Government bonds issued by big developed economies
have surged in price this year — pushing yields to record lows. A key reason is
that these “safe assets” are in short supply.
A wide variety of investors and corporations prize
the highest-quality government bonds for their cash-like qualities — and the
near certainty of getting their money back.
According to research by Oxford Economics, the
resultant global shortage of these safe assets is going to get worse. The
consultancy calculates that the supply of these assets will grow by $1.7tn
annually over the coming five years — with a $1.2tn issuance of bonds to fund
the US budget deficit the largest driver. But demand for these assets is
estimated to grow more rapidly, creating a $400bn annual shortfall and
indicating that government bond yields are set to remain low.
“The largest buyers are relatively price-insensitive
and will continue to accept low returns in exchange for safety,” said Michiel
Tukker, global macro strategist at Oxford Economics.
Mr Tukker said the extra demand would come as the
global economy grew more quickly than the supply of safe assets. Governments
around the world could alleviate the shortage by issuing more debt, he said.
Indeed, higher borrowing has recently moved towards the top of the political
agenda in the UK, the US and even the eurozone.
However, a big shift towards looser fiscal policy
around the world is unlikely, unless there is an economic downturn, Mr Tukker
thinks. In that case, he said, central banks would be likely to respond by
ramping up their own purchases of safe assets — adding to demand.
It’s been a decade since the worst financial crisis
since the Great Depression, and yet here we are in a world where the highest
government bond yield starts with the number “2.” Among the world’s major
developed economies, only the English speaking countries – the U.S., U.K.,
Canada, New Zealand and Australia – still have monetary policy rates above
zero. But there is more to low yields than monetary policy rates, and those
factors are likely to stay in place for an extended period.
The following table shows the highest interest rates
culled from the 20 largest developed countries from the policy rate to the
30-year bond. Over 200 interest rates were considered and the only one to yield
above 2% is the 30-year U.S. Treasury bond at 2.04%. Never has the highest
yield among these countries been so low.
Core inflation has been low and stable for 15 years
and shows no signs of a secular acceleration anytime soon. Low rates of
inflation mean interest rates should be in the low single digits. Without a
serious return of developed world inflation, which has not been the case for
almost 25 years, gone are the days of 4% to 6% yields without a crisis, like
the one in Europe’s government debt market around 2012.
Next is the global savings glut, a phrase coined by
former Federal Reserve Chairman Ben S. Bernanke in 2005. As populations
age, they have a propensity to save. This is shown by the following chart from
the International Monetary Fund. Note that prior to 2005, the global saving
rate was never above 24.5%. Since then, it’s only been lower during the
panic of 2009. The rate equaled its record high of 26.7% in 2018. This works
out to roughly $21 trillion saved every year. Since many seek to match the
investments in their savings to their life expectancies, they tend buy
The savings glut is leading to massive bond buying
that is resulting in yields dropping below the inflation rate nearly everywhere
in the developed world.
The two factors above alone should be enough to make
investors understand that the fair value for developed world yields now start
with a “1” or “0,” but two other factors are driving yields even lower, and
into negative territory.
One is the global flight-to-quality. As
the world economy slows, the natural reaction is to allocate into safe
fixed-income securities. Look no further than last week’s reaction to the poor
manufacturing data in the U.S. Bonds rallied and equities slid. Yes,
flight-to-quality is a cyclical factor that is present when the concern is
about a slowing world economy. So, expect this factor to come and go over time.
Right now, though, it is “coming.” This flight-to-quality has created to much
demand for bonds that the amount of negative yielding debt increased by $8
trillion this year to $14 trillion.
Yes, central banks might reverse from their negative
interest-rate policies, but that only means developed world rates, without a
crisis, will only go up to 1% or maybe 2%. Every future downturn will add back
in flight-to-quality buying and negative central bank rates, and down market
rates will go again to zero or even lower.
The secular outlook has changed and those applying
the thinking from previous economic cycles about inflation and real yields
conclude these low yields represent a bubble. They are not considering aging
populations that are buying bonds and pushing yields below inflation rates
driven lower by advances in technology. Add aggressive central banks willing to
take monetary policy rates into negative territory and the standard rules that
say bubble have not worked for almost a decade. Don’t expect this to change
The most commonly asked question from U.S. investors
is where they can find yield. Unfortunately, for those still hoping for a
previous cycle to return, we have bad news, you have it now at 1%. Embrace it
and be lucky U.S. yields are not negative – yet.
Investors are now paying for the privilege of lending
it cash. A sale of 487.5 million euros ($535 million) of 13-week
bills Wednesday drew a yield of minus 0.02%. Greece joins the likes of Ireland,
Italy and Spain benefitting from the European Central Bank’s supportive
monetary policy and deepening fears of a global recession.
UBS plans to levy a negative interest rate on wealthy
clients who deposit more than SFr2m (USD $2M) with its Swiss bank, as lenders
hunker down for a period of ultra-loose monetary policy.
Several banks in Switzerland and the eurozone already
pass on the cost of negative official rates to corporate depositors, although
most large players have refrained from doing so with individual clients.
But with policymakers expected to adopt a “lower for
longer” stance for the foreseeable future, UBS Switzerland will from November
charge 0.75% a year on individual cash balances above SFr2m, according to three
people briefed on the plans.
