“Airbnb’s branded buildings promise management companies 5% to 15% of the profit hosts generate. At Domain, residents who rent through Airbnb would pay Niido 25% of their home-sharing income. In exchange, Diffenderfer says, residents will have access to the same hotel-style amenities visitors will receive.”
“California is poised to become the first U.S. state to require solar panels on nearly all new homes.”
“The California Energy Commission on Wednesday is expected to approve a requirement that residential buildings up to three stories high, including single-family homes and condos, be built with solar installations starting in 2020.”
“California is pursuing aggressive policies to reduce air pollution and combat climate change—including a mandate to slash greenhouse gas emissions 40% below 1990 levels by 2030—that are helping drive renewable energy in the state.”
“Solar accounted for nearly 10% of California’s electricity generation in 2016, Energy Commission data shows.”
“Currently, about 20% of new single-family homes in the state are built with solar, said Bob Raymer, senior engineer with the California Building Industry Association, which represents thousands of home builders, contractors, architects and others. Making solar mandatory on homes is expected to add $8,000 to $10,000 to construction costs, he said.”
“While the building-industry organization would have preferred the Energy Commission hold off a few more years on mandating that homes be fitted with solar, it helped shape the rule to reduce compliance costs and increase flexibility, Mr. Raymer said. Builders would have the option to install solar in a communal area if it doesn’t make sense on individual rooftops. By installing batteries that help homeowners save energy for later use, builders can also gain some flexibility in meeting efficiency standards.”
“California has more solar power installed than any other state, with roughly 21 gigawatts of generation capacity, according to the Solar Energy Industries Association. That is far more than the second -largest solar-producing state, North Carolina, which has 4.3 gigawatts.”
“The commission expects the cost of adding solar, when combined with other revised efficiency standards, to add about $40 to an average monthly payment on a 30-year mortgage. However it estimates the investment would more than pay for itself, with consumers on average saving $80 a month on heating, cooling and lighting bills.”
Affiliate networks (‘affiliates’) = companies/brokers that design advertisements and pay to place them on social media sites on behalf of merchants.
“Granted anonymity, affiliates were happy to detail their tricks. They told me that Facebook had revolutionized scamming. The company built tools with its trove of user data that made it the go-to platform for big brands. Affiliates hijacked them. Facebook’s targeting algorithm is so powerful, they said, they don’t need to identify suckers themselves—Facebook does it automatically.”
“The basic process isn’t complicated. For example: A maker of bogus diet pills wants to sell them for $100 a month and doesn’t care how it’s done. The pill vendor approaches a broker, called an affiliate network, and offers to pay a $60 commission per sign-up. The network spreads the word to affiliates, who design ads and pay to place them on Facebook and other places in hopes of earning the commissions. The affiliate takes a risk, paying to run ads without knowing if they’ll work, but if even a small percentage of the people who see them become buyers, the profits can be huge.”
“Affiliates once had to guess what kind of person might fall for their unsophisticated cons, targeting ads by age, geography, or interests. Now Facebook does that work for them. The social network tracks who clicks on the ad and who buys the pills, then starts targeting others whom its algorithm thinks are likely to buy. Affiliates describe watching their ad campaigns lose money for a few days as Facebook gathers data through trial and error, then seeing the sales take off exponentially. ‘They go out and find the morons for me,’ I was told by an affiliate who sells deceptively priced skin-care creams with fake endorsements from Chelsea Clinton.”
“In a sense, affiliate scammers are much like Cambridge Analytica. Because Facebook is so effective at vacuuming up people and information about them, anyone who lacks scruples and knows how to access the system can begin to wreak havoc or earn money at astonishing scale.”
This is not a new game.
Affiliates are “…applying tricks on Facebook that had been invented by email spammers, who’d in turn borrowed the tactics of fax spammers in the 1980s and ’90s. New forms of media have always been hijacked by misleading advertising: 19th century American newspapers were funded in part by dishonest patent medicine ads. Within days of Abraham Lincoln’s inauguration, the makers of Bellingham’s Onguent were placing ads claiming the president had used their product to grow his trendy whiskers.”
“Fake personal endorsements and news reports are still the most effective tricks. Dr. Oz, the Shark Tank judges, and Fixer Upper co-host Joanna Gaines are among the most popular imprimaturs…”
“In the political realm, however, Mr. Xi enjoys advantages that may allow him to cope with the economic fallout far better than Mr. Trump can. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, even as Mr. Trump must contend with complaints from American companies and consumers before important midterm elections in November.”
“The Chinese government also has much greater control over the economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy.”
“’The American agricultural sector is quite influential in the Congress,’ said Wang Yong, a professor of economics at Peking University, explaining why China has targeted farm products such as soybeans with possible retaliatory tariffs. ‘China wants the American domestic political system to do the work.’”
“Alphabet bought enough renewable energy last year to match the power needs of all its data centers and global operations, making it the biggest corporate buyer of renewable power in the US.”
“The company has secured 3GW of renewable energy, making it the largest corporate buyer of renewable power, according to Bloomberg New Energy Finance, while Amazon and Apple are in second and third place.”
“Amazon has pledged that its cloud computing business will be 50% matched by renewables in 2017, while Apple has promised to source four gigawatts of renewable power by 2020, and has been trying to reduce the emission footprint of its supply chain.”
“There is a reason so many Americans choose to develop their net worth through homeownership: It is a proven wealth builder and savings compeller. The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter ($5,400).”
“People who are living in a middle- to-lower-class system, there’s no progressing. You’re stuck in that system. I don’t have subsidies. I work, but I feel stuck in this cycle and can barely make ends meet.’’ – Crisaliz Diaz, renter
Trying to get subsidized housing? Good luck.
“The last time Boston accepted new applications for rental-assistance Section 8 vouchers was nine years ago, when for a few precious weeks you were allowed to place your name on a very long waiting list. Boston is not atypical in that way. In Los Angeles, the estimated wait time for a Section 8 voucher is 11 years. In Washington, the waiting list for housing vouchers is closed indefinitely, and over 40,000 people have applied for public housing alone. While many Americans assume that most poor families live in subsidized housing, the opposite is true; nationwide, only one in four households that qualifies for rental assistance receives it. Most are like Diaz, struggling without government help in the private rental market, where housing costs claim larger and larger chunks of their income.”
