Tag: Interest Rates

April 10, 2017

If you were to read only one thing…

The US college debt bubble is becoming dangerous. Rana Foroohar. Financial Times. 9 Apr. 2017.

“Rapid run-ups in debt are the single biggest predictor of market trouble. So it is worth noting that over the past 10 years the amount of student loan debt in the US has grown by 170%, to a whopping $1.4tn — more than car loans, or credit card debt. Indeed, as an expert at the Consumer Financial Protection Bureau recently pointed out to me, since 2008 we have basically swapped a housing debt bubble for a student loan bubble. No wonder NY Federal Reserve president Bill Dudley fretted last week that high levels of student debt and default are a ‘headwind to economic activity.'”

“In America, 44m people have student debt. Eight million of those borrowers are in default. That’s a default rate which is still higher than pre-crisis levels — unlike the default rate for mortgages, credit cards or even car loans.”

“Rising college education costs will not help shrink those numbers. While the headline consumer price index is 2.7%, between 2016 and 2017 published tuition and fee prices rose by 9% at four-year state institutions, and 13% at posher private colleges.”

“The average debt load individual graduates carry is up 70% over the past decade, to about $34,000.”

“Growing student debt has been linked to everything from decreased rates of first time home ownership, to higher rental prices, to lower purchases of white goods and all the things that people buy to fill homes. Indeed, given their debt loads, I wonder how much of the ‘rent not buy’ spending habits of Millennials are a matter of choice.”

“But there are even more worrisome links between high student debt loads and health issues like depression, and marital failures. The whole thing is compounded by the fact that a large chunk of those holding massive debt do not end up with degrees, having had to drop out from the stress of trying to study, work, and pay back massive loans at the same time. That means they will never even get the income boost that a college degree still provides — creating a snowball cycle of downward mobility in the country’s most vulnerable populations.”

“How did we get here?”

Essentially, “beleaguered governments are pushing more and more of the responsibility for the things that make a person middle class — education, healthcare and pension — on to individuals.”

“What are the fixes? For starters, we should look closely at the for-profit sector, where default rates are more than double those at average private colleges. These institutions receive federal subsidies but typically spend a minuscule part of their budgets on instruction; in the US, nearly 50% goes on marketing to new students. It looks all too much like an educational Ponzi scheme.”

“Transparency is also key — the student loan market as a whole is hopelessly opaque. In one recent US study, only a quarter of first year college students could predict their own debt load to within 10% of the correct amount.  Truth in lending documents would help, as would loan counselling paid for by colleges. Sadly, the agency that is leading the fight on both — the CFPB — is under attack from Trump himself.”

“But the administration will not be able to hide from the student debt bubble. In an eerie echo of the housing crisis, debt is already flowing out of the private sector, and into the public. Before 2007, most student loans were underwritten by banks or other private sector financial institutions. Today, 90% of new loans originate with the Department of Education. Socialization of risk continues to be the way America deals with its debt bubbles. “

“Would that we considered making college free, as Bernie Sanders suggested. Even Mr. Dudley called this ‘a reasonable conversation.’ That way we could socialize the benefits of education too.”

More perspective: NYT – Loans ‘Designed to Fail’: States Say Navient Preyed on Students – Stacy Cowley and Jessica Silver-Greenberg 4/9

Worthy Insights / Opinion Pieces / Advice

NYT – The Gig Economy’s False Promise – The Editorial Board 4/10

  • “In reality, there is no utopia at companies like Uber, Lyft, Instacart and Handy, whose workers are often manipulated into working long hours for low wages while continually chasing the next ride or task. These companies have discovered they can harness advances in software and behavioral sciences to old-fashioned worker exploitation, according to a growing body of evidence, because employees lack the basic protections of American Law.”

WSJ – Should the Social Security Trust Fund Be Allowed to Invest in Stocks? – Alicia Munnell (Boston College) and Michael Tanner (Cato Institute) 4/9

  • In the argument for and against, “what the two sides generally do agree on is that the Social Security trust fund needs shoring up: According to a trustees’ report from last year, the fund is on track to run dry around the mid-2030s, at which point the program would be able to pay out only about 75% of promised benefits.”

Atlantic – What in the World Is Causing the Retail Meltdown of 2017? – Derek Thompson 4/10

  • “Finally, a brief prediction. One of the mistakes people make when thinking about the future is to think that they are watching the final act of the play. Mobile shopping might be the most transformative force in retail—today. But self-driving cars could change retail as much as smartphones.”
  • “Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas. CVS could have hundreds of self-driving minivans stocked with merchandise roving the suburbs all day and night, ready to be summoned to somebody’s home by smartphone. A new luxury-watch brand in 2025 might not spring for an Upper East Side storefront, but maybe its autonomous showroom vehicle could circle the neighborhood, waiting to be summoned to the doorstep of a tony apartment building. Autonomous retail will create new conveniences and traffic headaches, require new regulations, and inspire new business strategies that could take even more businesses out of commercial real estate. The future of retail could be even weirder yet.”

Markets / Economy

FT – Gundlach: appetite for reflation trade will wane further – Eric Platt 4/10

  • “Jeff Gundlach (chief executive of DoubleLine Capital – which manages $105bn on behalf of its clients), the influential bond investor, has warned that appetite for the so-called relation trade will evaporate further in coming months as expectations for an acceleration in US economic growth and inflation are tempered.”
  • Not all that surprising really, and if you’re in the market for a mortgage there should be some relief in pricing (there already has been so far this year).  Then the article goes on to say: “the yield on the 10-year Treasury bond will not be back up to 3% this year, a level he had previously said would spell the end of the bull market. DoubleLine’s founder told investors he believed it would head higher over a longer period and could reach 6% in four or five years.”
  • Come again… please elaborate. No really, the article doesn’t elaborate or link to any reports by Gundlach. Talk about burying the lead.
  • Consider the implications on home pricing if 10-year rates are at 6%. They’re currently at around 4.10% on a 30-year fixed, so about 260bp (basis points) or 2.6% points higher than 10-year rates which are around 2.4%. To translate, if you have a $400,000 mortgage (arbitrary number) you’d be looking at a monthly payment of $1,932.79 at today’s rate.  That same mortgage amount if 30-year fixed rate mortgages hold a similar spread when the 10-year treasury is at 6% would be $3,104.05. A 60.60% increase in the monthly mortgage amount or $14,055.12 additional after tax dollars each year. Or if you could only afford the $1,932.79 monthly payment, then you would only be able to take on a $249,067 mortgage. Presumably that would hurt your purchasing power.
  • Alternatively, consider commercial real estate. If the 10-year moved to 6% in four or five years, what should you be putting in your models for an exit cap rate? Currently the commercial property loans average about 150bp over the 10-year for the primary categories-office, retail, multifamily, and industrial-according to interest rate surveys from Trepp.  Hence, you can buy a going-in cap rate of 5% and have a little spread of 1.10% (110bp) over the cost of your debt.  Fortunately for the last 30 or so years you could model a lower exit cap rate – really accounting for a large part of many investors returns.  Consider if you had to add 350bp to your exit cap rate…
  • Again to translate. Today the idea of purchasing a property that generates $100,000 in triple net (NNN) income-net of all expenses, property taxes, etc.-at a 5% cap rate would imply that you’d be willing to pay $2,000,000 for the property. Okay. What happens if cap rates adjust to maintain a similar spread over the 10-year treasury if it moves to 6%?  Then for the same income you’d want a 8.6% cap or would be willing to pay $1,162,791.  A 41.86% drop in value.
  • Well, the counter argument would be that the economy would have to be cranking along pretty well for the 10-year Treasury rate to move to 6%.  Then some of the effects of the above would be neutralized by increasing incomes, increases in spending, and so on.  However, note that rent from tenants are contracted and increase in defined amounts – so in this case, they’d probably get the better of the landlords – unless there are generous percentage rent terms…
  • Don’t expect this to be a smooth transition, and real estate is not the only industry that relies on a lot of debt capital – think energy…

 

 

Bloomberg – There’s a Big Reason Volatility Might Be Coming Back – Alex Harris 4/8

WSJ – Nothing to Fear but the Lack of Fear in Markets – Steven Russolillo 4/9

Energy

FT – Energy shifts to a buyers’ market – Nick Butler 4/9

  • “Markets have a tendency to swing from side to side. There are times when suppliers can name their prices and times when the advantage is against them. We are the cusp of a major change after half a century of producer control. For the companies involved and their investors this is a hard moment. Some will see it as a cyclical move that will be reversed as demand increases. That is a very risky investment strategy. The better approach for both companies and investors is to assume that we are experiencing a structural shift and that to thrive those involved in the sector must adapt their business model and their investment strategy to a new reality.”

Australia

Rational Radical – Housing bubble is now official, commence arse-covering (panic)! – Matt Ellis 4/7

China

FT – China markets regulator: ‘iron cockerels’ to be dealt with harshly – Hudson Lockett and Jennifer Hughes 4/9

 

FT – HNA’s buying spree surpasses $40bn with CWT deal – Don Weinland, Arash Massoudi, and James Fontanella-Khan 4/9

  • “China’s HNA Group, the small domestic airline operator turned ultra-acquisitive conglomerate, has now struck more than $40bn of deals in little more than two years after announcing plans to buy Singapore logistics provider CWT.”
  • “However, the activity has confounded veteran bankers and China watchers alike, who have raised concerns over its rapid expansion and also questioned its sources of capital for the deals, many of which are done through affiliates. Moreover, the pace of HNA’s foreign dealmaking has quickened in spite of a Chinese clampdown on the flow of capital out of the country since November.”

March 10 – March 16, 2017

Toronto housing market – heads up, your peak has been called. Sometimes money just needs a home (in a foreign country).

First, Happy St. Patrick’s Day!  

Headlines

FT – China tries to restrict access to foreign children’s books 3/10. Hearts and minds.

Bloomberg – Saudi Arabia Says It Has Reversed a Third of Its Production Cuts 3/14. The Kingdom is losing patience with the free loaders.

WSJ – Home Builder Confidence Jumps to Highest Since 2005 3/15. Just like that…

Special Reports / Opinion Pieces

Briefs

  • The team at the Economist put together an interesting article on whether Venezuela’s dictatorship will survive?
    • “Venezuelans are suffering privation previously unheard of in what was once South America’s richest country. According to a study by three universities, 82% of households now live in poverty. That compares with 48% in 1998, when Chavez came to power. The rise in poverty follows Venezuela’s biggest-ever oil windfall. Of the $1tn the regime received in oil revenue, perhaps a quarter was stolen by insiders, according to the International Crisis Group, a think-tank. Infant mortality is rising, and Venezuelans are needlessly dying because of the shortage of medicines. Those who can, leave; perhaps 2m Venezuelans now live abroad.”
    • “To remain in power, Mr. Maduro’s state-socialist regime is extinguishing democracy.”
    • “His new hardline vice-president, Tareck El Aissami, heads a ‘national anti-coup command.'”
    • …
  • Jeevan Vasagar and Gabriel Wildau of the Financial Times covered the hiccup (China capital controls) in the large real estate development project named Forest City at the edge of Malaysia next to Singapore.
    • Resulting from capital controls in China, Chinese property developer “Country Garden has closed its showrooms in mainland China for its flagship $100bn Forest City development” at the southern tip of Malaysia.
    • The project which is scheduled to have its first move-ins next year, is projected to take two decades to develop and will house 700,000 people. The hiccup is that mainland Chinese have accounted for 70% of the buyers to-date.
    • To give a sense of the marketing message, “above the main reception desk [in Shanghai], the project appealed directly to investors looking to move money abroad with the slogan, ‘Preferred selection for overseas asset allocation. Forest City, adjacent to Singapore.'”
    • Bottom line, “capital control measures appear to be having an impact. Outbound foreign direct investment from China tumbled by 36% in January, including an 84% decline in outbound real estate investment by companies.”
  • Alistair Gray and Robin Wigglesworth of the Financial Times highlighted the delicate path the Fed walks in regard to mortgage-backed bonds.
    • “Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing program, but have so far provided few details.”
    • “Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”
    • “The Fed unveiled its mortgage-backed assets scheme at the height of the crisis in November 2008 and began the purchases soon after. Its MBS holdings have since swelled to account for almost a fifth of the entire $8.9tn market. Every month the central bank still buys billions of dollars worth of MBS as it reinvests the proceeds of maturing securities.”
    • Michael Fratantoni, chief economist of the Mortgage Bankers Association expects “all things being equal, just the removal of the ongoing purchases would push up mortgage rates relative to Treasury yields by at least 10 basis points.”
    • It is to be seen how the Fed unwinds itself and how the markets react – get ready.
  • Sarah Mulholland of Bloomberg covered a recent interview with billionaire real estate investor Richard LeFrak and his position that NYC apartment rents need to drop as much as 15%.
    • “Apartment rents in cities such as New York and San Francisco will need to fall as much as 15% for a glut of high-end developments to be absorbed, according to billionaire real estate investor Richard LeFrak.”
    • “New York landlords are already feeling the pinch as renters take advantage of a flood of new buildings to negotiate concessions and price cuts. Rents fell last month for Manhattan apartments of all sizes, the first across-the-board decline in at least four years, as property owners compromised to keep units from going empty.”

