Tag: Italy

June 28, 2017

If you were to read only one thing…

FT – Xi Jinping’s war on financial crocodiles gathers pace – Minxin Pei 6/25

  • “In late April, President Xi Jinping convened a politburo meeting specifically focused on stability in the financial system. Foreshadowing the crackdown, he ordered that those ‘financial crocodiles’ that destabilize China’s financial system must be punished.”
  • “While Mr. Xi did not name those financial crocodiles, it is not hard to find Chinese tycoons fitting this description: those who have borrowed recklessly and bought expensive overseas assets with abandon. A crackdown on such behavior is not only long overdue, but also can serve multiple purposes. As the Chinese saying goes, you slaughter a chicken to warn the monkeys.”
  • “Making an example of China’s wealthiest tycoons can have an instant and powerful deterrent effect and rein in overly aggressive business practices endangering the stability in China’s overleveraged and under-regulated financial sector. But the political benefits of a clampdown on Chinese tycoons, so far overlooked by most observers, are likely to be even more significant.”
  • “A large number of these tycoons had made their immense fortune before Mr. Xi’s ascent to the top in late 2012. As good relations with government officials are critical to business success, it is reasonable to assume that many, if not most, Chinese tycoons have cultivated close personal ties with members of China’s ruling elite.”
  • “Carrying out such a purge is relatively easy. Since many Chinese tycoons depend on state-owned banks for funding, the simplest way of pushing them under is to order the banks to cut off credit. This could force overleveraged tycoons into a liquidity crisis and even bankruptcy. Even those with healthier balance sheets will not be safe. The Chinese authorities will have no difficulty finding them to be in breach of some rule or other, ensuring that a politically motivated purge can be passed off as tough regulatory enforcement action.”
  • “A broader campaign to subdue Chinese tycoons will also help eliminate a longer-term threat to the Chinese Communist party in general, and the authority of Mr. Xi in particular. Under his leadership the party has methodically neutralized threats to its rule — from rival factions, corrupt officials, the media and liberal activists. But one powerful group, business tycoons, has remained largely untouched — until now.”
  • “This crackdown will be discriminating. A large number of Chinese tycoons will be sitting ducks because of their enormous wealth and questionable political allegiances. Others will be left alone or forced to prove their loyalty. When it is over, we should expect a complete re-ordering of China’s economic oligarchy.”
  • “The move against Anbang, Dalian Wanda and others is only the opening shot in this campaign.“

Perspective

WSJ – China’s All-Seeing Surveillance State Is Reading Its Citizens’ Faces – Josh Chin and Liza Lin 6/26

  • “Facial-recognition technology, once a specter of dystopian science fiction, is becoming a feature of daily life in China, where authorities are using it on streets, in subway stations, at airports and at border crossings in a vast experiment in social engineering. Their goal: to influence behavior and identify lawbreakers.”
  • “China is rushing to deploy new technologies to monitor its people in ways that would spook many in the U.S. and the West. Unfettered by privacy concerns or public debate, Beijing’s authoritarian leaders are installing iris scanners at security checkpoints in troubled regions and using sophisticated software to monitor ramblings on social media. By 2020, the government hopes to implement a national ‘social credit’ system that would assign every citizen a rating based how they behave at work, in public venues and in their financial dealings.“
  • “A world where everyone can be tracked by their face wherever they go is still a long way off, and will require much better algorithms and cameras than currently exist, said Anil Jain, the head of Michigan State University’s Biometrics Research Group.”
  • “China is moving in that direction, abetted by a vast surveillance network. Industry researcher IHS Markit Ltd. estimates China has 176 million surveillance cameras in public and private hands, and it forecasts the nation will install about 450 million new ones by 2020. The U.S., by comparison, has about 50 million.”

WSJ – Daily Shot: Data is Beautiful – World’s Highest Paid Athletes 6/27

Worthy Insights / Opinion Pieces / Advice

The Registry – Is Macy’s Amazon’s Next Target – John McNellis 6/23

  • Don’t sell the cow for the magic beans just yet. McNellis is great at providing perspective.

WSJ – Ties Between Chinese Banks and Deal Makers Run Deep – Anjani Trivedi 6/26

Motherboard – Amazon Is Trying to Control the Underlying Infrastructure of Our Economy – Stacy Mitchell 6/25

FT – A family coup in Saudi Arabia – Nick Butler 6/25

FT – Why Italy’s €17bn bank rescue deal is making waves across Europe – FT Reporters 6/26

FT – Italian bailout: too small to fail – Lex 6/26

  • “Blame central bank printing presses, and a consequent hunt for yield, for mispriced risks. By using public funds, European regulators have done nothing to dispel the notion that the ultimate costs of financial stability will continue to be borne by taxpayers.”

Markets / Economy

FT – Advertising agencies squeezed by tech giants – David Bond 6/25

  • “The industry has benefited from the growth in online publicity but it is starting to feel the impact of disruption.”

WSJ – Daily Shot: FRED – US Commercial & Industrial Loan Growth 6/26

WSJ – Daily Shot: FRED – US MZM Money Stock Growth 6/26

Real Estate

Bloomberg – Why Can’t They Build More Homes Where the Jobs Are? – Patrick Clark 6/23

  • “In a logical world, builders would rush to put up homes in the U.S. regions adding jobs at the fastest pace. In reality, it’s not so simple.” 
  • “San Francisco’s metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.”
  • “You can see the imbalance in this chart, based on one that Lawrence Yun, chief economist for the National Association of Realtors, uses to explain the shortage of for-sale homes across the country. For each metro, it compares net new jobs created from 2012 to 2016 with the number of new housing units authorized over the same period. Historically, one new housing unit for every two jobs created is considered normal, Yun said.”
  • “Nationally, builders have added fewer new units in the 10 years ending in 2016 than in any 10-year period since 1990. Low vacancy rates have led to rising rents. House hunters are sweating it out in seller’s markets, in which homes go quickly—and often above the listing price.”
  • “There are two ways to ease the inventory crunch, Yun said in an interview: ‘Either the builders build homes, or real estate investors unload homes onto the market.’”
  • “Why aren’t builders swinging into action? One reason may be a mismatch between the places people want to live and the places where buildable land is available. Plus, builders have had a hard time filling open positions, which boosts labor costs and slows the pace of construction. Zoning rules often prevent greater population density, pushing builders to erect single-family homes on the peripheries of big cities, instead of apartment buildings closer to job centers.” 
  • “Regulatory costs play a role, too. On average, they account for 24% of the expense of building a new home, according to a 2016 study from the National Association of Home Builders. In San Diego, they drive 40% of the cost of a new home, according to a report by a local housing group.”

Bloomberg – These Are the U.S. Cities Where It Costs Too Much to Build – Patrick Clark 6/26

  • “The U.S. needs more new housing.”
  • “Existing homes are in short supply for both buyers and renters, from bustling coastal metropolises to smaller inland cities. Home seekers are bidding up prices and historically low ownership rates mean more people are renting, triggering fierce competition for leases. There are signs that rent growth is slowing—it’s just not slowing quickly enough.”  
  • “A new report published by the National Multifamily Housing Council and the National Apartment Association—two trade groups for landlords—seeks to quantify just how much rental housing is really needed in cities across the U.S.—as well as how difficult it is for real estate developers to actually deliver.”
  • “The first chart seeks to quantify the demand part of the equation. It looks across metropolitan areas, estimating future homeownership rates, household formation, demand for second homes, and attrition of older units—among other factors.”
  • Second chart…
  • “The bad news for cities on this chart is that rent is expensive all over. In seven out of 10 cities where it’s hardest to build, more than two-fifths of renters spend at least 35% of their income on rent. The worst on that count is Miami, where 54% of renter households spend more than one-third of their income to pay for housing.”

