“Mr. Trump’s trade agenda may have certain U.S. industries-like steel-flashing smiles. American companies operating in China, though, can expect to lost a few teeth.”
“The U.S. trucking industry is short about 50,000 drivers, estimates Bob Costello, chief economist for the American Trucking Associations. The driver shortage ranked first among industry concerns in the American Transportation Research Institute’s annual survey, released last October.”
“The strong economy means more stuff to haul, even as increasing numbers of truckers retire. The average age of over-the-road truckers…is 49, compared with 42 for the U.S. workforce as a whole. Forecasts of massive job losses from autonomous trucks don’t help. Few people want to join a dying profession. With unemployment low, there are other options.”
“In response, pay is up. The median salary for drivers who haul a variety of goods nationally is about $53,000, according to an ATA survey published in March. That’s a $7,000 increase since the previous survey five years ago, or about $4,000 when corrected for inflation. For drivers who work for private fleets serving individual companies, such as PepsiCo Inc. or Walmart Inc., median pay is $86,000, up from $73,000.”
“But a shortfall remains. Recent regulatory changes exacerbate the problem. So does an increasing shortage of places to park.”
“China Merchants Group has teamed up with a London-based firm to launch a new Rmb100bn ($15bn) technology investment fund with aim of becoming China’s answer to the near-$100bn Vision Fund created by Japan’s SoftBank.”
“The state-owned conglomerate, along with other unnamed Chinese groups, has pledged to invest up to Rmb40bn of the fund, in what would be a huge pool of capital primarily designed to target investments in Chinese technology companies.”
“CMG is set to announce the plans with the UK’s Centricus, the investment firm that helped structure SoftBank’s record-setting technology fund, and SPF Group, a small Beijing-based fund manager that counts Joshua Fink, the son of BlackRock founder Larry Fink, as one of its partners.”
“In Venice, Barcelona, Thailand and New Zealand, ‘overtouristing’ is straining local infrastructure and prompting restrictions; the ‘Lord of the Rings’ effect.”
“The good news is that about 40% of cancer cases are preventable and that smoking, the biggest single cause, is in decline across much of the world. The bad news is that overall rates are shooting up as more countries adopt western lifestyles.”
“By 2035, the number of new cases is set to rise by 58% to 24m, according to a report from the World Cancer Research Fund.”
“’Over the next 20 or 30 years, unless anything is done to stop it, [obesity or being overweight] is going to overtake smoking as the number one risk factor for cancer,’ says Dr Kate Allen, executive director of science and public affairs at the WCRF.”
“The report is a synthesis of a decade of research on cancer risks with a new set of recommendations (see graphic) to minimize a person’s chances of developing the disease. It says 12 cancers are now linked to being overweight or obese.”
“’It has taken 40 or 50 years to make a big dent in tobacco consumption,’ Dr Allen says. In dealing with the problems of obesity, ‘it’s going to take at least that to get some traction,’ she adds.”
“Vancouver is so expensive that politicians want to tax its real estate market into submission, and many homeowners — who will lose money if home prices fall — think it’s the best idea they’ve heard in years.”
“Like many cities around the world, Vancouver is grappling with punishing housing costs that have pushed out large swaths of residents — and are causing distress among young adults who can’t afford rent today and take it for granted that they will never own a home.”
“Vancouver, surrounded by snow-capped mountains and wide maritime views, has never been especially cheap. But home and condominium prices are up by close to 16% over the past year, and about 60% over the past three, according to the Real Estate Board of Greater Vancouver.”
“What makes these gains so remarkable is that unlike Silicon Valley, London or New York — where the presence of high-paying tech and finance jobs helps explain housing costs — Vancouver has relatively low salaries. As part of their bid for Amazon’s second headquarters, Vancouver officials boasted about having ‘the lowest wages of all North American tech hubs’.”
“Established to make mortgages more affordable and expand US home ownership — Fannie during the Great Depression and Freddie in 1970 — the Treasury propped them up with about $188bn in bailout funds after the housing market meltdown. While Fannie and Freddie have private shareholders, they send most of their profits to the Treasury.”
“Since then, far from being reined in as critics demanded in the aftermath of the crisis, the two ‘government-sponsored enterprises’ remain as important as ever; even more so for commercial real estate markets.”
“Fannie and Freddie are best known for their principal role as the leading source of financing for owner-occupied mortgages. But for decades, they have played another role in supporting the market for rental housing, by helping finance property companies that acquire or refinance investments in apartment blocks. This second, lower-profile, part of their business has boomed since the crisis.”
“By the end of last year the pair had a financial interest in almost $500bn of commercial mortgages, equivalent to 38% of the total outstanding across the US. That compares with almost $200bn, or 25% of the market, a decade ago. Last year alone, the pair financed almost 1.6m rental units.”