Graphics

MarketWatch – The No. 1 stock of the bull market… and 39 others that soared 1,000% – Sue Chang 3/11

WSJ – Daily Shot: Bespoke Investment – S&P 500 Trading Days Since Last 1%+ Decline – 3/13

WSJ – Daily Shot: Natixis – China vs Europe Credit Expansion 2005 – 2016 – 3/13

NYT – The Fed’s Era of Easy Money Is Ending – Neil Irwin 3/13

WSJ – Asset Manager Deal Wave Has Just Begun – Aaron Back 3/14

WSJ – Daily Shot: The falling cost of US shale production 3/14

WSJ – Daily Shot: Pension Partners – Global Central Bank Policy Rates 3/15

WSJ – Daily Shot: National Association of Home Builders Optimism Index 3/15

Metrocosm – The Global Extremes of Population Density – Max Galka 7/22/15

  • “Only 5% of the world’s population lives in the entire blue region. For comparison, the same number of people live in the small red region.”

FT – Chinese private equity: look elsewhere – Lex 3/15

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Toronto’s Housing Bubble Has 24 Months to Live: BMO. Daniel Tencer. Huffington Post Canada. 13 Mar. 2017.

“Desperate homebuyers, take a two-year breather. Housing speculators, take warning.”

“Toronto’s house-price juggernaut is two years away from the sort of peak it reached in 1989, when a housing bubble burst in the city, BMO Economics says.”

“‘At the rate we’re now going with 20% year-on-year price increases, assuming stable mortgage rates and continued income growth, we’ll be at 1989 valuation levels in about 24 months,’ senior economist Robert Kavcic wrote in a note last week.”

Presumably that would imply that Toronto will get there faster if mortgage rates rise and income growth slows/flatlines.

“Toronto’s average house price jumped 27.7% in February from a year earlier, to $859,186. Single-family homes soared to $1.57 million on average, a jump of nearly 30% in a year.”

“The 1989 housing market peak led to a seven-year period of house price declines in Toronto, with prices falling 39% from their 1989 peak by 1996.”

“The most common explanation given by real estate industry insiders for Toronto’s rising house prices is that there is a shortage of housing supply in the quickly-growing city. That’s the argument used by the Ontario Real Estate Association to call for looser density requirements and looser restrictions on urban sprawl.”

However, looser restrictions won’t relieve pressure in the short-term. At this point “house prices are being driven upwards not by a real shortage but by ‘powerful expectational dynamics’ – the belief that prices will continue rising, causing people to rush buying homes.”

Animal spirits…

Searching for sanctuary – Foreign buyers push up global house prices. Economist. 11 Mar. 2017.

One of the offshoots of globalization is that while capital flows generally where it will attain its best return, it also flows to where it feels safe.

“In some places, foreign investment has led to a construction boom. In Miami apartments are being built in numbers not seen since the financial crisis, financed in part by Venezuelan money. Australia lets foreigners invest only in new-build properties, and they do: 26,000 new flats are due on the market in Sydney and Melbourne over the next 18 months. In London 45,000 homes have been built since 2014 – the highest rate in ten years – but locals grumble many are pads for footloose foreigners.”

“In many of these countries affordability looks stretched. The Economist gauges house prices against two measures: rents and income. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable. By these measures house prices in Australia, Canada and New Zealand look high. In America as a whole, housing is fairly valued, but in San Francisco and Seattle it is 20% overpriced.”

“Haven investors may disregard affordability measures. Property can either be a bolthole [place where you can escape to and hide] or earn an income; in many supply-constrained cities its value may rise rapidly; even if not, the risks may be lower than at home… A study in 2016 found that increased political risk in places such as Greece and Syria explained 8% of the variation in London’s house prices since 1998.”

“Policymakers may well scratch their heads [and they do]. It is difficult both to make housing more affordable for a country’s own citizens and to encourage foreigners to buy. Britain has in fact tried to curb foreign enthusiasm with higher taxes, and by publishing a registry of 100,000 British homes owned by foreign companies – a potential embarrassment for some.”

“But unintended consequences lurk. After a 15% levy on purchases from abroad was introduced in the Canadian city of Vancouver last August, the number of foreign buyers dropped by 80%. That helped dampen house-price inflation there but pushed up demand in nearby Victoria. It also deterred highly skilled immigrants. The levy will soon be amended to exclude foreigners on skilled-work visas.”

At times it can be hard to understand how property markets can continue to rise despite a seeming lack of buyers at price points necessary to bring new product to market. Bottom line, people have different motivations for the things they do and spend their money on (even if it means losing some of it).

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

FT – Cheesegrater price expected to spur City of London property sales 3/12

FT – Investors switch tack on distressed Europe debt 3/13

FT – Clampdown puts brakes on Chinese house price boom 3/13

FT – China real estate investment grows at fastest pace in 2 years 3/13

Huff Post (Canada) – Realtor Promises ‘Goldmine’ In Listing Proving Toronto’s Gone Nuts 3/8

Investment News – Investors accuse Nicholas Schorsch of plundering RCAP for own gain 3/10

NYT – After $225 Billion in Deals Last Year, China Reins In Overseas Investment 3/12

NYT – Kushners, Trump In-Laws, Weigh $400 Million Deal With Chinese Firm 3/14

NYT – China Pushes Legal Overhaul That Would Bolster State Power 3/15

WSJ – Hoteliers Cast Airbnb as Fast-Growing Professional Rival 3/9

WSJ – Chinese Banks’ Latest Funding Trick Gets Scrutiny It Deserves 3/13

WSJ – A Split Decision for Neiman Marcus Debt Holders 3/14

WSJ – China’s Amazing Disappearing, Reappearing Infrastructure 3/14

WSJ – As Retailers Go Silent, Big Data Fills the Void 3/15

WSJ – Housing Market Madness: Denver is Now a Worse Deal Than San Francisco For Tech Workers 3/16

 

 

February 24 – March 2, 2017

The insurance industry in China has been good business – too good. What is the magic number for China’s foreign exchange reserves? What gives – why haven’t the share buybacks by US corporates juiced returns (passive investing)?

Headlines

FT – Samsung heir Lee Jae-yong charged with bribery 2/28. Lee Jae-young is actually looking at jail time.

FT – China capital crackdown threatens wave of overseas buyouts 2/27. Dalian Wanda’s $1bn acquisition of Dick Clark Productions is in question even though the argument can be made that it is strategic to its cinema business (AMC, Carmike Cinemas, Odeon & UCI theatres, Legendary Entertainment) and even though it is being made by one of China’s most connected and richest individuals.

WSJ – London’s ‘Cheesegrater’ Sold to Chinese Firm for $1.4 Billion 3/1. Hong Kong property tycoon Cheung Chung Kiu’s CC Land Holdings just stumped £1.15bn up for the Leadenhall Building in London – recently appraised at £915m at the end of September. Well, the office yields in London at around 4.6% are near double the 2.6% in Hong Kong and the yuan is up 12% on sterling since the Brexit vote.

Special Reports / Opinion Pieces

Briefs

  • Robin Harding and Elaine Moore of the Financial Times covered that the Bank of Japan has telegraphed to the world that it plans to keep buying bonds to keep yields at 0%.
    • “The Bank of Japan published detailed schedules of planned asset purchases for the first time on Tuesday as it seeks to prove its commitment to a zero per cent cap on 10-year government bond yields.”
    • “Japan’s central bank said it will buy a minimum of ¥1.375tn and a maximum of ¥2.175tn of government bonds during March, giving a series of dates and estimated sizes for its planned bond auctions at different maturities.”
    • “The BoJ gave a strong hint that its announcement is meant to signal a minimum plan for purchases, rather than a maximum, saying it ‘may increase the frequency as needed.'”
    • “Japan’s 10-year yield is currently trading at 0.04%, having reached 0.11% at one point earlier this month before the BoJ stepped in and offered to buy in unlimited quantity to prevent it from rising any higher.”
    • Bottom line, the BoJ is all-in on maintaining 0% yields and the market can be assured of that.

Graphics

WSJ – Daily Shot: US Total Oil Exports 2/23

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WSJ – Daily Shot: China – WMP Product Investment Categories 2/23

  • “…Pressure on corporate bonds poses risks to Wealth Management Products (WMPs). One could argue that these offerings are a form of Ponzi scheme because when investors redeem their holdings, managers rely on other money to come into the product. If more people redeem than invest, the managers will be forced to liquidate and it’s not clear there will be enough to repay the last guys out.”

wsj_daily-shot_china-wmp-product-investment-categories_2-23-17

WSJ – Daily Shot: Chinese Bank WMP Deposit Percentage 2/23

wsj_daily-shot_chinese-bank-wmp-deposit-percentage_2-23-17

WSJ – Daily Shot: FRED – US Home Price Index v Avg. Hourly Earnings 2/23

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Economist – Longevity in rich countries – The Data Team 2/23

economist_longevity-in-rich-countries_2-23-17

Visual Capitalist – Millionaire Migrants: Countries That Rich People Are Flocking To – Jeff Desjardins 2/24

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WSJ – Daily Shot: Snap Value Progression 3/1

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WSJ – Daily Shot: Maptitude – Largest coffee chains by US County 3/1

wsj_daily-shot_maptitude-largest-coffee-chains-by-county_3-1-17

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

China bans fourth richest man from insurance sector for 10 years. Gabriel Wildau. Financial Times. 24 Feb. 2017.

“China’s fourth richest man [Yao Zhenhua, chairman of Baoneng Group] has been banned from the country’s insurance industry for 10 years, in the most aggressive move yet by regulators to tame borrowing and hostile corporate takeovers by insurers.”

“Much of the funding for Baoneng’s…investments came from investments gathered by its life insurance unit, Foresea Life Insurance, which Mr Yao also chairs.”

“Foresea quickly scaled the premium rankings of China’s life insurance industry by selling so-called ‘universal insurance’ products, which are essentially wealth management vehicles with a small protection component.”

“Insurers are able to offer higher yields than those available on comparable vehicles from banks and other fund managers because they have the freedom to invest in a wider range of assets. Anbang Insurance Group has also relied on sales of universal insurance products to fund a high-profile global shopping spree.”

“But analysts have warned against the strategy. Such products essentially force insurers to seek out risky, high-yielding assets in order to meet future payouts. Analysts are also concerned by a liquidity risk when short-duration products are matched to long-term illiquid assets such as real estate or large equity stakes.”

“Rarely seen in public, Mr Yao was China’s fourth richest man in 2016 with a fortune of $17bn, up more than ninefold from a year earlier, according to the Hurun Report. Local media say he started as a vegetable seller before making his first fortune as a property developer in the freewheeling city of Shenzhen in the 1990s.”

Previously, the China Insurance Regulatory Commission chairman Xiang Junbo had “warned that insurers cannot be ‘ATM machines’ for corporate raiders.”

“Mr Xiang also promised on Wednesday to curb ‘aggressive’ pricing and ‘unreasonably’ high returns on some insurance products. He said insurers should not interfere with the management of listed companies. Instead, the industry should focus on its core function of providing risk protection.”

China curbs capital outflows to keep renminbi stable. James Kynge. Financial Times. 28 Feb. 2017.

“China successfully curbed the flow of money cascading out of the country in January following the imposition of administrative controls, raising the potential for Beijing to prevail in its efforts to keep the renminbi stable against the US dollar this year, analyst said.”

“In January, capital outflows fell to $30bn from $55bn in December, according to estimates by Goldman Sachs, an investment bank.”

“This represented a considerable reduction on the monthly average in a country that has experienced a leakage of $1.2tn between August 2015 and January this year, yielding a monthly average of $71bn.”

ft_china-capital-outflows_2-28-17

“‘Given the still-large size of China’s reserves, this pace of outflows in unlikely to stop the central bank from pursuing its current exchange-rate policy, which can be sustained for another couple of years,’ said Long Chen, analyst at Gavekal Dragonomics, a research company.”

The reasons for the slow down are varied; however, where there is disagreement is on what would be considered a sufficient amount of foreign exchange reserves.

“China’s foreign exchange reserves fell $12bn in January to below the psychologically important $3tn level to $2.99tn, representing almost a $1tn reduction from its level of July 2014.”

“The issue of China’s reserves adequacy has arisen from applying the International Monetary Fund’s new reserve metric to the country.”

“Under this calculation, the proposed minimum reserves for China is $2.7tn…”

“But Brad Setser, senior fellow at the Council on Foreign Relations (CFR), a New York-based think-tank, said that China had ample room to defend its currency.”

“‘The world would be in a better place if there was a broad recognition that China can burn through another $1tn in reserves and, with $2tn still in reserves, be above nearly all metrics of reserve adequacy,’ Mr. Setser wrote in a CFR blog.”