Energy

WSJ – Shale Produces Oil, Why Not Cash? – Spencer Jakab 6/26

FT – Oil exporters face fall in foreign exchange reserves – Steve Johnson 6/26

Finance

WSJ – Daily Shot: Danske Bank – US Treasury SOMA redemption schedule 6/26

Environment / Science

NYT – Carbon in Atmosphere Is Rising, Even as Emissions Stabilize – Justin Gillis 6/26

China

FT – Anbang’s predicament amid bank-risk probe – Gabriel Wildau 6/25

  • “Last week China’s banking regulator ordered lenders to report their credit exposures to Anbang Insurance Group and three other private conglomerates that have been snaffling up overseas assets in recent years.”
  • “The move adds to the problems facing Anbang, which has become known for splashy purchases including New York’s Waldorf Astoria hotel.”
  • “Anbang’s rise over the past three years has been spectacular. Premium revenue reached Rmb504bn ($74bn) last year from only Rmb26bn in 2013, driven by sales of universal life insurance, a savings product.”
  • “Anbang is big, and its business model creates risks. Combined assets from Anbang’s life, property and casualty, and health units rose from Rmb163bn to Rmb2.5tn over the same period, making it China’s second-largest privately owned insurer behind Ping An Insurance Group.” 
  • “The group’s business model creates a potential for a maturity mismatch. It sells investment products with maturities as short as two years, but ploughs much of the revenue into assets that could be difficult to sell on short notice. That could leave it struggling to raise cash if many investors ask for their money back at once.”
  • “Anbang’s various subsidiaries own Rmb1.06tn worth of shares in mainland-listed companies, according to Wind Information. Anbang has also completed foreign acquisitions worth more than $11bn since 2014, according to Dealogic.”
  • “Premium revenue at Anbang Life Insurance plunged to just Rmb1.5bn in April from a monthly average of Rmb27bn last year and Rmb82bn per month in January and February, according to CIRC data.”
  • “Sam Radwan, partner at Enhance, a consultancy that advises Chinese insurers, says that many companies that sell short-dated universal life policies use cash from new product sales to help them meet payouts on maturing ones. That way they do not have to sell longer-dated investments. But a halt to sales would threaten that practice if it continues.”
  • “Analysts say regulators may face pressure to allow Anbang to resume at least some new product sales or arrange other temporary funding support. That would give the company more time to raise cash by selling assets or raising new equity.”
  • “Anbang’s last big equity injection, worth $9bn, was in 2014. Since then, Anbang has relied on leverage to fuel its rapid asset growth.” 
  • “The leverage ratio at Anbang Life Insurance — total assets divided by shareholders’ equity — rose from 3:1 to 17:1 from 2013 to 2016, according to Financial Times calculations based on the company’s annual report. State-owned China Life Insurance, which follows a more conservative strategy, has a ratio of 9:1.” 
  • “Anbang Life’s solvency ratio — a metric used to measure an insurer’s ability to meet promised payouts — fell from 150% at the end of last year to 129% three months later. It is still well above the 100% ratio that signals potential inability to meet obligations.”

Europe

Reuters – Italy winds up Veneto banks at cost of up to 17 billion euros – Silvia Aloisi and Steven Scherer 6/26

  • “Italy began winding up two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders’ good assets in the hands of the nation’s biggest retail bank, Intesa Sanpaolo.”
  • “The government will pay 5.2 billion euros to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of Popolare di Vicenza and Veneto Banca, which collapsed after years of mismanagement and poor lending.”
  • “Economy Minister Pier Carlo Padoan said the total funds ‘mobilized’ by the state would be for up to 17 billion euros – three times more than had initially been estimated to recapitalize the banks with public money.”
  • “The decree effectively means that the Veneto banks’ branches and employees will be part of Intesa Sanpaolo by Monday morning, a move designed to avoid a potential run on deposits that could have spread chaos across the whole banking industry.”
  • “Intesa Sanpaolo, Italy’s best-capitalized large bank, said last week it was open to purchasing the rump of the good assets for one euro on condition Italy’s government passed a decree agreeing to shoulder the cost of winding down the two banks.”
  • Well, good thing they waited. Now they were paid €5.2 billion for the good assets.

Other Links

FT – Sale prices for second-hand private jets fall 35% – Hugo Greenhalgh 6/24

  • “Rich find their planes are hard to sell because of glut created a decade ago.”

WSJ – Daily Shot: Car Ownership Cost Comparison 6/26

June 27, 2017

Perspective

Yahoo Finance – Business Insider: Here’s where Americans are moving to and from – Andy Kiersz 6/22

WSJ – For Consumers, Less Debt but Lots of Bills – Justin Lahart 6/23

  • “Americans’ finances are in the best shape they have been in years. As a group, U.S. households’ debt-to-income and debt-to-asset ratios in the first quarter fell to their lowest levels since the early 2000s. A prolonged period of low rates have made that debt easier to bear: The Federal Reserve this week reported that households’ overall debt-service ratio—the share of after-tax income going toward debt payments—are near historic lows.”
  • “But Americans face financial obligations beyond debt payments, such as rents and auto leases, and these are taking a bigger bite out of pay. Indeed, the Fed report shows the share of income going toward non-debt financial obligations is sitting near its highest level since the 1980s. It is a development that particularly for households at lower income levels may be crimping spending.”
  • “Commerce Department figures show the homeownership rate fell to its lowest levels in over a half-century in the years since the financial crisis, and it doesn’t look likely to recover anytime soon. That has tightened the supply of rental units, pushing rents up 18% over the past five years, according to the Labor Department, even as inflation away from housing has been nearly nonexistent.”
  • “So while many people who own their homes have benefited from rock-bottom mortgage rates, renters’ monthly nut has risen. Those renters tend to be poorer: The Fed’s most recent survey of consumer finances, conducted in 2013, showed the median annual income of families that rented was $27,800 versus $63,400 for families that owned.”
  • “Then there are the payments that aren’t included in the Fed’s data on financial obligations, but that consumers are nevertheless obliged to pay. Mobile phone and internet plans, for example, have moved to the essential spending bucket for most households, and they come with a monthly bill. The Labor Department estimates that spending on information and information processing services—a category that includes mobile telephone, landline telephone and internet services—now counts for 3.2% of the average consumer’s spending versus 2.3% in 2000.”