“The expansion has raised eyebrows in the industry. Competitors that provide this type of finance — banks, life insurance companies and other institutional investors — say the taxpayer’s backing allows Fannie and Freddie to offer borrowers better terms than they can.”
“Supporters say the pair have also helped stave off an affordable housing crisis, especially as a new generation of renters has been locked out of the post-crisis recovery. ‘If they didn’t exist, there would be a major problem for multi-family housing,’ says Shekar Narasimhan, managing partner at the real estate group Beekman Advisors, who was the first chair of Fannie Mae’s advisory committee on this type of housing.”
“For critics, the pair have played a central role in financing the boom. Developers have completed about 1.3m rental units in the US over the past five years, according to RealPage data, including a record 365,000 in 2017.”
“’Aggressive lending practices by the GSEs this cycle have been an important factor in the degree of over-investment and over-valuation of multi-family properties in certain key markets,’ says Michael Shaoul, chief executive of Marketfield Asset Management.”
“’I do not think that the GSEs have been as critical in commercial real estate as they were in traditional mortgages a decade ago — but they have perhaps allowed some of the more marginal projects to minimize equity capital this time around.’”
“In all, first quarter annual asking rents for ground floor retail space declined in 13 out of 16 shopping corridors, and the overall average asking rent for those areas dropped 19.5% from the previous year to $653 a square foot, according to a report from real estate services firm CBRE Group Inc.”
“The continued drop in retail asking rents comes as no surprise—as traditional companies reshape their businesses to the growth in online shopping, retailers reduce the number of brick-and-mortar stores they operate. Also, merchants continue to balk at high rents. Between 2010 and 2014, average asking rents in Manhattan jumped more than 100% across the 16 retail corridors, according to an earlier report from CBRE.”
“U.S. oil major Chevron Corp has evacuated executives from Venezuela after two of its workers were imprisoned over a contract dispute with state-owned oil company PDVSA, according to four sources familiar with the matter.”
“The Chevron workers may face charges of treason for refusing to sign a supply contract for furnace parts drawn up by PDVSA executives, Reuters reported earlier this week. The workers balked at the high costs of the parts and a lack of competitive bids.”
“The most troubling takeaway from two days of congressional hearings on Facebook Inc. was this: Mark Zuckerberg didn’t want to explain how the social network operates.”
“Zuckerberg found it hard to plainly acknowledge that Facebook tracks users from device to device, collects information on websites people visit and apps they use, gathers information on people’s physical locations, collects phone call logs from Android smartphones and pulls in some online activity from people who don’t even have Facebook accounts.”
“Zuckerberg declined to acknowledge that Facebook’s ad system and products are informed by all of this information gathering on and off the social network. If Facebook were a true bargain with users — they get a useful, free service in exchange for seeing advertising based on their interests and activity — then Zuckerberg should be comfortable explaining how it all works.”
“Instead, given the option to articulate Facebook’s relationship with users (and non-users), he dodged. A lot.”
“He said he couldn’t answer queries from Senator Roy Blunt, who asked on Tuesday whether Facebook tracks users across their computing devices or tracks offline activity. The answer to both is yes. During the House committee hearing on Wednesday, Zuckerberg claimed not to know what ‘shadow profiles’ are, even though this term has been used for years to describe Facebook’s collection of data about people who don’t use its services by harvesting the inboxes and smartphone contacts of active Facebook users. (Zuckerberg reluctantly acknowledged that Facebook gathers information on people who aren’t signed up for Facebook for what he said were ‘security purposes.’)”
“Most people do not understand the scope of Facebook’s data collection. Lawmakers tried more than once to get Zuckerberg to say this, but he never did. Here’s a piece of evidence lawmakers could have showed the CEO: In a survey conducted recently by Digital Content Next, a trade group of news organizations that is frequently critical of Facebook, a majority of respondents said they didn’t expect the social network to track use of non-Facebook apps to target ads, collect their physical location when they’re not using Facebook or harvest information from non-Facebook websites that people visit. Spoiler alert: Facebook does all of those things.”
“It’s not people’s fault if they don’t know how Facebook works. If Zuckerberg and Facebook were comfortable with the data-based bedrock of their business, he should be able and willing to explain all the ways Facebook collects data on everyone and how it uses it.”
“It felt as though the company made a calculated decision to deflect rather than talk openly about the scope of Facebook data collection and its data-based ad system. And to me, that was a sign that Facebook is embarrassed about what it does for a living.”
“On Wednesday, Tesla’s notes plunged to a low of 86 cents on the dollar, the clearest sign yet creditors aren’t totally sure the company will be money good.”