The move underscores how banks in Europe and the US
are scrambling to prepare for a protracted spell of lower rates that threatens
their profitability, having previously wagered that central bankers would
tighten monetary policy.
“We assume that this period of low interest rates
will last even longer and that banks will continue to have to pay negative
interest rates on customer deposits at central banks,” UBS said. “Following
similar moves by a number of other banks here in Switzerland, we confirm that
we’ve decided to adjust cash deposit fees for Swiss francs held in
The move comes as Credit Suisse, UBS’s main rival,
said on Wednesday it was also thinking about imposing a levy on some wealthy
now an extremely insightful piece from Robin Harding of the Financial Times.
This one is in its entirety with some emphasis made in bold (mine).
This will be a discomforting, defining week for the
global economy. That is not because the US Federal Reserve is set to cut
interest rates. Rather it is because of the strikingly low level of rates from
which the Fed will start: a range of just 2.25% to 2.5%.
After more than a decade of economic expansion, and
despite everything from tariffs to tax cuts, it seems this is as high as US
interest rates go. Meanwhile, the European Central Bank is debating whether to
reduce its negative rate still further. Until this month, it was possible to
imagine that pre-financial crisis levels of 4% to 5% might eventually return.
According to their own projections, Fed officials
believe rates will settle at 2.5% in the long run. Subtract their 2% inflation
target and the real reward for capital is going to be a miserable 0.5%. The
equivalent rate in Europe and Japan will almost certainly be much lower. Such
low levels of interest rates are a profound change from the past. (The federal
funds rate was 6.5%, and the real rate was about 4% as recently as 2000.)
Although interest rates touch almost every aspect of economic life, the developed
world remains deep in denial about the consequences. Here are eight themes for
investors and policymakers to ponder.
First, there is an intimate link between long-run
interest rates and long-run economic growth. Perhaps capital is less relevant
to the digital economy, but for interest rates to max out at such low levels
sends an alarming signal about the prospects for future expansion.
Second, monetary policy is broken. In 2008-09, the
Fed cut rates by 5 percentage points and it was not enough. Today it has far
less room to respond to a recession. The Bank of Japan, which made no move on
Tuesday, has all but given up trying to hit its 2% inflation target. The ECB is
in danger of going the same way. The world is dismally unprepared for a
downturn: two of the world’s most influential central banks may start the next
recession with their policy rate already below zero.
Third, if monetary policy is broken,
fiscal policy must step in. That means either governments must approve higher
spending and tax cuts in response to a recession or else give the central bank
a fiscal tool in the form of “helicopter money”, essentially printing money to
spend or distribute to the public.
Alternatively, governments could set higher inflation targets and use fiscal
policy to reach them now. That would give their central banks more room to cut
when they need it.
Fourth, lower interest rates make
debt more sustainable. This is particularly true for public debt, because
countries actually borrow at these low risk-free rates, and somewhat true for
private debt. For many countries, it makes sense to borrow more in order to
invest. Predictions of financial crisis based on past levels of debt-to-gross
domestic product are likely to be misleading.
Fifth, capital stock should rise
relative to output. Investments that were once unprofitable now make sense:
road upgrades to save a few minutes of time; expensive, niche drugs to help a
few hundred people; or extra years of study to earn a graduate degree. Such
projects may feel irrational. They are not.
Sixth, any asset in fixed supply is now more
valuable, because its future cash flows can be discounted at a lower rate. A
monopoly supplier of water or electricity, land in a city center or the back
catalogue of Disney: the capital value of these assets must rise, so their
yield matches the lower interest rates. This trend is related to recent
movements in wealth inequality. It also puts investors at risk of identifying
financial bubbles that do not actually exist. One vital policy response would be to slash the return
on capital allowed to utilities.
Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price. Thus falling interest rates make planning and zoning rules a crucial economic issue.
Eighth, low interest rates make it harder to save. In
particular, they make it harder to save for a pension, and harder to live off
whatever capital accumulates. This fact has been obscured by the one-off rise
in price for scarce assets, many of which are owned by pension funds. But
future returns are likely to fall. The result will force workers to accept some
combination of later retirement, higher taxes, bigger pension contributions or
lower incomes in old age.
It is possible that this bout of low interest rates
will end. Perhaps the Fed is mistaken and it will have to raise rates sharply
in the future. Perhaps a burst of technological progress will raise growth and
boost demand for capital.
But no one can choose to make that happen: this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi to make life miserable for the world’s savers.The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.
The trend towards lower real
interest rates has lasted for decades and is as likely to continue as to
reverse. With central banks moving to ease, it is time to stop waiting for
rates to recover and face the world as we find it.
It’s hard to wrap your head around just how low U.S.
interest and bond yields are—still are—a decade after the Great Recession
ended. Year after year, prognosticators said that rates were bound to go back
up soon: Just be ready. That exercise has proved to be like waiting for Godot.
Thirty-year mortgage rates are a fraction of long-run
averages, and companies too are paying very little to borrow. All that cheap
money has been helping the economy along. On the other side of the ledger, bank
depositors are getting paid only a fraction of 1% on their savings.