WSJ – Daily Shot: WHO – Global Smoking use under age of 15 6/23

WSJ – Daily Shot: Axios – Number of US Payphones 6/23

Worthy Insights / Opinion Pieces / Advice

FT – Corporate governance minefield awaits China A-share buyers – James Kynge 6/22

  • “A corporate governance minefield awaits fund managers who will be obliged to pour billions of US dollars into Chinese equities after MSCI, the most influential indexer of emerging market equities, decided to include domestic Chinese A-shares in its main global indices.”
  • “Murky or undisclosed ownership structures, regular corruption scandals, exposure to unregulated shadow finance and a predominance of behind-the-scenes state influence over corporate decisions are just some of the governance challenges that global investors in the Chinese A-shares are set to encounter, analysts say.”
  • “A crucial feature of stock market governance is that investors exert influence over the board of directors, who in turn run the company to serve the interests of investors. But for state-owned companies in China, almost the opposite applies. Directors are appointed by the state to run the company for the benefit of state stakeholders who often shy away from engagement with portfolio investors.”
  • “Although the 222 A-shares slated for inclusion a year from now will represent only 0.73% of MSCI’s flagship emerging markets index, the cohort is far from insignificant. UBS, an investment bank, estimates that passive and active investors who track the index will be obliged to invest about $15bn in the Chinese shares.”
  • Caveat emptor.

13D Research – Has the meteoric rise of passive investing generated the “greatest bubble ever”? 6/16

  • “There is, really, no price discovery. And if there’s no price discovery, is there really a market?” – Steven Bregman, co-founder of Horizon Kinetics
  • “It seems algos are programmed with a bias to buy. Individual stocks have risen to ludicrous levels that leave rational humans scratching their heads. But since everything always goes up, and even small dips are big buying opportunities for these algos, machine learning teaches algos precisely that, and it becomes a self-propagating machine, until something trips a limit somewhere.” – Wolf Richter
  • “J.P. Morgan estimated this week that passive and quantitative investors now account for 60% of equity assets, which compares to less than 30% a decade ago. Moreover, they estimate that only 10% of trading volumes now originate from fundamental discretionary traders. This unprecedented rate of change no doubt opens the door to unaccountability, miscalculation and in turn, unforeseen consequence.”

The Atlantic – Power Causes Brain Damage – Jerry Useem July/August Issue

  • “How leaders lose mental capacities – most notably for reading other people – that were essential to their rise.”

Finance

WSJ – Stock Picking Is Dying Because There Are No More Stocks to Pick – Jason Zweig 6/23

China

FT – Alibaba taps user data to drive growth spurt – Louise Lucas 6/21

  • Data, data, data. The more I know about your customers, the more you’re willing to pay me to broker transactions. And the more I know about you (consumer), the better able I am to match you (sell you) with products you’d want.

FT – Big China companies targeted over ‘systemic risk’ – Lucy Hornby, Yuan Yang, Gabriel Wildau 6/22

  • “This is a game changer for Chinese M&A and could pretty much stop all outbound deal making in its tracks.” – Keith Pogson, EY’s senior partner for financial services in Asia.

FT – Beijing’s video-streaming ban lops $1bn off Sina Weibo market cap – Emily Feng 6/22

  • “Chinese regulators have ordered three major internet platforms to halt all video and audio streaming services, as the country ramps up its control over online content.”
  • “Microblogging site Sina Weibo was one of the three slapped with the streaming ban. Popular news portal site iFeng and video streaming platform ACFUN have also been ordered to stop streaming.”
  • “The three companies did not possess the necessary license to stream audio and visual content and were ‘not in line with national audiovisual regulations and propagating negative speech,’ according to an announcement posted on Thursday night on the website of the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), China’s media oversight body.” 
  • “Users would now have to apply for a license to continue video or audio streaming, according to a statement issued by the company.”
  • “The abrupt halt on video and audio streaming comes as China steps up its policing of internet content, particularly content it deems salacious. Earlier this month, more than 60 social media accounts, some on Weibo and including many celebrity gossip channels, were shut down for disseminating ‘vulgar content’ and ‘negatively impacting society’.”
  • “Meanwhile, a new cyber security law that took effect in June now mandates that any data relating to national security must be held on Chinese servers and large data transfers abroad must first be reviewed.”

Europe

Wolf Street – Two Italian Zombie Banks Toppled Friday Night – Wolf Richter 6/23

  • “When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!”
  • “It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.”
  • “The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.”
  • “In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they ‘were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.’”
  • “’Failing or likely to fail’ is the key phrase that banking supervisors use for banks that ‘should be put in resolution or wound up under normal insolvency proceedings,’ the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation.”

Japan

FT – Toshiba to be demoted to second ranks of Tokyo Stock Exchange – Leo Lewis and Kana Inagaki 6/23

  • “Struggling conglomerate leaves Nikkei 225 for first time since index launched in 1950.”

Turkey

NYT – Turkey Drops Evolution From Curriculum, Angering Secularists – Patrick Kingsley 6/23

  • “Turkey has removed the concept of evolution from its high school curriculum, in what critics fear is the latest attempt by President Recep Tayyip Erdogan’s government to erode the country’s secular character.”
  • What does one do when there is an inconvenient truth… deny its existence and keep future generations in the dark.

February 3 – February 9, 2017

Chinese companies stashing cash ($110bn) in wealth management products. Italian banking sector depending on UniCredit?

Headlines

FT – Bank of Japan intervenes to buy 10-year JGBs 2/3. Well for now it appears that the Bank of Japan’s tolerance for the Japanese 10-year bond is about 0.11% – the point at which it just intervened in the market indicating it would buy an unlimited amount of bonds to keep them at that rate or less.

FT – Overseas Chinese acquisitions worth $75bn cancelled last year 2/5. “Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through.”

WSJ – U.S. Firms Slash Interest Tab in $100 Billion Refinancing Blitz 2/8. Borrowers are using investor demand for yield to impose rate reductions on their debt.

NYT – A Crack in an Antarctic Ice Shelf Grew 17 Miles in the Last Two Months 2/7. A rift in the Larsen C ice shelf (one of the largest) that started in late 2014 is about 2 months away from pushing a very large glacier into the sea and leading to an eventual collapse of the Larsen C – which is not good.

Bloomberg – Supply Is the Technical Factor Behind Global Rally in Markets 2/8. “In short, a world with excess savings is still struggling to sate its appetite for investable assets in public markets, amid a net shortage of new stocks and corporate bonds.”

