Tag: Inequality

August 10, 2017

Perspective

NYT – Public Works Funding Falls as Infrastructure Deteriorates – Binyamin Appelbaum 8/8

FT – Who was convicted because of the global financial crisis? – Kara Scannell and Richard Milne 8/8

Worthy Insights / Opinion Pieces / Advice

NYT – The Political Payoff of Making Whites Feel Like a Minority – Lynn Vavreck 8/8

NYT – Our Broken Economy, in One Simple Chart – David Leonhardt 8/7

A Teachable Moment – Do You Own this Ticking Time Bomb in Your Retirement Account? – Anthony Isola 8/8

  • Watch out for single entity stable value products.

Real Estate

WSJ – The Best Place for a New Warehouse? An Old Mall – Esther Fung 8/8

  • “The pressure for speedy online package delivery is prompting companies to look for distribution facilities closer to residential areas or highways.”
  • “Some of the best locations, it turns out, are dead malls.”
  • “Warehouse landlords say they like former malls because the shopping centers occupy swaths of space relatively close to where consumers live or near main highways.”
  • “But it isn’t easy to convert a mall into logistics space quickly. Developers say it takes a community ready to accept that the mall has failed as well as understanding that there are viable job opportunities in logistics real estate.”
  • “The dramatic shift in the retail industry and growth of e-commerce have led some analysts to estimate that 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years.”
  • “Meanwhile, the appetite for industrial space continues unabated. Roughly 247 million square feet of industrial space is expected to be delivered this year, according to real-estate services firm JLL.”

Finance

WSJ – Daily Shot: TheAtlasInvestor.com – Euro Junk Bonds & US Treasuries 8/9

South America

NYT – As Maduro’s Venezuela Rips Apart, So Does His Military – Nicholas Casey and Vanessa Herrero 8/8

  • “A growing number of Venezuelan officers are openly breaking ranks with the president and taking up weapons.”
  • “Venezuela has a history of coups and attempted overthrows at times of crisis, and many in the country now wonder if this is one of those times.”
  • “But the nation’s leaders are keenly aware of that, too, and as they face their greatest turmoil in years, they appear to have come prepared: The government has spent years ensuring that the military’s top commanders are deeply invested in the status quo.”
  • “In a single day Mr. Maduro promoted 195 officers to the rank of general. Venezuelan generals, more than 2,000 strong, enjoy a range of privileges, from lucrative control of the food supply to favorable rates for exchanging dollars.”
  • “Eleven of the 23 state governors in Venezuela are current or retired generals, along with 11 heads of the 30 ministries, giving them an extraordinary stake in preserving the government’s control over the country.”
  • “And the defense minister, Vladimir Padrino López, an army general, has been granted an even more lucrative arrangement, with expanded powers to control the country’s ports, as well as parts of the oil and mining industries.”
  • “’Maduro has made sure to give many rewards to senior military officers in exchange for loyalty,’ said John Polga-Hecimovich, a political scientist who studies Venezuela at the United States Naval Academy. ‘While he is completely dependent on them to stay in power, they have much to lose if he is gone.’”
  • But…
  • “Most midlevel officers, however, are far removed from the high ranks or patronage systems on offer from the government. Instead, said Raúl Salazar, a retired general who served as defense minister under Mr. Chávez, they see a deepening poverty caused by the food and medicine shortages that are plaguing the country.”
  • “’Their families, their friends, their acquaintances, everyone is suffering and they begin to ask themselves if it’s getting better or worse,’ General Salazar said. ‘Everyone has the same voice that talks to them each day, and that is their conscience.’”

July 27, 2017

Perspective

NYT – The Cost of a Hot Economy in California: A Severe Housing Crisis – Adam Nagourney and Conor Dougherty 7/17

  • “A full-fledged housing crisis has gripped California, marked by a severe lack of affordable homes and apartments for middle-class families. The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state.”
  • “The extreme rise in housing costs has emerged as a threat to the state’s future economy and its quality of life. It has pushed the debate over housing to the center of state and local politics, fueling a resurgent rent control movement and the growth of neighborhood ‘Yes in My Back Yard’ organizations, battling long-established neighborhood groups and local elected officials as they demand an end to strict zoning and planning regulations.”
  • “For California, this crisis is a price of this state’s economic boom. Tax revenue is up and unemployment is down. But the churning economy has run up against 30 years of resistance to the kind of development experts say is urgently needed. California has always been a desirable place to live and over the decades has gone through periodic spasms of high housing costs, but officials say the combination of a booming economy and the lack of construction of homes and apartments have combined to make this the worst housing crisis here in memory.”
  • “Housing prices in Los Angeles, San Francisco, San Jose and San Diego have jumped as much as 75% over the past five years.”
  • Thus democratic State Senator Scott Wiener has sponsored “…one of 130 housing measures that have been introduced this year, would restrict one of the biggest development tools that communities wield: the ability to use zoning, environmental and procedural laws to thwart projects they deem out of character with their neighborhood.”
  • “’We’re at a breaking point in California,’ Mr. Wiener said. ‘The drought created opportunities to push forward water policy that would have been impossible before. Given the breadth and depth of the housing crisis in many parts of California, it creates opportunities in the Legislature that didn’t exist before.'”
  • “For the past several decades, California has had a process that sets a number of housing units, including low-income units, that each city should build over the next several years based on projected growth. Mr. Wiener’s bill targets cities that have lagged on building by allowing developers who propose projects in those places to bypass the various local design and environmental reviews that slow down construction because they can be appealed and litigated for years.”
  • “The bill applies only to projects that are already within a city’s plans: If the project were higher or denser than current zoning laws allow, it would still have to go through the City Council. But by taking much of the review power away from local governments, the bill aims to ramp up housing production by making it harder to kill, delay or shrink projects in places that have built the fewest.”