“Almost a decade removed from the foreclosure crisis that began in 2008, the nation is facing one of the worst affordable-housing shortages in generations. The standard of “affordable” housing is that which costs roughly 30% or less of a family’s income. Because of rising housing costs and stagnant wages, slightly more than half of all poor renting families in the country spend more than 50% of their income on housing costs, and at least one in four spends more than 70%. Yet America’s national housing policy gives affluent homeowners large benefits; middle-class homeowners, smaller benefits; and most renters, who are disproportionately poor, nothing. It is difficult to think of another social policy that more successfully multiplies America’s inequality in such a sweeping fashion.”
In 2015, “the federal government dedicated nearly $134 billion to homeowner subsidies. The MID accounted for the biggest chunk of the total, $71 billion, with real estate tax deductions, capital gains exclusions and other expenditures accounting for the rest. That number, $134 billion, was larger than the entire budgets of the Departments of Education, Justice and Energy combined for that year.”
As a homeowner myself, I fully attest to the wealth effect. While I greatly appreciate the MID, I would understand if it went away.
“When we think of entitlement programs, Social Security and Medicare immediately come to mind. But by any fair standard, the holy trinity of United States social policy should also include the mortgage-interest deduction — an enormous benefit that has also become politically untouchable.”
“The MID came into being in 1913, not to spur homeownership but simply as part of a general policy allowing businesses to deduct interest payments from loans. At that time, most Americans didn’t own their homes and only the rich paid income tax, so the effects of the mortgage deduction on the nation’s tax proceeds were fairly trivial. That began to change in the second half of the 20th century, though, because of two huge transformations in American life. First, income tax was converted from an elite tax to a mass tax: In 1932, the Bureau of Internal Revenue (precursor to the I.R.S.) processed fewer than two million individual tax returns, but 11 years later, it processed over 40 million. At the same time, the federal government began subsidizing homeownership through large-scale initiatives like the G.I. Bill and mortgage insurance. Homeownership grew rapidly in the postwar period, and so did the MID.”
“By the time policy makers realized how extravagant the MID had become, it was too late to do much about it without facing significant backlash. Millions of voters had begun to count on getting that money back. Even President Ronald Reagan, who oversaw drastic cuts to housing programs benefiting low-income Americans, let the MID be. Subsequent politicians followed suit, often eager to discuss reforms to Social Security and Medicare but reluctant to touch the MID, even as the program continued to grow more costly: By 2019, MID expenditures are expected to exceed $96 billion.”
“’Once we’re in a world with a MID, says Todd Sinai, a professor of real estate and public policy at the University of Pennsylvania’s Wharton School, ‘it is very hard to get to a world without the MID.’ That’s in part because the benefit helps to prop up home values. It’s impossible to say how much, but a widely cited 1996 study estimated that eliminating the MID and property-tax deductions would result in a 13% to 17% reduction in housing prices nationwide, though that estimate varies widely by region and more recent analyses have found smaller effects. The MID allows home buyers to collect more after-tax savings if they take on more mortgage debt, which incentivizes them to pay more for properties than they could have otherwise. By inflating home values, the MID benefits Americans who already own homes — and makes joining their ranks harder.”
“The owner-renter divide is as salient as any other in this nation, and this divide is a historical result of statecraft designed to protect and promote inequality. Ours was not always a nation of homeowners; the New Deal fashioned it so, particularly through the G.I. Bill of Rights. The G.I. Bill was enormous, consuming 15% of the federal budget in 1948, and remains unmatched by any other single social policy in the scope and depth of its provisions, which included things like college tuition benefits and small-business loans. The G.I. Bill brought a rollout of veterans’ mortgages, padded with modest interest rates and down payments waived for loans up to 30 years. Returning soldiers lined up and bought new homes by the millions. In the years immediately following World War II, veterans’ mortgages accounted for over 40% of all home loans.”
“But both in its design and its application, the G.I. Bill excluded a large number of citizens. To get the New Deal through Congress, Franklin Roosevelt needed to appease the Southern arm of the Democratic Party. So he acquiesced when Congress blocked many nonwhites, particularly African-Americans, from accessing his newly created ladders of opportunity. Farm work, housekeeping and other jobs disproportionately staffed by African-Americans were omitted from programs like Social Security and unemployment insurance. Local Veterans Affairs centers and other entities loyal to Jim Crow did their parts as well, systematically denying nonwhite veterans access to the G.I. Bill. If those veterans got past the V.A., they still had to contend with the banks, which denied loan applications in nonwhite neighborhoods because the Federal Housing Administration refused to insure mortgages there. From 1934 to 1968, the official F.H.A. policy of redlining made homeownership virtually impossible in black communities. ‘The consequences proved profound,’ writes the historian Ira Katznelson in his perfectly titled book, When Affirmative Action Was White. ‘By 1984, when G.I. Bill mortgages had mainly matured, the median white household had a net worth of $39,135; the comparable figure for black households was only $3,397, or just 9 percent of white holdings. Most of this difference was accounted for by the absence of homeownership.‘”
“This legacy has been passed down to subsequent generations. Today a majority of first-time home buyers get down-payment help from their parents; many of those parents pitch in by refinancing their own homes… Differences in homeownership rates remain the prime driver of the nation’s racial wealth gap. In 2011, the median white household had a net worth of $111,146, compared with $7,113 for the median black household and $8,348 for the median Hispanic household. If black and Hispanic families owned homes at rates similar to whites, the racial wealth gap would be reduced by almost a third.”
“Racial exclusion was Roosevelt’s first concession to pass the New Deal; his second, to avoid a tax revolt, was to rely on regressive and largely hidden payroll taxes to fund generous social-welfare programs. A result, the historian Michelmore observes, is that we ‘never asked ordinary taxpayers to pay for the economic security many soon came to expect as a matter of right.’ In providing millions of middle-class families stealth benefits, the American government rendered itself invisible to those families, who soon came to see their success as wholly self-made. We forgot because we were not meant to remember.”
“So why do we keep this ‘poor instrument’ around, if the overarching goal of American federal housing policy is to create a nation of homeowners? Perhaps because the MID enjoys entrenched, unyielding support from a powerful real estate lobby. We often discuss the influence of the gun and pharmaceutical lobbies, but the real estate lobby has spent much more than either group. According to the Center for Responsive Politics, the National Association of Realtors spent $64.8 million in lobbying efforts in 2016, making it second only to the U.S. Chamber of Commerce in terms of dollars spent. And to 1.2 million Realtors, the mortgage-interest deduction is nonnegotiable. The association calls it a ‘remarkably effective tool that facilitates homeownership.’ Jerry Howard, the chief executive of the National Association of Home Builders, refers to the MID as ‘one of the cornerstones of American housing policy.’ Of course, industry groups have a responsibility to their members, who enjoy profiting from a government subsidy that increases the prices of homes they build and sell.”