Special Reports / Opinion Pieces

Briefs

  • Stephen Foley and Hannah Kuchler of the Financial Times elaborated on institutional investor anger over Snap’s decision to offer voteless shares.
    • Snapchat (Snap) is a first in pursuing an IPO that will issue shares to the market with NO voting power. “The two founders, Evan Spiegel, chief executive, and Bobby Murphy, chief technology officer, will control the company and continue to do so even if they step down.”
    • “The prospectus says a founder’s voting power will only be diluted if he cuts his stake substantially or ‘nine months after his death.'”
    • “Other technology companies, including Google and Facebook, have concentrated control in the hands of their founders, creating different classes of stock. But none has gone public with a class that has no votes whatsoever.”
    • The pros – management can focus on long-term value. The cons – management is not accountable to its outside shareholders.
    • The downside to index funds – “many funds will be forced to own Snap when it is included in major stock market indices…”
    • The concern is the precedent this could set…
  • Anne Richards of the Financial Times discussed the challenges posed to markets by long-term demographic trends.
    • “The global economy has now passed an important tipping point. For the first time in recorded history, children under the age of five no longer outnumber those aged 65 and above. We have arrived at ‘peak child.'”
    • “The United Nations has estimated that the global population will continue to age and, by 2050, more than 15% of the global population will be aged over 65. Economists often point to the challenges that Japan faces as the population ages; by 2050, most of the G7 will have a similar demographic profile as Japan does today, as will China, Brazil and Russia.”
    • “In a world where immigration policy reform is increasingly dominating political agendas, policymakers should recognize that gross domestic product largely reflects a demographic profile where more workers enter the workforce, who (if everything goes to plan) will then produce, earn and consume more than the previous quarter.”
    • “Naturally, as the workforce shrinks due to aging, the reverse will be true. However, it does not necessarily mean than an economy is underperforming if the trend rate of growth is falling to reflect a smaller workforce.”
  • Peter Grant of The Wall Street Journal highlighted that several large investors have cut back on their property exposure due to the bull market losing steam.
    • “Some prominent real-estate investors (i.e. Blackstone Group, Brookfield Asset Management, United Parcel Service Inc’s pension trust and Harvard Management Company) are reducing their holdings and getting more selective about new deals, in a sign that the eight-year bull market for U.S. commercial property is coming to a close.”
    • “Deal volume decreased by $58.3 billion, or 11% in 2016, the first annual decrease since 2009, according to data firm Real Capital Analytics.“
    • “Caution among investors in the $11 trillion U.S. commercial property sector is being driven by lofty prices, the length of the market cycle so far and the recent rise in interest rates, which makes bonds look more attractive compared with commercial property. Also, developers are adding new supply of some property types at the fastest rate since the recovery began.”
    • “For example, more than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real-estate tracker Axiometrics Inc.”
  • Lucy Hornby of the Financial Times covered the vow made by Beijing’s mayor to banish parts of the city to the provinces.
    • “Beijing’s new mayor has vowed to gut the city of all functions unrelated to its status as national capital, in an effort to push the growing population into the surrounding provinces.”
    • “Mr. Cai said he would reduce Beijing’s land zoned for construction and cap the city’s population at 23m.”
    • “Almost 22m people now live in Beijing or surrounding satellite cities, up from 4m in 1950 and 9m in 1980.”
  • Robin Wigglesworth of the Financial Times pointed US small-caps guru Henry Ellenbogen’s recent concerns over the post-election rally.
    • “US small stocks guru Henry Ellenbogen is concerned that the ferocious post-election equity rally could unravel unless the economy accelerates sharply to justify the frothy valuations, warning that most of the gains were powered by fickle inflows into exchange traded funds.”
    • “Over $20.6bn has gushed into US small-caps ETFs since early November, according to EPFR, while dedicated small-caps mutual funds have actually suffered some outflows, underscoring the role of passive investment vehicles in the move.”
    • “‘When you have those kind of flows into an illiquid asset class, you can really drive performance. Stuff that was outside the index has been roughly flat, while everything in the index has risen significantly,’ Mr. Ellenbogen said. ‘If there is a setback, the fund flows that drove small-caps higher will be just as aggressive on the way out.'”

Graphics

WSJ – Daily Shot: US Major Inflation Components 02/02

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WSJ – Daily Shot: US Cord Cutting 02/02

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WSJ – Daily Shot: FRED – Domestic Bank Demand for Commercial Real Estate Loans 02/06

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WSJ – Daily Shot: S&P Retail – S&P 500 Relative Performance 02/06

  • “US retail shares continue to underperform as investors question business models.”

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WSJ – Daily Shot: Domestic Water Use Per Capita by U.S. State 02/06

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WSJ – Daily Shot: FRED – US Student Loan Balance 02/07

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WSJ – Daily Shot: Statista – Lawsuits filed against US Administrations in first 14 days 02/07

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WSJ – Daily Shot: Global Skyscraper Construction 02/07

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FT – China forex reserves dip under $3tn to touch 5-year low – Gabriel Wildau 2/7

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FT – Investors pile into risky bonds in bet on Trump economy – Eric Platt 2/8

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WSJ – Daily Shot: EIA – US Electricity Production 02/08

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WSJ – Daily Shot: US Market Volatility 02/08

  • “Volatility is dead. We’ve now hit 85 consecutive days without a 1% drop in the S&P 500. The last time this occurred was in 2006.”

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Bloomberg – The Race to the Speed of Light Is Accelerating – John Detrixhe 2/8

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WSJ – For Chinese Home Buyers, Seattle Is the New Vancouver – Laura Kusisto and Kim Mackrael 2/7

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WSJ – Daily Shot: Pew Research – US Religiosity Index 02/08

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Economist – Emerging markets’ Trump tantrum abates, except in Turkey 2/4

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Featured

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

Chinese companies park record $110bn in wealth products. Don Weinland. Financial Times. 6 Feb. 2017.

“Cash-rich Chinese corporations are running out of places to invest.”

“As economic growth cooled and investment opportunities ebbed in China last year, listed companies moved a record $110bn of idle cash into financial products, mainly at banks, according to data from Wind Financial Information.”

“The flood of company funds into wealth management products – up some 40% on the previous year – was a sign that many groups in the country shunned risky corporate expansion amid the economic slowdown, instead preferring short-duration investments.”

“About $64bn of the cash companies invested in wealth products had been raised from investors through initial public offerings and private placements…” Why raise cash if you’re not going to use it?

“Over the past four years, Chinese regulators have leaned on listed groups to pay out regular dividends in the hope of bringing mainland bourses more in line with international standards.”

“The wealth management investments show that many state-held groups still refuse to return cash to shareholders.”

“‘The state still has strong holdings in many of these companies, often more than 50%. So institutional investors cannot put pressure on companies to pay out dividends,’ said Wong Chi-man, executive director at China Galaxy International Securities.”

Okay, so if all of these companies (which are traditionally where idle capital is sent to generate economic returns) are preferring to sit on cash for a lack of investment opportunities within their own business, how are the wealth management products being sold going to generate returns – especially at scale?

Is Italy’s financial future resting on UniCredit? Rachel Sanderson, Martin Arnold and Jonathan Ford. Financial Times. 6 Feb. 2017.

“Jean-Pierre Mustier, chief executive of UniCredit, has criss-crossed the world in the past two months seeking to cajole investors into buying €13bn in new shares – a major test of confidence not just for Italy’s largest bank but also the country’s teetering banking sector.”

“As UniCredit launched its bumper rights issue on Monday – at a steep 38% discount to its theoretical ex-rights issue price – bankers in the underwriting consortium said they were confident that it would be successful. It needs to be… Besides worries about profitability and governance, investors fear the industry’s €360bn mountain of doubtful loans, of which €200bn are in default.”

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“The offering comes at a tumultuous moment. The implementation of a government decree – earmarking €20bn to rescue several midsized banks, including Monte dei Paschi di Siena, the world’s oldest lender – remains up in the air.”

“The broader issue is whether a successful fundraising by UniCredit will help draw a line under concerns about Italy’s largest bank by assets, and in turn Italy’s banking sector.”

“Italian banks have long been burdened by a large stock of non-performing loans, which they have valued at prices higher than investors are willing to pay.”

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“Gross non-performing exposures measured €356bn, or 17.7% of total loans, according to the latest financial stability report. That is three times the amount that is normal in most European economies. The stock of gross sofferenze – the worst kind of defaulted loan – remains at about €200bn; net of provisions that the banks themselves have taken these amount to €85bn.”

“Mr. Mustier, speaking to the Financial Times in December, suggested that the problem of its NPLs (Non-Performing Loans) is deeper than many appreciate.”