The longevity of low rates has upended long-standing
assumptions about money and reshaped a generation of investors, traders,
savers, and policymakers. The Federal Reserve has tried to push the U.S. into a
higher-rate regime, raising rates nine times since 2015, when the key
short-term rate was near zero. But now the central bank appears ready to
reverse course and start cutting again when it meets at the end of July.
Anne Walsh, chief investment officer of fixed income
at Guggenheim Partners, says there’s been “a paradigm shift of epic proportion
for investors.” Not only are short-term rates low, but long-dated bond rates
are minuscule, too, suggesting that investors see little likelihood of
rates—and the economic conditions they reflect—changing anytime soon.
Borrowers of all kinds have been clear benefactors of
this sea change, with many nations and companies locking in low rates for as
long as a century. Belgium and Ireland have sold 100-year bonds, as did Austria
this year at a yield of 1.171%. In 2015, Microsoft Corp. sold 40-year bonds and
the University of California issued 100-year debt. Subdued rates have also
buffered the U.S. Treasury from rising interest costs on the federal debt.
Individuals have had to get used to earning paltry
rates. The national average rate on savings accounts is 0.10%, little changed
from four years ago and down from 0.30% in 2009, according to data from
Bankrate.com. In 2000, well before the financial crisis, the rate was 1.73%.
The problem is the same for institutions that manage
savings on behalf of others. Pension funds, overseeing trillions in retirees’
future cash, have been ratcheting down return expectations. The 30-year
Treasury bond, a favored debt security, yields about 2.5%—compared with an
average 6.5% since the 1970s. Even a record rise in stock prices hasn’t solved
the low-return problem for pension funds, because many of them cut their
allocations to equities after the financial crisis.
Where low rates really bite isn’t in current returns
but in the future gains investors can reasonably expect. Interest rates set a
kind of baseline for the return on all assets. As they fall, bond values rise
and stocks often do, too. But once rates have settled at or near rock bottom,
there’s less room for that kind of price appreciation.
While some Fed officials wish they could get back to
more-normal rates, so they have more room to ease again in the future if they
need to fight a downturn or fresh financial crisis, they seem to have their
hands tied. For all the problems low rates may cause, policymakers see them as
a stimulant to growth. Although unemployment rates are very low, the economy
took an agonizingly long time to recover from the financial crisis. And now a
slowdown in global growth and headwinds from Trump’s trade war have made risks
to U.S. output too strong to ignore.
The surprising persistence of low rates has even
quietly reordered the hierarchy on Wall Street. Hedge fund managers may still
be glamorous on shows like Billions, but in real life they’ve had to fight to
retain clients. Partly that’s because many hedge fund managers thrive on
volatility, and in a world where the dreaded spike in interest rates has never
arrived, there’s been too little of that for them. The long fall in rates has
made it easier so far to earn money with simple investments such as stock and
bond index funds. Meanwhile, cheap financing costs and rising asset values have
been a boon for private equity firms. Investors have committed about $4
trillion to them in the last decade, according to data from research firm
In 2009, bond powerhouse Pacific Investment
Management Co. saw all this coming, when they dubbed their multiyear investment
outlook “the new normal” and predicted lower long-term yields. They saw the
same issues the Fed and central bankers around the world are grappling with
now: slow growth, a combination of technological innovation and low-cost global
labor that eases inflationary pressure, and a glut of savings as the
populations of rich countries age. Looking ahead, with many of those 2009
factors remaining, “the new wrinkle is concern around global trade and
countries looking more inward,” Pimco Group Chief Investment Officer Dan
Ivascyn says. “Yields can absolutely go a lot lower.”
“Naspers, the South African media company that is one of the biggest shareholders in Tencent, said that it would sell down part of its stake in the Chinese technology giant for the first time in almost two decades.”
“In a statement on Thursday, Naspers said that it would sell stock worth more than $10bn, equivalent to 2% of the shares in Asia’s biggest company by market capitalization, to fund investments elsewhere.”
“The transaction would reduce Naspers’ stake in Tencent, the world’s biggest gaming company and the owner of China’s WeChat and QQ social networks, from 33% to 31%.”
“Naspers added that it did not plan to sell any more of its Tencent shares for at least the next three years.”
“But even Thursday’s limited sell down is a landmark for what has been one of the most successful venture capital investments in history, and comes as Hong Kong-listed Tencent shifts strategy after years of explosive growth.”
“Naspers’ investment of $32m in Tencent in 2001, now worth $175bn, powered its rise from a publisher and pay-TV operator to Africa’s biggest company by market capitalization.”
Approximately a 65.91% compound growth rate over 17 years. How do you like them apples?
“According to the Real Estate Board of Greater Vancouver, single detached homes in Vancouver (on a local currency basis) have risen from approximately $400K CAD to $1.75 million CAD since 2002. That’s a 337% increase in 15 years. With incredibly fast rising prices, a large portion of the population is engaged in real estate brokerage, real estate development, construction, renovations, and everything that goes along with that. The echoes of Phoenix, Las Vegas, and San Diego from 2006 cannot be ignored.”