Remove the MID or alter it by capping the value on the homes it applies to, etc. The article goes on to discuss the arguments – worth the read.
“In some markets, there are virtually no affordable units left. The median annual rent for a two-bedroom apartment is currently $39,600 in Boston, $49,200 in New York City and $54,720 in San Francisco. Families priced out of large cities have moved to smaller ones, and now those cities are experiencing some of the steepest rent increases in the nation. The poor used to live on the other side of the tracks. Now they live in different towns and counties entirely.”
Of course those different towns are jacking rents with all of this new demand.
“And yet we continue to give the most help to those who least need it — affluent homeowners — while providing nothing to most rent-burdened tenants. If this is our design, our social contract, then we should at least own up to it; we should at least stand up and profess, ‘Yes, this is the kind of nation we want.’ Before us, there are two honest choices: We can endorse this inequality-maximizing arrangement, or we can reject it. What we cannot do is look a mother like Diaz in the face and say, ‘We’d love to help you, but we just can’t afford to.’ Because that is, quite simply, a lie.”
WSJ – Daily Shot: California Economy 5/8
“Other than the US, only these four nations have an economy larger than California’s.”
“China’s championing of globalization should be great news for exporters in Latin America, where trade with the Asian giant has ballooned since the early 2000s. But trade growth has stalled and, according to the Inter-American Development Bank (IDB), this is not only because of the bursting of the commodities bubble. High tariffs and other barriers both in China and in Latin America show that free-trade rhetoric has yet to be matched by action.”
“In a recent report, Uncovering the Barriers of the China-Latin America and Caribbean Trade, the IDB details tariffs and other ‘discriminatory’ policies afflicting the relationship. Their presence has contributed to a decline in trade between the two, which slowed to $247bn in 2016, a 7% drop from the previous year and the third consecutive annual fall.”
“According to the IDB, Latin America’s farmers have been hit particularly hard. Beijing imposes tariffs of 17.3% on agricultural produce from Argentina, 17% on that from Brazil and 16.1% from Mexico, compared with its average tariffs of 13.4% for the farm sector worldwide. The difference matters: soya alone represents a fifth of the region’s total exports to China.”
“’During the [commodity] boom years, Latin American countries were very passive, they just sort of expected Chinese demand to continue endlessly and didn’t do much to diversify exports, with [only a few] exceptions,’ says Carlos Casanova, Hong Kong-based economist at BBVA. ‘You keep on hearing ‘la fiesta se acabo’ [the party is over]. I think Latin America is coming to grips with the fact that the Chinese economy is rebalancing and that they need to diversify the export basket.’”
WSJ – Daily Shot: FRED – Tightening Credit Standards for Multifamily Sector 5/8
“In commercial real estate, the multi-family sector continues to struggle as banks tighten lending standards (chart below) while demand wanes (second chart below). These trends will be reflected in slowing multi-family housing starts.”
“Looking at 447 supposedly repeating price patterns identified in the last few decades, academics from Ohio State and the University of Cincinnati contend that more than half are basically figments of their discoverers’ imagination. The study, ‘Replicating Anomalies’ by Kewei Hou, Chen Xue and Lu Zhang, attributed the findings to a statistical sleight of hand known as p-hacking.”
“While lodged squarely in the academic realm, the paper is a broadside against an area of research that has come to dominate financial economics and underpin both quantitative investing and smart beta exchange-traded funds. It joins a growing body of literature that suggests people looking for money-making opportunities within the market’s chaos often see what they want to see, or confuse profitability with luck.”
“Philippine casinos reported as much as 110% increases in VIP revenue from high-rollers – from $27 billion in bets placed last year, and possibly far more if off-books betting were tallied. Phone betting, also known as betting by proxy, has grown to account for as much as 85% of the business at some VIP rooms used by big spenders, according to people familiar with the operations who asked not to be identified as they’re not authorized to speak publicly.”
“While the Philippine Amusement and Gaming Corp., the casino regulator also known as Pagcor, permits phone betting, many other gambling centers ban it because of money-laundering concerns. Macau eliminated betting by proxy last year citing the risk. Not all Philippine casinos engage in proxy betting.”
“Unlike banks, insurance companies and other finance-related firms that must comply with the Philippines’ anti-money laundering law, casinos are exempt from such reporting requirements – an issue the U.S. State Department called ‘an especially critical concern.'”
“Phone betting isn’t the only way the Philippines is trying to attract long-distance gamblers. The regulator issued 35 licenses for online betting operations restricted to foreigners outside the country, Andrea Domingo, chairman and chief executive officer of Pagcor, told a Senate hearing in February. The government expects to ‘make a lot of money’ from these licenses, Domingo said.”
“As one person familiar with this case put it: ‘Most Chinese billionaires are like geese – they get fat on their political connections and close ties to party leaders, but at some point the emperor decides he wants to eat foie gras.'”
“Roughly $9.6tn of bonds trade in negative territory, down from nearly $14tn four months ago and $10.7tn near the end of December, as rising inflation expectations and hopes of a rebound in economic activity propels yields higher.”
“European and Japanese sovereign debt comprise the vast majority of negative-yielding securities, while some $514m of euro-denominated corporate bonds also trade with a yield below zero. That figure is down from $916m in September.”
“The declining value of debt trading with a negative yield also reflects a stronger US dollar, which makes foreign obligations appear smaller when converted back to the greenback.”
Fitch Ratings recently issued a report pointing to the risks that Chinese lenders are facing in funding the One Belt, One Road (Obor) initiative. Indicating that “the investments have been driven more by China’s desire to exert global influence than focusing on real demand for infrastructure.”
“‘The lack of commercial imperatives behind Obor projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors,’ Fitch said on Thursday.”
Why… “credit ratings for countries where China has big infrastructure plans provide a gauge for the projects’ underlying creditworthiness, Fitch said. Most of the countries are of speculative sovereign-rating grade but several, such as Laos, are not rated at all.”
