“Wall Street is betting that more well-off Americans will want to be renters.”
“Financiers who loaded up on homes after the housing bust for pennies on the dollar are buying yet more—despite home prices in many markets being at all-time highs.”
“Their wager: High prices, higher mortgage rates and skimpy inventory are making homeownership harder. Well-to-do families who might have bought a single-family home in another era are willing to rent a house now, especially if it means access to a good school system.”
“The number of homes purchased by major investors in 2017 was at least 29,000, up 60% from the previous year, estimates Amherst Capital Management LLC, a real-estate investment firm with an affiliated business that made nearly 5,000 of those purchases.”
“Single-family homes have become far more attractive to investors than apartments, where a nationwide glut has driven down rental yields.”
“This year, investors have raised billions of dollars from bond buyers, pension funds and even wealthy Chinese individuals to purchase more homes. They have been particularly aggressive buyers in places like Atlanta, Phoenix, and other metro areas with good schools and faster-growing economies.”
“On Monday, the investment firm Pretium Partners LLC said it had raised more than $1 billion so that its Progress Residential could add to its 26,000 rental homes.”
“Cash to acquire and renovate homes has become so abundant lately that some rental investors can’t spend it fast enough. Without enough homes to buy, some investors are now building their own in popular residential markets like Miami and Nashville, Tenn.—upending a traditional pattern of Americans buying starter homes and moving up.”
“Managing far-flung clusters of homes—much harder than running an apartment building—has long been a hurdle for investors. But analysts and rental executives say investors are gaining confidence it can be done profitably. Also, wealthier tenants in the single-family-home market typically have children and need more bedrooms than most apartments offer. They’re also willing to accept rent increases to stay in good school districts.”
“These investors’ war chests have been swelled by rising home prices, which give them more valuable collateral to borrow against to buy more.”
Construction
WSJ – Daily Shot: John Burns RE Consulting – Construction Contractor Hourly Wages 7/11
China
WSJ – Daily Shot: BlackRock – Annual Growth in China Bank Claims 7/11
“Succeed or fail, Masayoshi Son is changing the world of technology investing.”
“The fund is the result of a peculiar alliance forged in 2016 between Mr Son and Muhammad bin Salman. Saudi Arabia’s thrusting crown prince handed Mr Son $45bn as part of his attempt to diversify the kingdom’s economy. That great dollop of capital attracted more investors—from Abu Dhabi, Apple and others. Add in SoftBank’s own $28bn of equity, and Mr Son has a war chest of $100bn. That far exceeds the $64bn that all venture capital (VC) funds raised globally in 2016; it is four times the size of the biggest private-equity fund ever raised.”
“The fund has already spent $30bn, nearly as much as the $33bn raised by the entire American VC industry in 2017. And because about half of its capital is in the form of debt, it is under pressure to make interest payments. This combination of gargantuanism, grandiosity and guaranteed payouts may end up in financial disaster. Indeed, the Vision Fund could mark the giddy top of the tech boom.”
“Rapid growth in debt levels is historically the best predictor of a crisis. And this year the corporate bond market has been on a tear, with companies issuing a record $1.7tn last year, and over half a trillion already this year. Even mediocre companies have benefited from easy money. But as the rate environment changes, perhaps more quickly than is imagined, many could be vulnerable.”
“Investors who bought some of the riskiest emerging market sovereign bond sales in the past year have been left nursing paper losses as a strengthening dollar has rattled sentiment for emerging markets.”
“JPMorgan’s emerging markets bond index has lost 5.1% since the start of this year.”
WSJ – Daily Shot: FRED – BOJ Assets YoY Change 5/13
“From the outside, the Korean economy appears to be flourishing: the country is home to major industry leaders such as Samsung, Hyundai, and Kia. It’s the 11th-largest economy in the world, with semiconductors, car LCDs, and other high-tech products dominating its exports. The overall unemployment rate is just 4.6%.”
“Still, young people can’t find jobs. Youth unemployment has hovered around 10% in Korea for the past five years. The underemployment rate — defined by those involuntarily working jobs they’re overqualified for or are part-time — is even higher as of this year: it hovered at 38% in 2016, according to Dongseo University professor Justin Fendos.”
“In this highly educated economy, it can be hard for young Koreans to distinguish themselves from their peers. Nearly 70% of all Koreans ages 25–34 have a post-secondary degree, the highest of all Organization for Economic Co-operation and Development (OECD) countries, and a high school degree is nearly universal. Entire neighborhoods in Seoul are full of college graduates studying to pass hiring exams in order to get in at Korea’s biggest companies or the enviable public sector.”
“’The design of Korean society is a big reason why the cryptocurrency became so popular,’ says Yohan Yun, a 25-year-old assistant reporter in Seoul who invested around $400 in Ethereum. ‘People here are generally unhappy with their current status in society.’”
“Even employed young people are pessimistic about their economic prospects: a survey conducted in 2015 showed that half of young Koreans don’t believe that they will do better than their parents’ generation, compared to 29% in 2006.”
“For young Koreans, cryptocurrency seems like a rare shot at prosperity. Months after last year’s bubble started to implode in February, the Korean won remains the third most traded currency for Bitcoin. The country of 52 million comprises 17% of all Ethereum trading, and it was the location of two-thirds of world’s biggest exchanges this winter, Korea Expose reported in February.”
“An estimated three in 10 salaried workers in Korea had invested in e-currencies by December 2017, according to a survey by Korean recruiting firm Saramin. Eighty percent of those people were in their 20s and 30s.”
“But now that the prices of cryptocurrency coins like Bitcoin, Ethereum, and Ripple have tanked, many Korean youths are dealing with the mental and financial aftermath of their losses. Korean psychologists have reported an uptick of patients from the so-called ‘Bitcoin blues,’ divorce counselors say marriages are splitting from failed investments, and even the country’s prime minister said that virtual currencies are on track to cause ‘serious distortion or pathological social phenomena’ among Korea’s young population.”
“Real estate used to be the traditional way to grow one’s fortune in Korea, but prices have become exceedingly expensive for even upper-middle-class people. And interest rates for savings accounts are rarely more than a few percentage points a year.”
“Koreans’ hyperconnectivity helped spur Bitcoin’s popularity. Teens and young adults spend around four hours a day using mobile phones in Korea. Nearly every Korean home has internet access, and 88% have smartphones, the highest percentage globally. Such an abundance of connectivity allowed potential traders of all ages to learn about the craze and hear about the insane amounts of money one could make on trading. Cryptotrading clubs, where people can meet like-minded traders and share tips, popped up at many Korean universities.”
