Tag: Japan

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

 

 

December 23 – December 29, 2016

A review – how India and Indonesia have gone about chasing tax revenue. Global bond sales hit a record in 2016 led by corporations. US housing gains highlight the growing economic divide.

First, Happy New Year! 

Headlines

Special Reports / Opinion Pieces

Briefs

  • Yuan Yang and Sherry Fei Ju of the Financial Times highlighted how China city governments have collided with Didi over migrant drivers.
    • “China’s ride-sharing platforms face their biggest regulatory test so far after city governments in Beijing and Shanghai approved a policy of ‘local cars, local drivers’ on Wednesday.”
    • “Migrants from rural China constitute the core of the workforce for not only car-hailing apps but some of the country’s largest internet groups including Alibaba and Meituan-Dianping, all of which rely on low-paid drivers and couriers.”
    • “The regulations say you can be fined Rmb10,000 ($1,440) if you are discovered. But 99% of passengers don’t want us to be checked, or they wouldn’t be able to take taxis, so they won’t report us.” – Mr. Huang, a driver in Shanghai originally from Jiangsu
    • “About 40% of Beijing’s and Shanghai’s combined 43m residents are from outside the city, according to the cities’ statistics bureaus.”
    • “China has over 270m rural migrants who have moved to cities to seek a better livelihood. But they are kept under firm restrictions by China’s internal passport rules, the hukou system, under which people receive different benefits depending on whether they have an urban or rural registration and where they are registered.”
    • So two things: 1) you have a huge section on the economy that operates at an equilibrium that requires subsidized labor and investor losses in order to provide products at a price point where consumers will pay for them, and 2) there are millions of people that are forced into a “second-class” citizenship (with rights similar to those of illegal immigrants in the US) by a registration system that seeks to control migration patterns.  Think about it.
  • Tom Mitchell of the Financial Times covered how the lease renewals in Wenzhou have eased homeowner fears.
    • “In an announcement at the weekend, the land ministry said that 20-year residential property leases in the eastern city of Wenzhou would be automatically extended without charge, ending speculations that homeowners would face steep renewal fees equivalent to one-third of their property’s value.”
    • “Ever since Deng Xiaoping’s landmark economic reforms were introduced in the early 1980s, allowing people to buy land and property for the first time since the 1949 communist revolution, titles in the world’s most populous country have been limited by fixed-term leases.”
    • Wenzhou was the first to the fixed-term leases to expire – clearly garnering national and global interest.  Granted, the city is unusual with its 20-year leases versus the norm of 70-years; “the shorter leases were introduced in Wenzhou in the 1990s to make properties more affordable.”
    • The bigger issue at hand is the moral hazard that it represents. Presumably buyers believed that the government would come to their rescue at the end of their lease terms – probably the punters selling the units assured the buyers of the same – and low and behold, they did.  While the lease rollovers represent a huge revenue source for municipalities, actually letting market forces take hold would put many homeowners in dire straits when their leases expire.  Further such a course of action would send shivers across the country when all property owners suddenly realize how precarious their land tenures are… which of course would limit property appreciation – likely to send it down meaningfully, and so on and so forth.
    • To be sure the special case of Wenzhou “does not signal a final resolution of the issue.” The government is “studying a new law that would regulate lease renewals nationwide.”
  • Bruce Einhorn, Peter Pae, Jungah Lee, Kanga Kong, and Abhishek Vishnoi of Bloomberg Businessweek featured the current unrest in South Korea as the country seeks to rein in its corporate elite.
    • The recent impeachment of South Korean President Park Geun-hye and the scandal surrounding it has brought to the surface the anger and frustration “of a population struggling with the transition to a slow-growth era.”
    • “Economists expect South Korean gross domestic product this year to expand 2.7%, marking the first five-year period with growth below 3.5% since the 1950s. Manufacturers are suffering from the slowdown in China, South Korea’s top export market, and soft demand elsewhere. Export growth has declined in 21 of the past 23 months. Youth unemployment is 9.3%, in part because rigid labor laws discourage employers from hiring young graduates. ‘ Without some serious restructuring,’ says Emily Dabbs, an economist for Moody’s Analytics in Sydney, the outlook ‘is going to be quite weak.'”
    • “Monthly household incomes for urban salary and wage earners grew 1.7% in the third quarter from a year earlier. As recently as 2012, income growth regularly topped 5%.”
    • Worse, “many jobs are low-paying temporary positions without the insurance, pensions, and other benefits regular workers enjoy. Temporary employees, who make up one-third of the workforce, earn on average about 41% of what a full-fledged employee does.“
    • “Since the end of military rule in the late 1980s, an unwritten social compact has allowed corruption among the political and corporate elite as long as ordinary Koreans enjoyed solid economic growth.”
    • This story line is being played out all around the globe…