“He said the issue stems from Italy’s double-dip recession but also from Italian companies’ practice of funding themselves with ‘hot money.’ The companies had ‘the wrong kind of balance sheet,’ he said. ‘They had not enough capital and they were managing their liabilities by having short-term liabilities to cover long-term assets.'”

“It has taken Mr. Mustier, a Frenchman who lived in London for 20 years, to call out the deeper cultural problems facing Italy’s banking sector. The question is whether his remedy will last beyond this month’s share sale.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – What are China’s 12345 hotlines? 2/7

Economist – Buttonwood: Bubbles are rarer than you think 2/8

Economist – Melania Trump’s “once-in-a-lifetime” opportunity to profit 2/9

FT – Snap: clickbait 2/2

FT – Shanghai shows changing face of FDI in China 2/3

FT – US protectionism and deglobalization spell inflation 2/5

FT – Foreign investors cut holdings of China bonds for first time since 2015 2/5

FT – IMF board split over bailout terms for Greece 2/6

FT – Facebook and Google team up to fight fake news in France 2/6

FT – Thinking the unthinkable on Germany going nuclear 2/6

FT – China credit flood set to persist despite PBoC rate rises 2/8

FT – Why is the eurozone back in crisis over Greece? 2/8

FT – South Korean court all but sinks Hanjin Shipping 2/9

FT – US inflation expectations slide 2/9

NYT – Steve Bannon Carries Battles to Another Influential Hub: The Vatican 2/7

WSJ – The Next American Farm Bust Is Upon Us 2/9

WSJ – Landlord Concessions Rising in Manhattan and Brooklyn 2/9

 

 

December 16 – December 22, 2016

China no longer the largest US creditor – Japan is again. China capital outflows, have you looked at the bank loans? Brazil’s Odebrecht just got served the FCPA’s largest settlement.

Happy Holidays!

Headlines

  • FT – Ferocious competition roils private equity market 12/17. Deal volume is down, acquisition multiples are up (“acquisitions made in the first half of this year required private equity managers to pay on average 10 times the cash flow of a target company, well above the previous peaks for deal valuations in 2006 and 1999”), dry powder is at a record closing in on $1tn, and future returns are looking skinny, but then again consider your options in stocks and bonds.
  • FT – Private equity: lowering the bar 12/20. Following on the previous headline, despite – or rather because of – lower projected returns, top tier private equity groups are able to dictate terms on investors. In some cases lowering the hurdle rate from 8% to 6% or in some cases just removing them altogether…
  • NYT – Calpers Cuts Investment Targets, Increasing Strain on Municipalities 12/21. Calpers is reducing benefits and lowered its return assumptions from 7.5% to 7.0% to be phased in over three years. Oh, and “shifting expectations down to 7% will force the State of California to contribute an additional $2 billion a year for state workers…”

Special Reports / Opinion Pieces

  • FT – The Opec agreement: Russia’s role adds a geopolitical twist – George Abed 12/15
    • “The three-way oil agreement involving Russia, Saudi Arabia and its GCC neighbors, and Iran, who in combination produce nearly a third of global supplies, is likely to have tamed the wild gyrations of the oil market, at least for a time. More significantly, the accord may have given rise to an uneasy alliance of convenience which may have broader implications, for the future of the Middle East as much as for the global oil markets.”

Briefs

  • Andres Schipani of the Financial Times illustrated how hyperinflation is at Venezuela’s doorstep.
    • Last week the Venezuelan President Nicolas Maduro “announced plans to scrap the ubiquitous 100 bolivar bill, which makes up about half the country’s banknotes but is increasingly worthless as annual inflation is forecast to top 1,600% next year.”
    • “The plan, which the government insists is necessary to fight currency hoarders and counter an ‘economic war’, is to replace the old money with new high denomination notes, including 20,000 bolivar bills.”
    • However, due to looting, riots, and protests that accompanied this initiative, the president has extended the currency’s use until sometime in the new year.  This of little comfort with monthly inflation above 50% and where it is difficult to obtain high denomination notes.
    • “Caracas-based consultancy Ecoanalitica said the range of notes reflected inflation of 17,011% since the older notes were first launched in 2008.”
  • Chris Kirkham of The Wall Street Journal highlighted that the percentage of young Americans living with their parents is at a 75-year high.
    • “Almost 40% of young Americans were living with their parents, siblings or other relatives in 2015, the largest percentage since 1940, according to an analysis of census data by real estate tracker Trulia.”
    • wsj_percentage-of-18-34-year-olds-living-at-home_12-21-16
    • “The result is that there is far less demand for housing than would be expected for the millennial generation, now the largest in U.S. history. The number of adults under age 30 has increased by 5 million over the last decade, but the number of households for that age group grew by just 200,000 over the same period, according to the Harvard Joint Center for Housing Studies.”
    • Why? “Analysts point to rising rents in many cities and tough mortgage-lending standards as the culprit…”
    • Well at some point this back log is likely to play out with an increase in household formation and housing starts. As it stands, “economist project the historically large millennial generation will more than double its current number of households through 2025.”
  • Rachel Sanderson, James Politi, and Martin Arnold of the Financial Times covered the Italian bail out of the world’s oldest bank – Monte dei Paschi di Siena bank.
    • “Monte dei Paschi di Siena is to be rescued by the Italian state using a new €20bn bailout package, as a last-gasp private sector rescue plan for the world’s oldest bank looked set to fail, forcing losses on bondholders.”
    • “The state funds to rescue the bank would come from a €20bn package approved by both houses of parliament on Wednesday that could be used to bail out several of Italy’s most fragile banks. Goldman Sachs estimates they need €38bn to be adequately capitalized.“
    • Granted, not everyone is pleased. “A backlash against a taxpayer-funded bailout of Italy’s weakest lenders has already begun. Codacons, a consumer lobby group, estimated €20bn ploughed into Italy’s failing lenders would cost each Italian family €833.”

Graphics

WSJ – Daily Shot: Vancouver Housing Market Correction 12/18

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WSJ – Daily Shot: Declining income mobility in US 12/18

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Visual Capitalist – 75 Years of How Americans Spend Their Money – Jeff Desjardins 12/19

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WSJ – Daily Shot: S&P vs. Treasury Spread 12/20

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FT – China’s ‘airpocalypse’ hits half a billion people – Yuan Yang 12/19

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WSJ – Daily Shot: Change in Mortgage Rates Since Election 12/21

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WSJ – Daily Shot: Percentage of Adults Without Children in House 1967 & 2016 12/21

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FT – Hedge fund fees take a trim – Lindsay Fortado 12/21

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Featured

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

China cedes status as largest US creditor to Japan. Tom Mitchell, Joe Rennison, and Eric Platt. Financial Times. 16 Dec. 2016.

“Beijing’s ownership of US Treasuries fell by $41.3bn to $1.12tn in October, according to data from the US Treasury released on Thursday – the sixth straight month of decline. Japan’s holdings fell by $4.5bn to $1.13tn for the same period.”

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According to Eswar Prasad, an economics professor at Cornell University and former IMF director for China, “this pattern is unlikely to be reversed in the near future, especially with US and Chinese economic fortunes and monetary policy stances continuing to diverge. The days of China providing abundant and cheap financing for US budget and current account deficits through the purchases of Treasury securities may have come to an end.”

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“China and Japan account for 37% of the total $6tn of holdings tracked by the Treasury and Federal Reserve.”

China capital outflows: bank loans dwarf foreign deals. Gabriel Wildau and Don Weinland. Financial Times. 17 Dec. 2016.