“Thanks in part to the frenzy, some coins cost up to 51% more in Korean markets than anywhere else. Bitcoin’s price was up nearly $8,000 in January, Bloomberg reported. The ‘kimchi premium’ drew foreign traders to buy their coins abroad and trade them in the Korean market.”
“But then came the crash. From January 6th to January 16th, 2018 the price of Bitcoin to Korean won tumbled from a high of a US-equivalent $25,065 to $13,503, according to Korbit. It continued to fall to $7,410 by February 5th, and as of April 2nd, the price of a bitcoin sits at $7,241.”
“In total, the Bitcoin crash wiped out $44 billion of value in January, or more than Ford’s entire market capitalization, according to Bloomberg. New regulations against cryptocurrency trading, particularly ones from a worried South Korean government, helped usher the fall.”
“The mobile-home market is showing signs of stress.”
“The delinquency rate on mobile-home loans has increased by 200 basis points, or 2 percentage points, over the past year, according to research cited by UBS. The 30-day-plus delinquency level is now about 5%, the highest level since 2005.”
“The increase in the number of struggling mobile-home borrowers suggests that a large chunk of these people haven’t benefitted from the economic growth of the past few years, despite the low unemployment level.”
“This data represents a piece of a jigsaw puzzle of the condition of consumer finances in the US. And the picture that’s emerging, according to UBS, is of a two-speed economy, with lower-income consumers and younger borrowers with substantial student debt moving at a slower pace than more affluent and established participants.”
“‘We believe weakness in these two groups (lower-income consumers and younger borrowers) will drive higher credit losses at some stage over the next few years — particularly in credit card, installment, and student loans — with macroeconomic inflection from job growth to job loss as a likely catalyst,’ UBS said.”
John Burns RE Consulting – California Has Density Solutions, but Not Enough New Housing – Pete Reeb 4/3
Finance
WSJ – Daily Shot: Deutsche Bank – European Bond Issuance v ECB Purchases 4/4
WSJ – Daily Shot: Deutsche Bank – Emerging Market USD & EUR Debt Issuance 4/4
China
WSJ – Daily Shot: Deutsche Bank – Credit Expansion in BRIC Countries 4/4
WSJ – Daily Shot: Hong Kong Retail Sales 4/4
“Hong Kong’s retail sales jumped by most in eight years as wealthy shoppers from the mainland return.”
Japan
WSJ – Daily Shot: Deutsche Bank – Declining Service Quality in Japan 4/4
“Instead of inflation, Japan’s extremely tight labor markets are translating into reduced-quality services for consumers. The US is starting to experience this trend as well.”
“Not only are Puerto Rico’s bonds the top performer in the $3.9 trillion municipal market, they’ve gained more than any other dollar-denominated debt in the world, according to data compiled by Bloomberg.”
WSJ – Daily Shot: Puerto Rico General Obligation Bonds 4/4
“The world’s poorest countries are increasing their borrowing at a worrying pace and face the mounting risk of debt crises, the IMF has warned.”
“Since 2013, the median ratio of public debt to gross domestic product in low-income countries has risen 13 percentage points to hit 47% in 2017, according to new research by the IMF.”
“The research found that 40% of low-income developing countries face ‘significant debt-related challenges’, up from 21% just five years ago.”
“Fiscal deficits rose between 2013 and 2017 in nearly three-quarters of the nations the IMF studied, and in nearly half of those cases the deficit increase came despite a decline in investment, an indication that the debt was not being put to productive use economically. “
“As a result it is becoming increasingly likely that more poor countries will face a debt crisis, the IMF staff paper said.”
“Homes prices at $4 million or more that went into contract in the first 12 weeks of the year had their asking prices cut by an average of 10%, the most in data going back to 2012, according to Olshan Realty Inc.”
“Xi’s drive to encourage building of residences for rent opens market worth a potential $2tn.”
“Since 2014, 30 quasi-REITs worth Rmb65bn have been issued on the Shanghai and Shenzhen stock exchanges and through private placements, according to the China REITs Alliance, an industry group.”
“But these products trade over the counter, so liquidity is poor. Most are also not accessible to retail investors. Some also differ from true REITs because their yields derive partly from capital appreciation, not only rental income.”
“The value of Chinese REITs could reach Rmb4 to Rmb12tn if their share of gross domestic product or of total real estate assets were comparable to the same ratios in the US, according to estimates last year by researchers at Peking university’s Guanghua School of Management.”
“But experts say a more active REITs market in China requires action from the tax bureau. The boom in Chinese housing and land prices over the past decade means that absent new policy, older property sold off to a REIT would be subject to large capital gains taxes.”
“High property prices also mean that rental yields are low — often less than 3% for commercial real estate and under 1% for residential. Without tax benefits, dividend yields on REITs would be too low to attract investor interest.”
“China’s insurance regulatory agency Friday took control of hard-charging, acquisitive Anbang Insurance Group Co., saying the action is needed to avoid a collapse of the firm following suspected illegal activity and the downfall of its once-highflying chairman.”
“The China Insurance Regulatory Commission published a letter to Anbang management saying duties of the board and management will now be overseen by a working group of regulators from various agencies for one year. ‘All transactions of your company, asset trading, information dissemination, contract signing other than traditional insurance business are subject to the consent of the working group,’ said the statement dated Feb. 12.”
“Separately, Wu Xiaohui, who led Anbang until he was detained eight months ago, has been indicted on charges of fraudulent fundraising and abusing his position, according to a one-sentence notice by prosecutors in Shanghai on Friday. The insurance regulator’s statement refers to Mr. Wu as Anbang’s former chairman.”
“The Waldorf Astoria purchase ushered in the rise of a new breed of Chinese deal makers. The companies, which also included Dalian Wanda Group, HNA Group and Fosun International, bought up everything from hotels to banks to movie production companies. Though the companies are privately owned, their leaders often benefited from their political connections, and they were often backed by cheap debt provided by China’s state-run banks.”
“The deals made the companies truly global players. For example, in a financial disclosure last spring, shortly before the police detention of its chairman, Anbang said that nearly three-fifths of the assets of its main business, life insurance, were overseas.”
“Property was a big focus for Anbang. In 2016, it spent more than $6 billion for a group of hotels in the United States, buying it from Blackstone Group, a private equity giant. That gave it marquee properties including the Westin St. Francis hotel in San Francisco, the Loews Santa Monica hotel in California and the Fairmont Chicago hotel.”
“Anbang also offered more than $13 billion for Starwood Hotels and Resorts before abandoning its bid in 2016, without explanation. By then, the Chinese deal makers had hit a wall.”