 Graphics

WSJ – Paying to Lend: The Negative-Yield Story of 2016 – Richard Barley 12/27

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WSJ – The Mystery of Japan’s Stagnant Wages – Anjani Trivedi 12/27

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WSJ – As Home Prices Rise, Flippers Make a Comeback – Kirsten Grind and Peter Rudegeair 12/28

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WSJ – Daily Shot: FRED Declining US Homeownership Rate 12/28

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WSJ – Daily Shot: FRED US Home price growth vs. Wage growth 12/28

Doesn’t help that rents and home prices are outpacing wage growth

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WSJ – Daily Shot: FRED US Housing Cost Inflation 12/28

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WSJ – Daily Shot: Prescription Drug Price Inflation 12/28

Another place inflation has been taking off

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WSJ – Daily Shot: US Food Deflation 12/28

And a place where it is not

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WSJ – Daily Shot: Declining Cost of Chinese Imports 12/28

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WSJ – Daily Shot: Value of US Manufacturing Shipments 12/28

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WSJ – Daily Shot: China Central Government Stimulus 12/28

As things are slowing down in China, the government has been stepping up its stimulus

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WSJ – Daily Shot: China Private investment growth 12/28

While the private sector has been hitting the breaks

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WSJ – Daily Shot: China 20yr Government Bond Yield 12/28

Doesn’t help that the cost of funds is jumping

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WSJ – Daily Shot: China AA+ Corporate Bond Yield (Index) 12/28

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WSJ – Daily Shot: Family Incomes spent on childcare 12/28

I can relate to this.

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Comstock’s – California to Pay Billions More After CalPERS Cuts Assumed Rate – Romy Varghese 12/29

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Bloomberg Businessweek – Mapping the Growth of Disability Claims in America – Brendan Greeley 12/16

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Visual Capitalist – These 5 Big Companies Control the World’s Beer – Jeff Desjardins 8/4

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Featured

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

How India and Indonesia are chasing tax revenue. Erwida Maulia and Kiran Sharma. Financial Times – Nikkei Asian Review. 25 Dec. 2016.

The Financial Times put together an interesting article on Indonesia’s and India’s efforts to increase their tax revenue base.

In Indonesia, they have “calculated that political stability and a dramatic drop in the tax rate could help to bring home an estimated 11,400tn rupiah ($851bn) parked overseas.”

To help repatriate this wealth, Indonesian President Joko Widodo has launched a massive tax amnesty campaign. “More than 10,000 people a day answered the president’s pitch in September: declare assets now and take advantage of a discounted tax rate – as little as 2% compared with 25% – and, in turn, be part of Indonesia’s future.”

The good news for some of this money is that “beyond the new low rates, the amnesty doesn’t require tax officials to trace the origins of the assets and it prohibits the disclosure of information, even to law enforcement.”

Granted, not everyone is happy about the repatriation. “The efforts to corral big assets unsettled Singapore, one of Asia’s leading financial centers, which is estimated to hold more than $200bn in assets for Indonesians. Account holders who notified financial institutions in Singapore that they would apply for the amnesty suddenly found the financial police involved. Singapore policy and the Monetary Authority of Singapore, the financial industry watchdog, had informed banks there to file suspicious transaction reports whenever anyone sought to participate in the amnesty.”

“According to financial sources, Singapore banks offered some of the wealthiest Indonesians better interest rates if they would declare but not repatriate their money.”

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“As of December 19, 141tn rupiah had been committed for repatriation, just 14% of the target. The number of participants declaring assets, though, has been far more encouraging. From July to mid-December, there were 508,000 participants and a total of 4,035tn rupiah of assets declared, equal to 30% of the country’s gross domestic product.”

“While Indonesia has pursued a single, clear and well-publicized program to find hidden assets, India has launched a multi-faceted assault to find revenue in a country where only 1% of the 1.25bn population pays income tax.”

“It has made for a tumultuous year for nearly every Indian household.”

“From June to September, the government embarked on a much-publicized program for people to self-declare secret assets. The first such tax amnesty in nearly 20 years drew in a disappointing 673bn rupees ($9.93bn) from 71,726 people. Soon after, Modi (Prime Minister Narendra Modi) authorized raids of high-net-worth individual’s homes and offices.”

And then “November 8 was the game-changer. From midnight, the government declared a withdrawal of high-denomination notes, sucking out 86% of the currency in circulation by value from a predominantly cash economy. People were given until December 30 to deposit the banned notes into their bank accounts.”