Worthy Insights / Opinion Pieces / Advice

FT – China’s credit squeeze sends warning on global growth – William Sterling (Trilogy Global Advisors) 7/18

  • “China has sent a deflationary chill through global markets this year by engineering a major slowdown in the growth of bank credit in the country.”
  • “In fact, we would argue that the unravelling of many of the so-called ‘Trump trades’ in global markets this year reflects the deflationary chill that China’s credit squeeze is creating, rather than simply registering skepticism about Trump administration policies.”
  • “Over the course of little more than a year, China went from exporting deflation to helping create the “global reflation” theme that was evident in global equity markets in the second half of 2016.”
  • “The most important global policymaker nobody has ever heard of is Guo Shuqing, the recently appointed chief of the China Banking Regulatory Commission (CBRC).”
  • “With the implicit support of President Xi Jinping, Mr Guo has issued a flurry of new regulations aimed at tackling corruption and speculation, including a requirement that banks account for previously lightly regulated ‘wealth management products’ in line with capital adequacy regulations.”
  • “The result is that the credit impulse, best understood as ‘the rate of change of the rate of change’ of credit relative to GDP, has declined by a whopping 17.5% of GDP in the first quarter of 2017.” 
  • “In the meantime, expect weaker commodity prices and less upward pressure on US interest rates.”
  • “China’s impact on the world economy is significant. Over the past five years its nominal GDP has expanded by $3.7tn, an amount that exceeds the GDP of Germany. In contrast, the entire global economy has expanded its nominal GDP by only $2.2tn.”
  • “As well as accounting for nearly 170% of the growth in the world’s nominal GDP in this period, it seems that China may have made US corporate earnings great again. Per Commerce Department figures, rest-of-world profits for US corporations were up by 25% in the first quarter of 2017, while domestically generated profits were down slightly and well below their peak of 2014.”
  • “The key concern for global investors is that even though China’s credit policy may be almost as important to the global economy as shifts in Federal Reserve or European Central Bank monetary policy, China’s economic policymaking remains far less transparent than in many other key nations.”
  • “Monitoring China’s credit impulse, therefore, is perhaps the best means open to investors to ‘watch what they do, not what they say’.”

FT – Ignore the Cassandra chorus, rates won’t skyrocket – Scott Minerd (chief investment officer Guggenheim Partners) 7/17

  • “The simple truth is that, while rates may trend higher in the near term, the risk is that we have not reached the point where the macro economy can sustain persistently higher rates. If anything, political, military and market uncertainties would more likely lead to another sudden decline in rates rather than a massive spike upward.”
  • “Investors would be wise to ignore the growing chorus of Cassandra cries and look through the noise to the fundamentals. There are many things to be concerned about in the world but skyrocketing rates is not likely among them.”

A Teachable Moment – Numbers Can Lie – Tony Isola 7/20

  • “Narratives without statistics are blind, statistics without narrative are empty.” – Steven Pinker

NYT – Behind a Chinese Powerhouse (HNA) a Web of Family Financial Ties – David Barboza 7/18

NYT – Saudi King’s Son Plotted Effort to Oust His Rival – Ben Hubbard, Mark Mazzetti and Eric Schmitt 7/18

  • A family matter made public.