“China was shaken three years ago by a surge of money out of the country and concerns that its economy had been layering on too much debt. Anbang and the other Chinese deal makers, which had borrowed heavily to fund their shopping sprees, soon drew attention from officials. State media labeled them ‘gray rhinoceroses‘ — big problems that are ignored until they start moving fast.”
“The Chinese government’s takeover of Anbang Insurance and criminal prosecution of founder Wu Xiaohui marks the biggest step yet in an official crackdown on risky financing by ambitious conglomerates that has prompted a severe decline in China’s overseas dealmaking.”
“But on the same day as the Anbang seizure was announced, Chinese company Fosun said it would buy a controlling stake in Lanvin, France’s oldest couturier. The move underlines the diverging fates of the four largest private conglomerates — the others are HNA and Dalian Wanda — that Beijing identified last year as borrowing too aggressively to fund offshore deals.”
“All have captured headlines over the past few years with a series of audacious foreign acquisitions. These include Anbang’s $2bn purchase of New York’s Waldorf Astoria, Dalian Wanda’s takeover of Hollywood studio Legendary Entertainment for $3.5bn, and HNA’s $40bn splurge on stakes in companies including Deutsche Bank and Hilton Worldwide.”
“Beijing stepped in last year to curb the spree, worried that companies were overpaying for foreign assets and draining China’s foreign currency reserves, while relying on risky financing methods to fund acquisitions.”
“Analysts say the government’s treatment of the groups differs depending on their sources of financing, and whether they have co-operated in the government’s campaign to slow capital outflows and cut leverage.“
“Wanda has co-operated with official directives by unloading more than $4bn in overseas assets over the past nine months and promising to “refocus” on the domestic economy. Last week it sold its 17% stake in Spanish football club Atlético Madrid.”
“HNA, meanwhile, has appeared to win back support as it regroups amid a liquidity crunch. Last week, the debt-laden company announced the HK$15.8bn ($2bn) sale of two plots of land in Hong Kong to local developer Henderson Land.”
“It was Anbang’s financing model that caused the Chinese authorities most concern. Unlike other groups that relied on bank loans or bond issuances to fund acquisitions, Anbang relied on sales of investment-like products it sold to wealthy Chinese retail investors labelled as life insurance, a part of China’s sprawling shadow-banking system.”
“Anbang’s finances were also in a more precarious state than other companies due to the mismatch between the short-term nature of its assets and the longer-term nature of its liabilities.”
“China’s Anbang Insurance went from zero to too-big-to-fail in the blink of an eye. It is a lesson in how quickly China’s financial problems grow—and how much is left to clean up.”
“A capital raising, including a possible government capital injection seems likely. The total cost of cleaning up the mess, including whatever losses sit on Anbang’s gargantuan balance sheet—put at close to 2 trillion yuan ($300 billion) in April by financial magazine Caixin—is an unknown.”
“This yearlong ‘management’ of Anbang announced by regulators could be misinterpreted as a positive for China: financial shares rose. But investors celebrating China’s apparent success at containing financial risks without damaging the broader economy shouldn’t be so sanguine.”
“Anbang fueled its international shopping spree, including a top-dollar price for the Waldorf Astoria Hotel in New York, on the back of high-yielding, often highly leveraged investment products sold to retail investors. Some of these, known as wealth-management products, or WMPs, became the target in 2017 of government efforts to clean up China’s highly leveraged financial system. That essentially cut off one the biggest sources of Anbang’s funding.”
“Anbang and WMPs are not, however, the end of China’s debt crackdown story. While WMPs and the bonds they invested in withered, companies have returned to previously popular forms of non-bank finance including trust loans, off-balance sheet company-to-company loans and bankers’ acceptances.”
“These grew 15% last year after just 4% growth in both 2015 and 2016. Overall debt and equity issuance stayed robust despite the crackdown.”
“Anbang may be wrapped up. But the cost of letting finance take such a big chunk of China’s economy is far from being resolved.”
“For three decades Tajikistan has wanted to build the world’s tallest hydroelectric dam but struggled to pay for it.”
“That changed last September when the mountainous central Asian country tapped international debt markets for the first time, was inundated with $4bn of orders and eventually sold $500m of debt at a yield of 7.125% — a landmark moment for an economy with an annual GDP of just $7bn.”
“Investors’ search for yield, brightening global economic conditions and structural reforms in many countries have resulted in benign conditions for what debt bankers refer to as ‘frontier’ economies.”
“The world’s riskiest countries are selling debt at a record rate, research published late last year found, with junk-rated borrowers comprising nearly half of all borrowing from emerging markets in 2017; one adviser called it a ‘gold rush’.”
“’The markets are so good at the moment that clients can literally ask for whatever they want,’ said an experienced deals banker. ‘People will buy anything so long as it offers them yield and diversification. They get bored of only being able to buy the same names and have also hit their limits for some of the more frequent names’.”
“’Ultimately this is people’s pensions we’re talking about,’ said one investor. ‘If you explained to the man on the street that their pension fund is being invested in Nigeria at 7%, they would be incredulous. If you threw that decision out to ordinary people, would they buy it? Probably not’.”
“Bitcoin and many of its peers have crashed in recent months from all-time highs reached in December. But that hasn’t dented the popularity of one crypto-fundraising method: so-called initial coin offerings.”
“Sales of those digital tokens have already raised about $1.66 billion this year, according to research and data firm Token Report. About 480 have launched in 2018 and only 126 of those have closed to new funds. That puts the market on pace to top last year’s total of $6.5 billion raised in coin offerings, according to the firm.”
“Whatever their motive, coin-offering investors have created some of the best-capitalized startups in incredibly short periods. The $1.5 billion raised by block.one in less than a year is equal to the amount raised by Twitter Inc. between 2007 and 2011 across nine separate funding rounds. And only four initial public offerings in 2017 and 2018 raised more than the amount block.one has attracted, according to data from Dealogic.”
“The continued success of coin offerings is even more remarkable given heightened regulatory scrutiny globally of cryptocurrencies and on the sales of digital tokens.”
“In the U.S., the SEC and Commodity Futures Trading Commission have heightened their oversight of the coin-offering market. The CFTC recently issued a customer advisory in which it advised people to avoid ‘pump-and-dump’ schemes, and offered whistleblowers a monetary reward in the case of successful enforcement actions.”
“The SEC has brought enforcement actions against several ICOs, most recently a Texas-based outfit called AriseBank, which had claimed to have raised more than $600 million in an ICO.”
“That pressure may have led to something of a bifurcation in the market for coin offerings. While large, widely publicized projects like block.one and Telegram have no problem raising money, others have had trouble meeting their fundraising goals.”
