suisse. They are ‘dramatic and unprecedented,” he says, noting it took 80 years for the U.S. median age to rise seven years, to 30, by 1980, and just 34 more to climb another eight, to 38.“ 

“By 2050, the world’s population will have grown 32%, but the working-age population (15 to 64 years old) will expand just 26%. 

Among advanced countries, the working-age population will shrink 26% in South Korea, 28% in Japan, and 23% in both Germany and Italy, according to the U.N. For middle-income countries it will rise 23%, led by India at 33%. But Brazil’s will edge up just 3% while Russia’s and China’s will contract 21%.” 

This will only compound pension and social security obligations…

“Among rich countries, the U.S. remains demographically fortunate: Its working-age population should grow 10% by 2050. But it will still shrink as a share of total population from 66% to 60%. The demographic drag on growth, in other words, will last decades.” 

“In 2008, the same year Lehman Brothers failed, the first baby boomers qualified for Social Security, and since then, the number of beneficiaries has ballooned, from 41.4 million to 49 million.”

We are going to have to become a whole lot more productive to achieve GDP growth.

Lastly, while I’m not going to go into this article in detail, Ezra Fieser’s “The Town Viagra Built Tries to Move On” in Bloomberg Businessweek provides an example of whether it is better to have a short-term infusion of success/cash – that should theoretically leave you better off – or to never have had it at all…

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

BloombergBusiness: Calpers Reports It Paid $3.4 Billion to Private-Equity Firms

ConstructionDive: Dodge – Rebound in October construction starts ‘alleviates concern about a stalling expansion’ 11/23

FT: Natural resources prices ‘may fall again’ 11/19

FT: Asian and Russian buyers desert prime London property market 11/19

FT: China police swoop over $125bn in illegal cash transfers 11/20

FT: Beijing’s economic competence questioned 11/20

FT: Chinese developer Evergrande buys life assurer stake 11/23

FT: Chinese-Korean joint venture to mass-produce cloned beef cattle 11/23

FT: Investors psyched by the endowment effect 11/25

FT: Five Disney copycat hotels fined in China 11/25

FT: China’s ‘national team’ owns 6% of stock market 11/26

NYT: LivingSocial Offers a Cautionary Tale to Today’s Unicorns 11/20

NYT: As Investors Shun Debt, Banks Are Left Holding the Bag 11/19

Reuters: Wage pressure coming? U.S. companies start to sound the alarm 11/19

WSJ: Why the Housing Rebound Hasn’t Lifted the U.S. Economy Much 11/22