“…Taxation and interest rates are going higher. Cap rates on rentals or commercial properties are shockingly low (think 1% to 3% in most circumstances). In fact, Canada’s price-to-rent ratios are now well above what they were in the U.S. during the 2006 housing debacle. According to the Bank of Canada, 47% of Canada’s mortgages will reset in the next 12 months. To put that in perspective, a five-year fixed mortgage rate in Canada averages approximately 5.14%. This is 11% higher versus the 4.64% that it averaged for most of the past 2 years.”
“As part of the budget that New York lawmakers passed last Friday, ride-hailing services and taxis face a new fee if they drive in Manhattan. These aren’t nickel-and-dime increases, either: Uber, Lyft and the like face a $2.75 charge for each ride, taxis get a $2.50 increase and group ride services like Via and uberPOOL will be charged $0.75 per customer. It’s meant to combat congestion and help fund subway repair and improvements, providing an expected $400 million per year going forward for the MTA.”
“Unsurprisingly, it’s already catching flak from customers and from taxi drivers, who have become far outnumbered by ride-sharing cars in the last several years. Of the 103,000 vehicles for hire in NYC, 65,000 are driven by Uber contractors alone, while taxis remain capped by law at 13,600, The New York Times reported. As a result, average traffic in Manhattan has slowed from 6.5 miles per hour to 4.7.”
“Other cities have enacted their own surcharges for ride-hailing services in recent years, but they are far lower than those New York just passed. Seattle instated a $0.24 charge for each trip in 2014, Portland, OR agreed to levy a $0.50 fee per customer in 2016, both of which funnel money collected toward regulating ride-sharing services. Chicago passed one in 2014 that will reach $0.65 this year and directs part of the funds raised toward public transit, much like New York’s will.”
“Walmart is expanding its money transfer operation to 200 countries, the latest move in the retail giant’s slow but steady push into financial services.”
“Through the new scheme, people will be able to deliver money from Walmart’s nearly 5,000 US stores to locations abroad within 10 minutes, the company said.”
“Arkansas-based Walmart first unveiled a money transfer service four years ago, allowing customers to send funds between its stores, and aiming to reach the “underbanked” — about 27% of Americans have limited access to traditional banking, according to the Federal Deposit Insurance Corporation. Walmart claims it has saved customers $700m in fees because it charges cheaper rates.”
“The retailer has partnered with MoneyGram, one of the big wire transfer groups, to expand globally this month. The service will allow US residents to send money to countries such as Mexico, which received nearly $30bn in remittances last year, according to Mexico’s central bank.”
“Walmart’s push into money transfers comes a few months after it announced it was partnering with PayActiv and Even, two financial-technology firms, to offer its 1.4m US employees tools for money management and on-demand access to their earned wages.”
“The moves suggest the retailer may see itself as a partner of the big financial services companies rather than a direct rival going head to head with basic products such as checking accounts or credit cards.”
“The number of co-op and condominium sales in Manhattan fell nearly 25% during the first quarter compared to the same period last year, according to new research by Miller Samuel real estate appraisers and Douglas Elliman real estate brokers.”
“It was the largest annual decline in sales in nine years, according to the report.”
“The average sale price across Manhattan fell by 8.1% from the year-earlier quarter, and the average price per square foot also recorded a sharp decline, falling by 18.5% to $1,697.”
“Luxury apartment sales, considered the most expensive 10% of all properties, were hit particularly hard, as were new developments.”
“The average sales price of a luxury apartment fell 15.1%, down from $9.36m in the first quarter of 2017 to $7.94m in the first quarter of this year, and the number of sales was down 24.1%. The number of newly built apartments that went into contract fell 54%.”
WSJ – Daily Shot: Black Knight – Mortgage Equity 4/3
“Turning to consumer credit, how much borrowing capacity do households have against their homes? The answer is $5.4 trillion. $2.8 trillion of that capacity is with borrowers who have the highest credit scores.”
WSJ – Daily Shot: Black Knight – Hurricane-related mortgage delinquencies in Florida and Puerto Rico 4/3
WSJ – Daily Shot: Deutsche Bank – Countries with Negative-Yielding Bonds 4/3
“After decades of urbanization and rural neglect, China’s Communist party is seeking to revitalize the countryside, where wages and standards of living have stagnated compared with those of big cities.”
“When China’s premier Li Keqiang recently vowed progress on a property tax intended to rein in home prices, it signaled to the country’s real estate developers that more than a decade of double-digit growth would soon end.”
“Facing slowing growth in their core business, top developers are betting on the education market, building and operating international schools for tens of thousands of students.”
“The country’s three biggest property developers — Country Garden, Evergrande and Vanke — have seen sales slow in the first quarter of this year, according to an industry ranking compiled by research agency China Real Estate Information Corp. Meanwhile, home price growth has dipped following a clampdown on lending and property speculation.”
“That has already made a dent in developers’ financials. Dalian Wanda reported a revenue drop of almost 11% in 2017 while other residential developers are girding for longer-term impact. JPMorgan Chase has forecast as much as a 6% decline in mainland Chinese home sales this year.“
“Now developers are ‘looking at other sectors in which to invest in order to get the returns that they need to continue growth’, says John Mortensen, regional director of real estate investment and management company JLL, which often works with universities.”