“While an overseas buying spree by Chinese companies has grabbed headlines, more mundane activity such as trade finance and corporate cash management are a much bigger strain on China’s foreign exchange reserves, analysis of official data shows.”

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“‘Several hundred billion in outflows are simply associated with repayment of existing loans,’ said Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official.”

“Foreign bank claims on China, a broad measure of cross-border lending, have fallen by $305bn in the 18 months through June this year, according to the most recent figures from Bank of International Settlements, showing how banks are pulling funds from the country. Claims had risen by $643bn in the previous two years.”

“Much of this lending came in the form of trade finance. When the renminbi was appreciating against the dollar, Chinese importers eagerly borrowed in dollars.”

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“‘Corporates rushed to raise funding in dollars because interest rates were very low. Now that carry trade is being unwound,’ said Harrison Hu, China economist at Royal Bank of Scotland in Singapore.”

“To be sure, the regulatory focus on corporate deals is a response to a rapid acceleration of outbound FDI. But it also reflects the lower disruption from tightening the reins on foreign acquisitions compared with forcing loan or bond defaults by blocking cross-border debt repayments.”

“‘The cross-border regulations could definitely have an impact on companies that have offshore debt,’ said Xia Le, chief Asia economist at BBVA in Hong Kong. ‘There is a concern that many will have to refinance but at a much higher cost. They will need to issue very high-yielding bonds.'”

Brazil’s gargantuan corruption scandal goes global. Economist. 22 Dec. 2016.

“On December 21st America’s Department of Justice (DoJ) reached a $3.5bn settlement with Odebrecht, Brazil’s biggest builder, and with Braskem, a petrochemical joint venture between that firm and Petrobas. The DoJ alleges that since 2001 Odebrecht and Braskem paid $788m in bribes to officials and political parties in Brazil and in 11 other countries.“

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“The payoffs brought Odebrecht and Braskem contracts for around 100 projects, many of them to build public infrastructure. Often, governments paid more for the work than they needed to. The DoJ alleges that Odebrecht set up a ‘Division of Structured Operations,’ which ‘effectively functioned as a stand-along bribe department.'”

“The settlement is the biggest yet under America’s Foreign Corrupt Practices Act (FCPA). It is more than double the previous record: $1.6bn paid by Siemens, a German engineering giant, in 2008.”

“Odebrecht has accepted that the appropriate fine for the company is $4.5bn but says it can only afford $2.6bn; the remaining $900m is owed by Braskem.”

Additionally, now the authorities in the 11 countries will have a crack at the two companies.

Either way “Odebrecht is a shadow of its former self. To survive the investigations, it has been retrenching. Over the past three years the company has reportedly laid off 100,000 of its 181,000 employees, most of them since the launch of the Petrobas investigation in March 2014…. Even Odebrecht’s stake in Braskem, which makes up half of the construction firm’s revenues, may be up for sale. That is quite a comedown for a company named in 2010 by a Swiss business school as the world’s best family-run firm.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Central bank injection soothes China credit squeeze 12/15

FT – China’s exports to the US fall for first time since crisis 12/15

FT – US drugmaker charges 200 times UK price for common worm pill 12/18

FT – Vanke: to our sponsors 12/19

FT – Yield on German two-year debt falls to new low 12/19

FT – Uber racks up $800m third-quarter loss despite China exit 12/19

FT – Italy seeks up to €20bn to prop up fragile lenders 12/19

FT – China’s bull market in bonds on borrowed time 12/19

FT – Lawyers demand Chinese government action to clear smog 12/20

FT – US sues Barclays for fraud over crisis-era loans 12/22

LinkedIn – Reflections on the Trump Presidency, One Month after the Election (Ray Dalio) 12/19

Miami Herald – Miami Beach wants to know if you’re renting your condo on Airbnb 12/15

NYT – How Republics End (Krugman) 12/19

NYT – Hedge Fund Math: Heads We Win, Tails You Lose 12/22

ValueWalk – CalPERS Cuts Retiree Benefits For First Time Ever 12/20

WSJ – China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities 12/15

WSJ – Surging Dollar Upends China’s Huge Bond Market 12/16

WSJ – Platinum Partners’ Executives Charged With $1 Billion Securities Fraud 12/19

 

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

wsj_daily-shot_bloomberg-barclays-us-corporate-high-yield-avg_12-08-16

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 25, 2016 – December 1, 2016

Another Arab awakening looming. China clamp down on capital flight. Indonesia’s forests are burning.

Headlines

Special Reports / Opinion Pieces

Briefs

  • Rachel Sanderson of the Financial Times brought attention to the fears of Italian bank failures with the pending referendum this weekend.
    • “Italy’s banks have €360bn of problem loans versus €225bn of equity on their books.”
    • Should prime minister Matteo Renzi lose a constitutional referendum this Sunday (12/4), there are eight banks in various stages of distress that are rather exposed…not to mention any potential panic that may spread across Europe.
  • Yuan Yang and Hudson Lockett of the Financial Times highlighted that there is a sperm crisis of sorts in China as male fertility is declining.
    • “Last year fewer than a fifth of young men who donated sperm in the inland province of Hunan had sufficiently healthy semen to qualify as a donor, according to a 15-year study of more than 30,000 applicants. In 2001 more than half qualified.”
    • “‘Growing evidence seems to suggest that male infertility is increasingly becoming a serious concern in the entire country,’ said Huang Yanzhong, senior fellow for global health at the Council of Foreign Relations in New York. If shown to reflect a broader trend, such findings would further complicate China’s mounting demographic problems.”
    • For reference, “China’s fertility rate – the number of children a woman is expected to have during her child-bearing years – was 1.05 last year….”
    • “The researchers in the Hunan semen study, published online in the journal Fertility and Sterility, say there is no clear explanation for why donors’ reproductive health declined so rapidly. But they point to ‘increased environmental pollution, including pollution of water, air and food,’ as a possible explanation.”
  • Sonia Talati of Barrons pointed to the declining sales prices in the Miami condominium market.
    • “The correction in Miami’s overheated condo market, which we predicted 18 months ago, has arrived sooner than we expected. Sales are down 30% since last October to 983 units. 870 newly-constructed units are currently listed, and only some 50 sold in the last six months, according to the latest report of real estate lender StatFunding.com.”
    • “Prices are coming down to the point that people are selling their Miami condos at a loss to be rid of their properties. Take, for example five units in the luxury-waterfront condominium building, Marina Palms, which sold below the prices that the sellers originally paid. One seller, who had purchased a unit for $950,000, hoping to soon have a property north of a million dollars, recently sold the unit for $800,000, a  16% loss, one year later. According to the StatFunding.com report, the number of resale condos sold at a loss is up 500% since May.”
    • “The Miami condo market is going through a ‘price discovery phase,’ says Andrew Stearns, Statfunding.com’s founder and CEO, with potential buyers ‘hesitant to enter into the market at the prices sellers are asking.'”
    • “Buyers are sitting on the fence with good reason. More than 10,000 units are scheduled to be completed within the next two years, almost doubling the existing available inventory of 14,000 condos.”