Project Syndicate – Why Do Cities Become Unaffordable? – Robert Shiller 7/17

  • “The question, then, is why residents of some cities face extremely – even prohibitively – high prices.”
  • “In many cases, the answer appears to be related to barriers to housing construction. Using satellite data for major US cities, the economist Albert Saiz of MIT confirmed that tighter physical constraints – such as surrounding bodies of water or land gradients that make properties unsuitable for extensive building – tend to correlate with higher home prices.”
  • “But the barriers may also be political. A huge dose of moderate-income housing construction would have a major impact on affordability. But the existing owners of high-priced homes have little incentive to support such construction, which would diminish the value of their own investment. Indeed, their resistance may be as intractable as a lake’s edge. As a result, municipal governments may be unwilling to grant permits to expand supply.”
  • “Insufficient options for construction can be the driving force behind a rising price-to-income ratio, with home prices increasing over the long term even if the city has acquired no new industry, cachet, or talent. Once the city has run out of available building sites, its continued growth must be accommodated by the departure of lower-income people.”
  • “But this tendency can be mitigated, if civil society recognizes the importance of preserving lower-income housing. Many of the calls to resist further construction, residents must understand, are being made by special interests; indeed, they amount to a kind of rent seeking by homeowners seeking to boost their own homes’ resale value. In his recent book The New Urban Crisis, the University of Toronto’s Richard Florida decries this phenomenon, comparing opponents of housing construction to the early-nineteenth-century Luddites, who smashed the mechanical looms that were taking their weaving jobs.”
  • “In some cases, a city may be on its way to becoming a ‘great city,’ and market forces should be allowed to drive out lower-income people who can’t participate fully in this greatness to make way for those who can. But, more often, a city with a high housing-price-to-income ratio is less a ‘great city’ than a supply-constrained one lacking in empathy, humanitarian impulse, and, increasingly, diversity. And that creates fertile ground for dangerous animosities.”

Real Estate

WSJ – Foreign Buyers Pump Up U.S. Home Prices – Laura Kusisto 7/18

  • “Foreigners are buying U.S. homes at a record rate, helping push up prices in coveted coastal cities already squeezed by supply shortages.”
  • “In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, nearly a 50% jump from a year earlier, according to a National Association of Realtors report released Tuesday.”
  • “That surpassed the previous record for foreign investment set in 2015, when foreigners purchased nearly $104 billion of U.S. residential property.”

WSJ – Property Developers Push for Open Drinking on City Streets – Esther Fung 7/18

FT – Retail woes lead to rising commercial mortgage delinquencies – Joe Rennison 7/17

  • “We see a lot of retail loans defaulting at maturity. Borrowers are just unable to re-finance their loans.” – Mary MacNeill, managing director – Fitch Ratings

FT – Will the death of US retail be the next big short? – Robin Wigglesworth 7/16

  • “Credit Suisse estimates that as many as 8,640 stores with 147m square feet of retailing space could close down just this year — surpassing the level of closures after the financial crisis and dotcom bust. The downturn is hitting the largely healthy US labor market — the retail industry has lost an average of 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year.”

FT – Blackstone warns of internet impact on US shopping malls – Robin Wigglesworth 7/16

  • “’The retail industry is clearly facing headwinds. And it’s the first time we’ve seen secular rather than cyclical headwinds,’ said Nadeem Meghji, head of North American real estate at Blackstone. ‘We’re now seeing pressures even on luxury retailers, which I didn’t expect to happen as fast as it has.’”
  • “The market for second-tier enclosed malls has virtually frozen given how concerned investors are, but Mr. Meghji estimated that in the past two years prices may have plunged as much as 40% on average for the 1,100 enclosed regional malls in the US. Even for the top 50, prices have probably declined by 20%, the Blackstone executive said.”
  • “The private equity firm’s $102bn real estate arm still owns some grocery shop-anchored malls in high-density population areas, but no longer has any exposure to the enclosed shopping mall sector.”

Energy

FT – California confronts solar power glut with novel marketplace – Gregory Meyer 7/17

  • “California is a leader in solar and wind power. The Golden State is well on its way to reaching a self-imposed goal of getting a third of its electricity from renewable sources by 2020, part of an aggressive agenda to cut greenhouse gas emissions.” 
  • “Yet this bold strategy is causing complications. At noon on clear spring days, too much solar power courses through the state’s electrical grid. Generators must pay customers to take excess supply — a condition called “negative prices” — or unplug their plants. Still, California consumers have some of the highest electricity rates in the country.” 
  • “Amounts of electricity generated by the sun and wind can vary in the space of hours, however, as clouds darken the skies or breezes die down. Every day, solar power fades towards dusk just as people come home and turn on lights, air conditioners and televisions.” 
  • “The imbalance market helps to iron out utilities’ power scramble as supply and demand shift during the day. It builds on longstanding markets for power delivered hours, days or months ahead by offering power delivered between five and 15 minutes in advance. When California suddenly finds itself with too much electricity, other states can now absorb it, and vice versa.”
  • “Participants say the imbalance market lowers overall costs for customers, makes grids more reliable and reduces carbon dioxide emissions by using clean energy that might otherwise be shut off. The ISO says the market has used 412,000 megawatt-hours of surplus California renewable energy since 2015, displacing 176,000 tons of carbon.” 