However, to be clear it appears that only Fitch is humbugging the Obor initiative whereas the other ratings agencies are praising it, especially as the U.S. appears to be getting out of global infrastructure investment business.
“The Society for Worldwide Interbank Financial Telecommunication (Swift) said the value of international renminbi payments fell 29.5% compared with 2015.”
“The renminbi was only the sixth most used currency in 2016 despite its formal recognition in October by the International Monetary Fund as a global reserve currency, alongside the dollar, euro, yen and sterling.”
“The Swift rankings are the latest sign that Beijing’s global ambitions for the renminbi have been put on hold as the People’s Bank of China focuses instead on stemming both the redbacks’s fall against the dollar and steady erosion of the country’s foreign exchange reserves, which have declined 25% to $3tn since 2014.”
“China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.”
“Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”
“Among other requirements, SAFE (State Administration of Foreign Exchange) said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subject to money-laundering investigations, SAFE said.”
“At The Spire in London, a 67-story tower with sweeping views of the River Thames and flats starting at 595,000 pounds ($751,901), prospective buyers were caught off guard by the new rules. Less than 70% of clients who signed purchase contracts last year have made their initial payments, with the rest now facing ‘problems,’ a press official at Greenland Holdings Corp., the project’s Shanghai-based developer, said on Jan. 12.”
Prior to the new restrictions from SAFE, “overseas investment from China in residential, commercial and industrial property totaled $33bn in 2016, up 53% from a year earlier, according to global real estate group JLL, as Chinese buyers snapped up office buildings, hotels and residential land.”
“The biggest deal of the year was Anbang Insurance Group’s $6.5bn purchase of Strategic Hotels and Resorts from private equity group Blackstone.”
“A survey by the Hurun Report found that property is the most popular form of overseas investment for Chinese with $1.5m or more. Of this group, 60% plan to invest in property over the next three years, implying 800,000 prospective buyers.”
“‘Prices in major Chinese cities have risen so fast in the past year that an overseas house seems to offer good bang for your buck,’ Rupert Hoogewerf, chairman of the Hurun Report, said in October.”
“The Council on Tall Buildings and Urban Habitat’s annual review of the world’s tall buildings – 656 feet (200 meters) or higher – found that 128 were completed in 2016, the third straight year that the number of completed skyscrapers has broken the record.”
“In a country-by-country breakdown, China was home to the most tall-building projects (84) in 2016, followed by the United States (7), South Korea (6), Indonesia (5), the Philippines (4) and Qatar (4).”
“The tallest building completed in 2016 was the 1,739-foot-high Guangzhou CTF Financial Centre in Guangzhou, China, while the tallest towers built in the U.S. were both in New York City – 30 Park Place (926 feet) and 10 Hudson Yards (879 feet).”
WSJ – Daily Shot: FRED Average Sales Price for New Homes Sold in US 01/26
What happens when Xi Jinping decrees that he wants China to become a great football nation… entrepreneurs and politicians do their best to oblige.
“Chinese football clubs splashed out more than $450m in transfer fees (the fee one club pays to another club to poach talent) last year, a spree that helped global spending on the acquisition of players reach a record high.”
“According to Fifa’s Transfer Matching System, an arm of the sport’s world governing body, the total spent on transfer fees worldwide hit $4.8bn in 2016, a 14.3% increase compared with the year before.”
“Among the recent deals, Shanghai SIPG bought Brazilian midfielder Oscar from Chelsea for $63m.”
Granted, Chinese authorities have caught on to the reality that a lot of cash is leaving China in pursuit of football clubs, talent and media rights. Hence, “Chinese sporting authorities have sought to crack down on spending on players,… with efforts such as cutting the number of foreign footballers allowed to play in each match from four to three per team.”
Regardless, the transfer fees paid by China are still behind that of England, Germany, Spain, and Italy – especially the English clubs that “spent $1.37bn on transfer fees in 2016, an 8.7% increase on the year. This included the world-record signing of Paul Pogba worth up to €110m, by Manchester United from Italy’s Juventus last August.”
Still it seems that the Spaniards have the best farming system (or acquirers of talent from an investment standpoint) in that they “were the largest seller of players, receiving $554.5m in transfer fees last year, more than the $508.7m they spent on players.”
“A football club in the Chinese Super League has been sold to a local property developer at an equity valuation of more than $800m, suggesting it is worth more than European giants such as AC Milan and Atletico Madrid.”
“The high price put on Beijing Guoan, the top team in the capital, underlines the investment surge in football in China, despite recent efforts by the government to crack down on what it called ‘irrational’ spending on foreign players.”
“Sinobo Land, a little-known property developer, is buying 64% of the club for Rmb3.6bn from current owner Citic, a state-owned investment group, giving it a valuation of Rmb5.6bn ($807m).”
“Football industry analysts said that the premium paid for the club, which finished fifth in last season’s CSL, could not be justified based on its sporting performance or immediate commercial prospects.”
However, the team is in Beijing, regularly attracts 40,000 attendees to each match, and President Xi Jinping has aspirations for China to host a World Cup and win. So maybe it’s not too far of a stretch.
I suppose it’s less ostentatious than paying $400m for a 13% stake in Manchester City (Li Ruigang in 2015).
“The combination of rebounding commodity prices and hopes for faster US economic growth under Donald Trump is helping some of the riskiest corporate borrowers secure cheaper financing and underlines investors’ growing stomach for risk.”
“An expanding list of companies with a triple-C rating – deep within speculative territory – have been able to lock in borrowing costs below 7%, as yields have fallen over the past 10 months.”
“Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6%. Last February, triple-C paper traded with a yield of 18.57%, according to Bloomberg Barclays Indices. That figure has nearly halved to 9.36% today.”
“‘It seems there is insatiable demand for yield,’ said Kevin Lorenz, a high-yield portfolio manager with TIAA CREF. ‘Triple-Cs are routinely pricing at 7% or less. The compensation you get paid to take risk is getting narrower and narrower, much like in 1997-98 and 2004-2006.'”
“High-yield groups have raised $25bn in the US so far this year – up more than fivefold from 2016 – including $3.4bn from triple-C rated issuers, according to Dealogic. It marks the greatest haul from triple-C groups at the start of a year since 2011.”
Declining global trade. Chinese bank loan loss provisions. Pending auto loan crisis?