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The affects are still being felt, especially as new notes have been slow in their roll out. “Former Prime Minister Manmohan Singh, an economist, said the national income could decline by 2%.”

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Hopefully it was worth it.

Bottom line, “sophisticated investors and wealthy families will always be searching for privacy and confidence in how their money is secured and governments will be hard pressed to keep pace. ‘Thinking of Indonesia in 1998 or India’s latest currency reforms gives you a good idea as to why people in these two countries want a safe place for their money,’ said Jason Sharman, professor of governance and public policy at Griffith University in Australia. ‘Offshore is often told as a story of greed, which it often is, but it’s even more a story of fear. Often justified fear.'”

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Corporates lead surge to record $6.6tn debt issuance. Eric Platt. Financial Times. 27 Dec. 2016.

“The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.”

“Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.”

“While US government bond yields touched their low in July, the prospect of Mr Trump cutting taxes and injecting fiscal stimulus has accelerated a move higher in interest rates that some investors fear will make debt burdens harder to bear in 2017.”

“After touching a record low of 1.32% in July, the yield on the 10-year US Treasury – an important benchmark for corporate borrowing costs – has surged more than a percentage point to 2.57%.”

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“With the universe of negative-yielding bonds touching almost $14tn at one point, money managers were willing to stomach lower returns. The year’s debt sales were buoyed by China and Japan-based issuers, up 23% and 30% respectively, from a year earlier.”

“Investors say they expect 2016 is likely to prove a high-water mark for debt issuance in this cycle, with the Fed forecast to raise rates further and question marks growing over the future of bond-buying programs from the BoJ and the ECB.”

Housing Gains Highlight Economic Divide. Laura Kusisto. Wall Street Journal. 27 Dec. 2016.

“The volatile housing market of the past 15 years is widening the divide between pricey urban and coastal areas and more affordable inland regions, creating large swaths of winners and losers based largely on geography.”

While the S&P CoreLogic Case-Shiller National Home Price Index is up 5.6% in the last twelve months through October, however, “adjusted for inflation, prices are still roughly 15% below the peak.”

“Much of the spoils have been concentrated on the high end. A study by Weiss Analytics, a housing-data firm, found homes in ZIP Codes where the median value is $500,000 to $1 million are now worth 103% more than they were 16 years ago, before a boom in the mid-2000s was followed by the worst housing crash since the Great Depression. Home prices in those areas have shot up 39% since the bust.”

“In ZIP Codes where the median home was worth $100,000 to $150,000, prices have risen 16% since the trough of the market and are now worth 24% more than they were in 2000.”

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Adding a political lens to this, “in counties that voted for Mr. Trump, home prices have been largely flat for the past 15 years, according to a county-by-county analysis of home values and voting patterns by real-estate tracker Zillow.”

“In January 2000, just before the housing market’s boom-bust cycle began, homes in counties that voted for Mrs. Clinton in 2016 were worth $36,000 more than those in the counties that voted for Mr. Trump, according to the Zillow analysis. Today, the gap stands at almost $97,000.”

“The difference is even starker in counties that changed how they voted in this election. In counties that swung for Mrs. Clinton, homes are worth about $147,000 more than homes in counties that swung for Trump.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Forget Rogue One, Disney Is Rebuilding the Entire Star Wars Universe 12/15

Bloomberg – It Was Going to Be the Year of the REIT 12/27

FT – Five industries under threat from technology 12/25

FT – Cristina Fernandez charged in Argentina corruption case 12/27
FT – Toshiba writedown warning revives financial stability fears 12/27

FT – China debt: long time coming 12/27

FT – Bond investors must accept low-for-long era is over 12/27

FT – US hits Russia with tough sanctions over election hacking 12/29

Investment News – Coming off a disastrous 2016, sales of nontraded REITs could bounce back in 2017 12/27

Naked capitalism – A Tale of Two Retirements: The Great Divide Between CEOs and Everyone Else 12/28

NYT – Growth of U.S. Population Is at Slowest Pace Since 1937 12/22

NYT – Obama Strikes Back at Russia for Election Hacking 12/29

WP – The Arctic is showing stunning winter warmth, and these scientists think they know why 12/23

WSJ – Italy’s Bank Rescue Is a Precarious Balancing Act 12/23

WSJ – Xi’s Power Play Foreshadows Historic Transformation of How China is Ruled 12/26

WSJ – The Real Story About Rising Home Prices 12/26

WSJ – Plain-Vanilla Real Estate Gains Clout With Chinese 12/27

WSJ – Aluminum Billionaire Planning Escape From China: Lawyer 12/28

WSJ – China’s Currency Drops But Pressure Still Builds 12/28

 

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 9 – December 15, 2016

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

Headlines

Special Reports / Opinion Pieces

Briefs

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

 Graphics

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

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

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

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

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

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

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

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

bloomberg_worlds-20-most-expensive-cities-for-expats_12-14-16

Featured

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So… invest in even riskier ventures?