Environment / Science

WSJ – Daily Shot: statista – 20 Worst Cities Worldwide for Air Pollution 7/26

Health / Medicine

FT – ‘Urgent wake-up call’ for male health as sperm counts plummet – Clive Cookson 7/25

  • “The sperm count of men in the western world has fallen by more than half over a period of 40 years, according to an international study described by its authors as ‘an urgent wake-up call’ about declining male health.”
  • “’Decreasing sperm count has been of great concern since it was first reported 25 years ago,’ said senior author Shanna Swan of Icahn School of Medicine at Mount Sinai, New York. ‘This definitive study shows . . . that the decline is strong and continuing.’”
  • “Professor Allan Pacey of Sheffield university, who has been skeptical about previous research showing declining sperm counts, said the latest research dealt with many of his criticisms. But he urged people to ‘treat this study with caution as the debate has not yet been resolved and there is clearly much work still to be done’.”
  • “Prof Pacey pointed out too that the reported decline from 99m to 47m sperm per milliliter still left the average count within what fertility clinics regard as the ‘normal’ range.”
  • “In northern Europe today more than 15% of young men had a sperm count low enough to impair their fertility, Prof (Richard) Sharpe (of Edinburgh University) added, and ‘this is likely to get worse rather than better’.”
  • “The combination of declining male sperm counts and a growing delay in couples trying for a baby — often until the woman is in her 30s and her own fertility is declining — created ‘a double whammy’ for natural conception in modern western societies, he said.”

Bloomberg – China’s Sperm Count Problem Has Created a Billion-Dollar Market 7/12

  • While the above article focused on samples from North America, Europe, Australia and New Zealand, China too has its problems.

Britain

FT – UK plans to ban sale of new petrol and diesel cars by 2040 – Jim Pickard and Peter Campbell 7/26

  • “UK environment secretary Michael Gove has announced plans to ban the sale of new petrol and diesel cars in Britain by 2040.”
  • “The announcement follows the lead set by France two weeks ago and will be set out in the UK government’s long-awaited ‘air quality plan’ on Wednesday.”
  • “Mr. Gove will say that all new cars will have to be fully electric within a quarter of a century. His promise to ban other engine types — including hybrids — shifts the government further from its existing position, which was an ‘ambition’ for all new cars to be zero-emissions by 2040.”
  • “The coalition government’s ‘carbon plan’ in 2011 also predicted that all new cars sold after 2040 would have to be emission free, to meet a target of having no petrol or diesel cars on the roads by 2050.”
  • “The announcement is a milestone in the shift towards electric cars, which currently account for less than 1% of UK sales.”

China

FT – Wang Qishan: China’s enforcer – Tom Mitchell, Gabriel Wildau, and Henny Sender 7/24

  • Arguably the second most powerful person in China.

WSJ – China’s Visible Hand Starts to Squeeze -Jacky Wong 7/18

  • “Macau looks likely to be another target of China’s efforts to contain leverage and capital outflows.”

FT – China’s railway diplomacy hits the buffers – James Kynge, Michael Peel and Ben Bland 7/17

  • “China’s ability to build high-speed railways more cheaply than its competitors gave the technology a central place in ‘One Belt, One Road’, Beijing’s ambitious scheme to win diplomatic allies and open markets across more than 65 countries between Asia and Europe by funding and building infrastructure.”
  • “But less than two years after these hopeful words were uttered, a Financial Times investigation has found that China’s high-speed rail ambitions are running off the tracks. Far from blazing a trail for One Belt, One Road, several of the projects have been abandoned or postponed. Such failed schemes, and some that are under way, have stoked suspicion, public animosity and mountains of debt in countries that Beijing had hoped to woo.”
  • “In terms of scale, the rail push ranks as one of the biggest infrastructure undertakings in history. The total estimated value of 18 Chinese overseas high-speed rail schemes — including one completed (the Ankara-Istanbul service), five under way and 12 more announced — amounts to $143bn, according to a study by the Center for Strategic and International Studies, a Washington-based think-tank, and the Financial Times. To put this number in context, the US-led Marshall Plan, which helped revive Europe after the second world war, was completed with $13bn in American donations, a sum equivalent to $130bn today.”
  • “The size of China’s grand design has made its many shortcomings all the more eye-catching. The combined value of cancelled projects in Libya, Mexico, Myanmar, the US and Venezuela is $47.5bn, according to FT estimates.”
  • “This is almost double the $24.9bn total value of the five projects under way in Laos, Saudi Arabia, Turkey and Iran, where two lines are under construction, according to CSIS estimates.”
  • “So why is it that so many rail projects backed by China’s unrivalled financing firepower, huge construction companies and advanced technology fall by the wayside? The answers reveal much about the limitations in Beijing’s global development vision.”
  • Mostly it’s “…the vastly divergent capacities to take on and absorb debt. China’s economic heft and authoritarian system allows companies that enjoy effective government guarantees to load up on loans and operate at a perennial loss. China Railway Corporation, the state-owned rail operator and investor in the country’s high-speed networks, has debts of Rmb3.8tn ($558bn), much more than the national debt of Greece. This is partly because much of the 22,000km of high-speed rail in China runs at a loss, officials say.”