FT – Hong Kong car park space fetches $620,000 10/28. The stall at 55 Conduit Road (exclusive Mid-Levels district) sold for a record HK$4.8m. For comparison the previous record (also same road) was for HK$4.4m and for the 1,574 parking stalls that traded hands in the third quarter, the average price was HK$1.3m ($167,917).
Interesting perspective, but doesn’t go down the possible/likely outcome that if ESPN continues to lose subscribers and revenues, that ESPN and other content buyers will put pressure on content sellers (NFL, NBA, MLB, NCAA, etc.) to lower their fees.
Rather than provide the world with a better handle on ‘truth’ and ‘facts’ people are creating their own “echo chambers” filled with confirmatory articles and news sources. And of course, this doesn’t apply to me or you….
“Earlier this year, One Kings Lane, the online home goods retailer once worth almost $1 billion, sold itself to Bed Bath & Beyond, one of the companies it was supposed to displace, for just $12 million. Jawbone, the maker of sleek wearable fitness hardware once seen as a threat to Apple’s, has seen its value fall 50%. Since 2015, researcher CB Insights has counted 80 ‘down rounds,’ instances of a startup accepting a reduced valuation to raise more venture funding. ‘There was this fog hanging over Silicon Valley in 2001,’ says Botha (Roelof Botha, partner at VC firm Sequoia Capital) referring to the last big tech bust. ‘And there’s a fog hanging over it now. There’s no underlying wave of growth.'”
Yet at the same time VC funds are flush. “A few years ago, a big VC fund might have had about $500 million to play with. Today, ‘big’ means well over $1 billion. VCs raised $12 billion in the first quarter of 2016, which the industry’s trade group says marked a 10-year high. ‘The world has never seen an investment climate like this one,’ says Bill Gurley, a partner with Benchmark who led the firm’s investment in Uber. ‘It’s hard to express how much money is out there.'”
As Benchmark’s Gurley puts it “we’re in a slow correction. You might see a unicorn go down once a quarter.”
“Grocers are struggling to lure e-commerce-loving millennials into their aisles amid what experts say is a permanent shift in shopping patterns among consumers.”
“I don’t think we’ve seen shopping change so dramatically ever. Those things in the past that have been real drivers for grocery in terms of freshness and quality aren’t the key drivers for millennials.” – Marty Siewart, senior VP for consumer and shopper analytics at Nielsen
“Consumers between 25 and 34 years of age last year spent an average of $3,539 on groceries, about $1,000 less in inflation-adjusted dollars than people that age spent in 1990, federal data shows.”
Of course it doesn’t help that “the more than 75 million Americans born in the 1980s and 1990s are also delaying marriage and childbearing, milestones that traditionally lead people to start making big trips to the grocery store.”
“UnionPay customers from the mainland (China) will only be allowed to use their credit and debit cards to buy accident, illness and tourism-related insurance policies in Hong Kong, the state-backed bank card provider said on Saturday through one of its subsidiaries.”
Why the sudden change…
“UnionPay said it ‘has observed a significant increase in overseas insurance transactions by cards issued from mainland China’ and is now preventing its mainland customers from buying insurance products that include ‘investment-related contents.'”
“The purchase of insurance products overseas, particularly in Hong Kong, had become a popular way to move money offshore, particularly after the devaluation of the renminbi in August 2015.”
The skinny: “genetic modification in the United States and Canada has not accelerated increases in crop yields or led to an overall reduction in the use of chemical pesticides.”
“An analysis by The Times using United Nations data showed that the United States and Canada have gained no discernible advantage in yields – food per acre – when measured against Western Europe, a region with comparable modernized agricultural producers like France and Germany. Also, a recent National Academy of Sciences report found that ‘there was little evidence’ that the introduction of genetically modified crops in the United States had led to yield gains beyond those seen in conventional crops.”
“At the same time, herbicide use has increased in the United States, even as major crops like corn, soybeans and cotton have been converted to modified varieties. And the United States has fallen behind Europe’s biggest producer, France, in reducing the overall use of pesticides, which includes both herbicides and insecticides.”
A new trend is taking place in the private equity world, one that is promising to hold investor money for longer periods in return for less returns.
Granted, “private equity has become a victim of its past success: its strong performance relative to other asset classes looks increasingly difficult to replicate as high valuations and stiff competition among private equity groups make new deals more expensive.”
Thus new funds are “offering investors vehicles that will run for 14 years or more, rather than the traditional 10 years, and offer 15% returns or less, lower than the 20% in a typical fund.”
“Already the industry’s average returns are slipping below the 20% mark: for 2015, buyout funds generated an average internal rate of return of 17.1%, according to data from Preqin.”
“Fund managers are deploying less money, sitting on a record $839bn of so-called dry powder at the end of the third quarter, according to Preqin. Many buyout chiefs say they are modelling potential investments with the expectation that they will be selling into a lower stock market.”
Speaking to the timelines of these new funds, the intent is to match investment returns to investor’s long-term liabilities and to avoid forced sales due to too-short investment time horizons.
The benefits of being a city where entitled land is scarce and money flows abundantly… or a further sign that this real estate development cycle has been going on too long such that municipalities can continue to up the ante.
The City of Beverly Hills and the Dalian Wanda Group (large Chinese developer) just inked perhaps the most advantageous deal to a municipality – ever. Granted, Dalian Wanda wouldn’t have done the deal if it didn’t make sense to them – at least on paper.
“The terms are still subject to approval by the Beverly Hills City Council, which will launch a three-day round of hearings on the development Monday. The terms include a doubling of the upfront payment from Wanda to the City from $30 million to $60 million; a quadrupling of environmental mitigation and sustainability fees to 1.25% from 0.45% of the sale of any portion of the development, including the condos, and an additional 2% of any subsequent sale; and hotel occupancy surcharge of 5%, on top of the city’s statutory transient occupancy tax of 14%.”
“The city says it expects the terms to yield $820 million in revenue over 30 years, an increase of $560 million over the previous terms.”
“…Trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8% in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.”
“It is the first time since World War II that trade with other nations has declined during a period of economic growth.”
Further, “the United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion.”
“In better times, prosperity increased trade and trade increased prosperity. Now that wheel is turning in the opposite direction.”
Worse, “there are also signs that the slowdown is becoming structural. Developed nations appear to be backing away from globalization.”
“The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.”
“During the 1990s, global trade grew more than twice as fast as the global economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted.”