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

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

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

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

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

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

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

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

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

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

Other Interesting Articles

The Economist

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

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

FT – Airbnb backlash spells trouble for landlords 12/8

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

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

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

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

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

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

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

FT – Betting on German Bunds 12/14

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

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

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

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

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

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

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

 

December 2 – December 8, 2016

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

I know, lots of featured articles this week…

Headlines

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

Special Reports / Opinion Pieces

Briefs

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

Graphics

WSJ – Daily Shot – 12/02

wsj_daily-shot-us-home-price-recovery_12-2-16

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

Economist_stock forecast trends tend to be wrong_12-1-16

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

wsj_china-foreign-exchange-reserves_12-7-16

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

nyt_us-income-gap-continues-to-widen_12-6-16

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.”

wsj_boj-etf-purchases_12-5-16

“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.”

ftcr_chinas-top-10-insurers-by-sales-of-universal-life-insurance_12-6-16

“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.”

wsj_chinese-investment-receivable-growth_12-7-16

“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.”

ft_chinas-bond-boom_12-7-16

“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.”

ft_chinese-re-developer-bond-boom_12-7-16

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

 

September 16 – September 22, 2016

Chinese corporate debt…geez…Someone’s going to have to take a haircut. US pension crisis.

Headlines

Briefs

    • A recent study that was published in Environmental Research Letters, a top academic journal, indicated that the “toxic haze that spread across Southeast Asia from Indonesia forest fires last year caused the deaths of about 100,000 people across the region.”
    • “The death toll was concentrated in Indonesia, which had about 92,000 excess deaths from persistent haze that choked the region between July and October, according to researchers at Harvard and Columbia.”
    • “What the BIS (Bank for International Settlements) terms the country’s ‘credit gap’ is now three times higher than the typical danger level, the research shows.”
    • “The BIS rates a reading above 10% as cause for concern; China’s gap hit 30.1% in March.”
    • FT_China 'credit gap'_9-18-16
    • “The International Monetary Fund estimated in June that Chinese companies that had borrowed a collective $1.3tn did not have enough earnings before interest, taxes, depreciation and amortization to meet interest payments.”
    • “China first breached the 10% threshold in 2009 and has not yet experienced a crisis. Many analysts believe that the country’s low level of foreign currency debt and its government-controlled banking system make crisis less likely.”
    • “China Debt Default? To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled “China: Solving the debt problem” that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017.”
    • ValueWalk_China Leverage Ratio_9-14-16
  • Hudson Lockett of the Financial Times illustrated the scale of potential shadow finance losses that lurk in China.
    • “Losses from bad debt in China’s shadow financing sector could amount to 3.7% of GDP, according to a new analysis of off-the-books lending and investment.”
    • “The new report from CLSA also estimates shadow financing in China grew to Rmb54tn ($8.1tn) by the end of 2015 – equivalent to 79% of gross domestic product, with 64% of the total originating at or relating to mainland banks.”
    • “The firm also reiterated its May estimate for Chinese banks’ non-performing loan ratio of 15%, or Rmb11.4tn, assuming the same recovery ratio of 40%, which would entail potential losses of 10% of GDP. The total losses when combined with those from bad debt in shadow financing would come to 13.7% of GDP.”
    • FT_China full financing_9-19-16
  • Takashi Nakamichi and Rachel Rosenthal of the Wall Street Journal discussed the Bank of Japan’s recent bond-rate target in its policy revamp.
    • “The Japanese central bank, which has struggled for nearly two decades to bring about steady inflation, said Wednesday it wants to keep the yield on 10-year Japanese government bonds at zero, and will adjust the pace of its bond buying as needed to achieve that.”
    • “The long-term-rate target, the first in the BOJ’s century long history, challenged conventional wisdom that rates in the huge government-bond market are ultimately set by market forces and can’t be fully controlled by an official entity. Central banks are usually assumed to have much more control over short-term rates, and many around the world target rates for debt with a term of less than a year.”
    • “One worry: ‘In theory, they could be forced to buy an unlimited amount of bonds,’ said Marcel Thieliant, Japan economist at research firm Capital Economics in Singapore.”
    • “Mr. Kuroda called the new policy a ‘reinforcement’ of easing. The BOJ also took the unexpected step of saying it would aim for inflation to exceed 2% instead of merely hitting it, a nod to calls from some U.S. economists for a higher target.”
  • Peter Wells of the Financial Times highlighted that the universe of negative-yielding sovereign debt just fell to $10.9tn.
    • “The universe of negative-yielding sovereign debt fell to $10.9tn as of September 12, a drop of $1tn since June 27 largely due to yields on some longer-dated maturities moving back into positive territory, according to a new report from Fitch Ratings.”
    • “Of the countries afflicted by negative yields, Switzerland has 95% of its outstanding debt trading with a yield below zero.”
    • “Fitch also calculates that as a result of low and negative yields, investment income for sovereign investors globally are ‘prospectively earning nearly $500 billion less annually in investment income than they would have earned with yields available in 2011.’ The investment-grade sovereign debt market is $38bn.”
    • FT_Negative-yielding sovereign debt_9-21-16