“Meanwhile, China’s education market is booming. The sector will grow from Rmb1.64tn ($261bn) in revenue in 2015 to Rmb2.9tn ($461bn) in 2020, according to Deloitte, with particularly high demand for English-language curriculums.”
“Amid fierce competition to get into good universities at home and overseas, proximity to a good school is often a key factor in determining Chinese property prices. A 2012 study of Shanghai housing found that prices were more than 40% higher in top-rated school districts.”
“That has prompted residential developers to build new complexes with schools within walking distance of apartments, hiring or building in-house education teams to recruit teachers and design bilingual curriculums.”
“Guangzhou-based Country Garden, China’s top residential developer by sales, is now also among the country’s biggest private education providers. Its education subsidiary, Bright Scholar, runs 52 bilingual international schools that each offer a full education from kindergarten to secondary school. Bright Scholar listed on the New York Stock Exchange last year, raising more than $150m.”
“Vanke Group, China’s second biggest residential developer by sales, set up its own education group in 2015 as part of a strategic shift aimed at offering a ‘full ecology’ to families.”
“Dalian Wanda is another property group with a growing interest in schools — its children’s education and entertainment group almost tripled its sales last year even as the group’s total revenues fell more than 10%.”
“About a week after Mr. Modi grinned for the cameras with the prime minister, a state-run Indian bank told regulators that it had found nearly $1.8 billion in fraudulent transactions linked to the jeweler’s account. Indian officials now accuse Mr. Modi, his family and business associates of assembling a global empire with nearly $3 billion in money obtained illegally, mostly from government-run banks. He denies wrongdoing.”
“For many Indians, the allegations against Mr. Modi further cement the notion that taxpayer-owned banks are footing the bill for the lavish lifestyles of a rising elite. That idea has particular resonance in a country where stark poverty — India is home to a third of the world’s poorest people — remains dire.”
“Just a decade ago, during the global financial crisis, Indian lenders were held up as a bastion of stability. Today, they are considered more vulnerable than those in other leading emerging markets, mostly because state-controlled lenders dominate the sector, according to the International Monetary Fund.”
“Of the $6.5 billion in fraudulent loans that have hit the industry over the past two years, the most egregious cases were at government-owned banks, according to figures released by Parliament. Executives at those lenders are more likely to be appointed for their political connections than for their talent, financial analysts say.”
“Russia’s central bank is to create a ‘bad bank’ to ringfence Rbs1.1tn ($19bn) in toxic assets from three nationalized top-10 lenders, vastly increasing the total bill for bailing them out.”
“Vasily Pozdyshev, a deputy central bank governor, told Russian news agencies on Monday that the central bank would transfer assets from three collapsed banks into Trust, another failed lender.”
“Taxpayers are footing the largest bank rescue bill in Russia’s history to fund the central bank’s takeover of three privately held banks last year to stave off a collapse in the sector.”
“The largest of them, Otkritie, was Russia’s biggest privately held bank by assets until it was nationalized in August. The central bank then nationalized B & N Bank, another top-10 lender, and Promsvyazbank to stop them from going under.”
“Under Ms Nabiullina (Elvira Nabiullina, Russian central bank governor), the central bank is conducting an unprecedented clear-up of the sector under which it has wound down more than 300 banks since 2013. To rescue the three top-10 lenders, however, Ms Nabiullina had to create a separate bailout mechanism that allowed the central bank to take direct stakes in their capital.”
“The pipeline is Russia’s most ambitious, costly and geopolitically critical energy project since the fall of the Soviet Union, and represents a $55bn bet on uncharted territory by the world’s biggest gas company.”
“Russia’s first eastern pipeline is the most striking physical manifestation of President Vladimir Putin’s diplomatic pivot towards China amid rapidly worsening relations with the west. It is the biggest and most critical element in a suite of energy deals, funding packages and asset sales that seek to warm a once frosty relationship.”
“For Gazprom, the Kremlin-controlled gas export monopoly behind the pipeline, the mega-project is the largest and most expensive in its history. When the taps are switched on in December 2019, the world’s largest gas exporter will be connected for the first time with its largest energy importer.”
“This year’s box office so far has been a story of one completely dominant movie, ‘Black Panther,’ highlighting a potentially troubling trend for Hollywood in which ticket sales are increasingly concentrated among just a few ultra-successful pictures.”
“With $650.7 million and counting, ‘Black Panther’ is on track to become the third highest grossing movie ever in the U.S. and Canada. It accounted for 23% of all ticket sales in the first three months of the year, ending Saturday, according to comScore. That is the second-highest percentage ever behind only ‘Titanic,’ which took 25% in the winter of 1998.”
“’Black Panther’ is an extreme example of the trend that Hollywood has been struggling with for some years. In 2015, 2016 and 2017, the top 10 movies raked in between 32% and 35% of total box office, comScore said. Previously, that figure never exceeded 30%. So far this year, it is 58%.“
“After a decade as one of the world’s hottest housing markets, Toronto is moving in two directions. Transactions have certainly cooled since May as the government introduced new rules to tame runaway prices. But the impact has been largely on big, expensive detached homes, with sales plunging 41% in February from a year earlier, and prices dropping 12% since hitting a record last year. Condo prices, in contrast, soared about 20% since last February.”