“Jeremy Stevens, Asia economist at Standard Bank, holds a similar view. ‘It seems fair to argue that in terms of foreign exchange reserves, somewhere between $1.56tn and $2.2tn would be adequate for China’s working capital,’ he said.”

It is to be seen what China itself considers the ‘right’ amount of reserves. Regardless, part of the capital curbs have been aimed at encouraging more discretion by Chinese investors and companies in their foreign acquisitions.

“Pan Gongsheng, head of SAFE [State Administration of Foreign Exchange], was quoted as telling a Chinese newspaper this month that some overseas acquisitions by Chinese companies had been carried out with a ‘strong element of blindness.'”

ft_china-direct-investment-flows_2-28-17

US share buybacks punch below their weight. Robin Wigglesworth. Financial Times. 1 Mar. 2017.

In questioning whether corporate share buybacks have been on the whole a net positive, there has been a host of views presented. The concerns being that buybacks are short-sighted, returning cash to shareholders rather than pursuing growth initiatives. The implication being that these companies don’t have sufficient growth opportunities. However, in some cases companies simply have too much cash and recognize that they would do their owners a disservice by holding on to all of it.

“But perhaps the most notable thing about the buyback spree – more than $2tn of shares have been purchased in the past five years – is how it has arguably provided only a modest boost to equity prices, at least compared to the scale of the purchases.”

“Indeed, the share price performance of the most generous and consistent buyback companies paint a surprisingly muddied picture.”

ft_biggest-us-corporate-buyback-programs_3-1-17

“The S&P 500 Buybacks Index has rallied 96% over the past five years, outpacing the broader market’s 73% gain since. This is an outperformance of 2.8% annually. However, next to the sheer scale of the buybacks – the estimated $2tn spent is equal to a tenth of the S&P 500’s current value – it has underwhelmed.”

“Worse, the Nasdaq Buybacks index has even underperformed the broader Nasdaq Composite gauge over the past five years, with the former rising 86.3% and the latter by 90.3% – an annualized undershooting of 1.3%.”

“Goldman Sachs’s chief US equity strategist David Kostin has calculated that buybacks have been the single biggest source of demand for US stocks since the financial crisis, providing a vital pillar of demand at a time when domestic pension funds and foreign investors have largely been selling.”

“For example, last year overseas investors and US pension funds respectively offloaded $148bn and $127bn of American stocks. But US companies snapped up a record $644bn of their own shares, Goldman estimates.”

Further, “Goldman Sachs earlier this year [2017] lifted its forecast for S&P 500 share repurchases from an already lofty $780bn to $800bn.”

So why the muddied outcome… Charles Cara, head of quantitative strategy at Absolute Strategy Research has an “…intriguing reason for what he calls the ‘buyback anomaly’ of share repurchases not proving as big an uplift as the sheer volume would suggest: the rise of passive investing.”

“Passive investment vehicles do not react to share price moves. As equity prices move so do their index weights by an equal amount, provided that the share count remains constant. In other words, if Apple’s shares rise by $10, then an exchange-traded fund need do nothing, as its existing holdings of Apple stock obviously rises by the same amount.”

“Buybacks reduce the numbers of outstanding shares. If those shares rise as a result of the buyback, then an ETF or index-tracking fund – which do not sell to companies buying back their stocks – will find itself overweight compared to its benchmark, and will be forced to sell some of the shares and buy the rest of the stock market to rebalance.”

As Mr. Cara puts it, “buybacks are a prop to the whole stock market, but have a subdued impact on individual stocks because there is a countervailing force from passive investors.”

Other Interesting Articles

The Economist

 

FT – Chinese manufacturing jobs vanish as robots take over 2/23

FT – China seeks baby boom to counter sluggish birth rates 2/24

FT – Private equity losing out to cash-rich buyers on the big deals 2/26

FT – China economic strength allows shift from stimulus 3/1

FT – SF Express chief shakes up China’s rich list as shares soar 3/1

FT – The private equity party is overcrowded 3/1

Guardian – Scraping by on six figures? Tech workers feel poor in Silicon Valley’s wealth bubble 2/27

NewsMax – Yale’s Robert Shiller: Pull Back Now From Overpriced Bull Stock Market 2/24

NYT – Snapchat Founders’ Grip Tightened After a Spat With an Early Investor 2/23

NYT – What Booming Markets Are Telling Us About the Global Economy 3/1

WSJ – Why Chinese Men Are Dying 2/24

WSJ – How Dangerous Is a Stock Market of Mindless Robots? 2/24

WSJ – Trumpflation vs Negative Rates: The Battle Endures 2/28

WSJ – World’s Most Indebted Developer Keeps Piling It On 2/28

WSJ – The Urban Condo Boom Has Reached Its Final Frontier: Detroit 3/1

WSJ – How Chinese Companies Finance Their Ambitions Abroad 3/2

 

February 10 – February 16, 2017

Venezuela having difficulties meeting its oil delivery commitments. REITs backing away from apartments. Chinese companies lending to the tune of $2tn where bankers have pulled back.

Headlines

FT – Alphabet opts to spell out its stock options 2/9. Google recently let slip that it will be treating stock based pay as a cost in its financials (normally relegated to the GAAP footnotes).

FT – Oil and gas discoveries dry up to lowest total for 60 years 2/12. As oil and gas companies have been pulling back on exploration it’s no surprise that new discoveries are down; however, they are yielding more from existing fields.

Special Reports / Opinion Pieces

Briefs

  • Jon Sindreu of The Wall Street Journal illustrated foreigner’s recent dumping of US debt, putting up a test for rates.
    • “Foreign buyers, led by China, are taking a smaller slice of debt issued by the U.S. and other major economies, a change that may test the long-held belief that overseas money has kept interest rates low in the developed world.”
    • “Foreigners are steadily pulling back: As of November, for the first time since 2009, less than 30% of the $20 trillion market for U.S. government debt was held overseas, according to the latest official data, released in January, from the Treasury Department and Federal Reserve. In the U.K., it is now 27%, compared with a record of 36% in 2008. In Germany, it is 49%, down from a peak of 57% in 2014.”
    • wsj_government-debt-held-by-foreigners_2-9-17
    • “In the longer term, the decline in foreign buyers might not matter so much. For countries that print their own currency, bond yields – and thus the price of bonds – are strongly determined by where investors believe central banks will set interest rates in the future. In theory, at least, bonds whose prices are pushed up or down excessively by supply-and-demand forces will eventually correct to correspond to interest-rate expectations.”
    • “In Japan, the central bank now directly fixes 10-year borrowing costs for the government at 0%. There, foreigners own just 9.2% of the government debt market; yet bond yields have stayed at record lows for decades, despite a government debt load amounting to 229% of Japan’s economy that has elicited repeated warnings from ratings companies.”
  • Adding on to Sindreu’s article, Brian Chappatta of Bloomberg discussed how America’s biggest creditors dump treasuries in warning to Trump.
    • “From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it’s the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world’s safest debt market seems less of a sure thing – particularly after the upswing in yields since November. And then there is Trump’s penchant for saber rattling, which has made staying home that much easier.”
    • bloomberg_selling-of-us-treasuries_2-12-17
    • “Nobody is saying that foreigners will abandon Treasuries altogether. After all, they still hold $5.4 trillion, or roughly 43% of the U.S. government debt market. (Though that’s down from 56% in 2008.) A significant drawdown can harm major holders like Japan and China as much as it does the U.S.”
    • “In December, Japanese investors reduced their investments in U.S. debt by 2.39 trillion yen ($21.3 billion) after a smaller pullback in November. While only a fraction of Japan’s $1.1 trillion of holdings, they were the first back-to-back declines since the start of 2014. China, which owns just over $1 trillion of Treasuries, has been selling since May. Its holdings are at a seven-year low.”
    • Bottom line there is too much unpredictability for many foreign investors right now, despite there being clear advantages in the rate spread between foreign and domestic markets.
  • Anjli Raval of the Financial Times highlighted that recently Opec beat oil output cut expectations.
    • “Opec countries drastically curbed their output in the first month of their new production agreement, in the clearest sign to date that the world’s biggest oil producers are committed to living up to the November pact to cut global supplies.”
    • “The limits adopted by the oil cartel in January have been ‘one of the deepest in the history of Opec output cut initiatives’, the International Energy Agency said on Friday.”
    • “The IEA said Opec crude production fell by 1m b/d to 32.06m b/d in January, surpassing expectations at the start of the six-month supply agreement…”
    • The Opec target cut is 1.2m barrels per day.
    • “‘Opec and Saudi get plaudits for month one but there are still five months of the  deal to run,’ said Bill Farren-Price, head of Petroleum Policy Intelligence. ‘It’s unlikely cuts are going to get deeper from here.'”
    • “Opec’s cuts drove a big drop in world oil supplies of 1.5m barrels a day in January. If the cartel maintains its level of compliance, excess inventories should fall by about 600,000b/d during the first half of 2017.”
    • “Even though stockpiles are falling, higher prices have driven an increase in drilling in the US as well as Brazil and Canada, where the IEA expects ‘significant increases in production.’ Non-Opec production, led by US shale oil supply, is forecast to grow by 400,000b/d in 2017 from last year.”
  • Sarah Krouse of The Wall Street Journal covered the milestone that Vanguard just passed $4 trillion in assets under management.
    • “Indexing pioneer Vanguard Group has climbed to $4 Trillion ($4.048tn) in assets for the first time, accentuating a loss of faith among investors in traditional money managers who handpick stocks.”
    • “Of the $533 billion of net flows into all mutual funds and exchange-traded funds last year, 54%, or $289 billion, went to funds managed by Vanguard, according to research firm Morningstar Inc. The fund company’s own tally for the year was even higher, at $322.8 billion.”
    • Similarly, “BlackRock topped $5 trillion in assets late last year for the first time. It has a larger international business than Vanguard.”
    • “Rival firms who have long been synonymous with their star pickers of stocks and bonds have been hurt by years of subpar performance and relatively high fees. Investors pulled a net $340.1 billion from U.S.-based actively managed funds last year, according to Morningstar, while pouring a record $504.8 billion into U.S.-based passively managed funds.”
    • For reference, “Vanguard crossed the $3 trillion threshold in August 2014.”
  • The Data Team over at the Economist illustrated the migration and labor shortages in Asian countries.
    • “Although Asia is home to half the world’s population, it provides only 34% of the total number of emigrants and host a mere 17% of immigrants. Just one-third of Asians who move abroad remain on the continent, and of those, most stick to neighboring countries. This makes it hard to fill jobs in many countries where they are needed, despite a surplus of labor elsewhere.”
    • “The imbalance of workers will only grow more dire as populations get greyer. For now, China is still a net exporter of labor. But during the next 30 years its working-age population is set to shrink by 180m, and it will need 20m more domestic workers. Overall, East Asia would have to import 275m people between the ages of 15 and 64 by 2030 to keep the share of its population at working age steady. Singapore, Malaysia, Vietnam and especially Thailand need workers, while Myanmar, Indonesia and the Philippines have too many. South Asia, meanwhile, could afford to lose 134m  laborers – India alone could send more than 80m abroad – without worsening its dependency ratio. China’s projected shortfall in 2030 is equivalent to 24% of its current working-age population; in Bangladesh the likely surplus is 18%.”
    • economist_asian-migration-and-labor-shortages_2-10-17
  • Kiran Stacey of the Financial Times covered how the number of deaths by air pollution in India is set to surpass those in China.
    • “India is on the verge of overtaking China as the country with the most deaths caused by air pollution, the world’s biggest environmental killer, according to research published on Tuesday.”
    • “In 2015 both countries suffered about 1.1m premature deaths as a result of polluted air, with India just 18,000 behind China, the US-based research organization Health Effects Institute found, making air pollution the fifth-highest cause of death among all health risks.”
    • ft_indias-air-pollution-deaths-to-exceed-chinas_2-14-17
    • “Worldwide, air pollution caused 4.2m deaths in 2015, a 7.5% jump from a decade earlier. Toxic air now kills almost as many people as high cholesterol and even more than excessive sale or being overweight, according to the study.”
  • Laura Kusisto of The Wall Street Journal highlighted a current measure being put forth in Los Angeles that would seek to ban major real-estate developments – at least for a few years.
    • “The second-largest U.S. city is considering a measure that would effectively halt major real-estate projects, the most extreme example yet of a revolt against development breaking out across the country.”
    • “The moves threaten to further constrict a tight supply of housing. Housing starts dropped 2.6% in January, the Commerce Department said Thursday. The number of single-family and multifamily starts per 1,000 households last month was about 36% below the 50-year average, according to Ralph McLaughlin, chief economist at Trulia.”
    • “In Los Angeles, residents in early March are set to vote on a ballot initiative that, if passed, would suspend for two years any development that requires a modification to the city’s existing planning rules.”
    • “‘People feel the system is rigged,’ said Michael Weinstein, president of the AIDS Healthcare Foundation, which has poured some $3.7 million into promoting the measure. ‘It’s all about billionaires getting what they want.'”
    • If you’re wondering why the AIDS Healthcare Foundation is spending donation money on this initiative, it’s because “many of the patients served by the AIDS Healthcare Foundation are struggling with rising housing prices.”
    • “San Francisco in June passed a ballot initiative that puts a 25% on-site affordable-housing requirement on most new residential buildings…”
    • “In Oregon, the Portland City Council in December unanimously passed a similar ordinance requiring buildings with 20 units or more to set aside 20% of units for affordable housing…”
    • “Despite complaints in Los Angeles about a deluge of development, housing construction now is at only a fraction of the rate of the mid-20th century, before strict zoning rules were put in place. From 1950 through 1959, about 250,000 units of new housing were added in the city of Los Angeles, according to an analysis of the census data by advocacy group Abundant Housing LA. From 2010 to 2015, the figure was 25,000, though the city issued permits for about 50,000 units in roughly the same period.”
    • “In the middle of the last century, zoning regulations were such that there was enough capacity in the city to build housing for 10 million residents, according to David Waite, a local planning lawyer.”
    • “The adoption of ‘community plans’ in the 1970s and a ballot initiative in the mid-1980s knocked that down to 4.5 million people, meaning Los Angeles is now almost at full capacity.”
    • “The proposed rule up for vote in March, called the ‘Neighborhood Integrity Initiative’ and referred to as Measure S, would require the city to update all community plans.” Essentially, if passed, development would be put on hold while the neighborhood plans are updated with input from the community.