FT – China’s Xi orders debt crackdown for state-owned groups – Tom Mitchell 7/15

  • “’Deleveraging at SOEs is of the utmost importance,’ the Chinese president said at this weekend’s National Financial Work Conference, which convenes only once every five years. He added that the country’s financial officials must also ‘get a grip’ on so-called ‘zombie’ enterprises kept alive by infusions of cheap credit.” 

FT – Chinese purchases of overseas ports top $20bn in past year – James Kynge 7/15

South America

FT – Venezuela’s economic and political crisis in charts – Lauren Leatherby 7/25

July 12, 2017

If you were to read only one thing…

Bloomberg News – Shoppers Can Buy Bad Debt on China’s Equivalent of Ebay – 7/11

  • “Used by millions of Chinese to buy everything from clothes to food and electronics, the platform (Taobao), known for its bargains, typically markets more than 1 billion yuan of soured assets a day, according to Bloomberg calculations. Recent listings include a portfolio of 118 non-performing loans from some companies in Yunnan province, a villa seized by a bank in the southern canal city of Shaoxing, and a property in central Beijing that’s also in default.”
  • “China’s embrace of e-retailing is helping it tackle another byproduct of the country’s rapid economic evolution: the rise of bad debt.”
  • “Slowing growth and an uptick in corporate defaults has fueled the market, with NPLs at commercial banks more than doubling over the past two years to 1.6 trillion yuan as of the end of March. As Beijing pushes lenders to find market-oriented ways of dealing with soured loans, interest in distressed debt has climbed, spurring banks and asset managers to look beyond traditional venues like auction houses and exchanges to dispose of the assets.”
  • “China Cinda Asset Management Co. — one of the country’s biggest distressed asset managers, and the firm marketing the steel company’s debt — said last month that it’s collaborating with Alibaba to set up a special section on Taobao to auction its wares.”
  • “Following Taobao’s lead, more than 50 other websites marketing their services to banks and other sellers of bad loans emerged in China in the first half of last year, according to a March report from PricewaterhouseCoopers LLP. More than 20 financial institutions are listed as partners on Taobao’s auction platform for soured assets, including Shenzhen-based Ping An Bank Co., Beijing’s China Minsheng Banking Corp. and China Citic Bank Corp.”
  • “E-commerce platforms provide access to more investors and the lender has garnered interest for assets marketed on Taobao that failed to yield inquiries offline. But while they can bring a level of transparency to bad loan trading, sites like Taobao also attract individual investors who don’t typically have the skills needed to do full due diligence on an NPL deal…”

Perspective

WSJ – Daily Shot: FRED – 2015 Median Household Income Adjusted by RPP 7/11

Bloomberg – America’s Pension Bomb: Illinois Is Just the Start – Laurie Meisler 6/30

  • “We’ve been hearing it for years: America’s public pensions are a ticking time bomb. Well, at long last, the state of Illinois is about to expose just how big this blowup could be. As of the 2015 fiscal year, Illinois had promised its employees $199 billion in retirement benefits. Right now, it’s $119.1 billion short. That gap lies at the center of a years-in-the-making fiscal mess that’s threatening to drop the state’s credit rating to junk-bond status. But Illinois is hardly alone. Connecticut and New Jersey—states that, to most of the world, seem like oases of prosperity—are under growing financial strain, too.”

Worthy Insights / Opinion Pieces / Advice

NYT – How We Are Ruining America – David Brooks 7/11

  • “Over the past generation, members of the college-educated class have become amazingly good at making sure their children retain their privileged status. They have also become devastatingly good at making sure the children of other classes have limited chances to join their ranks.”

Bloomberg Businessweek – The Next Job Humans Lose to Robots: Real Estate Appraiser – Joe Light 7/11

  • “Advances in big data at Zillow and elsewhere are helping automation creep into knowledge-based professions.”

Silicon Beat – World’s 10 least affordable housing markets include San Jose (least affordable in the US) and SF – Richard Scheinin 7/10

  • Using the Median Multiple (median house price / median household income), the Demographia International Housing Affordability Survey (2017) has ranked the following cities as the least affordable in the world.
  1. Hong Kong
  2. Sydney, Australia
  3. Vancouver, Canada
  4. Auckland, New Zealand
  5. San Jose, USA
  6. Melbourne, Australia
  7. Honolulu, USA
  8. Los Angeles, USA
  9. San Francisco, USA
  10. Bournemouth and Dorset, UK

Markets / Economy

WSJ – Daily Shot: FRED – US Consumer Credit as Percentage of GDP 7/11

WSJ – Daily Shot: FRED – US Student Loans Owned by Federal Govt 7/11

  • “Student loans owned directly by the government now total $1.1 trillion, representing about 30% of the overall consumer credit. Note that this figure does not include student debt that is guaranteed but not directly owned by the federal government.”