Graphics

FT – North Pole temperature rise increases climate fears – Pilita Clark 11/22

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FT – British workers face worst decade for pay in 70 years – Gemma Tetlow 11/24

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Economist – What the world worries about 11/24

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FT – India’s demonetization in four charts – Kiran Stacey 11/27

ft_india-demonetization_11-27-16

WSJ – Daily Shot – 11/30

wsj_daily-shot_moodys-rated-chinese-corporates_11-30-16

Featured

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

De-development: Another Arab awakening is looming, warns a UN report. Economist. 29 Nov. 2016.

On November 29, the UN produced its latest Arab Development Report and the findings are not all that encouraging. “Five years on from the revolts that toppled four Arab leaders, regimes are ruthlessly tough on dissent, but much less attentive to its causes.”

“As states fail, youth identify more with their religion, sect or tribe than their country. In 2002, five Arab states were mired in conflict. Today 11 are. By 2020, predicts the report, almost three out of four Arabs could be ‘living in countries vulnerable to conflict.'”

“Horrifyingly, although home to only 5% of the world’s population, in 2014 the Arab world accounted for 45% of the world’s terrorism, 68% of its battle-related deaths, 47% of its internally displaced and 58% of its refugees. War not only kills and maims, but destroys vital infrastructure accelerating the disintegration.”

“The Arab youth population (aged 15-29) numbers 105m and is growing fast, but unemployment, poverty and marginalization are all growing fast. The youth unemployment rate, at 30%, stands at more than twice the world’s average of 14%.”

“Yet governance remains firmly in the domain of an often hereditary elite. ‘Young people are gripped by an inherent sense of discrimination and exclusion,’ says the report, highlighting a ‘weakening [of] their commitment to preserving government institutions.'”

Further, “despite the Arab League’s pretensions to brotherhood, visa-free travel among its 22 countries in unusual. Many Arabs need exit permits to boot.”

As the report’s lead author, Jad Chaaban, so aptly puts it “the moment I ban a displaced or marginalized person from traveling to work, I’m implicitly leaving him as a victim for an extremist ideology.”

On the plus side (or downside for the ruling elites), the current youth of the Arab world are better educated and more in tune with the world at-large thanks to social media.

China to clamp down on outbound M&A in war on capital flight. Gabriel Wildau, Don Weinland, and Tom Mitchell. Financial Times. 29 Nov. 2016.

“China is readying new restrictions on outbound foreign investment in an effort to curb capital outflows that are putting downward pressure on the renminbi and draining foreign exchange reserves, according to people who have seen a draft of the rules.”

“The State Council is most concerned about outbound mergers and acquisitions worth more than $10bn, said two people familiar with the government’s deliberations. They added that Chinese officials would scrutinize purchases of more than $1bn if they were outside the investor’s core business. Meanwhile, state-owned enterprises will not be allowed to invest more than $1bn on a single overseas real estate transaction.”

“‘The reversal of measures to liberalize capital outflows reflects China’s zig-zag approach to reforms,’ said Eswar Prasad, a China finance expert at Cornell University. ‘This step signals the government’s conventional preference for stability and control rather than economic liberalization and resulting volatility.'”

“According to commerce ministry data, Chinese companies’ overseas purchases have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”

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“Due largely to capital outflows, the renminbi has fallen 5.8% this year, on track for its worst year on record. China has sold dollars from its foreign exchange reserves to try to curb downward pressure on the currency, with reserves hitting $3.12tn at the end of October, the lowest level since March 2011.”

“China is on course to record its first net foreign direct investment deficit this year, according to balance of payments data. Inbound FDI exceeded outbound flows every quarter from 1998 until the middle of last year but China has reported FDI deficits for four of the past five quarters, including a record $31bn in the third quarter of 2016.”

In addition to concerns about capital flight due to US dollar appreciation relative to the Yuan, “analysts and bankers said Beijing was also concerned about the quality of Chinese overseas investments. The government fears some transactions are being rushed through without proper due diligence to cash in on the dollar’s continuing appreciation against the renminbi.”

Despite tough talk, Indonesia’s government is struggling to stem deforestation. Economist. 26 Nov. 2016.

Despite being offered $1bn by Norway to stop cutting down its forests, Indonesia continues to burn its peatlands.

“In recent years no country has lost forest at a faster rate than Indonesia. Between 2000 and 2012 around 6m hectares [14.8m acres] of primary (meaning virgin) forest disappeared, mainly on the islands of Borneo and Sumatra. Roughly 40% of the deforestation took place in nominally protected areas.”

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Further, the forest being cleared tends to be peatland. “Indonesia contains around 14.9m hectares of peatland – most of the world’s tropical peat forests.”

“Peat forests can be as much as 200 times more damaging to the atmosphere when burnt than other types of vegetation, both because they store more carbon and because more of it is released as methane, an especially harmful greenhouse gas.”

Bottom line, the palm-oil firms have too much influence and it has been too easy bribe officials to gain access to protected lands… “a paper published in 2013 found that almost 90% of deforestation in Sumatra between 2000 and 2010 was done by big palm-oil firms.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

AWCS – Something I’m Worried About (underfunded pensions) 11/27

Bloomberg – Trump’s Tax Cut Means Billion-Dollar Writedowns for U.S. Banks 11/30

Economist – Barcelona hits Airbnb with a hefty fine 11/25

FT – Lawyers shake up a sleepy pension world 11/24

FT – Nigerian oil companies hit hardest by funding crisis 11/26

FT – China ‘fake equity’ court ruling threatens shadow banks 11/27

FT – Hunt for yield pushes more investors into riskier assets 11/28

FT – China M&A: full stop 11/29

FT – Beijing targets family assets in city anti-graft crackdown 11/29

FT – Chinese household debt surges 11/29

FT – China slaps extra tax on super-luxury cars 11/30

Inst. Investor – How Low Can CalPERS Go? 11/30

NYT – In Scotland, Trump Built a Wall. Then He Sent Residents the Bill. 11/25

NYT – Inside a Fake News Sausage Factory: ‘This Is All About Income’ 11/25

NYT – ‘My Soul Feels Taller’: A Whistle-Blower’s $20 Million Vindication 11/25

Vanity Fair – My descent into the right-wing media vortex 11/23

Visual Capitalist – Fertility Rates Keep Dropping, and it’s Going to Hit the Economy Hard 11/25

WSJ – Rising Mortgage Rates Help, but Also Hurt, Banks 11/27

WSJ – Big Names Take Hit on Theranos 11/28

WSJ – Home Prices Recover Ground Lost During Bust 11/29

WSJ – Chinese Developers Reassess U.S. Projects 11/29

WSJ – Why Italian Stability Is in the Hands of One Bank’s Bondholders 11/30

WSJ – India’s Cash Dash Stuffs Banks With Problems 12/1

 

July 1 – July 7, 2016

The bad debt in Italian banks is looking like a BIG problem. The world has become more reliant on Middle Eastern oil. Not looking so rosy for hedge fund reinsurers.

