Tag: Japan

June 22, 2017

Perspective

Data Is Beautiful – Adult Obesity rates in the United States – zonination 6/20

Worthy Insights / Opinion Pieces / Advice

Project Syndicate – Brexit In Reverse? – George Soros 6/19

  • “Economic reality is beginning to catch up with the false hopes of many Britons. One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. Indeed, in the year since, they have managed to maintain those standards by running up household debt.”

A Teachable Moment – How Can We Fix a Broken 403(b) System? – Anthony Isola 6/21

Markets / Economy

Reuters – For thousands of U.S. auto workers, downturn is already here – Nick Carey 6/21

Real Estate

WSJ – Avocado Toast Looks a Better Bet Than Australian Housing – Jacky Wong 6/20

  • “Chinese buyers have been gobbling up houses all over the world in recent years. There could be some nasty surprises when the buying stops.”
  • “There are already signs of imminent pain for the global property market, thanks to China’s efforts to stop money pouring out of the country. Inquiries from China for foreign real estate fell 31% in the first quarter from a year ago, according to Juwai.com, a portal that connects potential Chinese buyers to property listings overseas. For some of the most popular destinations, the drop was even bigger—42% for the U.S. and 39% for Australia.”
  • “The property market Down Under looks particularly vulnerable. China accounts for four in every five foreign buyers in Australia, with their interest a prime reason why home prices have surged to unaffordable levels: Prices in Sydney, for example, are up 72% since 2012.”
  • “Some are waking up to the potential trouble ahead, with Australia’s household debt now nearing 200% of disposable income. Moody’s downgraded 12 Australian banks and their affiliates Monday, citing rising risks associated with the housing market, following a similar move by Standard & Poor’s last month. The country’s four biggest banks alone have a $1.1 trillion exposure to Australian housing loans, making up 55% of their total portfolios, according to Morgan Stanley.”
  • “Worse still, nearly 40% of home loans now are interest-only, meaning borrowers don’t need to repay the principal for a certain period, usually five years. Such loans work fine when house prices keep rising. The worry now is that prices will start falling as Chinese buying interest wanes: Meanwhile, homeowners who have only had to pay interest on mortgages could see a rise in payments as the interest-only period on their loans expires.”

Energy

WSJ – Oil Returns to Bear Market – Stephanie Yang, Alison Sider, and Timothy Puko 6/20

  • “Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.”

Finance

FT – Argentina’s 100-year bond cannot defy EM playbook forever – Jonathan Wheatley 6/20

  • “Really? A dollar-denominated bond that pays back 100 years from now, from a junk-rated country that has barely managed to stay solvent for more than half that time in its entire history as a creditor? While there is certainly an investment case for taking part, several analysts warn that this issue is a classic sign of a market getting ahead of itself.”
  • “The point, though, is not the 100 years. The complexities of bond math mean that, once maturities go beyond 30 years, the investment case barely changes. Barring default, with a yield of nearly 8%, the bond will repay investors in full in about 12 years, all else (such as inflation) being equal — and that’s leaving aside its resale value. Many investors will have much shorter horizons.”
  • “In a world starved of yield, the 7.91% on offer proved to be quite a pull and the bond attracted orders of $9.75bn for the $2.75bn issued. ‘People are looking out over the next 12 to 24 months and see a pretty positive outlook [for Argentina],’ says David Robbins, head of emerging markets at TCW in New York. ‘Duration in high yield is something they are more comfortable with.’ Argentina, he notes, is in effect selling equity in its economic recovery.”
  • “Sérgio Trigo Paz, head of emerging market fixed income portfolio management at BlackRock, says the rationale and the pricing are all good. But, he adds: ‘When you put it into perspective, it gives you a sense of déjà vu.’”
  • “He sees two scenarios. In one, the Fed is right about inflation and rates will continue to rise. This would turn the Argentine bond into ‘a bad experience’. In the other, markets are right, US inflation and payrolls will disappoint and we will be back in a low rate environment, which will be good for the bonds — until deflation rears its head again, hurting the Argentine economy and its ability to pay.”
  • “In the meantime, he says, there is a ‘Goldilocks’ middle ground in which investors can suck up an 8% coupon. Beyond that: ‘It doesn’t look good either way — which is why you get an inflection point.'”

Japan

FT – Toshiba picks government-backed group as chip unit buyer – Kana Inagaki and Leo Lewis 6/20

  • “After a chaotic months-long search for a buyer, Toshiba has picked a consortium led by a Japanese government-backed fund as the preferred bidder for its prized memory chip business.”
  • “The group — which includes the Innovation Network Corporation of Japan fund, private equity group Bain Capital and the Development Bank of Japan — competed against rival offers topping ¥2tn ($18bn) from US chipmaker Broadcom and Apple supplier Foxconn.”
  • “’Toshiba has determined that the consortium has presented the best proposal, not only in terms of valuation, but also in respect to certainty of closing, retention of employees, and maintenance of sensitive technology within Japan,’ the company said in a statement on Wednesday.”