Graphics

Business Insider – Here’s how many people in every state don’t have health insurance – Bob Bryan 2/9

wsj_daily-shot_us-uninsured-by-state_2-9-17

Bloomberg – Demand for Treasuries Is Now a ‘Made in the U.S.A’ Phenomenon – Luke Kawa, Liz McCormick, and Tracy Alloway 2/7

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Economist – The world’s biggest gamblers – The Data Team 2/9

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NYT – Why Falling Home Prices Could Be a Good Thing – Conor Dougherty 2/10nyt_where-housing-costs-too-much_2-10-17

Bloomberg – China’s Zombie Province Shows Trouble With Its Bond Market – Bloomberg News 2/12

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Visual Capitalist – Visualizing the Tallest Building in Each State – Jeff Desjardins 2/13

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WSJ – Daily Shot: Moody’s Investors Service – Chinese Wealth Management Products – 2/13

  • “China’s WMPs (Wealth Management Products) continue to grow, with the asset-liability mismatch remaining elevated. Imagine a product that ‘guarantees’ a certain rate, gives you a 1-3 month liquidity, and invests in 5-year corporate bonds.”

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WSJ – Bond Buying Surges, Tightening U.S. Corporate Spreads – Chris Dieterich 2/13

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Business Insider – An ‘investment mania’ is propelling Canada’s home prices to their biggest gain since 2007 2/14
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FT – China Inc hits brakes on foreign property investment – Gabriel Wildau 2/16

ft_china-outbound-investment_2-16-17

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Venezuela falls behind on oil-for-loan deals with China, Russia. Marianna Parraga and Brian Ellsworth. Reuters. 10 Feb. 2017.

“Venezuela’s state-run oil company, PDVSA, has fallen months behind on shipments of crude and fuel under oil-for-loan deals with China and Russia, according to internal company documents reviewed by Reuters.”

“The delayed shipments to such crucial political allies and trading partners – which together have extended Venezuela at least $55 billion in credit (about $50bn from China and $5bn from Russia’s Rosneft)- provide new insight into PDVSA’s operational failures and their crippling impact on the country’s unraveling socialist economy.”

“Because oil accounts for almost all of Venezuela’s export revenue, PDVSA’s crisis extends to a citizenry suffering through triple-digit inflation and food shortages reminiscent of the waning days of the Soviet Union.”

“The total worth of the late cargoes to state-run Chinese and Russian firms is about $750 million, according to a Reuters analysis of the PDVSA documents.”


“At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms – with shipments delayed by as much as 10 months, according to the documents. It also failed to make timely deliveries of another 3.2 million barrels of crude shipments to China’s state-run China National Petroleum Corporation (CNPC).”

“A total of 45 cargoes bound for Russian and Chinese companies are late for a variety of reasons, according to internal operational reports about shipments of crude and refined products.”

“The problems include operational mishaps, such as refining outages and delayed cleaning of tanker hulls, and financial disputes with service providers owed money by PDVSA.”

For example, “… a company official said PDVSA was unable to deliver a 1.8 million-barrel cargo of fuel oil to PetroChina because Bahamas terminal Borco, where PDVSA rents storage space, has intermittently prevented the firm from using the tanks since 2016 due to lack of payment.”

“Another 2 million-barrel cargo of fuel oil bound for China in November was postponed because of stained crude tankers, which cannot navigate international waters due to environmental regulations.”

Adding salt to the wound… “the fall in crude prices has made the oil-for-loan agreements more onerous. Because loan payments were negotiated when crude prices were higher, the agreements require PDVSA to ship more oil in order to continue servicing the debts at the same rate.”

Which all of course “saps its ability to ship to other customers – such as India, or customers in the United States – who would pay in cash, which PDVSA desperately needs.”

As an anonymous trader that regularly buys Venezuelan oil so aptly put it “at this point, everybody is trying to collect pending debts from PDVSA by receiving cargoes, but production is not enough.”

In Echo Of ’07, REITs Back Away From Multifamily. Andrew Barnes, Jake Mooney, and Zach Fox. S&P Global Market Intelligence. 7 Feb. 2017.

“Amid concerns of a peaking multifamily market, publicly traded U.S. real estate investment trusts in 2016 were net sellers of multifamily properties for the first time since 2009.”

“In total, REITs sold $13.0 billion more multifamily properties than they bought. In the past 10 years, the only previous time REITs off-loaded more multifamily assets than they bought by such a large amount was in 2007, when sales dwarfed purchases by $21.11 billion.”

“REITs’ caution around making new property investments follows a long and steady escalation in apartment values, which have more than doubled since 2010, according to a national index from Moody’s/Real Capital Analytics. In recent months, a flood of new construction has depressed rents in coastal markets. New York and San Francisco, both key markets for the largest multifamily REITs, Equity Residential and AvalonBay Communities Inc., saw rent growth flatline in 2016.

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“‘Multifamily has just been overbuilt throughout the United States,’ said Jay Rollins, co-founder and managing principal at JCR Capital Investment Corp., which invests in properties valued at $50 million or less. ‘Everywhere. And it will decline everywhere.'”

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Despite rising interest rates and expectations of further rises “…sales data does not show property prices declining in response. According to data firm Real Capital Analytics, cap rates dipped to 3.9% for mid- and high-rise apartments nationwide in 2016 third quarter. In San Francisco, the average cap rate stood at just 2.7%, barely above the 10-year Treasury rate, but with considerably more risk.”

“Broadly, observers say, property buyers seeking near-term yield are avoiding coastal cities, leaving them to long-term investors like sovereign wealth funds and high-net-worth individuals. But whereas REITs have cooled on acquisitions nationwide, some prominent private equity firms have still pursued deals in the middle of the country, where ‘the math can still work,'” according to Drew Babin, an analyst at Robert W. Baird & Co. Inc.

“Most notably, Starwood Capital Group kicked off 2016 by buying 72 properties from Equity Residential for $5.37 billion, and said Jan. 19 that it will acquire Milestone Apartments Real Estate Investment Trust, a Canadian REIT that owns U.S. Sun Belt properties, for $2.85 billion.”

“Historically, apartments have been a relatively safe bet. Apartment buildings are one of the more stable real estate asset classes over time, Babin said – in part because they have the backstop of funding from Freddie Mac and Fannie Mae. Even for top-of-the market buyers, patience can be valuable. Apartment prices rose 62% over the decade beginning in November 2006, despite two years of sharp price declines that began in 2008, according to the Moody’s/RCA index.”

sp-market-intelligence_us-apartment-index_2-7-17

Chinese Companies Rush In With Nearly $2 Trillion Where Bankers Fear to Lend. Rachel Rosenthal and Anjie Zheng. The Wall Street Journal. 9 Feb. 2017.

“Chinese companies are increasingly stepping in as lenders, as banks reduce their funding to struggling industries and the country’s mammoth bond market comes under strain.”

“Company-to-company loans in China jumped by 20% last year to 13.2 trillion yuan ($1.92 trillion), according to research firm CEIC. That is roughly double the size of the loan book at Wells Fargo & Co., the U.S.’s biggest lender. This entrusted lending, so named because banks serve as middlemen, is now the fastest-growing major component of the country’s elaborate system of informal, or shadow, banking.”

“The most recent surge came during the selloff in China’s $9.3 trillion bond market late last year. Big, cash-rich companies – mostly state-owned enterprises and some private companies – stepped in: New entrusted loans rose to 405.7 billion yuan ($59.02 billion) in December, more than double the month prior, according to data tracker Wind Information, and the highest monthly issuance in two years.”

“Instead of investing in their core business, companies can earn interest rates of up to 20% making entrusted loans, often with only cursory checks on borrowers’ creditworthiness. Such lending often props up companies in sectors like mining and property where Beijing wants to reduce excess capacity. It also adds to China’s $18 trillion corporate debt pile, already equal to 168% of gross domestic product, according to the Bank for International Settlements.”

“Some entrusted loans are between a company and its own subsidiaries, similar to how many big companies globally loan cash to different parts of their business. Still, between 2007 and 2013 more than 60% of entrusted loans were channeled to companies in industries with overcapacity, according to a study by the U.S.-based National Bureau of Economic Research.”

“‘It’s not a sustainable business model’ for the lending companies, said  Julian Evans-Pritchard, China economist at Capital Economics. ‘Their main operations are only staying afloat by acting like a shadow bank.'”

“Company-to-company lending took off in China in the 1990s when, after a period of rapid growth, many state-owned firms started generating large amounts of cash. With no private shareholders pushing for dividend payouts, many put that cash to work by lending it out.”

wsj_chinese-entrusted-loans_2-9-17

“But entrusted lending is unusual. Banks are involved, but only as a middleman: Direct company-to-company lending is still legally prohibited. Banks can charge fees of up to 5% of the loan, according to BMI Research, but leave credit checks to the lending company.”

“In some cases, lending companies aren’t pulling back even when loans sour.”  Why, because they’re usually to subsidiaries…

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

A Wealth of Common Sense – Where You Live & the 50/30/20 Rule 2/14

Bloomberg – Yellen Sets High Hurdle for Reducing Fed’s Massive Bond Holdings 2/14

Business Insider – Paul Singer’s Elliott: ‘There is a deep underlying complacency which we think permeates global financial markets’ 2/1

FT – Take a deep breath: we must all help clean up London’s toxic air 2/3

FT – The importance of bubbles that did not burst 2/10

FT – Major Chinese bitcoin exchanges halt withdrawals after crackdown 2/10

FT – China’s Wanda circles Postbank in search of European bank assets 2/13

FT – Swiss signals that cash may no longer be king 2/13

FT – US labels Venezuelan vice-president a drug kingpin 2/13

FT – Down on China? Not Morgan Stanley (Alphaville) 2/14

FT – China’s top football team vows to phase out foreign players 2/15

FT – China returns as net buyer of US Treasuries 2/15

FT – What Chinese monetary tightening? 2/15

Investment News – Changing direction, FS Investments launching a nontraded REIT 2/14

NYT – Japan Limited Immigration; Now It’s Short of Workers 2/10

NYT – Amazon’s Living Lab: Reimagining Retail on Seattle Streets 2/12

NYT – India’s Air Pollution Rivals China’s as World’s Deadliest 2/14

Reuters – U.S. investors brace for mounting political risks as they decode Trump 2/14

ValueWalk – BCG: Hedge Funds Face Potential Doomsday Scenario 2/10

WSJ – Race to Revamp Shopping Malls Takes a Nasty Turn 2/14

WSJ – Bonds Tied to Dying Malls Could Be the Next ‘Big Short’ 2/14

WSJ – Retail Zombies Haunt Industry 2/15

WSJ – A Harsh Reality Is Hitting the Housing Market 2/15

 

 

January 6 – January 12, 2017

Saudi Arabia looking for savings where it can find them.

Headlines

FT – Venezuela’s president raises minimum wage 50% 1/8. Despite minimum salary raises of 322% since February of 2016, Venezuelan workers now earn about $60 a month on the legal exchange rate or $12 a month at the black market exchange rate – bottom line is that goods inflation is outpacing wage inflation.

FT – Tillerson sets stage for clash with Beijing over South China Sea 1/11. In his confirmation hearing, US secretary of state nominee – Rex Tillerson, said in regard to the South China Sea “we’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands also is not going to be allowed.” If he is confirmed, you can bet there will be more tension to come.