“Researchers at Ernst & Young found that less than 25% of the ICOs in November 2017 hit their goals, down from 93% in June. Token Report said the median amount raised by ICOs this year is about $12 million.”
“Beijing’s nationwide anticorruption drive, which drove luxury spending to a halt just three years ago, has faded. That coincided with a rebound in property prices, Chinese consumers’ main source of wealth. According to Deutsche Bank, the housing boom has added 86 trillion yuan ($13.5 trillion) to the total value of residential properties in the past two years. And unlike previous cycles, the gains aren’t concentrated in the biggest cities such as Shanghai and Beijing but have spread to smaller cities. People in these so-called tier-two and tier-three cities have made more money from their houses on paper last year than from their wages, according to Deutsche.”
“The ‘Japanization’ of the global economy marked by transition to low growth and low inflation has started to attract investor attention as a phenomenon in recent years. There has been scarcely any nominal GDP growth over the past 20 years in the Japanese economy.” – Daiju Aoki, analyst at UBS Japan
“Demographics are triggering the lack of GDP growth. As a society ages, its population becomes more dependent on government services and less productive in terms of generating goods and services.”
Japan’s peak worker to dependent ratio was in 1990.
“Mr. Kuroda, governor of the BoJ since 2013, claimed the central bank’s policies ‘have contributed significantly to the positive turnaround in Japan’s economy’ and said there was no chance of reducing the level of monetary accommodation.”
“‘It is often argued that there is a limit to monetary easing but I do not share such a view,’ Mr. Kuroda told an audience in Tokyo. He said there was ample room for the BoJ to buy more government bonds, to cut interest rates further, or to buy other assets such as corporate bonds, equity and real estate funds.”
“Yet despite the high level of monetary stimulus, the latest date show a 0.4% fall in the consumer price index compared with a year ago, and a slowdown in inflation even excluding volatile food and energy prices.”
“Mr. Kuroda argued that the failure to hit 2% inflation so far is because of three shocks: falling oil prices since summer 2014, weakness in demand after raising Japan’s consumption tax in April 2014, and a slowdown in emerging markets from summer 2015.”
“Given that, said Mr. Kuroda, ‘it is imperative for the Bank firmly to maintain its commitment to achieving the price stability target of 2% at the earliest possible time.”
“Please don’t buy so many bonds, Mr. Central Banker. It is rapidly becoming a case of ‘too much of a good thing’.” – Hans Lorenzen, credit strategist at Citi Research
Private investors are being crowed out…
And markets are being driven by macroeconomic policies more and more…
As the European Central Bank (ECB) is running up against its self-imposed limits on how much of a country’s debt it can hold and since there simply aren’t enough bonds they can buy that qualify under their guidelines, the ECB is contemplating buying European equities.
“Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.”
The Bank of Japan holds ¥10.182 trillion (approx. $98 billion) of “individual stocks and exchange-traded funds as of Aug. 20, in terms of book value.”
Though “economists have been split over the costs and benefits. Some say that Japan’s capital market can no longer accurately price the value of stocks; too much BOJ money has flown into some specific companies. Others say it has helped prop up share prices, thus producing ‘wealth effects’ to help the economy fight deflation.”
“Since Hanjin Shipping Co. of South Korea filed for bankruptcy protection there last week, dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world because of uncertainty about who would pay docking fees, container-storage and unloading bills. Some of those ships have been seized by the company’s creditors.”
According to Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen, “43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.”
All told about $14 billion worth of cargo is stranded at sea with the crews running short on rations…
“To sum up ten years in one paragraph: a historic speculative bubble in credit finally burst, and the US came out ahead thanks to looser monetary policy and swift action to fix its banks, while emerging markets slowed down, and Europe was left behind thanks to its bloated banking system and badly designed currency.”
“Once impacts become noticeable, they’re going to be upon you quickly. It’s not a hundred years off – it’s now.” – William V. Sweet, National Oceanic and Atmospheric Administration
So it turns out there is nearly one million metric tons of aluminum being stored in Mexico. “The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory.”
“For most of the last 15 years, China was a darling for emerging market investors as its demand for commodities lifted the economic fortunes of countries in Latin America, Africa and Asia. But now, as China struggles with the hangover from its debt-fueled boom, fund managers are increasingly shunning Asia’s giant.”
“The main deterrent is China’s corporate debt. Although this issue has been well-flagged in recent years, disquiet over its size and sustainability is deepening. A recent report by S&P Global Ratings, the rating agency, estimates that China’s total outstanding corporate debt in 2015 was $17.8tn, or 171% of GDP, making China’s corporate debt mountain by far the world’s largest in both absolute and relative terms.”
“Not only is the ratio of Chinese company debt to GDP more than double that in the US and eurozone, it is projected to grow far more quickly as an increasing number of heavily-indebted corporations ramp up their borrowing simply to repay debts that are coming due. By 2020, China’s outstanding corporate debt will be $32.6tn, while its share of global company borrowings will have risen to 43% from 35% last year, according to S&P estimates.”
“The S&P report estimates that $13.4tn, or nearly half, of total credit demand in China by 2020 will be for refinancing purposes.”
While there are many differences of opinion as to how this shakes out, with either a major meltdown or some internal growing pains (and everything in between), we shall see. Either way, keep an eye on this one.
This article really follows the one above and I highly recommend reading the whole thing.
Let me try and paraphrase: imagine you’re a new company and you want to take on debt to help you grow the business. Okay, sounds good and it works. The additional debt allows you to buy assets that help you to become more productive and hence grow sales/profits faster than the amount of debt and its associated servicing costs. Boom, you’re a hero and making lots of money.
So you do this some more and some more and some more. Eventually, your rate of productivity slows for every piece of debt you take on. Oh and did I mention that because you’ve been rolling over the debt to really juice growth, now your debt balance is quite a bit bigger than your total sales.
Fortunately, your cost of debt is low and you can keep on operating, but your lender is no longer willing to extend you credit, so you start talking to your suppliers to provide you with “credit-like” loans – meaning, hey why don’t you front me some money to buy more products from you and I’ll pay you back once I sell the goods to my customers.
Okay, this keeps on working, but eventually you’re running out of good options so you start looking for your highest possible rate of return projects regardless of the risk… ‘Come on lucky number 7.’
Oh and as to the debt, well, you’ve accumulated so much of it that it has become the lender’s problem and it’s such a big problem that it’s also their depositors’ problem (your mom and pop savers).
So what do you do and who is going to take the ‘haircut’…
From JPMorgan’s Peter Acciavatti: “Recovery rates in 2016 are extremely low… for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%… As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%.”