“Chinese prosecutors have accused the former chairman of acquisitive conglomerate Anbang Insurance Group of fraud and embezzlement, offering the first detailed explanation of why authorities toppled the once high-flying tycoon.”
“Prosecutors on Wednesday accused Mr Wu of issuing false financial statements, marketing materials and regulatory filings to gain approval to sell such products. He also exceeded fundraising limits approved by the China Insurance Regulatory Commission, prosecutors alleged.”
“A whiff of political prosecution remains because the basic business model of selling universal insurance to finance high-profile acquisitions was not limited to Anbang, although Mr Wu’s group was the most aggressive.”
“Prosecutors alleged Mr Wu oversold Rmb724bn ($115bn) in insurance products, diverting Rmb65bn to another company he controlled, which he used for overseas investments, debt repayment and ‘lavish personal spending’. Mr Wu was also accused of concealing his control of Anbang through the other company.”
“They also accused Mr Wu of using proceeds from the sale of universal insurance to inject capital back into Anbang, a form of circular financing designed to boost the company’s reported capital ratio and create the impression of financial strength.”
“Less than a month after it was seized by the Chinese government, Anbang Insurance Group, the giant conglomerate, is once again offering small investors ‘you snooze, you lose’ investment opportunities — your money back, guaranteed.”
“Sold like stocks or bonds in bank branches around China, the products carry names like Anbang Abundant Stability No. 10, suggesting the investments are conservative. They are anything but.”
“Still, Anbang and other companies keep selling them — and Chinese investors keep buying them. When China took over Anbang, it only underlined the widely held — and potentially dangerous — belief that the Chinese government will always be there to bail them out.”
“China has a problem with debt. Shadowy, underground lenders have flooded the country with a staggering $15 trillion in credit, which threatens to hobble its economy.”
“Beijing now appears to be taking a harder stance with the companies in need of a bail out. On Wednesday, Chinese authorities accused a founder of Anbang, who was the deal maker who bought the Waldorf Astoria, of bilking investors of more than $10 billion. In a country where courts tend to convict, the accusations raised the likelihood that the executive, Wu Xiaohui, could face life in prison.”
“The Chinese authorities have pressured big issuers to slow down. In November, they proposed tightening disclosure rules and stopping firms from guaranteeing payments to investors, among other steps.”
“Data suggest China is making some headway. The total outstanding balance of wealth management products issued by Chinese banks was about $4.7 trillion in 2017, up just 1.7% from a year before, according to China Wealth, a state-backed company that tracks China’s wealth management products. Two years ago, sales were growing at roughly 50%.”
“Zhu Ning, a Tsinghua University economist, said the only way the government can prevent investors from taking on more risk that they can handle is to allow for ‘some real failures’.”
“China has been reluctant to allow for failures. Fearing mass unrest, the ruling Communist Party has repeatedly instructed Chinese banks and local officials to cave in to angry investors, who have protested outside government offices after losing their investments.”
“The real test, according to Mr. Zhu, could come later this year, when wealth management products issued years earlier have to be paid back.”
“’Nonperforming loans are going to be so severe that some of the weaker banks will be forced to face their Judgment Day — whether they are going to be bailed out or whether they are going to die,’ he said.”
“Opinions differ on the exact nature of Tesla, ranging from struggling car manufacturer to tech pioneer to something akin to the second coming. Regardless, it is undoubtedly one thing: a money machine.”
“I don’t mean that in the sense of Tesla making a lot of money; more that it is a machine for the raising and consumption of money.”
“All companies are this to one degree or another, of course; it’s just that Tesla Inc. is more at the ‘another’ end of things. Reliably negative on free cash flow, Tesla depends on a smorgasbord of external funding, from equity raising to vehicle deposits to high-yield bonds to securitized leases to negative working capital. And that smorgasbord rests, of course, on Tesla’s famously gravity-defying stock price and faith in CEO Elon Musk.”
“Which is why these four charts deserve more than a glance from even the most ardent Muskovite:”
“We’re just over a week away from knowing whether or not Tesla has hit its (much reduced) target for producing 2,500 Model 3s per week by the end of the first quarter. The signs thus far aren’t good, which also raises doubts about the 5,000-a-week target for the end of June.”
“Hitting these targets matters for the Tesla money machine on three fronts.”
“First, reducing that risk-laden reliance on negative working capital and getting a return on the money already spent on production lines relies on producing more cars. Second, analysts currently expect Tesla to burn through $2.7 billion of cash this year — and analysts tend to be optimistic on this stuff. Third, when Moody’s rated that bond Tesla sold last August, it was assuming 300,000 Model 3 deliveries this year, which now looks far out of reach.”