Special Reports / Opinion Pieces

Briefs

  • Ben McLannahan of the Financial Times illustrated the growing discrepancy between GAAP and non-GAAP reporting at public companies.
    • “According to research company Audit Analytics, 96% of companies in the S&P 500 presented non-GAAP metrics in their earnings releases in the fourth quarter of last year. That was up from 88% in the third quarter.”
    • “Most of those non-GAAP numbers make the company look better. Last year a FactSet study found that the average difference between non-GAAP and GAAP profits reported by companies in the Dow Jones Industrial Average was 31%, up from 12% in 2014.”
    • Worse, “problems arise when companies go off-piste, using metrics that bear no relation to GAAP.”
    • Granted not all do this. “Telsa Motors, which is reckoned to be among the fastest and loosest with its anti-GAAP measures, said three months ago it would stop recognizing revenues according to its own peculiar formula.”
  • John Gittelsohn of Bloomberg covered Bill Gross’ recent comments regarding the importance of 10-Year rate reaching 2.6% being a bigger deal than the Dow at 20,000.
    • “Investors should watch for 10-year Treasuries to move above 2.6%, a threshold that would mark an end to the three-decade bond bull market and be a more important barometer than the Dow Jones Industrial Average passing 20,000, according to billionaire bond manager Bill Gross.”
    • “‘It is the key to interest rate levels and perhaps stock price levels in 2017,’ Gross, manager of the $1.8 billion Janus Global Unconstrained Bond Fund, wrote in a monthly investment outlook released Tuesday. ‘Investment happiness and/or despair may lie ahead over the next 12 months depending on it.'”
  • The Economist brought attention to recent research into “stand-your-ground” laws in America.
    • According to research published in the current Journal of the American Medical Association, soon after the 2005 “stand-your-ground” law passed in Florida (which allows “citizens who ‘reasonably believed’ their lives to be threatened were given the right to ‘meet force with force, including deadly force’ – even in public places and, critically, without the duty to try and retreat first”), “there was a sudden and sustained 24% jump in the monthly homicide rate. The rate of homicides caused by firearms increased by 32%.”
    • economist_legal-force_1-11-17
    • “The authors found that in states without a stand-your-ground law over the same time period those rates remained flat, suggesting that a nationwide crime wave was not to blame for the abrupt increase.”

 Graphics

WSJ – Developers Build on Home Rental Success With Whole Communities – Chris Kirkham 1/6

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Business Insider – This Goldman Sachs chart sums up the global fallout from the 2008 financial crisis – Ben Moshinsky 1/9

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WSJ – Daily Shot: FRED Revolving Credit v Hourly Earnings 01/09

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WSJ – Daily Shot: FRED Student Loans 01/09

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WSJ – Daily Shot: Northern Migration 01/09

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WSJ – Daily Shot: Business Insider – US Income Disparity by State 01/09

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WSJ – A Dark Day for Chinese Inflation – Nathaniel Taplin 1/10

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WSJ – Daily Shot: PitchBook U.S. Venture Capital Activity 01/11

wsj_daily-shot-us-vc-activity_1-11-17

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Saudi Arabia to cull billions of dollars of projects. Simeon Kerr. Financial Times. 11 Jan. 2017.

“Saudi Arabia is planning to cull billions of dollars of projects as part of its latest cost-cutting measures to narrow a gaping budget deficit and balance the books by 2020.”

In this effort PwC has been engaged to find savings between SR50bn and SR75bn ($13bn – $20bn).  “The focus of the cuts will be on capital expenditure, such as infrastructure projects, as Riyadh hopes to avoid any politically sensitive spending reductions after austerity measures last year triggered an outburst of public discontent.”

Bad for contractors – but really they just want to be paid what they’re already owed.  As it is “the government has halted or restructured hundreds of projects across the kingdom over the past two years. It has also delayed payments to companies, exacerbating the problems in the private sector and helping drive non-oil growth to less than 1% last year, its lowest level in years.”

“The finance ministry has pledged to finalize SR105bn in late payments by February.”

Saudi Arabia is not the only Gulf state making cuts. “The value of infrastructure contracts awarded in the Gulf last year fell 44% to $100bn, compared with $178bn in 2015, according to data from the Middle East Economic Digest. That compares with a high of $186bn in 2014.”

Other Interesting Articles

The Economist

CoStar – Blackstone Breaks Escrow on New Non-Traded REIT with Net Proceeds of $279 Million 1/4

FT – Vanguard is best-selling fund manager of 2016 1/7

FT – China’s coming property oligopoly, charted 1/8

FT – German bonds offer the best way to bet on a break-up of the euro 1/9

NYT – Department Stores, Once Anchors at Malls, Become Millstones 1/5

WSJ – Why Beijing’s Grip on the Yuan Is Becoming Tenuous 1/6
WSJ – How the Auto Makers Can Survive the Self-Driving Car 1/9

WSJ – Time to Start Worrying Again About Chinese Property 1/9

WSJ – America’s Fastest – Growing Loan Category Has Eerie Echoes of Subprime Crisis 1/10

WSJ – More Home Buyers Backed Out of Offers in 2016 1/11

 

 

December 9 – December 15, 2016

You can be certain that China is doing what it can to buy local. A US municipal pension crisis takes center stage in Dallas. Yeah, interest rates are going up – oh wait, what…

Headlines

Special Reports / Opinion Pieces

Briefs

  • Martin Sandbu of the Financial Times added some context to Opec’s recent production cut agreement with non-Opec member countries and likened it to a swan song.
    • Oil has rallied on recent production cuts agreed to by both OPEC and key non-OPEC countries (Russia).
    • “To top it off, Saudi Arabia’s oil minister signaled a willingness to cut, if necessary, even beyond the agreed limits to prop up prices – an announcement billed by some as a ‘whatever it takes’ moment to warn markets off testing the cartel’s resolve.”
    • However, the oil industry has changed and the US Shale producers are challenging Saudi Arabia for the key swing producer status. Two key facts to consider are 1) “…the break-even price for many shale producers is coming down  surprisingly fast. That means that the level at which shale can replace any OPEC cutback keeps going lower.” And 2) “…that, partly due to its manufacturing-style cost structure, shale is a dispersed private activity. Especially in market economies, it would be very difficult to decide production levels strategically even if one wanted to. So if US shale oil takes over Saudi Arabia as the global market’s swing producer, it will behave in a very different, and largely unstrategic, manner.”
    • “All this means is that OPEC – even with its new non-OPEC friends – has largely used up its ammunition by driving prices to where they are now.”
  • Tom Mitchell of the Financial Times illustrated how Trump’s policy shifts pose ‘unthinkable’ risks for China investors.
    • “We do not take an outbreak of a US-China trade war as our baseline case… But the … US election clearly show[s] how the conventional wisdom in economics may backfire these days. We need to think of previously unthinkable risk scenarios.” – Zhiwei Zhang, economist at Deutsche Bank
    • In regard to new capital controls, the “companies most at risk from the restrictions on dividend remittances include large automakers GM, Volkswagen and Toyota, for whom China is their largest and most profitable market.”
    • “Left to its own devices, the ruling Chinese Communist party would rather not restrict foreign investors’ dividends or punish American multinationals, even if Mr. Trump does indeed upend Sino-US relations…. Last week the party’s politburo identified ‘actively attracting foreign investment’ as one of its key ‘economic work tasks’ for 2017.”
    • “The risk for US multinationals lies in the fact that the Communist party is not entirely free to decide how it reacts to foreign ‘provocations.’ The party’s hand can be forced if an increasingly nationalist public feels the leadership is not being assertive enough in defense of territorial interests.”
    • It would seem the counter-argument would be that the Communist party should be able to pacify its citizens through its control of the media and propaganda apparatus, but as we’ve seen state-side, false news spreads far-and-wide and can affect people’s beliefs and behaviors.

 Graphics

FT – The ECB, bond buying and the capital key: a Q&A – Elaine Moore 9/7

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FT – Casino stocks jolted by Macau ATM limit reports – Peter Wells 12/8

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FT – Amazon’s no-checkout store threatens death of the cashier – Mark Vandevelde and Lindsay Whipp 12/8

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WSJ – Daily Shot: BAML EM High Yield Index (Spread) 12/9

  • “Despite higher bond yields, the global chase for yield continues.”

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Bloomberg – Good Luck Privatizing the American Dream – Mark Whitehouse 12/12

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WSJ – The Simple Truth About China’s Economy – Nathaniel Taplin 12/13

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Bloomberg – Tokyo Regains Costliest City for Expats Title as London Drops – David Roman 12/14

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Featured

*Note: bold emphasis is mine, italic sections are from the articles.

South Korea, Germany at risk from China tech rise. James Kynge. Financial Times. 13 Dec. 2016.

According to a recent report by The Mercator Institute for China Studies (Merics), a Berlin-based think-tank, the “Made in China 2025” plan is going to dramatically alter the market for a number of industrial countries that rely on China for a large portion of their sales.

“Industrial countries should have no illusions: Made in China 2025 will elevate a small but powerful group of Chinese manufacturers, dramatically increasing their competitiveness.”

“The Czech Republic, Germany, Italy, Hungary, Japan and South Korea are most at risk from the strategy because each of them derives more than 40% of the value of their industrial output from the high-tech and medium-tech industries that are targeted in China’s plan.”

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“The Merics report, which was based on an examination of policy documents, expert journals and newspaper articles, as well as more than 60 interviews with Chinese experts, finds that one clear aim of the industrial strategy is to cultivate domestic champions to replace the sales by foreign companies in China.”

 “Such an intent, the report says, can be seen in a semi-official document called Made in China 2025 Key Area Technology Roadmap, which has been endorsed by Ma Kai, a vice-premier and the official heading the interministerial Leading Small Group for Constructing a Manufacturing Superpower.”

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“Indications of strong state support are reinforced by funding being made available to spur Chinese innovation in smart manufacturing. The Advanced Manufacturing Fund, established this year, was approved by the State Council (cabinet) and is charged with spending its Rmb20bn allocation on upgrading the technology of important industries.”

“Another fund, the National Integrated Circuit Fund, has capital of Rmb139bn at its disposal and the Emerging Industries Investment Fund, which was also approved by the State Council, has Rmb40bn to spend on promising domestic companies.”

“The Merics report suggests that such assistance, plus the ability of some companies to undertake acquisitions of industry leaders overseas, is likely to catapult some Chinese manufacturing giants into the vanguard of global technology.”

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A stampede for the exit: A Dallas public pension fund suffers a run. Economist. 8 Dec. 2016.

To illustrate the challenges that many municipalities are having or going to have over the coming years, witness what is going on in Dallas where the Mayor is suing the city’s policemen and firefighters to keep them from pulling their funds from the pension fund.

“At the start of the year the fire and police pension fund had $2.8bn in assets. Since then nearly $600m has been withdrawn from the plan, of which almost $500m has been taken out since August 13th. That is an alarming acceleration; in 2015 total withdrawals were just $81m.”

“Even at the start of 2016, the plan was just 45% funded, and was expected to become insolvent within 15 years… The city estimates that the funded ration has fallen to 36% after the withdrawals.”

“The crisis is the result of three linked issues: overgenerous pension promises; the flawed nature of public-sector pension accounting in America; and some bad investment decisions. In order to pay the generous benefits, the scheme counted on an investment return of 8.5% a year, absurdly high in a world where the yield on ten-year Treasury bonds has been hovering in a range of 1.5-3%. So the scheme opted for riskier assets in private equity and property. But the strategy did not work; the value of its investments declined by $263m in 2014 and $396m in 2015, thanks largely to write-downs of those risky assets.”

Dallas is not alone in its pension woes, “the average scheme (in America) was 73.6% funded at the end of 2015, according to the Center for Retirement Research at Boston College. A more conservative accounting approach, as is required of private-sector pension plans, would bring the ratio down further, to 45%.”

However, “the Dallas fund has a particularly big problem. It operates a deferred-retirement option plan (DROP) which allows police and firemen who have qualified for retirement to keep working, while their benefits are kept in a separate account earning an interest rate that has been 8-10% a year. More than 500 Dallas DROP accounts are worth more than $1m; the average account is worth nearly $600,000.”

“In addition, since 1989, retirement benefits have been upgraded using an annual cost-of-living adjustment of 4%.” Instead of say at a consumer-price index of 1-2%.

“Together, the DROP plan and cost-of-living increases make up around half of the scheme’s total liabilities.”

“There are only two possible solutions to the shortfall: put more money into the fund or cut the benefits. A 1984 referendum limits the maximum amount of city contributions – a limit that the city has reached this year. The 2015 scheme report suggested that total annual contributions to the pension fund would need nearly to double, from 37.6% to 72.7% of payroll, in order to close the deficit, and even that would take 40 years. The pension scheme has asked that the city make a one-off payment of $1.1bn in 2018, which the city says would require it to more than double property taxes.”  And of course, “any attempt to reduce past benefits will almost certainly end up in the courts.”

So… invest in even riskier ventures?

Subprime borrowers to feel pinch as Fed raises rates. Alistair Gray. Financial Times. 14 Dec. 2016.

“Subprime borrowers are set to feel the pinch as US banks nudge interest charges up in response to the Federal Reserve’s rate rise, threatening to sour more credit card loans and some types of debt.”