Special Reports / Opinion Pieces

Graphics

WSJ – Japan’s Central Bank Splits Over Easing Program – Takashi Nakamichi 9/15

wsj_japans-central-bank-running-out-of-ammo_9-15-16

Bloomberg – Money Is Pouring Into Property Deals Banks Won’t Touch – Sarah Mulholland and Heather Perlberg 9/18

Bloomberg_Nonbank RE lending_9-18-16

Economist – Chinese investment: A sponge wrung dry 9/17

Economist_China fixed asset investment_9-17-16

WSJ – China Capital Outflows Bubbles Below the Surface – Anjani Trivedi 9/20

wsj_china-capital-outflows_9-20-16

FT – Bond bubble brings with it an odor of rotting fish – Robin Wigglesworth 9/20

FT_Government bond yields_9-20-16

Bloomberg – Not for Sale: The Best Land in America 9/8

Bloomberg_Ability to buy house lots not so good_9-8-16

FT – China local governments revive off-budget fiscal stimulus – Gabriel Wildau 9/20

FT_China off-budget Local gov't debt_9-20-16

Featured

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

Who’s next? The science of Chinese corporate defaults. James Kynge. Financial Times. 18 Sep. 2016.

“A total of 41 default cases have hit China’s domestic debt markets in the year to mid-September, more than the previous two years combined, according to Wind Information, a Shanghai-based financial data company. Some 70% of defaults by end-July were by state-owned enterprises, according to IHS, a consultancy.”

“The big picture behind China’s local government debt problem is stark. The liabilities of well over 100,000 companies problem is stark. The liabilities of well over 100,000 companies owned by local governments across the country grew at an average annual rate of 14.1% from 2012 to 2015 to reach Rmb35.4tn ($5.3tn), according to Moody’s research.”

FT_China locally owned SOE debts_9-18-16

“These are treated as contingent liabilities – or potential liabilities – because although local governments do not guarantee the debts of their corporate subsidiaries, they nevertheless are responsible for generating local economic growth, employment and public services so they would be loath to let an important contributor to such goals go under.”

“But in recent years, some local governments have built up such hefty debt burdens that even if they would like to bail out an important local employer, they may not be able to. Total direct local government debt, according to Moody’s, was Rmb16tn in 2015. Thus direct and contingent liabilities come to Rmb51tn – more than the GDPs of Japan and Germany combined.”

FT_China locally owned SOE debts balances_9-18-16

As to which companies to let default… “Nicholas Zhu, vice-president at Moody’s, describes a clear hierarchy of debt vulnerability. The most likely to default would be lossmaking, indebted companies owned by lower-tier governments – at the prefectural, city or county level – that have little revenue and large debts. The problem, however, with lower-tier administrations is that they often publish sparse statistics, so it is difficult to know the true state of their financial health.”

Nomura First Major Bank To Predict China Default Calculates Total debt to GDP at 309%; BIS Sounds The Alarm. Mark Melin. ValueWalk. 18 Sep. 2016.

“Nomura, which estimates China’s total debt – government and corporate debt – is Rmb211.8 trillion or 309% of GDP. The vast majority of this debt is corporate, which from a leverage perspective looks better. Non-financial sector accounted for Rmb158.5tn (231% of GDP, up by 92pp from 2007) and the financial sector for Rmb53.3tn (78% of GDP, up by 49pp).”

ValueWalk_China total debt-to-GDP_9-18-16

“The debt is up nearly 141% since 2007, which leads Nomura to conclude “a rising default rate is inevitable.”

ValueWalk_China debt-to-GDP options_9-18-16

“What this all means is that interest rates are likely to head near zero – the place at which such defaults can find their most advantageous environments. And of course, when interest rates fall, so, too, does the currency values. In the end, it is likely to become one big mess that might have global implications.”