South America

NYT – Venezuela Opens Inquiry Into a Critic: Its Attorney General – Nicholas Casey 6/20

  • Long a Chavista, attorney general Luisa Ortega is being investigated now that she has expressed concern at how far those in power are willing to go to quiet dissent.

June 14, 2017

Perspective

Economist – Climbing without ropes 6/8

  • “A series of remarkable feats increases the appeal of a niche sport.”

FT – Diplomatic victory for China as Panama ditches Taiwan – Ben Bland 6/13

  • “Panama has cut ties with Taiwan and established diplomatic relations with China, as Beijing intensifies efforts to isolate the self-governing island, which it considers Chinese territory.”
  • “Isabel Saint Malo, Panama’s foreign minister, signed a communiqué with her Chinese counterpart Wang Yi on Tuesday in Beijing to formalize the switch, leaving Taiwan with just 20 diplomatic allies.”
  • “Juan Carlos Varela, the president of the central American nation, said that signing up to Beijing’s ‘One China’ principle would generate ‘great potential in all areas’ including investment and job creation.”
  • “Beijing has tightened the squeeze on Taiwan since the election last year of President Tsai Ing-wen and her pro-independence Democratic Progressive party.”
  • “Panama’s defection is the latest diplomatic coup for Beijing, which is capitalizing on the uncertainty surrounding President Donald Trump’s foreign policy by exerting its influence from Southeast Asia to South Korea.”
  • “’China is exercising smart power more often, while the US is retreating from mainstream international politics,’ said Huang Kwei-bo, a professor of diplomacy at National Chengchi University in Taipei.”
  • “Taiwan still has expansive political and economic relations with many countries that do not formally recognize it, including the US, Japan and China itself, which consumes about 40 per cent of Taiwan’s exports.”

Worthy Insights / Opinion Pieces / Advice

Economist – America is no longer a force for stability in the Gulf 6/10

NYT – ‘No Such Thing as Justice’ in Fight Over Chemical Pollution in China – Javier Hernandez 6/12

Real Estate

WSJ – The Mall of the Future Will Have No Stores – Esther Fung 6/12

  • “Some landlords plug empty spaces with churches, for-profit schools and random enterprises while they figure out a long-term plan. Others see a future in mixed-use real estate, converting malls into streetscapes with restaurants, offices and housing. And some are razing properties altogether and turning them into entertainment or industrial parks.”
  • “In all, retailers have announced 2,880 store closings from January to April 6 of this year, more than twice as many as in the same period a year earlier, according to Credit Suisse . For the full year, the investment bank anticipates more than 8,600 stores to close. Analysts predict that 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years.”
  • “Many mall owners are trying to liven up the experience, bringing more dining and entertainment tenants and eschewing the traditional mix of middling food courts, fashion retailers and department stores.”
  • “In GGP’s holdings of more than 130 shopping centers, apparel takes up half of the portfolio by gross leasable area. Food has risen to 13% from 6% and is projected to go to 20% by 2025, said GGP Chief Executive Sandeep Mathrani in a recent earnings call. Apparel will fall by another 10% or so by the fall, and stabilize at around 40%, he said.”

China

Economist – China’s rockiest environmental problem: its soil 6/9

  • “Cleaning filthy soil is much harder than cleaning foul air.”

FT – China drive to relocate millions of rural poor runs into trouble – Tom Hancock 6/12

  • “Villagers return home after struggling with lack of jobs in urban apartments.”

FT – China accuses 2 more provinces of faking data – Lucy Hornby 6/12

  • “Corruption watchdog cites concerns over figures from Jilin and Inner Mongolia.”

FT – Anbang confirms chairman detained by Chinese government – Tom Mitchell and Lucy Hornby 6/13

Japan

FT – Japan Inc’s silence over Toshiba sends chill across Tokyo – Leo Lewis and Kana Inagaki 6/12