“About 92m consumers who have taken out loans with variable rates, such as credit cards, face higher monthly debt service payments as a result, according to TransUnion, which keeps an anonymized database of 220m borrowers. On average, the monthly increase comes to $6.45 per month.”

“A group of about 9.3m borrowers may be at risk of defaulting on at least one type of loan as a result of the rate increase, according to TransUnion.”

“The forecasts highlight the fragile financial state of many US consumers despite the economic recovery.”

“Sean McQuay, credit expert at NerdWallet, said some households are in for an unpleasant surprise since banks are not required to notify customers that their rates have ticked up in response to a rise in prime rates.”

“Savers, meanwhile, are unlikely to benefit from the Fed’s rate increase. Banks are already awash with deposits, and there is limited competition on these savings rates.”

Rather “the higher rates are expected to be good for banks, since they improve profit margins from lending. Even so, banking executives will be keeping a watchful eye on bad loans.”

Back to the consumers, the rate rise should be marginal unless the Fed does actually raise rates by 0.75 points next year and it is not accompanied by meaningful broad-sector growth in the US. As it is credit card delinquency rates are expected to increase with just the rate increase from this week.

ft_delinquency-rate-for-credit-cards_12-14-16

Other Interesting Articles

The Economist

Economist – A house divided: The alarming response to Russian meddling in American democracy 12/11

FT – Macau clarifies that daily ATM withdrawal limits to stay the same 12/8

FT – Airbnb backlash spells trouble for landlords 12/8

FT – China stocks fall by most in months amid crackdown on insurers 12/11

FT – Trump and China: the year of the chicken 12/12

FT – China challenges EU and US over market economy status 12/12

FT – S&P lowers rating for Dalian Wanda Commercial Properties 12/12

FT – Alphaville exclusive: Inside the gig economy 12/12

FT – IEA predicts oil glut will end if producers deliver deal 12/13

FT – Managing the inevitable decline of the renminbi 12/14

FT – Betting on German Bunds 12/14

NYT – Russian Hackers Acted to Aid Trump in Election, U.S. Says 12/9

NYT – Trump Suggests Using Bedrock China Policy as Bargaining Chip 12/11

NYT – Small Investors Join China’s Tycoons in Sending Money Abroad 12/11

NYT – Drug 85 Times as Potent as Marijuana Caused a ‘Zombielike’ State in Brooklyn 12/14

WSJ – Why Would a Chinese Insurance Giant Want to Own a Gas Pipeline? 12/13

WSJ – Tata Drama Bruises Confidence of Once-Loyal Investors 12/14

WSJ – Tesla Could Lose Lead in Electric Cars to Big Automakers 12/15

 

December 2 – December 8, 2016

Inflation running away in Venezuela. The ‘whale’ in the market is you – or really your proxy by way of the government. Barbarian insurers in China are pissing off the securities regulators. China’s banks hiding more than $2tn in loans. A rise in US interest rates are likely to put the hurt on China (among other places).

I know, lots of featured articles this week…

Headlines

  • WSJ – China Debts Just Keep on Rolling 12/6. Earlier this year Chinese corporate-bond defaults were taking off and now – all of a sudden – defaults are gone and companies are issuing lots more debt and at lower rates – some of which are the same companies that were on the edge of default; go figure.
  • FT – Profits in China: not safe 12/6. Now that the new rules from China’s State Administration of Foreign Exchange are taking effect, foreign companies are having difficulties repatriating earnings.

Special Reports / Opinion Pieces

Briefs

  • James Kynge of the Financial Times drew parallels between China’s current liquidity flood and those during the times of the Mongols and Chairman Mao.
    • “The dimensions of China’s liquidity splurge are startling. Ousmene Jacques Mandeng, formerly with the International Monetary Fund, has calculated that between 2007 and 2015 China created 63%, or $16.1tn, of the growth in the world’s supply of money.“
    • “China now has more money coursing through the arteries of its economy than the eurozone and Japan combined – and almost as much as the US and the eurozone combined. Since the financial crisis, commentators have focused on the efforts of the US, European and Japanese central banks to print money through ‘quantitative easing’, but China’s output has eclipsed them all.”
    • However, “the main issue is that debts are piling up almost as fast as China generates money to service them, creating what Jonathan Anderson of the Emerging Advisors Group calls a ‘debt funding bubble.'”
    • We shall see where we go from here.
  • Jacky Wong of The Wall Street Journal pointed out that passive investors are getting sucked into Hong Kong market failures by way of their market funds.
    • Bottom line, be very cautious of investing in companies with a thin float (very little shares traded), with a few insiders controlling most of the shares, and a large part of revenues generated from related entities… That goes the same for investing in passive index funds that invest in the same companies…
  • Oshrat Carmiel of Bloomberg highlighted that condominiums in NYC’s tallest luxury tower are being discounted by millions of dollars.
    • “At 432 Park Ave., buyers who signed contracts and completed those purchases this year got price reductions averaging 10%, according to an analysis by appraiser Miller Samuel Inc. In one of the most recent big transactions to close, a penthouse on the 88th floor sold for $60.9 million, a 20% markdown from what developers initially sought, city property records made public Dec. 2 show.”
    • “As new high-end projects mushroom across the skyline, developers of ones that came to market earlier are cutting deals to unload units before competition gets even more heated.”
    • “The building isn’t the only recently completed ultra-luxury tower that’s lowered prices. A few blocks away on 57th Street, a 4,193-square foot apartment at Extell Development Co.’s One57 sold in October for $21.6 million, or 24% off the last asking price, according to listing website StreetEasy.”

Graphics

WSJ – Daily Shot – 12/02

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Economist – Discounting the bull: Stock analysts’ forecasts tend to be wrong in reassuringly predictable ways 12/1

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WSJ – China’s Yuan and the Trillion-Dollar Numbers Game – Nathaniel Taplin 12/7

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NYT – A Bigger Economic Pie, but a Smaller Slice for Half of the U.S. – Patricia Cohen 12/6

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WSJ – Daily Shot: Bloomberg Barclays US Corporate High Yield Average OAS 12/8

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Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Venezuela struggles to tame triple-digit inflation. Andres Schipani. Financial Times. 5 Dec. 2016.

“In an echo of Wiemar Germany, Venezuelan shopkeepers have resorted to weighing banknotes instead of counting them. In defiance of official pegs, the local currency has tanked on the black market, losing a jaw-dropping 62% of its value in November, making bills in circulation in the country virtually worthless.”

“The biggest note in use is the 100 bolivar bill, which is worth roughly 2 US cents on the black market.”

As a result vendors are counting money with weight scales rather than waste the day away counting notes. The rule of thumb “100 notes of any denomination of Venezuela’s currency weigh 110 grams.”

“In the midst of a collapse in the parallel market (there are two local exchange rates – one used for priority imports and the other for everything else) and crippled by triple-digit inflation, the country’s central bank said it would begin circulating higher-denomination notes, including 500, 1,000, 2,000, 5,000, 10,000 and 20,000 bolivares, next week.”

“Carlos Miguel Alvarez, a senior economist with the Caracas-based Ecoanalitica, sees the measure as shortsighted. ‘The new bills may facilitate transactions, but unless the inflationary economic distortions are corrected, they won’t last very long as relief.'”

“Economists list those distortions as currency and price controls, coupled with lower oil prices, mismanagement and a relentless printing press. Venezuela’s central bank has kept inflation data under wraps for a year, but Mr. Alvarez forecast it would top 511% this year. The IMF puts 2016 inflation at 476%.“

“Now prices in certain stores can change daily. Some observers are comparing the issuance of larger Venezuelan bank notes with Zimbabwe’s decision to print a new currency to tackle a collapse of trust in its financial system.”

There’s a Big New Investor in Stock Markets: The State. Gregor Stuart Hunter and Kosaku Narioka. The Wall Street Journal. 5 Dec. 2016.

“Two of the world’s most important stock markets have a big new investor: the state.”

“About 30% of all the companies in Japan’s three main equity indexes now count the country’s central bank as one of their top 10 shareholders, according to a Wall Street Journal analysis of data as of the end of September. Six years ago, the Bank of Japan’s presence in the market was trivial.”

“In China, two major state-owned investment funds that are part of the so-called national team have become top 10 shareholders in 39% of listed companies over the past year, according to UBS, which analyzed shareholdings as of the end of September.”

“The new wave of state buying is unique in that it is aimed primarily at propping up markets and economies.” AKA helicopter money.

“Traders say the buying distorts stock values as investors build strategies around government actions rather than company fundamentals. The state’s indiscriminate purchases also might reduce pressure on managements to fix problems that otherwise could weigh on their stock. And then there is the question of how governments will ultimately wind down their holdings, a concern that some say could be deterring investors with a longer-term outlook.”

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“The BOJ (Bank of Japan) started buying exchange-traded funds that track equity indexes in December 2010. In July, it boosted its target to roughly ¥6 trillion ($53 billion) worth of ETFs each year. Its holdings had swelled to about ¥13 trillion by late November – equal to around two-thirds of the money held by all Japanese ETFs, according to a Journal analysis of data from the central bank and Morningstar.”

“In China, Central Huijin Asset Management, part of China’s main sovereign-wealth fund, and China Securities Finance Corp., which provides margin financing to the country’s brokerages, have been buying shares to support Chinese stock markets since the rout during the summer of 2015.”

“Any suggestion that the national team is active can produce a frenzy of buying among mom-and-pop investors, said Sean Taylor, chief investment officer for Asia-Pacific at Deutsche Asset Management.”

“Others say the national team’s presence has made the market more dull. Big state-backed funds have been selling down blue-chip shareholdings whenever the market rallies for a few sessions in a row, then buying them back if any selloff steepens. The main Shanghai market has traded in a much narrower range this year than in 2015…”

All this distortion can’t be good.

China’s regulators lose patience with ‘barbarian’ insurers. FT Confidential Research. Financial Times. 6 Dec. 2016.

“The chairman of the China Securities Regulatory Commission (CSRC) has sustained a public attack on aggressive stock purchases on the secondary market in recent months. Liu Shiyu, a former central bank deputy head, has accused this new breed of Chinese corporate raider of using illegal funds and morphing from ‘strangers at the gate to barbarians and finally to industry thieves.'”

“As we (Financial Times Confidential Research – FTCR) have noted, the most aggressive buyers in the A-share markets, such as Anbang Life, Foresea Life and Evergrande Life, have tended to be aggressive sellers of universal life insurance products, short-term life policies that are very similar to wealth management products but with an added life insurance component.”

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“Regulators worry that such policies are being sold primarily as high-yielding, short-term investment products, rather than long-term, conservative insurance products, and that their high returns are being achieved by means of high-risk, aggressive stock purchases designed to ramp up stock prices.”

“The insurers need to invest aggressively to match the generous returns offered by universal life insurance products.” However, “slowing sales of such products will pose a challenge in the coming year. The insurers depend on customers rolling over short-term policies to remain solvent; if they do not, insurers will be forced to sell their newly-acquired stakes, undermining their business model.”

The FTCR group does “not think Mr. Liu’s harangue marks an end to this battle. There is too much money involved and some insurance executives reportedly have better connections than their regulators.”

China’s Banks Are Hiding More Than $2 Trillion in Loans. Lingling Wei. The Wall Street Journal. 7 Dec. 2016.

Want to expand credit but not have the liability show up on your balance sheet?  Well, in China make it an “‘investment receivable,’ a loosely regulated category of assets that allows bank officials to set aside little or nothing for potential losses.”

“As of June, 32 publicly traded Chinese banks had a total of $2 trillion in investment receivables, up from $334 billion at the end of 2011, according to a tally by The Wall Street Journal of the latest available information from data provider Wind Information Co.”

“The investments are equivalent to 20% of the same banks’ total loans in dollar terms, up from 6% at the end of 2011. The 32 banks have about 70% of all the banking assets in China.”

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“The rapid growth in banks’ off-balance-sheet and investment activities, in essence, means hidden credit risks and could threaten financial safety.” – Shang Fulin, China’s top banking regulator

“Economists at Swiss bank UBS AG estimate as much as $2.4 trillion (16.5 trillion yuan) was ‘missing’ from the broadest measurement of credit disclosed by China’s central bank last year, up from $712 billion (4.9 trillion yuan) in 2014. The discrepancy is largely because Chinese commercial banks use so-called shadow lenders to mask loans as investments, the economists said.”

“If Chinese banks were required to count their investment receivables as loans, the banks would need to raise as much as $212 billion in capital, estimates UBS analyst Jason Bedford. That is not far short of the $262 billion raised by all Chinese banks in 2015.”

“As a result, the analyst said, ‘we expect any capital impact [on banks] to be dragged out over years to avoid a shock to the system.'”

“‘All banks are trying to move [loans] off balance sheets,’ said an official at Bank of Nanjing, nodding to a common belief that in China that Beijing always will stand behind the country’s banks. ‘The only risk we have is sovereign risk.'”

US interest rate rises set to expose China’s frailties. James Kynge. Financial Times. 7 Dec. 2016.