ValueWalk_China debt warning signs_9-18-16

US building up to pension crisis. Robin Wigglesworth and Barney Jopson. Financial Times. 20 Sep. 2016.

“The number are severe. According to the National Institute on Retirement Security, nearly 40m working-age households – 45% of the total – had no retirement savings whatsoever in 2013, whether an employer-sponsored 401(k) plan or an individual retirement account (IRA).”

“If you look for the black hole in the pension system, this is it. And these are the most vulnerable people in society.” – David Hunt, chief executive of PGIM, Prudential Financial’s asset management arm.

“Indeed, while younger people are less likely to have some sort of a retirement nest egg than older Americans, the biggest factor is income. Households with a retirement account have a median income of $86,235, while those without one have a median income of $35,509, according to the NIRS.”

FT_US retirement savings by age_9-20-16

“We have a crisis unfolding here. We’re asking people to set aside precious resources they don’t have… For millions and millions of Americans, the only thing they’ll have is Social Security.” – Russ Kamp, a pensions consultant

Social Security “together with the Supplemental Security Income program account for over 90% of the income for the bottom quarter of retirees, according to the NIRS.”

FT_US household retirement savings_9-20-16

“But Social Security’s future is as uncertain as it is politically divisive. When it was set up, retirees would only have to be supported for less than 13 years on average. These days the average American can expect to draw Social Security for almost two decades, and unlike traditional public sector pension plans, it operates on a pay-as-you-go basis.”

“Citi estimated earlier this year that the unfunded liabilities were over $10tn.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Civil Beat – Kirstin Downey: Here’s What Hawaii’s Housing Crisis Looks Like 9/22

Contra Corner – Another Way of Looking at Household Income Shows Virtually No Gain 9/22

FT- Libor as a real alternative with money market rates at 2009 level 9/18

FT – China’s addiction to debt threatens the economy 9/19

FT – Monte dei Paschi shares drop below 20 cents as recapitalization stalls 9/20

InvestmentNews – Top hedge fund (Robert Citrone) forecasts biggest market correction since 2008 9/21

NYT – A Trump Empire Built on Inside Connections and $885 Million in Tax Breaks 9/17

WSJ – The Market Gets Caught in a Squeeze Play 9/18

WSJ – Why Global Rule Makers See Risks in European Banks 9/19

WSJ – The China Box-Office Boom That Wasn’t 9/20

WSJ – Bank of Japan Makes Yield Curve Maneuvers in the Dark 9/21

 

September 2 – September 8, 2016

Whoa, that’s a lot of corporate debt… So, who is going to pay for China’s corporate debt balance? High Yield Bond Market decoupling from reality.

Headlines

Briefs

    • “The ‘Japanization’ of the global economy marked by transition to low growth and low inflation has started to attract investor attention as a phenomenon in recent years. There has been scarcely any nominal GDP growth over the past 20 years in the Japanese economy.” – Daiju Aoki, analyst at UBS Japan
    • “Demographics are triggering the lack of GDP growth. As a society ages, its population becomes more dependent on government services and less productive in terms of generating goods and services.”
    • Japan’s peak worker to dependent ratio was in 1990.
    • ValueWalk_UBS working-age population ratio_9-2-16
    • “Mr. Kuroda, governor of the BoJ since 2013, claimed the central bank’s policies ‘have contributed significantly to the positive turnaround in Japan’s economy’ and said there was no chance of reducing the level of monetary accommodation.”
    • “‘It is often argued that there is a limit to monetary easing but I do not share such a view,’ Mr. Kuroda told an audience in Tokyo. He said there was ample room for the BoJ to buy more government bonds, to cut interest rates further, or to buy other assets such as corporate bonds, equity and real estate funds.”
    • “Yet despite the high level of monetary stimulus, the latest date show a 0.4% fall in the consumer price index compared with a year ago, and a slowdown in inflation even excluding volatile food and energy prices.”
    • FT_Japan core inflation rate_9-4-16
    • “Mr. Kuroda argued that the failure to hit 2% inflation so far is because of three shocks: falling oil prices since summer 2014, weakness in demand after raising Japan’s consumption tax in April 2014, and a slowdown in emerging markets from summer 2015.”
    • “Given that, said Mr. Kuroda, ‘it is imperative for the Bank firmly to maintain its commitment to achieving the price stability target of 2% at the earliest possible time.”
    • “Please don’t buy so many bonds, Mr. Central Banker. It is rapidly becoming a case of ‘too much of a good thing’.” – Hans Lorenzen, credit strategist at Citi Research
    • FT_Citi - Central bank balance sheets_9-5-16
    • Private investors are being crowed out…
    • FT_Citi - Private investors being crowded out_9-5-16
    • And markets are being driven by macroeconomic policies more and more…
    • FT_Citi - Macro driven markets_9-5-16
  • Brian Blackstone and Tom Fairless of the Wall Street Journal posed the question: Could the European Central Bank start buying stocks?
    • As the European Central Bank (ECB) is running up against its self-imposed limits on how much of a country’s debt it can hold and since there simply aren’t enough bonds they can buy that qualify under their guidelines, the ECB is contemplating buying European equities.
    • “Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.”
    • The Bank of Japan holds ¥10.182 trillion (approx. $98 billion) of “individual stocks and exchange-traded funds as of Aug. 20, in terms of book value.”
    • Though “economists have been split over the costs and benefits. Some say that Japan’s capital market can no longer accurately price the value of stocks; too much BOJ money has flown into some specific companies. Others say it has helped prop up share prices, thus producing ‘wealth effects’ to help the economy fight deflation.”
    • Interesting times.
    • “Since Hanjin Shipping Co. of South Korea filed for bankruptcy protection there last week, dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world because of uncertainty about who would pay docking fees, container-storage and unloading bills. Some of those ships have been seized by the company’s creditors.”
    • According to Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen, “43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.”
    • WSJ_Hanjin shipping containers_9-7-16
    • All told about $14 billion worth of cargo is stranded at sea with the crews running short on rations…