From Edward Altman of NYU’s Stern School of Business: “Our approach to recovery rates is not centered on sectors. What we’ve looked at carefully over 25 years is the correlation between default rates and recovery rates. As you would expect, when the former rise to high or above-average levels, you always observe the latter dropping to below-average levels. This strong inverse relationship is as much a function of supply and demand as it is of company fundamentals. So if we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default.”
“In the 30-year life of the so-called junk bond market, the chasm between reality and central-planner-created markets has never been wider.”
Bottom line, despite being able to collect less and less on defaulting debt (meaning you would ordinarily be less eager to buy more high yield debt or at least want greater compensation for the risk), pricing for high yield debt continues to rise…
WSJ – Oil Market Boost May Come from Venezuela, Not Algeria 8/19. “Venezuela produced the least oil in June in over 13 years and output had declined by more than 200,000 barrels a day in just the first half of 2016. That is half an Alaska’s worth of output.”
The nontraded REIT industry is having a hard look at itself. Inland is eliminating its transaction fees and new entrant to the sector – but definitely not to institutional real estate investment – Blackstone Group has not committed to a specific yield – the primary attribute for selling these investments.
The thing is “Cap rates, a key valuation measure for real estate, have decreased dramatically since the credit crisis, while valuations of quality properties have increased. That means commercial real estate is simply too pricey to generate the promised returns (generally 6-7%) brokers need to pitch nontraded REITs to clients.”
“The math of these programs is much more challenging today. Cap rates are lower and I think the dividend yields have to come down. The publicly traded REIT market is paying a 3.5% dividend yield, on average.” – Allan Swaringen, president and CEO of JLL Income Property Trust
And with a lower fee structure I might add…
One thing to be mindful of in investing in nontraded REITs are their dividend coverage ratios. “That ratio, a REIT’s cash flow versus its dividend, or distribution, is one of the most important metrics for investing in nontraded REITs, which often resort to returning investor cash to pay for or cover the 6% or 7% dividend. Any return of investor money diminishes the REIT’s ability to perform in the long term.”
Bottom line, “nontraded REIT sponsors and advisers who sell them can say au revoir to the product’s most important marketing component: the promise of generating annual returns of 6% or 7% to yield-starved investors.”
“Trends that slammed profit in the first quarter – a stronger yen, negative interest rates and slumping China growth – haven’t reversed. At stake is a second straight year of earnings decline that could buy Prime Minister Shinzo Abe’s push for companies to boost capital spending and raise wages to spur economic growth.”
“With negative interest rates grinding away bank profits and a stronger yen bearing down on carmakers, aggregate operating income plummeted 17% in the June quarter, the biggest quarterly decline since 2011. That’s the year an earthquake in Fukushima and subsequent tsunami caused the yen to gain and stocks to drop.”
Airbnb has changed the short-term rental business in a big way. The company “now operates in 34,000 cities around the world and was recently valued by investors at $25.5 billion.”
On top of that, Airbnb has created an ecosystem of other companies that help landlords rent, maintain, and operate their units…
Well one of the recent companies created, Host Compliance, is the ‘tit for tat.’ Rather than assist people to attain the most out of their Airbnb listings, the company actually is set up to help cities and municipalities in the policing of their short-term rental regulations by sifting through the vast amount of listings data and providing reports on violations.
No surprise, most governments are overwhelmed and not truly set up to properly track abuses to their rules, hence they’re always playing catch up to tech innovators. I suppose it won’t be long that other tech innovators will pop up to “check-in” on other tech disrupters…
As the tech industry continues to boom, its companies continue to crowd out other businesses from San Francisco’s office market, ultimately reducing the city’s “economic diversity, giving it an enormous concentration in an industry that is particularly prone to economic swings.”
“Tech companies now occupy more than 29% of the city’s occupied office space, according to real-estate-services firm CBRE Group Inc. That is roughly double what the industry occupied in 2010 as well as the height of the dot-com bubble in 2001, CBRE said.”
“What’s more, the bulk of those occupying that office space are startups or those that recently went public, typically unprofitable companies that are considered some of the most volatile.”
“Looming in the minds of many in San Francisco is the city’s experience after the dot-com bust of 2001. Even though the tech sector was centered more in Silicon Valley to the south, the local economy was pummeled. Office vacancies soared above 20% from less than 4%, according to Cushman & Wakefield.”
China has just formalized new regulations for the Peer-to-Peer (P2P) market in the country. “Regulators and courts have previously issued many of the prohibitions contained in the latest rules in different forms, but the latest regulations mark the first comprehensive framework for regulating P2P lenders in China.”
“The rules, issued on Wednesday, forbid online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. They ban P2P platforms from securitizing assets or offering debt transfer mechanisms that mimic securitization. Companies are prohibited from using P2P platforms to finance their own projects.”
“Their fundamental nature is information intermediation, not credit intermediation.” – banking regulator
“Outstanding loans from 2,349 P2P platforms totaled Rmb621bn by the end of June, the banking regulator said in a statement on Wednesday. But an additional 1,778 ‘problem platforms’ have also been established, equal to 43% of all platforms.”
“The latest rules also prohibit P2P groups from operating ‘fund pools’ in which investor funds are not matched with specific loan assets. The banking regulator noted that ‘Ponzi schemes’ – in which inflows from new investors are used to finance payouts on maturing obligations – have been a problem for the industry.”
With a median 401(k) account balance of $104,000 for US households near retirement, that would imply a $4,000 annual income should they follow standard withdrawal practices.
Italian Prime Minister Matteo Renzi has put forth a referendum to vote this upcoming October that would enable him to move forward some much needed reform in the country. Should a “No” vote succeed, it “…will not just precipitate the fall of Renzi’s government; it could throw Italy’s long term membership of the eurozone into doubt, plunging the single currency area once again into crisis.”
As yield is vanishing from developed world economies – there is $13tn in negative-yielding debt outstanding at the moment – emerging market economies have seen a lot of interest of late… however, try to see it in context.
“The drive behind this intense demand for EM has nothing to do with EM. The one thing that emerging markets have that everyone wants right now is not raw materials or cheap labor, it’s yield. When you have negative interest rates in Europe and Japan, and zero rates everywhere else, the politics and economics of these countries becomes irrelevant.” – Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch
“Thus, emerging markets are flattered by a perception they are the least bad option for investors.”
However, investors need to be wary of the exposure that many EMs have to China.
China is having ever greater difficulty in producing economic growth – at least of the levels of the past few decades (which is to be expected). “Before the global financial crisis in 2008, China needed just over one dollar of credit to deliver one dollar of gross domestic product growth, the ratio is now six to one, according to Morgan Stanley.”