  • “For almost 70 years, Japan Inc, a support network of invisible corporate allegiances, binding investments and unwritten understandings, has stood behind the nation’s companies as the ultimate guarantor of stability.”
  • “But for Toshiba, one of its famous industrial names, corporate Japan has gone missing in its darkest hour of need.”
  • “The failure of Japan Inc to bail out Toshiba is not only a shock for the embattled group — it suggests the framework that has previously helped rescue troubled megabanks and distressed electronics makers may be disintegrating.”
  • “’The deal of Japan Inc was: ‘I will help you when times are tough’,’ says Jesper Koll, head of fund manager WisdomTree Japan, pointing to the diminishing grip of the ‘keiretsu’ — the business groupings whose closeness and mutual support underpinned Japan’s postwar economic growth.”
  • “The Japan Inc concept, say economic historians, evolved over decades to remedy precisely the problem thrown up by Toshiba. It is an unwritten code that demands that, even if the result is unsuccessful, an all-Japanese solution will not only be attempted but will receive broad support from big business, banks and government.”
  • “So far, say people involved in the talks, not a single Japanese company has submitted a bid for the chip division even though business leaders have voiced dismay at the prospect of Toshiba’s technology falling into the hands of Asian rivals.”
  • “Thinning financial ties have contributed to the unravelling of the Japan Inc structures. A long-term trend, accelerated under Prime Minister Shinzo Abe’s governance push, has been the unwinding of the cross-held share stakes between friendly companies.” 
  • “According to Nomura Securities, the ratio of holdings of Japanese stocks by listed Japanese banks and non-financial companies was 10.3% at the end of the financial year that ended in 2015. At its height in 1990, the ratio was 34%. Nomura optimistically predicts Japan’s megabanks will reduce their shareholdings in Japanese companies over the next few years by 20-30% from current levels.” 
  • “The question remains, according to Mr Koll, whether it is still meaningful to talk about Japan Inc, as the Toshiba situation has clearly shown that the old safety nets are gone.”
  • “The chief executive of a large Japanese company, who is close to top METI (Ministry of Economy, Trade and Industry) officials, adds that it is not just a lack of willingness to help. ‘I don’t know if you would call this the ‘end of Japan Inc’ but it is certainly true that the task of resolving the Toshiba problem has taken everyone here by surprise because of its difficulty,’ he says.” 
  • “’I think it has been a wake-up call for METI and Japan for what they can really do in a crisis. Less than they thought, is the frank answer.’”

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/12

  • “Venezuela’s stock market was up another 10% on the day.”

WSJ – Daily Shot: Venezuelan Black Market value for one US dollar 6/12

  • “This rally has little to do with the stock market and everything to do with the collapsing Venezuelan bolivar. It takes over 7k bolivares to buy one dollar on the black market.”

Other Links

WSJ – Daily Shot: Tax Foundation – U.S. Beer Taxes by State 6/13

May 4, 2017

Worthy Insights / Opinion Pieces / Advice

FT – The era of ‘deflationary progress’ means betting on automation – David Eiswert 5/3

  • “Investors need to come to reconcile themselves to the contradiction of progress and slower growth.”

A Wealth of Common Sense – Experts on an Earlier Version of the World – Ben Carlson 5/2

Markets / Economy

FT – US car sales drop faster than expected – Peter Campbell 5/2

WSJ – Daily Shot: BMI Research – Peak Auto Demand 5/2

Real Estate

WSJ – Japan’s Pension Fund Plows Into Real-Estate Investing – Peter Grant 5/2

China

WSJ – The China Debt Crisis Is Still Ripening – Nathaniel Taplin 5/2

  • “Chinese firms are still borrowing heavily and the Chinese banks backing them continue to rely heavily on risky interbank funding-eventually both firms and banks will need to pay the piper, or Beijing will need to absorb much more debt itself.”
  • “But as in the U.S., the breaking point is more likely to come when borrowers start feeling the pinch from slowing incomes and higher real borrowing costs. If the Chinese real-estate sector and inflation surprise on the downside later in 2017, or the dollar and rapid capital outflows bounce back, the piper could come knocking quicker than expected.”

WSJ – The Hot-Air Model of Chinses Asset Markets – Nathaniel Taplin 5/2

  • “Total financing to the real economy (including local government debt) was up more than 15% on the year in March, just marginally below the 17% peak in 2016.”
  • “All than money needs somewhere to go. And with stocks and bonds under pressure, and sending money abroad to buy Italian soccer clubs and dollar bonds getting tougher, cash is instead heading back into Chinese investors’ old standby: real estate.”

Puerto Rico

WSJ – Puerto Rico Placed Under Bankruptcy Protection – Andrew Scurria 5/3

  • “Federal officials placed Puerto Rico under bankruptcy protection, setting up a showdown with Wall Street firms owed billions of dollars in the largest-ever U.S. municipal debt restructuring and further complicating the U.S. territory’s efforts to pull itself out of a financial mess.”
  • “Puerto Rico and its agencies owe $73 billion to creditors, dwarfing the roughly $18 billion owed by the City of Detroit when it entered what was previously the largest municipal bankruptcy in 2013. The territory racked up its tremendous debt load during a decade long recession, beginning when tax credits that had built up its manufacturing based expired.”