“The deviation is largely as a result of mortgage regulations that went into effect on Jan. 1 as well as rising interest rates. The rule requires that even people with a 20% down payment, who don’t require mortgage insurance, prove they can make payments at least 2% points above the rates under which they go into contract.”
“That’s pushing buyers out of the detached segment and right into the condo market.”
“Thousands of online lenders could be facing extinction as China rolls out a new licensing framework, amid complaints about a lack of clarity on how the regime will work.”
“P2P platforms match borrowers with investors online. China’s P2P lending industry recorded transactions valued at $445bn in 2017, according to Online Lending Club, a data company.”
“Many P2P lenders, including one of the largest, Hongling Capital, were weeded out in crackdowns in 2016 and 2017 after agencies reporting to China’s central bank began closing fraudulent platforms and those selling high-interest loans.”
“Of more than 6,000 online lending platforms launched over the past several years, fewer than 2,000 were still in operation at the end of February, according to Online Lending House, a data provider — a sign of how regulation, competition and fraud have thinned the industry’s ranks.”
“As part of the regulatory overhaul, P2P lenders are barred from guaranteeing principal or interest on loans they facilitate; are limited to loans of no more than Rmb1m ($159,000) for individual borrowers and Rmb5m for companies; and must use custodian banks.”
“After years of delay and quiet opposition from vested interests, China will push ahead with a property tax that is viewed as crucial to taming the country’s housing bubble.”
“House prices in major Chinese cities are among the highest in the world in terms of price-income ratios, with speculative demand from Chinese investors — who see few other good places to park their savings — as a major driver. The result is an estimated 50m empty homes, according to a broad survey by researchers from Southwestern University of Finance and Economics in Chengdu.”
“A landmark blueprint for economic reform that the Communist party leadership approved five years ago included a pledge to push ahead with a property tax. But a subsequent slowdown in the economy, including a housing-market downturn in 2014-15, prompted authorities to shelve those plans.”
“Quiet opposition from wealthy urbanites, including government officials who own multiple homes, also hindered progress.”
“’When will the tax actually come out is difficult to say, but at least the intention has strengthened,’ said Chen Shen, head of property research at China Securities in Shanghai. ‘Two years ago everyone was discussing whether it would ever happen, but now it’s very clear that it will’.”
WSJ – Daily Shot: @NickTimiraos – Change in Home Prices – Japan & U.S. 4/2
“The problem with Uber was never that the chief executive had created a thuggish ‘Game of Thrones’-type culture, as Susan Fowler, an engineer, described it in a blog post. The problem was, and still is, Uber’s business model: Its modus operandi is to subsidize fares and flood streets with its cars to achieve a transportation monopoly. In city after city, this has led to huge increases in traffic congestion, increased carbon emissions and the undermining of public transportation.”
“Most customers who love Uber don’t realize that the company subsidizes the cost of many rides. This is likely a major factor in Uber’s annual losses surging from 2.8 billion in 2016 to $4.5 billion in 2017. This seemingly nonsensical approach is actually Uber’s effort to use its deep pockets to mount a predatory price war and shut out the competition. That competition is not only taxis and other ride-sharing companies, but public transportation.”
“Ridership on public transportation is down in nearly every major American city, including New York City (which recorded its first ridership dip since 2009). This is hurting the revenue that public transportation needs to sustain itself. Uber passengers and public transportation users alike now find themselves stuck in heavy traffic for far longer because of what’s been called ‘Uber congestion.’ In Manhattan, there are five times as many ridesharing vehicles as yellow taxis, which has caused average speeds to decline by 15% compared with 2010, before Uber.“
“Ride-sharing services could potentially add something positive to our transportation options, but only if they are regulated properly.”
“First, regulators should limit the number of ride-sharing cars. Traditional taxis already have a sensible limit to minimize congestion. A balance must be found between having enough taxi-type vehicles but not so many that the streets are choked with traffic. Fix NYC, a panel appointed by Gov. Andrew Cuomo of New York, has called for all Ubers, Lyfts and taxis to be outfitted with GPS technology to track congestion and to charge a fee on for-hire vehicles that could help reduce traffic and generate hundreds of millions of dollars for public transportation.”
“Second, Uber should be prohibited from subsidizing its fares. It should be required to charge at least the true cost of each ride. If Uber refuses, a ‘fairness fee’ should be added to each fare.”
“Third, ride-sharing companies and their vehicles should be required to follow the same laws as traditional taxis, especially in terms of background checks for drivers and insurance requirements.”
“Fourth, Uber should be required to share its data with regulators, including information about its drivers and their contact information, so that members of this ‘distributed work force’ can more easily contact one another and organize collectively if they choose.”
“Finally, regulations should ensure that Uber treats its drivers fairly. Mr. Khosrowshahi asserts that drivers’ wages are adequate, but according to one study, more than half of Uber drivers earn less than the minimum wage in their state, and some even lose money once the costs of driving are taken into account. That helps explain why, according to Uber’s own internal study, half of its drivers leave after a year.”
“The three-month London interbank offered rate climbed to 2.29% in the U.S. on Monday, its highest since November 2008. Libor measures the cost for banks to lend to one another and is used to set interest rates on roughly $200 trillion in dollar-based financial contracts globally, from corporate loans to home mortgages.”