“In other words, Tesla’s money machine will almost certainly need to raise more this year due to the Model 3’s problems — but those same problems undermine the pitch for selling more equity or debt.”
“This is happening against a backdrop of rising interest rates. Tesla’s debt has jumped in recent years, especially after it took on SolarCity Corp.’s obligations. Interest expense more than doubled in 2017 and reached the astounding level of one-third of gross profit in the final quarter of 2017:”
“At the same time, Tesla is moving closer to a maturity wall, with $3.7 billion of bonds and credit lines needing refinancing by the end of 2020.”
“Some $1.7 billion of that consists of three convertible bonds falling due between this coming November and the next one. Almost half of it — inherited from SolarCity — is hopelessly out of the money, with conversion prices starting at $560 (Tesla closed Thursday at $309 and change). The rest of it, a $920 million convertible due next March, sports a conversion price of just under $360; still underwater but within sight of the surface.”
“Converting that last one to equity would dilute Tesla’s free float by 2%. But that could be more palatable than the alternative of replacing it with a straight bond.”
“As of now, those three bonds pay a weighted-average coupon of just over 1%, or about $18 million a year. All else equal, assuming they were all refinanced at spreads similar to where Tesla’s 2025 bonds trade now, but factoring in the forecast increase in Treasury yields, that would jump to 7%, or $120 million. Putting that in context, Tesla’s entire interest expense last year was $471 million.”
“A rebound in the stock price would take much of this pain away, of course.”
“Today, established carmakers flaunt their ability to manufacture all kinds of models, from hatchbacks to sport utility vehicles, on a single production line. Their challenge is to revamp these operations to produce electric vehicles in high volumes, reinforcing barriers to entry in an industry under siege from technology companies and start-ups.”
“Instead of coming out with an array of unprofitable electric cars today, the incumbents are putting the bulk of resources into production facilities that will mass-produce models from 2020, once battery costs fall and economies of scale kick in. Analysts suggest this approach leaves the impression the incumbents are lagging far behind Tesla. But once the game actually starts, say experts, the carmakers will be in a strong position to dominate the market.”
“’None of the traditional car manufacturers will have problems scaling up electric vehicle production,’ says Klaus Stricker, co-head of the global automotive practice at Bain & Company. ‘That’s exactly what they do best’.”
“Yet if the stock market is any guide, investors are more skeptical. Valuations of the big carmakers are among the most depressed on the S&P 500, Germany’s DAX and Japan’s Nikkei indices, according to Bernstein. Yet Tesla is valued like its products are set to dominate the car market the way Apple conquered mobile phones.”
“Tesla’s market value of $55bn is about $2.3bn more than GM’s, though for every car it built last year the latter group produced 100.”
“Tesla’s production troubles are a reminder that in automotive history, it is how to build cars, rather than the merits of any particular model, that is key to success. After Ford displaced craft production with mass assembly in 1908, it was overtaken by GM in the 1920s with ‘flexible mass production’ that could produce an array of models, from entry-level to luxury brands, and respond to customer preferences. In the 1980s, both companies were disrupted by Honda and Toyota’s methods of lean production. The Japanese groups outsourced a majority of tasks previously considered critical. With parts arriving ‘just in time’ on the assembly line, they largely did away with inventories.”
“The success of German manufacturers, whose volumes more than trebled from 4m units in 1990 to 15m last year, was largely based on ‘platform sharing’ that let multiple models use the same design underpinnings. VW Group, the world’s largest carmaker, uses common building blocks under ‘the Lego principle’ to share engines, transmissions and components across its 12 brands.”
“These progressive changes were all based on superior methods of producing cars, forcing rivals to adapt or die. ‘Efficiency was always the cornerstone of success in the automotive industry,’ says Oliver Zipse, head of production at BMW. ‘As soon as you were not able to produce in a particular cost frame, you were out of the market’.”
“There are endless reasons a big-box toy store would collapse during a retail apocalypse — and Toys R Us acknowledged a number of them in its most recent annual filing: the teetering tower of debt incurred by its private-equity owners, competition from Amazon, Walmart and Target.”
“They even wrung their hands about app stores, labor costs and potential tariffs raising the costs of the imported goods they sell.”
“But one risk stood out. Toys R Us said there just weren’t enough babies…”
“It may not have been the biggest existential threat confronting Geoffrey the Giraffe (the store’s mascot), but it’s the one with the broadest implications outside of the worlds of toys and malls.”
“Measured as a share of overall population, U.S. births have fallen steadily since the Great Recession. They hit their lowest point on record in 2016 — the most recent year for which the Centers for Disease Control and Prevention has comparable data.”