WSJ – Daily Shot: FRED – Nonrevolving Consumer Loans owned by Credit Unions 7/11

  • “Starting in 2013, credit unions have built up a sizeable auto loan portfolio. This is quite a bet on the US consumer for these small lenders.”

Real Estate

WSJ – Daily Shot: Calculated Risk – Number of Negative Equity Mortgages 7/11

China

FT – China trial paves way for ‘unhackable’ communications network – Yuan Yang 7/10

  • “Success of Jinan project points to commercial application for quantum communications.”

WSJ – Here Comes Another Chinese Company on a Buying Binge – Jacky Wong 7/10

  • “China wants its biggest, most acquisitive, highly leveraged companies to tone it down — apparently by selling assets to other big, acquisitive highly leveraged companies.”
  • Case in point, Sunac’s purchase of 76 hotels and 13 theme parks from Dalian Wanda.
  • “But the deal won’t reduce the overall risks in China’s financial system. Sunac has been loading up on debt over the past year as it bought land aggressively. Its net debt, including perpetual securities, had more than tripled in 2016 to $7.8 billion — more than twice its shareholders’ equity.”
  • “Sunac has just enough cash, including restricted cash, to finance the Wanda purchase, but that would more than double its net debt. This seems to defeat the purpose to contain runaway debt within China’s financial system. But unlike Wanda, Sunac has raised all debt to buy domestic land and properties, important drivers for China’s economy, instead of splurging on overseas assets.”
  • “Capital outflows, instead of leverage, are Beijing’s real worry.”

WSJ – Dalian Wanda Rides China’s Financial Merry-Go-Round with Latest Deal – Anjani Trivedi and Jacky Wong 7/11

  • “When it comes to managing debt burdens, Chinese companies know how to keep it all between friends.”
  • “In a maneuver that will reduce the need for external financing, Wanda is lending some 29.6 billion yuan ($4.4 billion) to Sunac to buy its own assets.”
  • “The structure of the loan is a typical example of so-called entrusted lending, a common form of shadow banking in China in which one company lends money to another. Because that isn’t strictly legal, such loans are arranged via a bank that acts as a middleman, often earning a cut of the deal for its pains. Entrusted lending has ballooned to account for some 10% of credit in China, led by cash-rich state-owned companies that have branched out to loans as they struggle to find growth in their core businesses.”
  • “With the current Sunac-Wanda deal, Sunac should book the loan as debt, although it could bury it in one of its many joint ventures. Wanda will presumably record the loan as an asset, meanwhile. The ultimate effect is that most of Wanda’s debts haven’t been dealt with; they have just been shifted elsewhere within China Inc.”
  • “Wanda is lending the cash cheaply too. The three-year loan will be at the benchmark lending rate, now around 5%. Typically such loans are priced at a premium, especially those to indebted borrowers like Sunac, which has an eye-popping net debt-to-equity ratio of over 160%.”
  • “Still, if one of your friends is helping you out, it is rude to make them pay over the odds.”

FT – Sunac receives fresh ratings warning after $9.3bn Wanda deal – Nicholas Megaw 7/11

June 19, 2017

If you were to read only one thing…

FT – The real risks of the falling oil price – Nick Butler 6/11

  • “In any discussion of the oil market it is all too easy to ignore the real world consequences of the price fall that has occurred over the last three years. We might appreciate a small cut in the price of petrol or gasoline at the pump, even though its effect is dampened by high levels of taxation. But we do not give much thought to the impact of price changes on the supplying countries. That is short-sighted because the structural shift that has taken place is profoundly destabilizing and potentially very dangerous.”
  • “A new note from the Energy Information Administration in the US published last month sets out the impact of the fall in prices in recent years. It is worth summarizing the data, which are expressed in real 2016 dollars.”
  • “These are big numbers for all the countries involved. Very few have diverse economies that can adjust quickly to the fall in the price of a crucial export commodity. Most have large dependent populations, especially of children and young people. Nigeria, for instance, has some 115m people, amounting to 61% of its population, under the age of 25; Angola 13m — 63% of its population.”
  • “But simply looking down on the failings of the oil producers is not an adequate response.”
  • “The price fall has reduced the revenue of the Opec states by some $750bn from the 2012 level — a fall of over 60%. None have fully adapted to that loss of income. Most have assumed that the price change would be temporary and some have even borrowed to cover the shortfall of revenue against current spending — thereby storing up even more problems for the future.”
  • “The real pain of enforced austerity is only just beginning and will deepen as governments realize that the price fall is more structural than cyclical. The latest attempt to manage the market by extending the production quota for another nine months has had no positive effect. Prices for Brent crude on Friday were down to about $48 per barrel.”
  • “The pain will be profoundly destabilizing. At least five Opec states are at risk of very serious political and economic destabilization, including major economies such as Venezuela and Nigeria. Civil unrest is already evident in Libya and latent in Algeria. Across the whole of the cartel there is a substantial and growing group of restless, unemployed youths aged between 15 and 30.”
  • “In reality, the structural fall in the oil price is the most destabilizing economic event to have hit the world since the financial crash of 2008. In this case, the impact is being felt in slow motion but it is building and feeding on existing conflicts and tensions. And just as the collapse of the subprime housing market in the US shook the global economic system, so the problems of the cartel cannot be contained within the countries themselves. When problems are rapidly globalized through migration, terrorism and even health risks if key public services collapse, the deteriorating situation within Opec is all too likely to become our problem too.”