“Libor has been rising for the last 2½ years as the Federal Reserve lifts its key policy rate, but recently the pace has picked up. It has climbed nearly a full percentage point in the last six months—outpacing the Fed—and could rise further with the approaching end of the quarter, typically a time of elevated demand for short-term funds in the banking sector, analysts say.”
“Demand for dollars at the end of the first quarter could send Libor up an additional 0.2 percentage point in the coming days, market analysts say, as investors rebalance their portfolios and banks rein in their balance sheets. The end of March also marks the finish of Japan’s fiscal year, potentially compounding the moves as big investors bring money back to Japan.”
“Libor has already sprinted ahead of the rates indicated by central bank policies, an acceleration that has baffled economists and traders. That widening gap has alarmed those who watch it as a signal of stress in the financial system. Others have pinned it on a series of technical factors, such as rising short-term debt sales by the U.S. government and new corporate tax policies.”
“Other markets that can be tapped for dollars—including through the swaps market and liquidity lines maintained by global central banks—aren’t yet showing a big dollar squeeze.”
“House prices are falling in two out of five London postcodes, according to research that underlines the growing divergence between prices in southern English cities and those elsewhere in the UK.”
“The average annual rate of price growth in the capital has slowed to 1%, down sharply from 4.3% a year ago, meaning it is at its lowest level since August 2011, according to research by Hometrack, a housing market analyst. This stands in contrast to UK-wide average house price growth of 5.2% in the year to February 2018, up from 4% a year ago.”
“Prices are under greatest pressure in central London, where owners of the most expensive types of property began cutting prices in 2015 responding to the impact of higher taxes. In the past year, however, the trend has deepened in areas beyond the prime zones of Westminster and Kensington & Chelsea. The boroughs that saw the greatest drop in value were the City of London, Camden, Southwark, Islington and Wandsworth, according to Hometrack’s research.”
“Hometrack is predicting that the number of areas of the capital experiencing falling house prices will multiply during this year as trapped sellers reduce their asking prices to drive through transactions. ‘The net result will be a negative rate of headline price growth for London by the middle of 2018,’ the research said.”
“Outside southern England, house prices are more likely to be rising, in some places at a substantial pace. Edinburgh, Liverpool, Leicester, Birmingham and Manchester are adding more than 7% a year to their average house price, Hometrack found, with Leeds, Nottingham and Sheffield pegging rises of 6% or more.”
“The laggards in the 20-city index were Aberdeen (down by 7.7%), Cambridge (down by 1.5%) and Oxford (up by just 0.5%).”
“Last year, 37% of mortgage-origination volume was because of refinancings, according to industry research group Inside Mortgage Finance. That is the smallest proportion since 1995, and the number of refinancings is widely expected to shrink again this year. In 2012, refinancings were 72% of originations.”
“While purchase activity has climbed steadily from a post-financial-crisis nadir in 2011, growth in 2017 wasn’t enough to offset a $366 billion decline in refinancing activity. The result: The overall mortgage market fell around 12%, to $1.8 trillion, according to Inside Mortgage Finance.”
“What’s more, there are fewer homeowners eligible to refinance because of rising rates. The number of borrowers who could benefit from a refinancing is down about 37% from the end of last year, estimates Black Knight Inc., a mortgage-data and technology firm. At 2.67 million potential borrowers, this group is at its smallest since 2008.”
“Home-purchase activity has so far been holding up. Sales of previously owned homes in February rose 1.1% from a year earlier, countering worries that a downturn the previous month signaled a peak for the market.”
“Still, rising interest rates, a shortage of housing inventory and higher home prices are all long-term threats to purchase activity.”
“For refinancings, rising rates are a more immediate worry. Freddie Mac said last week that the average rate on a 30-year fixed-rate mortgage was 4.45%, up from 3.95% at the beginning of the year.”
“The Mortgage Bankers Association expects mortgage-purchase volume to grow about 5% in 2018 but refinancing volume to drop 27%. Refinance applications fell 5% in the week ended March 16 from the prior one, according to the group.”
“The numbers came in earlier this month on Maine’s 2017 lobster harvest. By historical standards, the 110.8 million-pound, $434 million haul was pretty spectacular. But it was a lot lower than 2016’s 132.5 million-pound, $540 million record, and it was another sign that the Great Lobster Boom that has surprised and delighted Maine’s lobster fishermen since the 1990s — and brought lobster rolls to diners from coast to coast — may be giving way to … something else.”
“The lobster boom does not seem to be the result of overfishing; Maine’s lobster fishermen figured out a set of rules decades ago that appear to allow them to manage the catch sustainably. There are just lots and lots more lobsters off the coast of Maine than there used to be. Why? In a column last spring, I listed four reasons that I’d heard during a trip to Maine:”
“Warmer temperatures in the Gulf of Maine.”
“A collapse in the population of cod, which eat young lobsters.”
“Reduced incidence of a lobster disease called gaffkemia.”
“Increased effort and efficiency on the part of lobstermen, who go farther offshore and can haul in more traps in a day than they used to.”