“Even adjusted for the aging population and declining share of women of childbearing age, U.S. fertility rates are at all-time lows.”
“That’s problematic for Toys R Us, which also operates the Babies R Us stores. The company claims in its annual report that its income is linked to birthrates, and it appears to be right.”
“There are, to be sure, numerous other factors at play. The same economic forces that encourage people to have children may also encourage them to splurge on toys, for example.”
“But it’s nonetheless apparent that Toys R Us’s fortunes rise and fall with the population of its target market.”
“And that’s why the company’s demise should worry the rest of us. Toys R Us focuses on kids, so it’s feeling the crunch from declining birthrates long before the rest of the economy. But it’s just a matter of time before the trends that toppled the troubled toy maker put the squeeze on businesses that cater to consumers of all ages.”
“Eventually, unless the country does something significant to encourage larger families or immigration, that narrowing base of the population pyramid will crawl upward.”
“In the end, Toys R Us will just have been the first of many businesses of all descriptions facing the same hard demographic truth: Economic growth is extremely difficult without population growth.“
“‘Thanks to low mortgage rates, buying a home is actually more affordable now than in the past 40 years,’ Alexandra Lee, a housing data analyst at Trulia, told Business Insider.”
“Mortgage interest rates hit 16.6% in 1981 in response to massive inflation in the US. In 2016, interest rates fell to about 3.5%, and they’re about 4.5% right now.”
“Trulia found that the typical household in 1980 could afford only about three-fourths of the median home price, compared with the median household in 2016, which could afford a home 1 1/2 times the median home price.”
“Twenty-two US metros crossed the threshold from unaffordable to affordable over the past four decades, according to the data. The markets that are too expensive for the average buyer now, including San Francisco, Seattle, and San Jose, California, were always too expensive.”
“Trulia ultimately found that Americans’ homebuying power has strengthened in the past 40 years.”
“Take Salt Lake City, for example. From 1990 to 2016, home prices increased 53%, but the affordability index jumped to 131 from 122. That is because interest rates dropped to 3.4% from 10% during that time. Homeownership in Salt Lake City became even more affordable over the 26-year period — and the case appears the same for many of the largest US metros.”
“Only the Denver, Miami, and Portland, Oregon, metro areas dropped in affordability during that time, Lee said.”
“By the end of 2017, a monthly mortgage payment on the median home in the US required just 15.7% of the typical household income, according to a report by Trulia’s parent company Zillow. Back in the late 1980s and 1990s, a mortgage payment took up 21% of the typical American’s income.”
Granted, coming up with a down payment on a house these days is no easy task.
Effect of interest rate rises are starting to bite.
“Interest rates for home loans have risen each week this year, so each week homeowners have had less incentive refinance their mortgages.”
“Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008.”
“Housing is more expensive today than it has been in a decade, and a decade ago credit was a lot easier to get. The average monthly mortgage payment is now up nearly 13% from a year ago, according to Realtor.com — a combination of higher home prices and higher interest rates.”
“Singapore remains the most expensive city in the world for the fifth year running, according to the latest findings of the Worldwide Cost of Living Survey from The Economist Intelligence Unit.”
“Honolulu Mayor Kirk Caldwell signed into law today a bill imposing a moratorium of up to two years on building permits for ‘monster’ houses, giving the city Department of Planning and Permitting time to come up with permanent rules to deal with the growing phenomenon.”
“DPP will, for the most part, not approve building permit applications during the moratorium for houses that cover more than seven-tenths of a lot under Bill 110 (2017). For example, a 5,000-square-foot lot could not have a living space that’s 3,500 square feet or larger.”
Another instance of a market where housing prices have gone well beyond what local incomes can support. As a result, people come up with ‘work-arounds’ which tend to overburden the local infrastructure and upset neighborhoods, resulting in blunt regulatory reaction. Honolulu is not unique to this problem.
“America is facing a new housing crisis. A decade after an epic construction binge, fewer homes are being built per household than at almost any time in U.S. history.“
“Home construction per household a decade after the bust remains near the lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City.”
“What makes the slump puzzling is that by most other measures, the American economy is booming. Jobs are plentiful, wages are on the rise and the stock market is near record highs. Millennials, the largest generation since the baby boomers, are aging into home ownership.”
“A combination of tightened housing regulations, a lack of construction labor and a land shortage in highly prized areas is driving the crisis, according to industry experts.”
“Even during the deep recession of the mid-1970s and the downturn in the early 2000s, builders put up significantly more homes per U.S. household than they are constructing now, in the ninth year of an economic expansion. Only at the bottom of the 1981 and 1991 economic downturns were per-household construction levels near what they are now, according to Jordan Rappaport, an economist at the Kansas City Fed. He says the only period when the U.S. might have built fewer homes by population was during World War II.”