“Although the economy is said to be growing at 6.7%, investment growth by private companies slowed to 2% in July, demonstrating that the most potent force in the Chinese economy sees scant hope of a return.”
“Scarcity of opportunity amid an abundance of growth defines China’s enervated state. So generous have banks, capital markets and shadow financial institutions been to virtually anyone who wishes to borrow that almost every industry is in a state of oversupply, slashing profits.”
“Standard & Poor’s, the credit rating agency, is the latest to raise the alarm. The anemic profits of Chinese companies is likely to intensify their need to borrow more merely to repay maturing debts, helping to drive global corporate debt levels to worrying levels by 2020.”
“Corporate debt is set to expand by half to $75tn over the next five years, according to S&P. China’s share of this debt is likely to rise to 43% in 2020 from 35% in 2015, the rating agency said, largely through companies borrowing to repay debts that are coming due.”
Bottom line, don’t throw out your fundamental analysis models just yet…
It’s a low-growth world for us…instead of high returns, we get zilch… Thus it is no surprise that funds are being pushed back to emerging markets in a big way.
Headlines
WSJ – Annuity Loss Adds to MetLife Drama 8/4. MetLife just took a $2 billion charge on its variable annuity business – the stock market responded by knocking off $4.3bn from the company’s capitalization.
WSJ – The Insurance Industry Has Been Turned Upside Down by Catastrophe Bonds 8/7. A dry spell in world of catastrophes and low yields elsewhere have brought pension and sovereign wealth funds to the table resulting in a major decline in the cost of risk – also eating away a nice part of the reinsurance industry’s profits.
Blackstone Group ($356bn in assets) is getting into the nontraded real estate investment trust business. Its first nontraded REIT – The Blackstone Real Estate Income Trust Inc. – was just registered on Wednesday.
The REIT is looking to raise $5bn and its manager “will receive a fee of 12.5% of the REIT’s total return after meeting a 5% hurdle.”
“Capped at close to 9%, the cost structure of the new Blackstone REIT is clearly different than the traditional full-commission nontraded REIT sold mainly by independent broker-dealers such as LPL Financial and Ameriprise Financial Services Inc. Such REITs typically carry loads of 12%, including a 7% (fee) to brokers at the time of sale. Nontraded REITs have been routinely criticized for their high fees and opaque cost structures.”
“Look for Blackstone to shun the traditional marketplace of independent broker-dealers and turn to wirehouses such as Merrill Lynch and Morgan Stanley, with whom they already have business relationships…”
“Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result.”
“The pull to par has become a drag: a buy-and-hold investor is guaranteed to lose money, even before taking inflation into account. The only way to make money is to find another buyer willing to pay a higher price – but that implies a bigger loss down the road.“
“Germany now has more than €160 billion of zero-coupon bonds in issue. All of its two-year notes pay no interest, along with three of its five-year notes; all of them trade above face value.”
“The crucial thing to understand is that these instruments are no longer bonds – at least not in the traditional sense. With no income attached to them, they are simply bets on the price another investor is willing to pay. They will also be more volatile: the long wait for repayment means small changes in yield will have a big effect on current prices.”
In an effort to reduce the problems from rapid growth and overpopulation, Beijing is seeking to push out residences to neighboring provinces such as Hebei and Cangzhou (see map).
“Despite the city’s efforts to keep a lid on population growth, greater Beijing now has almost 22 million people, an increase of some 6 million in a decade, official data show. The central area, comprising of six districts grew at an average rate of 414,200 a year over the same period to about 13 million.”
“Municipal leaders’ latest five-year plan aims to keep greater Beijing’s population under 23 million and to shrink the urban center by 15% by 2020, effectively pushing out some 2 million people – roughly equivalent to excising more than the population of Manhattan from New York City and dispersing those people elsewhere.”
“The strategy is to move low-end businesses such as wholesale markets, to Hebei-the province surrounding Beijing where growth has flagged-and coax people to follow.”
Just think what will happen to real estate prices when you push out that much demand…but then again, the laws of economics are generally suspended in China.
A fairly comprehensive story about the 1MDB scandal, the players involved, and the whistle blower who is suffering in a Thai jail until justice can be served – you can bet there will be a movie made… perhaps Red Granite Pictures could produce it…
“Slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2% a year from 1947 through 2000 – but starting 2001 has averaged only 0.9%. The economies of Western Europe and Japan have done worse than that.”
According to a new analysis by the McKinsey Global Institute, 81% of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97% in Italy, 70% in Britain, and 63% in France.”
“An entire way of thinking about the future – that children will inevitably live in a much richer country than their parents – is thrown into question the longer this lasts.”
Bottom line, people are working fewer hours and there is less “economic output being generated for each hour of labor.”
“The latest growth forecasts from the International Monetary Fund offer some optimism. It expects the pace of gross domestic product growth in emerging markets to increase every year for the next five years while developed markets stagnate.”
“But in truth emerging markets are growing from a shrunken base and a big part of the upturn is not due to things getting better but to things no longer getting worse. Big economies such as Russia and Brazil, for example, in deep recession for the past two years, are finally heading back to growth.”
“Fund flows to EMs have gone through the roof, but this is best described as [the result of] push factors rather than pull factors.” – Peter Kinsella, head of EM research at Commerzbank
“The EM bond rally is really a global fixed income rally.” – David Hauner, head of EM strategy at Bank of America Merrill Lynch
BlackRock’s ($4.6tn money manager) Sergio Trigo Paz, head of emerging markets fixed income, “who changed his view on EM bonds in February, describes what is happening now as a ‘capitulation’ – a realization by big institutions that they can no longer afford to ignore the returns on offer in emerging markets, which have been as high as 13% in the year to date.”
“The impact of such flows on EM sovereign bond prices, which have risen 15% this year, has been amplified by the fact that the asset class is small. An estimated $12tn of developed market government bonds now offer yields of less than zero, while their emerging market equivalents add up to about $800bn, so their ability to offer an alternative is limited.”
“For now, the pressure on prices has all come from buyers and for those who got in early the returns have justified the risks. The trick will be to know when to head for what could quickly become a very crowded exit.”
WSJ – Why All Italians Feel Monte dei Paschi’s Pain 8/1. The good news, troubled Italian bank Banca Monte dei Pasci di Sienna found buyers for €7bn of bad loans. The bad news other holders of bad Italian debt, the buyers picked up the debt at 27% of face value.
“Sovereign wealth funds are investing less money directly than at any time in the past five years. This marks the end of a safety net whereby state-backed vehicles mopped up assets in times of market stress, according to research.”