“But those changes have played out. Europe is fraying around the edges; low tariffs and transportation costs cannot get much lower. And China’s role in the global economy is changing. The country is making more of what it consumes, and consuming more of what it makes. In addition, China’s maturing industrial sector increasingly makes its own parts. The International Monetary Fund reported last year that the share of imported components in products “Made in China” has fallen to 35% from 60% in the 1990s.”
“The result: The I.M.F. study calculated that a 1% increase in global growth increased trade volumes by 2.5% in the 1990s, while in recent years, the same growth has increased trade by just 0.7%.”
Now, there is excess capacity in the world’s shipping lines. “In 2009, the world’s cargo lines had enough room to carry 12.1 million of the standardized shipping containers that have played a crucial, if quiet, role in the rise of global trade. By last year, they had room for 19.9 million – much of it unneeded.”
Further, automation is making it difficult, if not impossible, for developing nations to follow in China’s footsteps. “Dani Rodrik, a Harvard economist, calculates that manufacturing employment in India and other developing nations has already peaked, a phenomenon he calls premature deindustrialization.”
It doesn’t help that the benefits of globalization were oversold and that now nativists and protectionists are overstating the downsides.
“China’s banks are in a deepening stand-off with regulators over the level of provisions they must make to protect against loan defaults as bad debts continue to climb.”
Current provisions call for a loan loss provision ratio target of 150%. As it stands at least two of China’s largest four banks are below the coverage ratio. As of the third quarter Industrial and Commercial Bank of China has a coverage ratio of 136% (down from 143% in the second quarter). And that’s based on officially recognized non-performing loans.
“Officially, 1.8% of all Chinese loans are non-performing, although the credit rating agency Fitch puts the true figure at more than 15%. Following a huge credit boom, the outstanding amount of non-performing loans doubled in the two years before June 2016, reaching Rmb1.4tn.”
Hence, will the banks have to raise their loan loss reserves or will the regulators reduce the target ratio?
As Zhang Yingchao, a banking analyst at NSBO China – an investment bank, aptly puts it “setting standards is a tussle between the banks and the regulators. Who gets the upper hand depends on the state of the economy. If increasing the credit supply is necessary to meet the growth target of 6.5-7%, then the regulators will need to relax standards.”
“Repossessions in the US hit 1.6m in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8m and 1.9m peaks seen in 2008 and 2009, respectively.”
“That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.”
However, one of the key differences between this cycle and last is that whereas many of the repossessions in 2008 and 2009 were from fraudulent schemes “people renting cars under a fake name and not returning them, for example,” this time there has been a boom in subprime auto loans and people just not able to repay their loans.
The auto market is booming and correspondingly or really as a result of the growth in the auto loan market. “The auto loan market has grown from $750bn in 2011 to $1.1tn at the end of June, according to data from the US Federal Reserve.”
According to Peter McNally, a senior analyst at Moody’s – the rating agency, “while we have seen a gradual loosening in underwriting in recent years it has gotten to a point now where it is becoming unstable.”
“The subprime auto ABS market has grown to $38.1bn, down slightly from its second quarter high of $41.2bn, according to data from the Securities Industry and Financial Markets Association. Fitch Ratings defines subprime ABS as a deal with expected net losses above 7%. Net losses across subprime auto ABS hit 9.29% in September, according to Fitch – 23% higher than a year earlier.”
“The fear is that if losses continue to climb, investors will stop buying bonds issued by less diversified companies. If their access to funding stops, it could impair the credit quality of the issuer itself, throwing doubt over the quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.”
The virtuous cycle of Chinese real estate development. Global liquidity trap. What’s driving the China M&A boom?
In an effort to ease readability and to assist with navigation of the weekly posts I have updated the format this week. I am removing the featured articles/themes from the introductory paragraph – so there may at times not be an introductory paragraph, rather I will get right into Headlines (article links with a headline of what the article is about), followed by Briefs (currently featured as the “other items” section), Special Reports, Graphics, Featured (the featured themes/articles from the week), and will conclude with the Other Interesting Articles. Happy readings.
“The IMF predicts that inflation will be 720% in Venezuela this year, a figure Zimbabwe hit in 2006. By 2008 Zimbabwe was racked by hyperinflation so crippling that beggars who were offered billion-Zimbabwe-dollar bills would frown and reject them.”
“Suppliers, rather than giving goods away at the official price, prefer to sell them on the black market.”
In the case of a tanker of subsidized gasoline, “you can sell the cargo legally in Venezuela for $100, or drive across the border to Colombia and sell it for $20,000. The pitifully paid border police will be easy to square.”
“By the most overvalued official exchange rate, ten bolivares are worth one American dollar. On the black market, the same dollar fetches 1,150 bolivares. Zimbabwe abandoned its worthless currency not long after monthly inflation hit 80 billion percent in November 2008.”
“As of March, private real estate investment funds worldwide had $231 billion in aggregate dry powder – or capital commitments from fund investors ready to be spent – according to research firm Preqin. That’s the highest figure in history and a 10% increase since December.”
“Dry powder has grown in part because fund managers are having an increasingly difficult time finding profitable investments – not just because they are raising huge sums from investors.”
“In a year-end Preqin survey, 56% of fund managers polled said they see finding attractive investment opportunities as their biggest challenge – far ahead of raising funds (27%).”
2015 was the year of the unicorn, 2016 may be the year of the dead unicorn (private companies with valuations in excess of $1bn).
In late 2013 there were 39 unicorns (a phrase introduced by Aileen Lee, founder of Cowboy Ventures – a venture capital firm), now there are 156 globally “with a cumulative valuation of $550bn, according to CB Insights.”
Interesting thing is growing investment amounts by non-traditional VC investors, specifically large money managers like Fidelity and BlackRock. So called “crossover investments in private technology companies rose 51% last year, to more than $40.9bn across 800 deals, CB Insights data show.”
While crossover investments still make up a small portion of the VC funds in private companies, the question is whether the investors in these fund managers are equipped for VC investing? “58 tech start-ups suffered “down rounds” since the start of 2015.” Not to mention the lack of liquidity in these investments.
Natural gas goes through two primary seasons, an “injection season” when gas is put into storage during the warmer months of the year and a “withdrawal season” when gas is drawn down for use during the winter months for heating and the like.
Well two things have happened, 1) record amounts of gas is being produced, and 2) it’s been a lot warmer than usual during the winter months.