“The National Association of Home Builders estimates builders will start fewer than 900,000 new homes in 2018, less than the roughly 1.3 million homes needed to keep up with population growth. The overall inventory of new and existing homes for sale hit its lowest level on record in the fourth quarter of 2017, at 1.48 million, according to the National Association of Realtors.”
“That, in turn, is pushing up prices at what economists say is an unsustainable pace. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.3% in 2017. That was roughly twice the rate of income growth and three times the rate of inflation.”
“Builders cite numerous factors contributing to the construction slump. A decades long push for young people to go to college has driven down trade-school enrollment, depriving builders of skilled labor. Declining numbers of immigrant construction workers have sapped builders of unskilled labor.”
“The construction workforce in the U.S. declined to 10.5 million in 2016, from 10.6 million in 2010, when the real-estate market was near bottom, according to an analysis of U.S. Census data by Issi Romem, an economist at BuildZoom, a startup that tracks construction data for building contractors.”
“Nationwide, membership in the National Association of Home Builders peaked at 240,000 in 2007, then dropped to 140,000 in 2012, where it has remained throughout the recovery.”
“Builders in far-flung exurbs are encountering stiffer resistance from young buyers even as prices ratchet higher for land closer to cities. Economists say that in many large metropolitan areas, suburbanization might simply have reached its limits, as potential buyers increasingly reject long commutes. During the 1950s, buying a home in a new suburb, where land was plentiful and cheap, often meant driving half an hour to a job in the city. Today, commutes from new developments can be several times that long.”
“’There’s a tremendous mismatch between the places where people want to live and the places where it’s easiest to build,’ says Edward Glaeser, a professor of economics at Harvard University who studies constraints on housing supply.”
“But building remains below historical averages, and economists say it is unlikely to return to those levels before the next recession.”
“’It’s hard for me to see on single-family how you can build your way out of this,’ Mr. Rappaport says. ‘Even with these heroic efforts’ to overcome barriers to building new housing, he says, there is little chance ‘that you’re going to get a new stream of single-family homes that can relieve demand.’”
“Coastal cities such as San Francisco, Los Angeles, New York and Boston have taken criticism for their restrictive building codes, which make it more difficult to create enough housing to keep up with population growth.”
“Even metropolitan areas with more permissive approaches to building are lagging behind their historical construction levels. Housing permits in Memphis, Tenn., were 44% below their historical average in 2017, according to the latest Census figures analyzed by real-estate data firm Trulia, while permits in the Minneapolis metropolitan area were 16% below average.”
“In business, the mantra goes, the customer is always right and should get the best deal.”
“The opposite is happening in private equity where investors, including large pension funds, endowments, sovereign wealth funds and family money, face unfavorable fund terms and, in all likelihood, lower returns.”
“Private equity firms are clearly calling the shots and that is illustrated by the record amount of money they are turning away.”
“Huge institutional investors have so much money burning a hole in their pockets (Singapore’s GIC alone has $100bn of assets under management) they are under enormous pressure to find a home for this cash somewhere.”
“Hence their willingness to commit their cash to funds even if managers cut or reduce the so-called hurdle rate, which is the return that is guaranteed before a buyout group can claim a share of the profits. The industry standard is a preferred return of 8% on deals.”
“Advent International, the Boston and London-based group, raised eyebrows in 2016 when it announced it was closing a mega $13bn buyout fund without offering minimum returns to its investors. Last year, CVC, the former owner of F1, also said it was cutting its hurdle rate from 8% to 6%. The buyout firm also scrapped early-bird discounts given to new investors.”
“Rather than take their money and run from unfavorable terms, investors have doubled down on these private equity funds, which raised record amounts of cash in their fastest time ever. Advent had set out to raise $12bn and received more than $20bn of interest from investors. CVC raised €16bn but closed the door on billions more because demand was close to €30bn.”
“Rubbing salt into the wound of poorer terms, private equity managers are also warning them that returns should come down.”
“’The investors have accepted the idea of lower returns as OK,’ said the head of a private equity group. ‘It used to be that investors would earn 20% net internal rate of returns. Now they are happy with 14% or 15% net internal rate of returns.’”
“The poverty rate amongst black Americans, at 22%, is higher than the American average of 13%. But black people make up only 9m of the 41m poor Americans.”
“Money is supposed to be a means of buying things. Now, the nation’s hottest investment is buying money. And the investment rush is raising questions about whether one reason for the slow pace of economic growth in recent years is that the nation is busy distracting itself. While Bitcoin mining may not be labor intensive, it diverts time, energy and capital from other, more productive activities that economists say could fuel faster growth.”