Perspective

Bloomberg – The U.S. Is Where the Rich Are the Richest – Ben Steverman 6/16

cnsnews.com – Census: More Americans 18-to-34 Now Live With Parents Than With Spouse – Terence Jeffrey 4/19

Worthy Insights / Opinion Pieces / Advice

WSJ – How Anbang Could Clog China’s Financial Plumbing – Anjani Trivedi 6/16

  • “China’s decision to detain the chairman of Anbang Insurance Group, one of the country’s most acquisitive companies, is stunning in itself. The knock-on effects on the Chinese financial system could deepen the drama.”
  • “If customers of Anbang—owner of New York’s Waldorf Astoria hotel—start surrendering their policies and stop buying new ones, that could accelerate a continuing cash drain at the company. China’s insurance regulator has already been clamping down on the primary source of Anbang’s cash since late last year—short-term, high-yielding investment products disguised as insurance policies. Its premium income plunged 99% in April while its solvency ratio halved in the first quarter from the previous year.”
  • “The company’s tentacles reach far and deep into China’s financial system, with one key route being its lending of short-term funds into Chinese money markets.”
  • “Take its dealings with Chengdu Rural Commercial Bank, a provincial bank of which Anbang owns more than one-third, and which itself has some 40 subsidiaries across towns and villages in China. Anbang provides around 40% of the deposits for Chengdu Rural, and accounts for 80% of its related-party transactions, most of which are short-term, money-market loans. The bank also pays Anbang a high 5% interest on its deposits and holds some of Anbang’s debt.”
  • “Such tight relationships illustrate how financial stress at Anbang could quickly ripple through China’s banking system. Banks like Chengdu Rural have already become increasingly reliant on short-term wholesale funding and have been resorting to capital raises: The loss of a big cash provider like Anbang could cause real pain. Interbank funding conditions are already tight in China—the country’s central bank made its biggest one-day cash injection into the market in nearly six months on Friday. If the detention of Anbang’s chairman leads to the company stepping back more broadly from Chinese markets, the saga could have a while to run.”

Markets / Economy

Bloomberg – Nissans Crowding Rental-Car Lots Carry Risk as U.S. Sales Slow – Jamie Butters and John Lippert 5/30

Real Estate

Investment News – W.P. Carey exiting the nontraded REIT business – Bruce Kelly 6/16

Energy

Bloomberg – Solar Power Will Kill Coal Faster Than You Think – Jess Shankleman and Hayley Warren 6/15

National Post – This lonely drifting tanker carrying 2 million barrels nobody wants to buy sums up global oil’s struggle – Laura Hurst and Javier Blas 6/14

Asia – excluding China and Japan

FT – US targets $540m in assets bought with 1MDB funds – David Lynch 6/15

  • “The US Department of Justice on Thursday moved to seize an additional $540m in assets purchased with funds stolen from Malaysian sovereign wealth fund 1MDB, including a luxury yacht, a Picasso painting, jewelery and rights to the movie Dumb and Dumber.” 
  • “The US now estimates that a total of $4.5bn was pilfered by Malaysian public officials and their associates including Jho Low, a well-connected Malaysian businessman who held no formal role in the project.” 
  • “Including the new lawsuit and earlier civil forfeiture actions, the US government has moved to recover $1.7bn of that amount, according to Kendall Day, acting deputy assistant attorney-general. This represents the largest such US seizure action under a DoJ initiative aimed at recovering money stolen by corrupt foreign officials.”

China

Bloomberg Businessweek – Try Getting Your Kid Into a Beijing Public School – Dexter Roberts 6/7

FT – A deal too far for China’s Anbang – Tom Mitchell, Henny Sender, Lucy Hornby, and Gabriel Wildau 6/16

  • “The apparent fall from grace of the founder Wu Xiaohui has shone a spotlight on a brand of Chinese capitalism that has taken root in the financial industry.”