China is readying itself to tighten its monetary policy as the U.S. looks to do the same; however, right now isn’t the best time…

“The vast size of China’s debt mountain – which stands at over 250% of gross domestic product, up from 125% in 2008 – means that even minor increases in short-term interest rates may squeeze corporate activity and precipitate defaults, thereby hampering economic growth.”

“Alex Wolf, emerging markets economist at Standard Life Investments, argues that default risks are rising because more and more corporations are relying on the short-term money market to raise the finance they need to repay existing debts.”

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“Estimates by Fitch, the rating agency, reveal a level of pain in corporate China that is not hinted at by official statistics. Some 15% to 21% of loans in the Chinese banking system are already non-performing, Fitch estimates, compared with official numbers of less than 2%.”

In this context, it is unsurprising that foreign exchange reserved declined by nearly $70bn in November.

“The Institute of International Finance, a global association of financial institutions, calculates that in the first 10 months of this year net capital outflows from China totaled $530bn, with October marking the 33rd straight month in which more money left the country than flowed in.”

Property companies are also finding themselves on the short-end of the stick.

“In November, property developers issued only Rmb12bn ($1.7bn) in bonds, down from a monthly average of Rmb86bn from January to September, according to FT Confidential Research, a unit of the Financial Times.”

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Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Meitu: snap appy 12/2

FT – Think twice before picking Uber as a business model 12/4

FT – Foreign companies in China hit by new exchange controls 12/6

NYT – ‘They Are Slaughtering Us Like Animals’: Inside President Rodrigo Duterte’s brutal antidrug campaign in the Philippines 12/7

WSJ – Baby Boomers vs. Millennials: The Uneven Jobs Recovery 12/1

WSJ – Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime’ 12/4

WSJ – India’s Central Bank Can’t Cut It 12/7

 

November 18 – November 24, 2016

Chinese mainland real estate companies pricing out local developers in Hong Kong.

Happy Thanksgiving everyone and thanks for reading.

Headlines

Special Reports / Opinion Pieces

Briefs

  • Esther Fung of the Wall Street Journal highlighted that some property landlords are making deals with Uber and Lyft to allow for or make up for parking shortages.
    • “Ride services such as Uber and Lyft, along with the promise of driverless cars, represent the ‘single biggest game-changer for real estate’ over the next several decades, said Dave Bragg, an analyst at real-estate research firm Green Street Advisors.”
    • “In all, Green Street estimates parking needs will be cut in half over the next 30 years amid an anticipated decline in vehicle ownership, eliminating the need for 75 billion square feet of parking space.”
    • “Green Street expects mass adoption to begin around 2030 and to be completed 15 years later. Uber already has suggested its entire fleet would be driverless by 2030.”
    • Are the Uber drivers savvy to this?

 Graphics

FT – Italian 10-year bonds on course for worst month since 2012 – Mehreen Khan 11/17

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NYT – As American as Apple Pie? The Rural Vote’s Disproportionate Slice of Power – Emily Badger 11/20

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Visual Capitalist – How Much Government Debt Rests Upon Your Shoulders – Jeff Desjardins 11/23

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Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Mainland money distorting Hong Kong land prices, tycoon warns. Ben Bland. Financial Times. 24 Nov. 2016.

An interesting thing when local developers are priced out of a market by aggressive and seemingly foolhardy outsiders. What’s noteworthy is who is making the statement and how much development property sites are now going for in Hong Kong – despite its troubles.

“Lui Che-woo this month lost out in an auction for a Hong Kong site that was acquired by a subsidiary of HNA, the acquisitive (Chinese) mainland conglomerate, at double the price paid for a similar site in 2014.” 

Lui Chee-woo is head of Galaxy Entertainment and happens to be worth $11bn according to Forbes. HNA is a Chinese conglomerate with business lines that include aviation (Hainan Airlines), real estate, financial services, etc.  HNA also recently acquired a 25% stake in Hilton Worldwide from Blackstone for about $6.5bn in October.

“The site went for about HK$13,500 (USD $1,740) per square foot – similar to the going rate for completed apartments nearby.” 

That’s per buildable square foot folks…add another $1,000 psf in direct construction costs (probably around that amount to attain a finish level worthy of these price points), plus another $1,000+ psf or so in soft costs (you’ll need brand name architects to be consistent with the message), financing, and profit, and you’re at around $4,000+psf.  Not unheard of in this market, but consider the comps at around 50% of this…

“Mainland developers acquired 44% of the residential land sold by the Hong Kong government last year, up from just 7% in 2012, according to calculations by Spacious, a property listings website. In the year to date, mainland companies have bought 39% of the land auctioned.” 

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Bottom line, different folks/companies have different return metrics and objectives…

Other Interesting Articles

Bloomberg Businessweek

The Economist

A Wealth of Common Sense – How Bad Could Bond Market Losses Get? 11/20

Economist – You may be higher up the global wealth pyramid than you think 11/23

FT – China’s hairy crab scandal reveals depth of pollution crisis 11/17

FT – Jared Kushner, favored son-in-law of Donald Trump 11/18

FT – Blackstone looks to sell $2.3bn Japan property portfolio to Anbang 11/21

FT – Honeymoon is over for new Saudi leader as reform pain kicks in 11/22

NYT – Donald Trump’s Son-in-Law, Jared Kushner, Tests Legal Path to White House Job 11/17

NYT – Quit Social Media. Your Career May Depend on It. 11/19

NYT – Italy’s Banks Are in a Slow-Motion Crisis. And Europe May Pay. 11/19

NYT – Dallas Stares Down a Texas-Size Threat of Bankruptcy 11/20

NYT – Gender Colors Outrage Over Scandal Involving South Korea’s President 11/21

NYT – Mortgage Rates’ Rise Catches Home Buyers – and Lenders – Off Guard 11/23

WP – The North Pole is an insane 36 degrees warmer than normal as winter descends 11/17

WSJ – China Cracks Down on Home Buyers With Fake Divorces 11/22

WSJ – Rising Rates Threaten Global Property Investments 11/22

November 11 – November 17, 2016

Folks this Pension issue is a BIG PROBLEM. Speaking of problems, pollution in Delhi is a doozy. Supply side subsidies loom large in corporate China.

Headlines

Special Reports / Opinion Pieces

  • GMO Quarterly Letter – Not With a Bang But A Whimper – Jeremy Grantham – Q3 2016
    • “Well, the US market today is not a classic bubble, not even close. The market is unlikely to go “bang” in the way those (Japanese land and Japanese equities in 1989, US tech in 2000, and more or less everything in 2007) bubbles did. It is far more likely that the mean reversion will be slow and incomplete. The consequences are dismal for investors: we are likely to limp into the setting sun with very low returns. For bubble historians, though, it is heartbreaking for there will be no histrionics, no chance of being a real hero. Not this time.”

Briefs

    • While not the crux of the article, Anjani provides a succinct description of the rationale for Prime Minister Modi’s recent invalidation of 500 and 1,000-rupee notes (with just a few hours’ notice).
    • “The shock reform is aimed at rubbing out India’s pervasive black money – or unaccounted-for cash, some counterfeit, some legitimate but evading taxes. It is a bold move for Prime Minister Narendra Modi, who should get credit for bringing a larger part of the shadow economy into the formal economy.”
    • “But it is a dangerous move in the near term. The shadow economy accounts for more than 20% of gross domestic product and cash is equal to 12% of the GDP, triple the level in emerging markets generally, according to Nomura. The move has the potential to stifle commerce until the new notes are widely available.”
  • Pilita Clark of the Financial Times discussed an interesting finding by Scientists that there is progress in the fight against growing CO2 emissions.
    • “Global carbon dioxide emissions from burning fossil fuels have stayed almost flat for the third year in a row in what scientists say is a “clear and unpredicted break” that could mark a turning point in the world’s efforts to curb climate change.”
    • “Emissions are only expected to rise by 0.2% in 2016, having failed to increase in 2015 and growing by just 0.7% in 2014.”
    • “That is a sharp turnaround from the decade up to 2013 when carbon pollution growth averaged 2.3% a year.”
    • “A fall in the use of coal in China, by far the world’s largest carbon emitter, is the main reason for the slowdown.”
    • However, “researchers also cautioned that the job of curbing dangerous temperature rises had been made harder by the record growth of carbon dioxide concentrations in the atmosphere.”
    • “Atmospheric CO2 levels surged to 400 parts per million in 2015, the highest level seen in at least the last 800,000 years.”
    • “Concentrations are expected to climb to new records in 2016 on the back of a strong El Nino weather system that produced hot and dry conditions in many parts of the world, sapping the ability of trees and other vegetation to absorb carbon dioxide.”
  • Lucy Hornby and Christian Shepherd of the Financial Times featured the lengths that Chinese shopping mall landlords are going through to attract visitors to their centers, steps that include housing a polar bear named ‘Pizza.’
    • “The use of animals and other attractions comes as malls combat overcapacity, a problem immediately apparent to anyone who has turned up at a dusty, half-vacant shopping center in China’s provincial cities. The country has an estimated 4,000 malls, more than the US, and plans to reach 7,000 by 2025, according to Mall China, an industry organization.”
    • “Malls are starting to bring in a lot more entertainment and a lot more food. There is also a big focus on children – playgrounds, learning centers, even museums.” – Shaun Rein, founder of Shanghai-based China Market Research Group
    • “Last year 83 shopping malls gave up the fight and closed, according to a blue book on the commercial sector by the Chinese Academy of Social Sciences. They will be joined this year by Marks and Spencer, which announced last week it would close several stores in China in an effort to boost its flagging fortunes.”
  • Landon Thomas Jr. of the New York Times highlighted a recent interview with Blackstone’s Hamilton E. James and his plans to help with the retirement crisis.
    • The billionaire, Hamilton E. James, president of Blackstone, the private equity group. The plan, mandatory retirement contributions. It works in Singapore…
    • Why… “the average retirement savings for Americans from the age of 40 to 55 is $14,500… Sixty-eight percent of working-age Americans do not have an employer-sponsored retirement plan. And by 2050, 25 million Americans are projected to face lives of poverty when they stop working.”
  • Peter Grant of the Wall Street Journal pointed to the trouble brewing in commercial real estate.
    • “Defaults are rising in a key corner of the commercial real-estate debt market just as borrowing costs are set to jump, raising the likelihood of a slowdown of the $11 trillion U.S. commercial property sector in 2017.”
    • “Commercial property sales volume was down 8.6% in the first nine months of 2016 to $345.4 billion, according to Real Capital Analytics.”
    • “Now defaults are on the rise as well. More than 5.6% of some $390 billion worth of commercial property mortgages that have been packaged into securities was more than 60 days late in payment in September, according to Moody’s Investors Service. That was up from a 4.6% delinquency rate earlier this year.”
    • “In all, Morningstar Credit Ratings LLC predicts borrowers won’t be able to pay off roughly 40% of the commercial mortgage-backed securities loans coming due next year.”
    • “Adding to the market’s worries are new rules that go into effect on Christmas Eve under the Dodd-Frank regulatory overhaul requiring issuers of commercial mortgage-backed securities to keep at least 5% of the securities they create.”
    • “The so-called risk-retention rules likely will make borrowing more costly and complicated, raising the chances that some property owners won’t be able to refinance loans from the boom years.”
  • Chris Kirkham of the Wall Street Journal illustrated how a worker shortage has led more home builders to turn to prefab construction.
    • “A persistent shortage of construction workers across the U.S. is prompting some of the nation’s largest home builders to experiment with a model they once derided: factory production.”
    • “In the U.S., only about 2% to 3% of homes built in recent years are classified as modular, according to the Census. In other parts of the world, that share is significantly higher. More than a third of all homes in Austria and Sweden are built using off-site methods, and in Japan more than three-quarters of all detached homes are pre-assembled, according to industry research.”
    • wsj-modular-home-building_11-14-16
    • “But throughout the U.S. housing recovery, builders have suffered from a shortage of skilled labor, making it tough for them to keep up with demand. The number of workers employed in the industry this year is nearly 30% below the peak in 2006 and more than 15% below the average during the 2000s, according to the Labor Department.”
  • Chris Kirkham of the Wall Street Journal featured a recent affordable-housing initiative that was passed in Los Angeles that builders say will stifle construction.
    • “Nearly two-thirds of Los Angeles voters last week approved a citywide affordable-housing requirement for developers seeking to build projects of 10 or more units that need a zoning or height change.”
    • “The rule requires that up to 25% of units in rental properties and up to 40% in for-sale projects meet affordability guidelines. Alternatively, developers can pay a fee to the city.”
    • On top of that, the Los Angeles initiative “sets wage standards for the projects.”
    • “Developers must pay construction wages on par with those required for public-works projects, hire 30% of the workforce from within city limits, set aside 10% of jobs for certain disadvantaged workers living within 5 miles of the project and ensure 60% of workers have experience on par with graduates of a union apprenticeship program.”
    • Yeah, so that shortage in labor mentioned above is only going to get better when the qualifications and attributes of which labor you can use are made specific.
    • “Research is mixed on whether affordable housing mandates restrict the overall supply of housing in an area. A San Jose University study of California cities adopting such requirements in the mid-2000s found a notable decline in building permits after the rules were put in place, whereas other studies have found little or no effect on overall construction.”