Special Reports / Opinion Pieces

Graphics

Fidelity – Five scenarios for stocks – Jurrien Timmer 8/25

Fidelity_Five scenarios for stocks_8-25-16

FT – Emerging markets on track to set sovereign debt record – Elaine Moore 9/4

FT_Emerging market sovereign bond issuance_9-4-16

FT – Brazil hopes gambling will reverse its fortunes – Samantha Pearson 9/5

FT_Gambling losses per resident_9-5-16

WSJ – Now Companies Are Getting Paid to Borrow – Christopher Whittall 9/6

WSJ_European investment grade corporate debt_9-6-16

FT – Why emerging market bonds are not the answer for the yield-starved – Jonathan Wheatley 9/6

FT_Emerging market sovereign debt yields_9-6-16

FT_Amount of tradable external debt_9-6-16

FT – Inflation-linked gilt returns have gone through the roof – Joel Lewin 9/6

FT_Inflation-linked gilt returns_9-6-16

FT – Three things that could derail the eurozone’s recovery – Mehreen Khan 9/7

FT_Probability of US recession_9-7-16

Featured

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

China: the former EM darling. James Kynge. Financial Times. 1 Sep. 2016.

“For most of the last 15 years, China was a darling for emerging market investors as its demand for commodities lifted the economic fortunes of countries in Latin America, Africa and Asia. But now, as China struggles with the hangover from its debt-fueled boom, fund managers are increasingly shunning Asia’s giant.”

“The main deterrent is China’s corporate debt. Although this issue has been well-flagged in recent years, disquiet over its size and sustainability is deepening. A recent report by S&P Global Ratings, the rating agency, estimates that China’s total outstanding corporate debt in 2015 was $17.8tn, or 171% of GDP, making China’s corporate debt mountain by far the world’s largest in both absolute and relative terms.”

“Not only is the ratio of Chinese company debt to GDP more than double that in the US and eurozone, it is projected to grow far more quickly as an increasing number of heavily-indebted corporations ramp up their borrowing simply to repay debts that are coming due. By 2020, China’s outstanding corporate debt will be $32.6tn, while its share of global company borrowings will have risen to 43% from 35% last year, according to S&P estimates.”

FT_Chinese companies carry the riskiest debt load_9-1-16

“The S&P report estimates that $13.4tn, or nearly half, of total credit demand in China by 2020 will be for refinancing purposes.”

FT_Chinese company debt_9-1-16

While there are many differences of opinion as to how this shakes out, with either a major meltdown or some internal growing pains (and everything in between), we shall see.  Either way, keep an eye on this one.

Does It Matter If China Cleans Up Its Banks? Michael Pettis. Mauldin Economics. 31 Aug. 2016.

This article really follows the one above and I highly recommend reading the whole thing.

Let me try and paraphrase: imagine you’re a new company and you want to take on debt to help you grow the business. Okay, sounds good and it works.  The additional debt allows you to buy assets that help you to become more productive and hence grow sales/profits faster than the amount of debt and its associated servicing costs.  Boom, you’re a hero and making lots of money.

So you do this some more and some more and some more. Eventually, your rate of productivity slows for every piece of debt you take on.  Oh and did I mention that because you’ve been rolling over the debt to really juice growth, now your debt balance is quite a bit bigger than your total sales.