April 28, 2017

Worthy Insights / Opinion Pieces / Advice

  • ZeroHedge – Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History – Tyler Durden 4/27
    • “Call it Canada’s ‘New Century’ moment.”
    • “We first introduced readers to the company we said was the ‘tip of the iceberg in Canada’s magnificent housing bubble‘ nearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada’s largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices – most prominently noted short-seller Marc Cohodes – would constantly remind traders and investors about the threat posed by HCG.”
    • “Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.”
    • “As part of this inevitable outcome, one which presages the company’s eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17%, Street Capital Group Inc. fell 13%, while First National Financial Corp. declined 7.6%. In short, the Canadian mortgage bubble has finally burst.”

Markets / Economy

Bloomberg Businessweek – Zombie Nation: In Japan, Zero Public Companies Went Bust in 2016 – Jason Clenfield 4/4

  • “Corporate Japan achieved a rare feat in the fiscal year that ended in March. Not one of its almost 4,000 publicly-traded firms filed for bankruptcy protection.”
  • But they’re not alone.
  • “In China, roughly 10% of the country’s publicly-traded companies are ‘among the walking dead,’ being kept alive by continuous support from government and banks, according to research by He Fan, an economist at Beijing’s Renmin University.”
  • “Across much of Europe, inefficient bankruptcy laws are partly to blame for rising numbers of undead companies. The problem is especially acute in Italy, where zombies represent 6% of all businesses, double the rate in 2007, according to the OECD report.”
  • “A 2016 academic paper co-authored by University of Maryland economist John Haltiwanger showed the rate of business start-ups has been falling steadily since the 1980s. The drop has been so steep since the financial crisis that in some recent years more U.S. companies have closed than opened-there’s destruction but not much creation.” Referencing Austrian economist Joseph Schumpeter’s concept of ‘creative destruction.’
  • “Paul Donovan, global chief economist at UBS Wealth Management in London, says that cheap credit has made business around the world less efficient, and that the real walking dead will remain hidden until borrowing costs begin to climb.”

Real Estate

Bloomberg – Robots May Help Build Your Next Home and Fill the Labor Gap – Prashant Gopal and Heather Perlberg 4/17

WSJ – The Hedge Fund Manager Who’s Shorting America’s Malls – Serena Ng and Esther Fung 4/26

WSJ – S&P’s Warning: Here Are 10 Public Retailers Most in Danger of Default – Khadeeja Safdar 4/26

  • “The number of bankruptcies so far this year has already come close to the total in 2016, with 14 retailers filing compared with 18 last year, according to S&P Global Market Intelligence.”
  • Further, “researchers at S&P Global Market Intelligence last week released a list of 10 publicly traded retailers they consider most at risk of default within the next 12 months.”
    • Sears Holdings Corp.
    • DGSE Companies Inc.
    • Appliance Recycling Center of America Inc.
    • The Bon-Ton Stores Inc.
    • Bebe Stores Inc.
    • Destination XL Group Inc.
    • Perfumania Holdings Inc.
    • Fenix Parts Inc.
    • Tailored Brands Inc.
    • Sears Hometown and Outlet Stores Inc.

Finance

WSJ – There’s Trouble in Capital One’s Wallet 4/26

  • “Credit losses aren’t at dangerous levels, though the rising charges are a bit worrisome given the strong jobs market. More concerning is the inability of Capital One to predict its own losses. Investors should be on guard for more nasty surprises from the entire credit-card industry.”

Bloomberg – Wells Fargo, JPMorgan Wary of Auto Loans, Pack Them in Bonds – Matt Scully 4/27

  • “Depending whose money they’re using, Wells Fargo & Co. and JPMorgan Chase & Co. either love subprime car loans or fear them.”
  • “Both banks have grown more reluctant to make new subprime loans using money from their own balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all loans it made to car buyers in the first quarter by 29% after greater numbers of borrowers fell behind on payments. JPMorgan’s consumer and community banking head Gordon Smith earlier this year said the bank had cut its new lending for subprime auto loans ‘dramatically.'”

China

The Real Deal – Rumors circulate of Chinese government detaining Anbang chief Wu Xiaohui – EB Solomont and Cathaleen Chen 4/26

  • “According to the media reports, the investigation into Wu is connected to a $14.5 billion loan the Anbang chairman allegedly obtained illegally from Minsheng Bank. Wu used the illegal loan to invest in the stock market, the reports say. He may also have partly funded Anbang’s acquisitions with the loan, according to the reports.”
  • Oh by the way, “in January 2015, Reuters reported that Anbang had upped its stake in Mingsheng, the country’s largest private lender, to nearly 20%.”
  • Isn’t there a conflict of interest there?

Other Links

Bloomberg Businessweek – How a Gift of Coke Shares Helped Make These Colleges Richer – Janet Lorin 4/20

Bloomberg Businessweek – This Lawsuit Goes to 11 – Robert Kolker 4/20

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.”

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

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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

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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

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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.”

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“‘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.'”

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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.”

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“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 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