“The problem is that there is so little room to put gas between now and November. On Thursday, with one week to go in withdrawal season, the amount in underground storage was at an all-time record of 2.47 trillion cubic feet, some 52% higher than the five-year average. That is a whopping trillion cubic feet more than a year ago.”
“Last year, so much excess gas was produced in the following seven months that storage reached its theoretical limit. If this year is like 2015, then storage might be full by the middle of August. Gas would have nowhere to go, and producers would have to “shut in” production or sell it for nearly nothing until heating demand appears.”
“The biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds – it’s companies buying their own stock, by a 6-to-1 margin.”
Companies have “executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012.”
“Peer-to-peer lenders, who raise money from investors and then lend it out at higher interest rates, made 924 million yuan ($143 million) in down-payment loans in January, more than three times the amount made in July, according to Shanghai-based consultancy Yingcan.”
“Agents say these loans can attract annual interest rates of up to 24%.”
“Trying to reduce housing inventory by encouraging individuals to increase borrowing is a dangerous experiment. Enormous risks are lurking behind the surging property prices in first-tier cities.” – Ming Zhang, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
“Industrywide, nonperforming loans rose to 1.67% of total loans last year from 1.25% in 2014, according to official data. But analysts estimate the true ratio this year could be 8% or more. In the U.S., 14.6% of subprime loans made in 2005 defaulted, according to the Federal Reserve Bank of Chicago.”
“Steven Woods of Moody’s, the credit rating agency, says the entire US oil industry is under financial stress with prices at today’s levels.”
“At $40, the industry doesn’t work. Companies can’t earn an adequate return on capital.” – Mr. Woods
“The number of rigs drilling for oil and gas in the US has dropped 77% since September 2014, falling a further 14 last week to 450, the lowest level since the data were first collected in 1940.”
“To stabilize total US production and stop it falling, oil would need to be about $40 to $50 a barrel, he adds. To go back to the boom years of 2012-2014, when the US was adding about 1m barrels a day of additional supply every year, oil would need to be more than $80.”
“The shale revolution will not be reversed; in fact, the technology is continuing to advance. But every revolution needs to be followed by a period of consolidation, and this one is no different. The high-growth period of the industry’s history is over, perhaps for a long time.”
“Government subsidies have helped wind and solar get a foothold in global power markets, but economies of scale are the true driver of falling prices: The cost of solar power has fallen to 1/150th of its level in the 1970s, while the total amount of installed solar has soared 115,000-fold.”
“Just since 2000, the amount of global electricity produced by solar power has doubled seven times over. Even wind power, which was already established, doubled four times over the same period. For the first time, the two forms of renewable energy are beginning to compete head-to-head on price and annual investment.”
“The International Consortium of Investigative Journalists (ICIJ) this weekend went public with its findings that the firm (Mossack Fonseca) had, wittingly or unwittingly, helped clients evade or avoid tax, launder money or mask its origins. More astonishing than their methods, which are well known, was the scale of activity and the people involved. The 2.6 terabytes of data are thought to contain information about 214,500 companies in 21 offshore jurisdictions and name over 14,000 middlemen (such as banks and law firms) with whom the law firm has allegedly worked.”
Just imagine how much content Facebook is going to put out in the near future. “Live is like having a TV camera in your pocket. Anyone with a phone now has the power to broadcast to anyone in the world.” – Mark Zuckerberg, founder and chief executive of Facebook.
This is a game changer. Think the Kardashian’s get too much play, you ain’t seen nothing yet.
“To our surprise, age is the strongest predictor of balance sheet health, even after accounting for race and education… An American born in 1970 is projected to have 40% less wealth over their lifetime than an American born in 1940. Clearly, some larger economic and social forces are underway, reshaping economic opportunity in the U.S.”
Seeking an example of the credit boom in China fueling property developments that maybe should not be undertaken? Look no further than Hong Kong developer Goldin Properties’ Goldin 117 a $10bn project in Tianjin (30 minutes by high-speed train from Beijing).
Founder Pan Sutong (also the individual who had $13bn wiped off his paper fortune in a single day due to stock market girations) and China Cinda Asset Management “one of the state-run ‘bad banks’ with a mission to lend to distressed companies” are putting in Rmb9bn ($1.4bn) each recapitalize the project.
“Anne Stevenson-Yang of China-focused research house J Capital, argues that the use of government-backed funds to support Goldin is symptomatic of the wider misallocation of capital weighing upon China’s economy.”
“It’s a miniature picture of what China is all about, demonstrating scale in order to capture more financing. China’s asset management companies and banking establishment are dedicated to maintaining the value of their collateral because if they allow it to drop and they have to mark their real estate holdings to market, it would be a disaster for banks, depositors and cities.” – Ms. Stevenson-Yang
Because “Chinese banks are reluctant to continue lending to ambitious and overstretched developers,” the “government is pushing asset managers such as Cinda to extend more credit to ailing companies and has proposed allowing Chinese banks to swap debt in struggling enterprises for equity.”
“The government is using its financial arms to provide further guarantees to the real estate sector and other industries that are plagued by overcapacity. It’s setting a bad precedent and there is a very big risk of moral hazard because developers know that, in the end, the government will bail everyone out.” – Zhu Ning, a professor at the Shanghai Advanced Institute of Finance
“…when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors.”
“There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money.”
“The empirical data support this view – the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.
A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth.”
Subheader: China’s global investment spree is fueled by debt
“Chinese firms with little international experience and lots of debt have emerged as the biggest buyers of global assets. They have announced nearly $100 billion in cross-border M&A deals this year, already more than their $61 billion of foreign acquisitions last year.”
What is being missed are the motivations. General theories are concern over the Chinese economy or a pending yuan devaluation; however, what it really comes down to is that foreign acquisitions are a cheap (relative to what’s available in China) source of growth.
“Chinese buyers, by and large, are far more indebted than the firms they are acquiring. Of the deals announced since the start of 2015, the median debt-to-equity ratio of Chinese buyers has been 71%, compared with 44% for the foreign targets, according to The Economist’s analysis of S&P Global Market Intelligence data. Cash cushions are generally also much thinner for Chinese buyers: their liquid assets are roughly a quarter lower than their immediate liabilities. The forbearance of their creditors makes these heavy debts more bearable in China than they would be elsewhere. But the Chinese buyers are financially stretched, all the same.”