South America

FT – Venezuela’s food parcels prove imperfect solution to crisis – Gideon Long 6/16

  • “According to Fedeagro, an agricultural association, Venezuela produces only enough food to cover between 30-40% of domestic consumption, compared with about 70% a decade ago. Chronic food shortages ensure that Venezuelans regularly skip meals and go hungry. A survey from the Universidad Central de Venezuela found that three-quarters of the Opec nation’s population lost weight involuntarily in 2016.”

Other Links

Tax Foundation – How High Are Wine Taxes In Your State? – Jose Trejos 6/15

May 10, 2017

If you were to read only one thing…

NYT – How Homeownership Became the Engine of American Inequality – Matthew Desmond 5/9

  • “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.”

Perspective

WSJ – Daily Shot: California Economy 5/8

  • “Other than the US, only these four nations have an economy larger than California’s.”

Worthy Insights / Opinion Pieces / Advice

The Reformed Broker – Into the teeth of the next bear – Joshua Brown 5/9

  • “What will happen into the teeth of the next 20% stock market decline?” …

Bloomberg View – Puerto Rico Must Not Waste Its Second Chance – Michael Bloomberg 5/9

The Registry – McNellis: The Death of Retail? – John McNellis 5/9

Markets / Economy

WSJ – Daily Shot: Apple Market Cap 5/8

  • And it keeps on getting higher…

FT – China: not such a champion of global trade – Silvia Pavoni 5/8

  • “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.’”

Real Estate

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.”

Finance

Bloomberg – A New Paper Just Took a Huge Shot at Some of the World’s Hottest Investments – Eric Weiner 5/8

  • “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.”

Asia – excluding China and Japan

Bloomberg – China’s High Rollers Are Phoning In Big Bets to Manila Casinos – Daniela Wei and Bruce Einhorn 5/3

  • “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.”

China

Bloomberg Businessweek – China’s Booming Service Industry Can’t Keep Up With College Grads – Dexter Roberts 5/4

  • “Service industries, which employ 43% of all Chinese workers, are creating few jobs fit for college graduates.”

South America

FT – Hidden numbers reveal scale of Venezuela’s economic crisis – Valentina Romei 5/8

  • “A country that in 1980 had the highest GDP per capita in Latin America is no longer in the top 10 and its economy is smaller than those of Colombia, Chile and Peru, the IMF data show.”
  • A picture is worth a thousand words…

May 9, 2017

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics – Angst in America, Part 7: The Angst of the Millennial Generation – John Mauldin 5/7

  • Are High Home Prices Turning American Millennials Into the New Serfs? – Marc Faber
    • “Like medieval serfs in pre-industrial Europe, America’s new generation, particularly in its alpha cities, seems increasingly destined to spend their lives paying off their overlords, and having little to show for it. No wonder that rather than strike out on their own, many millennials are simply failing to launch, with record numbers hunkering down in their parents’ homes. Since 2000, the numbers of people aged 18 to 34 living at home has shot up by over 5 million.”

Real Estate

Forbes – Brookfield’s Bruce Flatt: Billionaire Toll Collector Of The 21st Century – Antoine Gara 5/2

WSJ – Auto Dealers Decide Cars Are Taking Up Too Much Prime Space – Adrienne Roberts 4/29

  • “Large chains opt to move merchandise to less-valuable real estate.”

China

FT – Macau proposes new ATM curbs to tackle Chinese capital flight – Ben Bland 5/8

  • “Macau is tightening restrictions on the use of ATM cards by mainland Chinese customers as the casino enclave confronts fears that it is being used as a hub for capital flight and money laundering.”
  • “The government said that in the future, mainland users of UnionPay, China’s sole clearing house for bank card transactions, would have to insert their identity cards into ATMs and have their identity verified by facial recognition software to withdraw cash.”
  • “The move appears designed to target gamblers and middleman who have been flouting withdrawal limits by using multiple ATM cards registered to different customers.”
  • “Withdrawals by mainlanders in Macau are limited to Rmb10,000 ($1,450) a day and Rmb100,000 per year.”
  • “Vitaly Umansky, a Hong Kong-based analyst at Bernstein, the research house, said the new ATM measures would add to the headwinds facing junkets and some ‘premium mass’ gamblers.”
  • “He said that, after the recent rebound in fortunes, the ATM crackdown would make ‘investors again realize that Macau risks are largely tied to policy and the power of the government to limit growth has not been diminished.'”

April 26, 2017

If you were to read only one thing…

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

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

Perspective

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

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

Worthy Insights / Opinion Pieces / Advice

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

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

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

Markets / Economy

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

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

Real Estate

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

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

WSJ_Rising US Home prices_4-26-17

Tech

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

Asia – excluding China and Japan

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

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

Britain

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

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

China

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

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

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

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

Other Links

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