Graphics

Bloomberg – World’s Biggest Real Estate Binge Is Coming to a City Near You 11/14

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FT – India’s cash clampdown is not radical enough – Martin Sandbu 11/14

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FT – 10-yr Bund yields at 9-month high as bond sell-off continues – Nicholas Megaw 11/13

ft_german-10-year-debt_11-13-16

WSJ – Daily Shot Charts – 11/15

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daily-shot_5yr-us-treasury-yield_11-15-16

daily-shot_market-probability-of-2016-fed-rate-hike_11-15-16

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A Wealth of Common Sense – The Bright Side of Rising Interest Rates – Ben Carlson 11/13

Charts from the Wall Street Journal. Effect of a 1 percentage point increase:

wsj_effects-of-yield-change-increase-of-1-point_11-13-16

Effect of a 1 percentage point decrease:

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Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Era of Low Interest Rates Hammers Millions of Pensions Around World. Timothy W. Martin, Georgi Kantchev, and Kosaku Narioka. Wall Street Journal. 13 Nov. 2016.

“As low interest rates suppress investment gains in the pension plans, it generally means one thing: Standards of living for workers and retirees are decreasing, not increasing.”

“The low rates exacerbate cash problems already bedeviling the world’s pension funds. Decades of underfunding, benefit overpromises, government austerity measures and two recessions have left many retirement systems with deep funding holes. A wave of retirees world-wide is leaving fewer active workers left to contribute. The 60-and-older demographic is expected to roughly double between now and 2050, according to the United Nations.”

“Pension funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. They range from as low as government bond yield in much of Europe and Asia to 8% or more in the U.S.”

“The problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. Global pensions on average have roughly 30% of their money in bonds.”

“Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis.”

“Japan is wrestling with the same question of generational inequality. Roughly one-quarter of its 127 million residents are now old enough to collect a pension. More than one-third will be by 2035.”

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“A typical Japanese couple who are both 65 would collect today a monthly pensions of ¥218,000 ($2,048). If they live to their early 90s, those payouts, adjusted for inflation, would drop 12% to ¥192,000.”

“In the U.S., the country’s largest public-pension plan is struggling with the same bleak outlook. The California Public Employees’ Retirement System, which handles benefits for 1.8 million members, recently posted a 0.6% return for its 2016 fiscal year, its worst annual result since the financial crisis. Its investment consultant recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target.”

“Yet the Sacramento-based plan still has just 68% of the money needed to meet future retirement obligations. That means cash-strapped cities and counties that make annual payments to Calpers could be forced to pay more.”

As an example, the affluent city of Costa Mesa in Orange County, “has outsourced government services such as park maintenance, street sweeping and the jail, as a way to absorb higher payments to Calpers. Pension payments currently consumer about $20 million of the $100 million annual budget, but are expected to rise to $40 million in five years.”

“The outsourcing and other moves eliminated one-quarter of the city’s workers. The cost of benefits for those remaining will surge to 81 cents of every salary dollar by 2023, from 37 cents in 2013, according to city officials.“

Pollution in India: Worse than Beijing. Economist. 10 Nov. 2016.

“Delhi’s annual average measure of PM2.5, a fine dust that is the most toxic component of its pollution, stands at 122 micrograms per cubic meter (μg/m3), about double Beijing’s annual average. On Diwali and ten succeeding days this year, Delhi’s air was clogged with averages of well over 500μg/m3, with peaks of up to 1,000μg/m3. The World Health Organization (WHO) says the ‘safe’ PM2.5 level is a mere 25μg/m3 over hours.”

“Edward Avol, an American scientist who has studied the effects of vehicle exhaust on children, says that Delhi’s pollution is at ‘an occupational level of exposure,’ meaning that it is as bad as that experienced by, say, miners using power tools in a closed space.”

Why… a couple of reasons. 1) The burning of rice stubble after harvest in neighboring areas – politicians are loath to make life difficult for farmers and have provided subsidies to encourage rice cultivation over other crops. 2) The diesel fuel used in India – which has also been subsidized to make it cheaper for farmers and truck drivers whose rigs and machinery run on diesel. Side effect is that diesel has been cheaper than gasoline, hence most Indians drive vehicles that run on diesel. 3) There are simply a lot of people in Delhi and the country is going through an industrialization.

As to the price being paid by the citizens… “A study published in Delhi in 2008 estimated that 40% of residents had damaged lungs. Along with a range of other ill effects from pollution, they were five times more likely to suffer from chronic lung disease than other Indians, and four times more likely to have hypertension.”

“Frighteningly, notes Mr. Avol, those results were based on levels of pollution that are only one-fifth to one-tenth of what Delhi lives with.”

In Trump’s China, Industrial Subsidies Loom Large. Anjani Trivedi. Wall Street Journal. 16 Nov. 2016.

“Large government subsidies, which are no secret, are becoming a larger part of operating profits at China’s companies, both state-owned and private. Almost 14% of listed, nonfinancial companies’ profits are attributable to government support, according to an analysis by Wind Info. That’s up from just under 5% six years ago. Even among private firms, many of which have state shareholders, 11% of profits come from the state.”

“Driving the need for the hand outs: In China, when a company posts losses for four straight years, it gets delisted from the stock exchange. Almost 10% of listed provincial state-owned companies rely on government largess to be profitable.”

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“Thriving sectors benefit as well. In China’s car industry, the world’s largest, subsidies have grown 50% annually since 2010. For leading car maker Geely, government subsidies and grants have accounted for 19% of gross profits, on average, over the past five years.”

However, “government incentives are hardly confined to China. The U.S. has its own web of tax incentives and other inducements. Global multinationals rank among the largest recipients too. Many boost come through programs that incentivize consumers. China’s help tends to be more on the supply-side.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Manhattan Renters Score Record Incentives in Apartment Glut 11/10

Bloomberg – Oil, Earthquakes and the Rush to Save Oklahoma 11/14

Bloomberg – The Real Cost of an MBA 11/16

FT – India’s cash chaos sparks growing backlash 11/13

FT – Buy dollars is the sudden Trump-era consensus trade 11/13

FT – Oil demand will grow for decades, says IEA 11/15

FT – Inflating inflation expectations 11/16

FT – Italy’s 50-year bond burnt in global sell-off 11/16

FT – Bank of Japan tests new firepower 11/16

FT – China’s renminbi hits 8-year low 11/16

FT – US urged to ban acquisitions by Chinese state-owned companies 11/16

LinkedIn – Reflections on the Trump Presidency, One Week after the Election (Ray Dalio) 11/15

NYT – ‘We Couldn’t Believe Our Eyes’: A Lost World of Shipwrecks Is Found 11/11

NYT – Teslas in the Trailer Park: A California City Faces Its Housing Squeeze 11/13

WSJ – SolarCity Could Give Tesla Too Much Sun 11/13

WSJ – At Long Last: The Earnings Recession Is Finally Over 11/13

WSJ – China’s Jack of All Trades (Evergrande Group) Needs a New Strategy 11/15

WSJ – China’s Debt Plan Feels Like Bad Case of déjà vu 11/15

WSJ – Donald Trump: The Housing Market’s Latest Threat 11/15

WSJ – New Competition for ‘Co-Working’ Model 11/15

WSJ – Firms Flee Mortgage-Backed Bond Business 11/15

WSJ – Ritzy Rentals Flood the Market 11/16

WSJ – Bank of Japan Keeps Rates Ready for Something Bigger 11/17

 

October 21 – October 27, 2016

Renewable energy sources overtake coal as the world’s largest source of power capacity. The effects of ageing on the markets.

Headlines

Briefs

  • Gavyn Davies of the Financial Times highlighted the importance of demographics on long-term interest rates.
    • In understanding the long-term direction for interest rates, Gavyn Davies, points to a couple key trends that are likely to imply low interest rates are hear to stay in developed economies.
    • First, the decline in the labor supply growth rate has led to an abundance of capital that doesn’t have a ready place to go, hence higher demand for what investment projects do exist and with capital competing amongst itself, rates go lower/stay low.
    • Second, an increasing dependency ratio (number of young and old people relative to the number of people in the labor force). Not enough savers… this should help raise interest rates considering that less capital is being accumulated; however, there is a nuance in point three.
    • Third, the increasing life expectancy of the population. Well, with people living much longer, people are reluctant to spend as they enter their later years.
  • Chris Newlands and Madison Marriage of the Financial Times covered a recent report that indicates 99% of actively managed US equity funds underperform.
    • According to S&P Dow Jones, “99% of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006. Almost 97% of emerging market funds have underperformed.”
    • Accordingly, “assets held in passive mutual funds have grown 230% globally, to $6tn, since 2007. However, assets held in active funds total $24tn.”
  • Sarah Mulholland of Bloomberg illustrated how rent hikes have been leading to increasing vacancies in retail real estate.
    • With retail lease rents at record highs, tenants are pushing back and vacancies are up. According to a recent report from Cushman and Wakefield, retail vacancy on Fifth Avenue in New York are up to 15.9% in the third quarter, up from about 10% a year ago.
    • As Richard Hodos, vice chairman at CBRE Group Inc, “property trades are being based on achieving ever-higher rents, and nobody every really looks at what retailers can afford to pay. In some cases, rents need to come down 30% or more for rents to be at levels where retailers are able to make sense of them again.”
    •  Bloomberg_Retail Rents on Fifth Avenue_10-25-16
    • The issue isn’t just limited to NYC. “Retailers are being squeezed across the U.S. In 2016, malls and other types of shopping venues have been hit by 280 major-brand store closures, totaling 12.8 million square feet (1.2 million square meters), data from Reis Inc show. Another real estate research firm, Green Street Advisors LLC, estimates that several hundred malls around the country will cease operations over the next decade.”

Graphics

WSJ – City Construction Set to Beat 2007 Peak – Josh Barbanel 10/25

WSJ_NYC building volume_10-25-16

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Renewables overtake coal as world’s largest source of power capacity. Pilita Clark. Financial Times. 24 Oct. 2016.

“About 500,000 solar panels were installed every day last year as a record-shattering surge in green electricity saw renewables overtake coal as the world’s largest source of installed power capacity.” 

Granted capacity does not mean electricity generation – “the amount of energy a plant actually generates varies according to how long it produces power over a period of time.” Thus, traditional sources of power – which generates power constantly (regardless of wind and darkness) – i.e. coal power still generate the majority of the world’s power. “Coal power plants supplied close to 39% of the world’s power in 2015, while renewables, including older hydropower dams, accounted for 23%, IEA data show.” 

Regardless, “two wind turbines went up every hour in countries such as China, according to International Energy Agency officials who have sharply upgraded their forecasts of how fast renewable energy sources will keep growing.”

A large part of the growth has been a result of rapidly declining costs.

“Average global generation costs for new onshore wind farms fell by an estimated 30% between 2010 and 2015 while those for big solar panel plants fell by an even steeper two-thirds, an IEA report published on Tuesday showed.” 

“An unprecedented 153 gigawatts of green electricity was installed last year, mostly wind and solar projects, which was more than the total power capacity in Canada.” 

The agency now predicts that “renewables’ share of power generation to rise to 28% by 2021, when it predicts they will supply the equivalent of all the electricity generated today in the US and EU put together.”

However, there are still policy risks that could slow the advance of renewable energy.

Demographics and markets: The effects of ageing. John Authers. Financial Times. 25 Oct. 2016.

“The new Fed paper suggests that ‘demographic factors alone account for a 1.25 percentage point decline in the natural rate of real interest and real gross domestic product growth since 1980.’ This is a huge claim, as it implies that demographics – rather than fiscal or monetary policy, technology or other changes in productivity – are responsible for virtually all of the decline in economic growth over the past 35 years.” 

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“In short, low yields may be unavoidable and much of the current policy debate may be misguided.”

Fortunately, a reckoning can be delayed by encouraging and allowing workers to work later into their lives.

ft_workers-after-age-65_10-25-16

Other Interesting Articles

Bloomberg Businessweek

Bloomberg – N.Y. Governor Cuomo Signs Bill to Fine Illegal Airbnb Hosts 10/21

FT – Financing ‘trick’ boosts lucrative private equity fees 10/19

FT – Why bond yields are so low 10/19

FT – China’s housing frenzy starts to calm 10/20

FT – The 1890s and the end of the great bond bull market 10/23

FT – Exposure to air pollutants linked to high blood pressure 10/24

NYT – Living in China’s Expanding Deserts 10/24

WSJ – Park Hyatt Hotel Destined for Oceanwide Development in Los Angeles 10/24

WSJ – A Startup’s Pitch: Come Invest With Your Rich Uncle 10/25

WSJ – Blackstone Enters Nontraded REIT Sector 10/25

WSJ – China’s Latest Debt Crackdown Just Delays More Serious Action 10/26

WSJ – How to Get Out of Chinese Property When the Price Is High 10/27