“Given how quickly the lobster harvests grew, though, especially from 2007 through 2012, it’s hard not to wonder whether they might not eventually collapse. They already have in several states farther down the Atlantic coast. Lobster landings were still on the rise as of 2016 (data aren’t available yet for 2017) in New Hampshire and Massachusetts but peaked in Rhode Island in 1999, Connecticut in 1998, New York in 1996 and New Jersey in 1990.”
“So that’s some evidence for the warming-ocean-temperatures theory of the lobster boom. This would imply that eventually even the oceans off Maine will get too warm, although it doesn’t give much of a hint as to when.”
Check the link for some very insightful interactive graphics.
“Black boys raised in America, even in the wealthiest families and living in some of the most well-to-do neighborhoods, still earn less in adulthood than white boys with similar backgrounds, according to a sweeping new study that traced the lives of millions of children.”
“White boys who grow up rich are likely to remain that way. Black boys raised at the top, however, are more likely to become poor than to stay wealthy in their own adult households.”
“Most white boys raised in wealthy families will stay rich or upper middle class as adults, but black boys raised in similarly rich households will not.”
“…Hyun Song Shin, research chief at the Bank for International Settlements, warned in a 2014 speech against the tendency to ‘focus on known past weaknesses rather than asking where the new dangers are.’ Banks may be stronger than a decade ago, but the financial system hasn’t returned to its pre-1980 repressed state.”
“Mr. Shin pointed out that bond markets are growing at the expense of banks in supplying credit, enabling business and government debt loads in many countries to surpass their pre-crisis peaks. Emerging markets have borrowed heavily in dollars, which leaves them vulnerable should the dollar’s value rise sharply. Before the crisis, 80% of investment-grade corporate debt world-wide yielded more than 4%; as of last October, less than 5% did, according to the International Monetary Fund.“
“Total U.S. debt, at around 250% of GDP, still stands at crisis-era peaks while debt levels in China have caught up and passed the U.S., according to the BIS. U.S. companies’ debts had reached 34% of assets by the end of 2016, the highest at least since 2000. Debt-servicing burdens haven’t risen commensurately thanks to low inflation and low rates, but they have begun climbing. More than $1 trillion a year still flows into emerging markets each year, according to the Institute of International Finance.”
“This tells us little about when or where a crisis will happen or what may trigger it. Crises surprise because they usually start with an assumption so sensible that everyone acts on it, planting the seeds of its own undoing: in 1982 that countries like Mexico don’t default; in 1997 that Asia’s fixed exchange rates wouldn’t break; in 2007 that housing prices never declined nationwide; and in 2011 that euro members wouldn’t default. James Bianco, who runs his own financial research firm in Chicago, speculates that the equivalent today might be, ‘We will never see higher inflation or higher growth.’ If either in fact occurs, the low interest rates that have raised household stock and property wealth to an all-time high relative to disposable income won’t be sustainable.”
“Mr. Rogoff (Kenneth Rogoff, Harvard University economist) concurs: ‘It’s much harder to get a crisis when you can borrow for virtually nothing and keep rolling it over.’ A 1.5 to 2 percentage point increase in real interest rates, which he isn’t forecasting, would be small by historical standards but could potentially make the debts of Italy or Portugal unsustainable.”
“Central banks know this, of course, which is one reason they are wary of raising interest rates too quickly—while nervous that if they raise them too slowly, the problem will get worse.”
“Nearly 4m barrels a day of US crude is expected to hit export markets by the mid-2020s, up from just over 1m b/d in 2017, meaning it will ship similar levels to Iraq and Canada, according to consultancy Wood Mackenzie. The industry is debating whether the world will be able to absorb these volumes and how global crude flows will redirect.”
“China surpassed the UK and the Netherlands to become the second-largest destination for US crude oil exports in 2017, accounting for a fifth of the 527,000 b/d total year-over-year increase in foreign sales. Chinese refiners say the trend will continue as Beijing seeks to partially address US president Donald Trump’s complaints about the trade deficit between the two countries.”
“The International Energy Agency forecasts that the US will cover most of the world’s demand growth over the next three years. As US supply surges, the world’s need for Opec’s crude is forecast to fall below current production rates in 2019 and 2020.”
WSJ – Daily Shot: US 3-Month LIBOR 3/18
“The US 3-month LIBOR reached 2.2% for the first time in nine years.”
“The price of ether, the cryptocurrency of the Ethereum network, has fallen below $500 for the first time this year. The decline comes days after a senior official from the Securities and Exchange Commission acknowledged that the agency had ‘dozens’ of open investigations into initial coin offerings. The price of ether has fallen 19 percent in the last 24 hours, from $580 to $470.”
“Africa attracted more Chinese state lending for energy infrastructure than any other region last year, highlighting Beijing’s view of the continent’s growing economic and strategic importance.”
“A study by Boston University academics shows that nearly one-third, or $6.8bn, of the $25.6bn that China’s state-owned development banks lent last year to energy projects worldwide went to African countries. This was ahead of south Asia, with $5.84bn.”
“The loans bring total Chinese energy finance in Africa since 2000 to $34.8bn. While this is well behind the $69bn lent in Europe and Central Asia, the $62bn in Latin America and the $60bn in Asia over the same period, the 2017 data illustrate Africa’s growing importance.”