“By a wide range of measures, America has a productivity problem. The economy is growing slowly, and almost 20% of adults in their prime working years are neither working nor trying to find work. Americans who do have jobs are less likely to start their own companies. Even the most basic kind of production is in decline. Americans are having less sex and making fewer babies.”
“Homebuyers in Honolulu have the highest mortgage debt-to-income ratio in the nation, while homebuyers on Maui have a ratio that’s third-highest in the U.S., topped only by San Jose in California’s Silicon Valley, according to a report by the personal finance company SmartAsset.”
“Homebuyers in the Honolulu metropolitan area have mortgages worth 3.959 times their annual income, on average, according to an analysis of data from the Consumer Financial Protection Bureau.”
“The data showed that Honolulu homebuyers have an average income of $131,639 and that the average mortgage is for $521,201.”
“Maui homebuyers in the Kahului-Wailuku-Lahaina metro area have an average income of $131,681, and the average mortgage there is $468,597, putting their mortgage-to-income ratio at 3.559.”
“By contrast, homebuyers in San Jose have an average income of $207,062 and an average mortgage of $740,693, giving them a ratio of 3.577.”
“California had 17 of the top 25 cities with the largest mortgage-to-income ratios on the list, while Hawaii had two of the top three.“
“Nationally, the average mortgage-to-income ratio was 2.119.”
“Prospect of higher interest rates a worry to shopping mall REIT investors.”
“While mall landlords generally have shown they are able to keep occupancy levels buoyant, there are growing concerns about pressure on rents and higher capital expenditures as they look to attract and retain tenants, many of which are shrinking their store footprints.”
“Recent comments by Starbucks Corp. Executive Chairman and founder Howard Schultz that he expects rents to fall also weighed on the retail property sector Tuesday.”
“’Over the last few weeks I have been in a number of U.S. cities and observed firsthand the abundance of empty storefronts across the country, in prime A1 locations,’ Mr. Schultz said in an email to Starbucks senior leadership team on Sunday.”
“’We are at a major inflection point as landlords across the country will be forced (sooner than later) to permanently lower rent rates to adjust to the ‘new norm’ as a result of the acute shift away from traditional brick-and-mortar retailing to e-commerce,’ he added.”
Energy
WSJ – Daily Shot: US Total Crude Oil Production 2/23
“Passive has gotten so large that it’s killed everything in its path — including itself. Welcome to the ‘Passive Singularity‘.”
“There are now so many indexes that putting your money in an index-tracking fund is a move requiring an active decision, according to researchers at Sanford C Bernstein & Co. The industry’s growth has even forced active managers to focus on selecting indexes themselves — be that to invest in, or to benchmark against.”
“It’s the latest broadside from Bernstein’s team, which in 2016 labeled passive investing ‘worse than Marxism’. Investors so far aren’t paying heed: passive mutual funds and ETFs absorbed $692 billion last year, compared to $45 billion in outflows for active funds, according to data compiled Bloomberg Intelligence.”
“The Bernstein strategists base their conclusions around the millions of indexes in existence, which far surpass the number of single securities. Do a little math and the madness is clear: with 3,000 easily-investable stocks, the number of possible combinations to turn into an index is a Googol (that number, written out, would be 1 followed by 100 zeros.)”
“With nearly half of equity assets managed passively in the U.S., there’s no sign that investors will stop gravitating toward cheaper, index-tracking products. Bernstein’s new research wrestles with a world where passive is larger than ever, and active managers have to fight for the trust of their clients. The team concedes that ‘passive investing has been a great force for democratizing access to capital markets and reducing the costs to society of managing assets’.”
“But a massive bull market rally across equities and debt markets has left many investors blind to the risks, which smart asset allocation can help to mitigate, Bernstein said.”
“In January, investors added $25 billion to active ETFs and mutual funds while allocating $103 billion to passive vehicles, data from Bloomberg Intelligence show.”
“’By all means, investors should save money on implementation by using passive vehicles as part of their allocation,’ the strategists wrote. ‘But the myth of purely passive investment will be exposed by a low-return world.’”
Cryptocurrency / ICOs
WSJ – Daily Shot: Bitcoin 2/28
“Bitcoin has been much less volatile in the past few days.”
“A lumber shortage has pushed prices to record highs as builders stock up for what is expected to be one of the busiest construction seasons in years.”
“Builders say the higher lumber costs are making homes more expensive. Lumber prices started rising last year after fires destroyed prime forests and a trade dispute between the U.S. and Canada restricted supplies. Now a shortage of railcars and trucks is forcing builders to pay even more.”