“The Bocconi report found that state funds invested €48bn directly last year, down 57% from €112bn in 2008.”
“Given the low oil-price environment and lower revenues for oil producers, [state funds] no longer have the cash positions to get into the markets once they correct.” – Sven Behrendt, managing director of GeoEconomica, a consultancy
“What if all Londoners, no matter how young or frail, smoked for at least six years? In effect, they already do. The city’s air pollution exacts an equivalent toll on each resident, cutting short the lives of nearly 10,000 people each year and damaging the lungs, hearts and brains of children.”
Bottom line, more needs to be done to track and publish long-term air-quality indexes similar to the existing short-term gauges that people and cities can utilize to alter behaviors and make informed life choices.
“With an estimated 30% of global government debt now offering yields of less than zero, he (Daniel Senecal, head of credit research at Newfleet Asset Management) says traditionally conservative investors are being pushed into new areas.”
“If you’re a pensions guy you have to do something. With German 10-years at zero, you need to change your mindset. Your whole view migrates into US high-yield and EMs.” – Daniel Senecal
“Insurers globally are having to come to terms with the idea of ‘lower for longer’ interest rates, making deep changes to business models that had been unaltered for decades. Whereas previously they might have clung to the hope that higher rates were around the corner, there is a realization that the industry has to do things differently – from investing in assets that might once have been seen as too risky, to experimenting with new products.”
As to how much cash are we talking about, PwC estimates that by 2020, insurance companies will manage about $35tn worth of assets.
“Traditionally, much of that has gone to relatively safe homes, such as bonds. At the end of last year, bonds made up about 68% of US property insurers’ total investments and 76% of life insurers’, according to S&P Global Market Intelligence. When those bonds offered decent yields there was no problem. Insurers could fulfill promises to customers and still have plenty left for shareholders.”
But “by last year the net yield on US life insurers’ overall invested assets had fallen to 4.7% – about a quarter lower than 2002 levels.”
Hence, the performance of US life insurance companies has tended to move in tandem with the 10-year Treasury yield…
In regard to attaining higher returns, insurers can either take on higher risks or tie up cash for longer. “Many prefer the latter, investing in more illiquid assets such as property. UK insurer Aviva says 80% of the new investments it is making to back its annuity business will be in long-duration assets rather than traditional gilts or corporate bonds.”
“Infrastructure investments are particularly popular as they offer the long-term cash flows life insurers need to back their promises. Germany’s Allianz, for example, is one of the main backers of London’s £4.2bn supersewer.”
Consider the alternative…“Nobody likes to invest at negative yields but life insurers have so much cash that they need to invest, and they need to do something with it.” – James Peagam, head of global insurance solutions at JPMorgan Asset Management
As to the other side of the equation, ‘new products’ or raising premiums, this is already underway.
“Life assurance customers may see the biggest changes. For decades, the industry has offered savings and retirement products that offer guaranteed minimum returns. In the future, these may no longer be on offer.”
“This would be a major shift. In the US, products with guarantees account for 60-80% of the US life insurers’ balance sheets, Moody’s estimates. The average outstanding guarantee is returning between 2% and 4%.”
The replacement product: “unit-linked products. These make no promises: customers’ investments simply rise and fall with the markets. They are similar to traditional asset management products.”
Which of course puts them in direct competition with traditional asset managers that are facing a major business model challenge from low-cost index fund companies like Vanguard and BlackRock.
“As Jon Hocking, an analyst at Morgan Stanley, points out, the unit-linked model distances insurers from their customers. ‘The risk is that you open Pandora’s box and the industry loses its dominant position in the long term savings market. The customer chooses between products and the only distinction is the fund performance” and fees…
So which insurers are under particular pressure, in the US these are the companies specializing in long-term care (“low interest rates have exacerbated the problems caused by rising treatment costs”) and those that have sold ‘universal life’ protection (“policies that combine death benefits with tax-advantaged savings”).
“Transamerica, a large US provider, is being sued by the advocacy group Consumer Watchdog on behalf of policyholders who bought coverage decades ago. It said consumers who had been offered guaranteed interest of at least 5.5% a year had been stung by premium increases of almost 40%.”
India just passed a new goods-and-services tax (GST) that will “unify the country’s 29 states and 1.3 billion people into a common market for the first time.”
“Few countries are fiddlier than India when it comes to paying taxes; the World Bank ranks it 157th out of 189 for simplicity… Because the rates differ between states, making stuff in one and selling it in another is often harder within India than it is in trade blocs such as NAFTA or the European Union.”
“That should change with the GST, essentially an agreement among all states to charge the same (still to be decided) indirect tax rates.”
“Better yet, the GST will be due on the basis of value added. That avoids businesses being thwacked by taxes on the entire value of the products they buy and sell rather than the value they create – a situation that often made it cheaper to import stuff rather than make it locally. Just as importantly, by requiring businesses to document the prices at which they buy inputs and sell products, it will force vast swathes of the economy into the reach of the taxman.”
The tax is supposed to be enacted in April 2017. There is a lot to be buttoned up by then and chances that exceptions will be inserted; however, it is good step forward and has the chance of boosting India’s GDP by 1-2 percentage points.
Helicopter money coming to Japan? GMO on EU immigration and the Brexit. Hong Kong and China at a cross road. ECB coming up against its quantitative easing boundaries.
China’s 2nd quarter gross domestic product came in at 6.7%, which is 10 basis points higher than forecast; however, the concern is where that growth has come from.
“Figures from the People’s Bank of China the same day showed that money supply growth was faster than expected, reaching levels last seen post 2008. New loans also rose by over $200bn, more than $50bn higher than economists’ estimates.”
Bottom line, “the reversion to state-led growth is unsustainable. Should China continue to shun reforms in favor of a quick fix, the short-term benefits of stabilized growth will be outweighed by the cost of persistent imbalances.”
The World Federation of Advertisers “estimates that between 10 and 30% of online advertising slots are never seen by consumers because of fraud, and forecasts that marketers could lose as much as $50bn a year by 2025 unless they take radical action. At that scale, the fraud would rank as one of the biggest sources of funds for criminal networks, even approaching the size of the market for some illegal drugs.”
“Global spending on online advertising has almost doubled in the past four years – reaching $159bn in 2015, according to research group eMarketer. This money underpins the internet economy and supports trillions of dollars of equity in media and technology.”
“Google, the biggest player in the online ad industry, generated revenues of $67bn from it last year.”
Bottom line, digital ad platforms and major buyers of online ads are emphatically building methods to track and prevent fraud and where they can and to the event that they can’t expect the federal government to step in.