Headlines

Briefs

    • As yields the world over drop “the effective yield on 7-to-10 year investment-grade corporates was 3.19%, according to Bank of America Merrill Lynch.” But relative to everything else, that’s really quite attractive.
    • “Indeed, in the universe of investment-grade debt, U.S. corporate bonds are close to the only game in town for investors looking for any yield. BofA Merrill Lynch credit strategist Hans Mikkelsen calculates that U.S. corporate bonds account for around 12% of all investment-grade debt outstanding world-wide yet they now represent about 33% of investment-grade yield income. Put otherwise, U.S. corporate bonds generate one out of every three dollars paid out by the entire universe of investment-grade debt.“
    • “Almost 87% of Japanese government bond yields are now below zero.”
    • “Unlike other major central banks, the BOJ is a buyer at almost any price and mainly purchases government bonds, which represent almost two-thirds of negative-yielding global sovereign debt globally.”
    • “Further buying will only push yields lower. Cutting back, while helpful in the short- to medium-term, means that the BOJ has to find other Japanese securities. But, unlike Europe or the U.S., asset-backed securities and corporate bonds are hardly an option because of their relatively small market sizes.”
    • For reference, “the BOJ now holds almost 30% of its government’s bonds.”
  • Rich Miller and Steve Matthews of Bloomberg called attention to the challenge that Janet Yellen faces in regard to setting rates when the US economy is running short of labor.
    • “Seven years into the economic expansion, the U.S. is showing signs it’s running short of job seekers qualified to fill openings. The shortfall, which has been evident for some time for highly skilled workers, is spreading to workers with less education as unemployment falls further.”
    • “We are now close to eliminating the slack that has weighed on the labor market since the recession.” – Janet Yellen, Federal Reserve Chair on June 6
    • “At 4.7% in May, the jobless rate is around the level that most Fed policymakers consider to be full employment.”
  • Central Banks are putting a squeeze on the bond market according to Min Zeng and Christopher Whittall of the Wall Street Journal.
    • “A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower.”
    • “Central banks themselves are having trouble finding all the bonds they need. The ECB, for example, can’t buy bonds with a yield lower than its deposit rate of minus -0.4%. As of July 1, 58% of German bonds eligible for ECB purchases traded below that level, according to Frederik Ducrozet, a senior economist at Pictet Wealth Management.”

Special Reports

Graphics

FT – Government bond yields fall to fresh record lows led by UK Gilts 7/1

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WSJ – Debt for Cheap: U.S. Companies Can Profit from Sinking Rates – Justin Lahart 7/1

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The Big Picture – China spends more on economic infrastructure annually than North America and Western Europe combined 7/4

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FT – Bad-debt warnings triggers fresh fears for Italian banks 7/4

FT_Italian banks bad debt fears_7-4-16

Visual Capitalist – This Map Shows the Average Income of the Top 1% by Location 7/6

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WSJ – Central Bank Buying Puts Squeeze on Bond Market – 7/6

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Featured

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

Bad Debt Piled in Italian Banks Looms as Next Crisis. Giovanni Legorano. Wall Street Journal. 4 Jul. 2016.

“In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”

“Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.”

According to Lorenzo Codogno, former director general at the Italian Treasury, “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

“The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.”

“…impaired loans at Italian banks now exceed €360 billion – quadruple the 2008 level – and they continue to rise.”

“Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25% – implying an additional €40 billion in write-downs.”

“One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.”

“There is an epidemic, and Italy is the patient that is sickest… if we don’t stop the epidemic, it will become everybody’s problem… The shock of Brexit has created a sense of urgency.” – Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry

However, European officials are loath to let the Italians use the Brexit as an impetus to gain permission to bend the rules of the banking regime that were only just established at great pains.  The Italians though are concerned “about the €187 billion of bank bonds in the hands of retail investors that would be wiped out by a bank resolution under the EU banking rules.”

IEA warns of ever-growing reliance on Middle Eastern oil supplies. Anjli Raval and David Sheppard. Financial Times. 6 Jul. 2016.

“The world risks becoming ever more reliant on Middle Eastern oil as lower prices derail efforts by governments to curb demand, the west’s leading energy body has warned.”

“Middle Eastern producers, such as Saudi Arabia and Iraq, now have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.”

“Demand for their crude has surged amid a collapse in oil prices over the past two years that has cut output from higher-cost producers such as the US, Canada and Brazil.”

“Middle Eastern producers now make up 34% of global output, pumping 31m barrels a day, according to IEA data. This is the highest proportion since 1975 when it hit 36%. In 1985, when North Sea production accelerated, their share fell to as little as 19%.”

Further, the adoption of more fuel efficient vehicles has slowed since the cost of gas has come down significantly. “In the US, more than two-and-a-half times as many sport utility vehicles were being bought compared with standard cars.” – Fatih Birol, executive director of the International Energy Agency.

“Even more concerning for policymakers is China, where more than four times as many SUVs were bought, suggesting the country’s rapidly growing car culture has adopted America’s taste for larger more fuel-hungry cars.”

“Lower oil prices are proving to be bad news for efficiency improvements.” – Fatih Birol

Bottom line, “‘the Middle East is reminding us that they are the largest source of low-cost oil,’ said Mr. Birol. He said the region was expected to meet three-quarters of demand growth over the next two decades.”

“Mr. Birol said policymakers needed to impose stricter fuel efficiency targets to reduce demand, arguing it was not feasible in a world market to completely sever reliance on Middle Eastern oil.”

“US oil production will increase, but it is still an oil importer and will be for some time.” – Birol

S&P sounds alarm on hedge fund reinsurers. Alistair Gray and Miles Johnson. Financial Times. 6 Jul. 2016.

“So-called hedge fund reinsurers (HFRs) have failed to make a profit from providing reinsurance cover for more than four years, according to Standard & Poor’s.”

“S&P found that HFRs had performed considerably worse than traditional reinsurers, which have complained that the entry of new money into their sector has driven profitability down for all.”

“Conventional reinsurers tend to invest their income in conservative assets such as corporate bonds, since they do not know in advance how much they will need to pay out in claims.”

“In contrast, HFRs pursue what S&P described as ‘meaningfully risker’ investment strategies. Their assets are managed by their affiliated hedge funds. Allocations vary but include exposure to speculative-grade leveraged loans, private equity and short positions.”

“So-called combined ratio for the HFRs – claims paid and expenses incurred as a proportion of premium income 0 has been above 100 in every year since 2012, meaning a loss from underwriting.”

“Last year the ratio came in at 110.2%, compared with a profitmaking 88.6% for their conventional reinsurance peers.”

“S&P said the HFRs’ investment performance had also been ‘rough’. Overall net investment income dropped 63% from 2014 to $247m last year.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – SMU, Yale Endowments Unload Real Estate Assets Due to Cooling Markets 7/1

Bloomberg – Blackstone Tenants Get a Shot at Buying Their Rental Houses 7/4

Bloomberg – Treasuries Deliver $700 Billion Windfall to World Safety Seekers 7/6

CNBC – This private equity giant wants to give landlords millions – here’s how 6/30

FT – Mexico raises interest rates to shore up peso 6/30

FT – Zenefits agrees to halve its valuation to $2bn 6/30

FT – Puerto Rico declares moratorium on debt payments 6/30

FT – Cash-starved Zimbabwe closes in on IMF deal to clear debts 7/6

MarketWatch – This economist thinks China is headed for a 1929-style depression 7/1

NYT – Italy’s Plan for Banks Could Roil Europe 7/6

Vanity Fair – Are We At The Start Of  A Tech World War? 7/6

Wharton – The Case for ‘Regrexit’: Why Britain Won’t Really Leave the EU 6/30

WSJ – Manhattan Apartment Sales Sputter 6/29

WSJ – Why Vanke Sank After Its Wake-Up Call 7/4

WSJ – Foreign Interest in U.S. Homes Cools 7/6