“Prices are rising as lumber yards try to stock up ahead of what looks likely to be a busy building season this spring. A strong economy and tight supply of houses are heating up the home-building market. The number of new units under construction in the U.S. rose almost 10% in January, the Commerce Department said, as strong demand kept builders working through the winter. Permits for new homes, a sign of anticipated construction, also rose.”
“Material prices now rival labor shortages as builders’ main concerns, a National Association of Home Builders survey showed in January. Prices for common building varieties like spruce and southern pine are at or near records, according to price-tracking publication Random Lengths. March-dated lumber futures at the Chicago Mercantile Exchange hit a record of $532.60 per 1,000 board feet last week after climbing more than 50% in 14 months.”
“That run-up began with a trade dispute between the U.S. and Canada, which provides about a third of U.S. timber, leaving many dealers hesitant to restock at elevated prices. The Trump administration eventually instituted tariffs of 20% or more on Canadian sawmills.”
“Problems mounted. The worst wildfires on record hit Canada’s Pacific coast. Hurricane Irma temporarily closed mills in the forests of Florida and Georgia. And then came a shortage of railcars and trucks to transport timber from forests in places like the Pacific Northwest. Rates for flatbed trucks rose 24% in January from a year earlier, according to DAT Solutions LLC.”
“US utilities, sustained for years in a warm bath of favorable financial conditions, are facing a cold shower.”
“An expected rise in interest rates and the shake-up of the tax system passed into law at the end of last year are threatening to squeeze utilities’ finances. Already, the S&P 500 utility sector index has dropped 13% from its peak in November.”
“Developed nations face a rising tide of government debt that poses ‘a significant challenge’ to budgets as interest rates increase around the world, the OECD has warned.”
“Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the ‘relatively favorable’ sovereign funding environment ‘may not be a permanent feature of financial markets’.”
“The warning on the longer-term consequences of high public borrowing marks a shift in stance by the OECD, which as recently as November was praising countries for easing fiscal policy to help global growth.”
“In an Economic Outlook, published at that time, the Paris-based organization said that ‘even a lasting increase in 10-year government bond yields of 1 percentage point . . . might worsen budget balances on average by only between 0.1% and 0.3% of GDP annually in the following three years’.”
“The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year. Debt to GDP ratios across the OECD averaged 73% last year, and its members are set to borrow £10.5tn from the markets this year.”
“Because much of the debt raised in the aftermath of the financial crisis is set to mature in the coming years, developed nations will have to refinance 40% of their total debt stock in the next three years, the OECD said.”
“In 1969, India’s then prime minister, Indira Gandhi, transformed the country’s banking landscape when she nationalized its 14 biggest commercial lenders, which together accounted for around 70% of the system’s deposits.”
“Nationalization was touted as way to protect depositors and force banks — which mainly catered to big industrial houses — to lend to a broader swath of the population, including farmers, traders and small businesses.”
“State dominance over the banking system has not worked out so well for India. Politically driven lending decisions, difficulties agreeing realistic debt workouts when loans sour, as well as uninspired, even fearful bureaucratic management and outdated IT systems have left state lenders with a far higher bad debt burden than their private rivals, hindering India’s economic prospects.”
“Now, the discovery of an alleged $1.8bn fraud at India’s second-largest state lender, Punjab National Bank, is prompting vigorous and concerted calls for New Delhi to admit the failure of Mrs. Gandhi’s bank nationalization — and reverse it.”
“According to PNB, staff at one of its Mumbai branches issued fraudulent bank guarantees for luxury jeweler Nirav Modi, and his diamond-trader uncle Mehul Choksi, to take cash advances from the overseas branches of other Indian banks — all ostensibly guaranteed by PNB.”
“Antiquated software systems — guarantees were issued without requisite documents or collateral — meant PNB’s management had no idea of the obligations mounting in its name. Nor did the banks that received the guarantees, mostly other state lenders, suspect any impropriety.”
“Analysts say the scam, which PNB says went on for several years without detection, highlights the rot in state banks and the need for radical change.”
“At the heart of India’s banking crisis, however, is New Delhi’s political control over what should be run as commercial entities and the inherent conflict of interest in the state’s multiple roles as economic policymaker, the largest bank owner and the industry regulator.”
“While New Delhi is now in the middle of a $32bn recapitalization scheme to shore up bank balance sheets after the last wave of bad debts, the PNB fraud has raised fears the government is simply throwing good money after bad.”
“Privatization of some, or even most, of India’s state banks is not a simple or quick solution to the sector’s problems. Analysts say the legacy of five decades of state ownership — and its impact on personnel, incentives and decision-making — will take years to undo. But the PNB fraud has persuaded many Indians it is time to start.”
Japan
WSJ – Daily Shot: TD Securities – Japanese Investors Looking For Returns Abroad 2/27