Goes to show that just because a company is worth several billion dollars, doesn’t mean they pay back all their debts.
“While the overall retail property sector appears to be strengthening, a handful of loans for lower-quality shopping centers and malls financed at the height of the previous CRE cycle are coming due now and proving to be a thorn in the side of publicly traded REITs.”
“Simon Property Group and WP Glimcher both turned malls back over to the lenders this week, and Kimco Realty Corp. disclosed that it doesn’t expect one of its joint venture-owned malls will be able to refinance a loan set to come due this fall.”
“All three of the malls involved in the foreclosure actions were last financed in 2006 and securitized in mortgage backed bond conduits.”
As the saying goes, don’t hate the player, hate the game.
“In 1950, when the global economy was struggling to recover from World War II, oil-rich Venezuela was the world’s fourth-wealthiest country, boasting a per capita GDP of $7,424 exceeded only by the United States, Switzerland and New Zealand. Indeed, Venezuela’s per capita income was nearly four times that of Japan (at $1,873), nearly twice that of Germany ($4,281) and more than 12 times that of China ($614), according to NationMaster.com, an economics statistics site. By 2012, Venezuela’s per capita GDP ranked 68th in the world, according to the World Economic Forum. But it has continued to shrink since then, dropping 5.7% in 2015 and by a projected 7.1% rate in 2016, according to the country’s central bank. Inflation in Venezuela, the highest in the world, reached 159% in 2015 and is expected to grow to 204% this year, according to the International Monetary Fund.”
“Whether or not they choose to admit it the Abe government is on the verge of becoming the first government of a major developed economy to monetize its government debt on a permanent basis since 1945.”
“There are many ways of defining helicopter money, but the essential feature is that it involves an increase in the budget deficit which is financed by a permanent increase in the central bank’s monetary base, not by the issuance of government debt.”
“This is different from quantitative easing, since QE involves the ‘temporary’ purchase of government debt, which is subsequently sold back into the market, at least in theory. And QE does not necessarily need to involve any increase in the budget deficit…”
While “the direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act.” It looks like the government is coming up with a work-a-round.
One method proposed is the issuance of perpetual bonds “…which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.”
Thing is, that “there is no doubt that the BoJ is now monetizing much of the increase in government debt needed to fund ¥10 trillion fiscal stimulus planned by the government. Since the market fully expects the BoJ’s debt purchases to be permanent, it is helicopter money by any other name.”
Why do this when the labor market is at close to full employment? Basically the inflation expectations in Japan are REALLY low and the BoJ is seeking to reduce its vulnerability to “…any new deflationary shock, from China for example.”
The key point that helicopter money will confer is that debt sustainability (which is why the sales tax increases have been/are being implemented) is not the priority. Rather that Japan will live with whatever debt level it takes to achieve inflation.
“The key problem is that it might restore inflation far too well. It is very difficult to calibrate the amount of helicopter money that is needed to hit the inflation target.”
Expect the delicate dance to continue, which may fail to get Japan out of its deflationary rut.
While this is piece is a commentary on immigration and the Brexit, I think it does a good job of presenting the scale of the immigration challenge that the EU is facing. I will only highlight two specific items (the full commentary is a good read) for brevity. 1) Grantham’s stance on the markets “despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break…” and 2) some of his thoughts on immigration to the EU.
“The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.”
“They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.”
“This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.”
“For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population of 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman). Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.”
“I wrote two years ago that this immigration pressure would stress Europe and that the first victim would be Western Europe’s liberal traditions. Well, this is happening in real time as they say, far faster than I expected. It will only get worse as hundreds of thousands of refugees becomes millions.”
Integration of Hong Kong with the Chinese mainland continues to be a delicate issue that is being stressed by a slowdown in the Chinese economy.
As Lily Lo, an economist at DBS, a Singaporean bank, put it “Hong Kong is really dependent on China and external trade. The Chinese economy is slowing down and this is a structural slowdown so we don’t think there will be a V-shaped recovery any time soon. There’s no quick fix.”
Further, as China has opened its economy more and more, Hong Kong is no longer the only or primary route to do business with China. “Its container port, which was the world’s busiest in the 2000s, has fallen to fifth place, overtaken by Shanghai, Shenzhen and Ningbo.”
“Mr. Tsang (John Tsang, the financial secretary of Hong Kong) and Li Ka-shing, the billionaire whose interests in Hong Kong stretch from ports to property and retail to telecoms, have both warned that the economic outlook is worse than that faced during the Sars epidemic in 2003, which killed 299 people and prompted the last sharp slowdown.”
“Chow Tai Fook, the biggest jeweler in the world by market capitalization, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualized basis by 22% in the three months to the end of June.”
“Yu Kam-hung, managing director of investment properties at CBRE, an estate agent, predicts that prices could fall up to 10% over the next year, and they are already 10 to 15% off their peak of 18 months ago.”
Then of course it doesn’t help that “there is a deep-seated animosity to (Chinese) mainlanders in Hong Kong. So why would they want to go somewhere they are not welcome when there are so many other choices.” – Shaun Rein, China Market Research in Shanghai
It wasn’t long after the Brexit referendum vote that government bond yields in the safest markets dropped even further (see graphic on Sovereign credit ratings above). Problem is that the current structure in place within the European Central Bank (ECB) is reaching its limits.
Currently the ECB is buying €80bn a month in European member country debt to stimulate the overall European economy (aka Quantitative Easing or QE).
Well, “under current rules, the scale of purchases under QE match the size of a member state’s economy, meaning that Germany’s Bundesbank must buy around €10bn of government debt each month – more than any other central bank in the region.”
“But because of the recent bond market shifts, more than 50% of German bonds previously eligible for QE have now become too expensive for the Bundesbank to purchase, yielding less than the ECB’s self-imposed floor of minus 0.4%, according to data from Bank of America Merrill Lynch.”
So, now the ECB is essentially faced with three primary options (there are other options – see “Five ways to change the rules within the article).
Scrap the minus 0.4% floor. The “economists at Goldman Sachs calculate (this) would buy the ECB the most time, enabling the Bundesbank to keep buying for up to another 18 months.”
“The option, however, would expose the eurozone’s central banks to heavy losses, which they have until now avoided because the minus 0.4% floor mirrors the ECB’s deposit rate charged on banks’ reserves.”
“Scrap the rule that bond purchases match the size of a member states’ economy.”
“But such a shift would open the way to buying more bonds from the most indebted countries, and would so be the most controversial of the fixes. Nowhere would it attract more criticism in Germany, where the change would be viewed as a bailout by the back door for profligate member states.”
End QE.
Don’t know if the EU or the world is ready for that.