“Chinese banks see lending to Chinese firms abroad as a safe way of gaining more international exposure. The government has encouraged them to support foreign deals. As long as the firms to be acquired have strong cash flows…”
“For the buyers, there are two strong financial rationales for the deals…
“First, debt-funded buyouts can actually make their debt burdens more tolerable. Take the case of Zoomlion, a construction-equipment maker with 83 times more debt than it earns before interest, tax, depreciation and amortization. It wants to buy Terex, an American rival with debt just 3.5 times larger than its earnings, for $3.4 billion. Even if the purchase consists entirely of borrowed cash, the combined entity would still have a debt-to-earnings multiple of roughly 18, a marked improvement for Zoomlion.”
“Second, Chinese buyers know that one key financial metric works to their advantage: valuations in the domestic stock market are much higher than abroad. The median price-to-earnings ratio of Chinese buyers is 56, twice that of their targets. In effect, this means they can issue shares domestically and use the proceeds to buy what, from their perspective, are half-price assets abroad.”
“…so long as their banks and shareholders are willing to stump up the cash, Chinese companies see a window of opportunity.”
“Late Monday, the People’s Bank of China lowered the amount of deposits that banks must hold in reserve by 0.5 percentage points, freeing up an estimated 700 billion yuan ($107bn) in funds for banks to make loans.”
“The timing of the easing measure, just after China assured Group of 20 finance chiefs it wouldn’t deliberately weaken the yuan, quickly raised eyebrows.”
However, a liquidity shortage is of greater concern to the central bank than the yuan stability. “The first sign of a cash squeeze came late last week, when China’s overnight money-market rates, a key gauge of liquidity, surged and caused Chinese stocks to plunge.”
“As an indication of the outflows, China’s foreign-exchange reserves plunged by $99.5bn in January, to $3.23tn.”
“As for the Malaysian attorney general’s conclusion that the $681 million deposited to Mr. Najib’s account was a Saudi royal-family donation, the international investigators have found no evidence any of this came from Saudi Arabia, according to those familiar with their probes.
A person familiar with 1MDB’s dealings also said the deposit didn’t come from Saudi Arabia. A Saudi official said in January the kingdom’s ministries of finance and foreign affairs had no knowledge of such a donation to Mr. Najib.“
“Since peaking at $19.6 billion in 2013, fundraising among public, non-listed REITs has dropped significantly in the past two years. In 2014, fundraising fell to $15.6 billion, followed by another sharp decline last year to $10.0 billion, according to data from Robert Stanger & Co., an investment banking and financial advisory firm. The company is forecasting another dip this year to between $7.0 billion and $8.0 billion.”
“Aside from the negative press, there are some big regulatory changes ahead for the sector. A new rule set to go into effect in April will require non-traded REIT funds to report the investment balance-net of fees-on customer statements. Non-traded REITs, for the most part, have a heavy burden of front-end fees of 10 to 12 percent.“
Side note: for those that have been reading my posts via LinkedIn, first, thank you, and second, it just came to my attention that the WordPress connection with LinkedIn had been disconnected. My apologies. There have been a few weeks of posts that you have missed. You can check out the posts at www.thejanusobserver.com and while there you may consider signing up for the email – you’ll have the posts sent directly to your email when they’re made, that way there won’t be any further mix ups.
*Note: bold emphasis is mine, italic sections are from the articles.
This article follows on the note in the top section about measures to increase banks loans into the economy.
“The problem is that China has reached an inflection point. A substantial chunk of new debt is increasingly going to pay old debt, creating less activity in the real economy aside from bankers’ fees and commissions.”
“A measurable effect is the so-called evergreening of credit, where lenders essentially roll loan maturities or provide credit simply to pay off old debt.”
“The result is a massive shortfall in the debt service compared with the sources of cash, to the tune of about 10% of corporate debt last year. That gap is filled with more borrowing.”
As the saying goes, “borrow a million dollars and it’s my problem, borrow a billion and it’s yours.”
“Japan crossed a ‘financial rubicon’ on Tuesday as the country sold new 10-year bonds with a yield below zero for the first time at a government auction.”
“The European Central Bank is expected to announce further monetary easing next week, and 10-year Bunds yield only 13 basis points.
Japan is the second country to sell 10-year bonds at a negative yield, after Switzerland became the first to do so in April last year.
The auction, of Y2.2tn ($19.4bn) in 10-year paper, at an average yield of minus 0.024%, means investors have paid a fee to lend money for a decade to the government, the most indebted G7 nation (gross debt/GDP ratio of 250%).“
“The buying appears to have been almost entirely dealers and speculators looking to hold the paper for a brief time or covering short sales accumulated in expectation of the yield dropping into negative territory.”
Large pension funds have stayed away; however “they cannot stay away from the auctions forever if their mandates include following particular bond indices.”
“Last year say the biggest collapse in the value of goods traded around the world since 2009.”
“Barring a spectacular turnaround in the global economy, the subpar performance is likely to be repeated in 2016, making it the fifth straight year of lackluster growth in global trade, a pattern not seen since the doldrums of the 1970s.”
“Some economists note that the plateau in worldwide trade in goods and capital has coincided with a surge in data flows – an indicator, they say, that the digital economy of the 21st century is starting to overturn the old order.”
The silver lining.
“Even as flows of finance, goods and services have slowed – falling from a peak of 53% of global output in 2007 to 39% in 2014 – the world has seen a surge in cross-border data. The flow of digital information around the world more than doubled between 2013 and 2015 alone, to an estimated 290 terabytes per second, McKinsey says. That figure will grow by a third again this year, meaning that by the end of 2016 companies and individuals around the world will send 20 times more data across borders than they did in 2008.“
“General Electric, which is using 3D printers to make fuel nozzles for jet engines and expects its aviation unit to be manufacturing 100,000 parts using the technology by 2020.”
“By its (McKinsey’s) calculations cross-border flows of capital, goods, services and data added an extra $7.8tn to the global economy in 2014. The added value of data flows alone accounted for $2.8tn of that total, slightly more than the $2.7tn attributed to the global trade in goods.”
Simultaneously global supply chains have shortened. As highlighted by the IMF and World Bank in a 2014 report, “as much as half the post-crisis slowdown in global trade could be attributed to “structural” rather than cyclical reasons.” I.E. decisions by countries and companies to bring production of component parts close to home.
“‘Risk-free now has a cost’, and clients are learning that they should accept it, says Mauro Vittorangeli, a senior fixed-income money manager at Allianz Global Investors, which oversees about $505 billion in assets.”