Fortunately, your cost of debt is low and you can keep on operating, but your lender is no longer willing to extend you credit, so you start talking to your suppliers to provide you with “credit-like” loans – meaning, hey why don’t you front me some money to buy more products from you and I’ll pay you back once I sell the goods to my customers.

Okay, this keeps on working, but eventually you’re running out of good options so you start looking for your highest possible rate of return projects regardless of the risk… ‘Come on lucky number 7.’

Oh and as to the debt, well, you’ve accumulated so much of it that it has become the lender’s problem and it’s such a big problem that it’s also their depositors’ problem (your mom and pop savers).

So what do you do and who is going to take the ‘haircut’…

The High Yield Bond Market Has Never Been This Decoupled From Reality. Tyler Durden (alias). Zero Hedge. 3 Sep. 2016.

From JPMorgan’s Peter Acciavatti: “Recovery rates in 2016 are extremely low… for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%… As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%.”

Zero Hedge_JPM - High-yield bond recovery rate_9-3-16

From Edward Altman of NYU’s Stern School of Business: “Our approach to recovery rates is not centered on sectors. What we’ve looked at carefully over 25 years is the correlation between default rates and recovery rates. As you would expect, when the former rise to high or above-average levels, you always observe the latter dropping to below-average levels. This strong inverse relationship is as much a function of supply and demand as it is of company fundamentals. So if we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default.”

Zero Hedge_High Yield Recovery Rate and Pricing_9-3-16

“In the 30-year life of the so-called junk bond market, the chasm between reality and central-planner-created markets has never been wider.”

Bottom line, despite being able to collect less and less on defaulting debt (meaning you would ordinarily be less eager to buy more high yield debt or at least want greater compensation for the risk), pricing for high yield debt continues to rise…

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Another Sign Manhattan Real Estate Is Feeling the Pain 8/31

Bloomberg – Saudi Arabia Said to Weigh Canceling $20 Billion of Projects 9/6

CoStar – Blackstone’s New Non-Traded REIT Begins Selling Shares 9/7

Economist – That 2008 comparison (again) 9/6

FT – Pension solution lies in long-term thinking 8/30

FT – HK property developer hangs hopes on art market 9/3

FT – Shanghai divorces highlight China’s property conundrum 9/4

FT – Why negative interest rates sometimes succeed 9/5

FT – Bank of Japan: great expectations 9/5

FT – Analysts laud ‘remarkable’ pick-up in emerging markets 9/5

FT – China banks shed staff and slash pay in cost-cutting drive 9/6

FT – Rocket’s writedown raises red flags 9/6

InvestmentNews – Ex-CFO at REIT formerly controlled by Nicholas Schorsch indicted 9/8

NYT – Sonia Sotomayor and Elena Kagan Muse Over a Cookie-Cutter Supreme Court 9/5

NYT – Subprime Lender, Busy at State Level, Avoids Federal Scrutiny 9/6

WSJ – Bank of Japan’s New Unease With Negative Rates 9/5

WSJ – The Problem With Dividend Stocks 9/5

WSJ – Why Chinese Bank Stocks Can’t Fly Too High 9/6

WSJ – How China Insurance Crackdown Could Rain on Deal-Making Parade 9/7

WSJ – Europe’s Bond Market: Even Further Through the Looking Glass 9/7

WSJ – Goldman Sachs Has Started Giving Away Its Most Valuable Software 9/7

 

August 26 – September 1, 2016

A novel way of paying off debt – issue more of it, the savings are already accruing. It’s official, Nigeria is in a recession.

Headlines

Briefs

    • “Stock valuations rise and fall, but when an important factor driving market performance is mathematically unsustainable, it is worth a closer look.” Specifically corporate dividends.
    • “Aswath Damodaran, a professor at New York University’s Stern School of Business, sees this as the market’s biggest risk. Mr. Damodaran, who is considered an authority on valuation, says S&P 500 companies through the first two quarters of the year collectively returned 112% of their earnings through buybacks and dividends. That is the highest since 2008 and well above the 82% average over the past 15 years, he said in a blog post last week.”
    • “Mr. Damodaran, who likes to be provocative, says with rates this low, traditional valuation metrics are distorted. Instead, the inability of companies to keep paying off their investors will cause the next downturn. ‘This is the weakest link in this market,’ Mr. Damodaran said in an interview. ‘We know cash flows will go down. What we don’t know is what the market is pricing in.'”
    • WSJ_S&P 500 corporate dividends_8-28-16
    • “The rise of third-party mobile payments in China at the expense of credit and debit cards is threatening commercial banks’ access to the customer data viewed as crucial to newly emerging financial and consumer business models.”
    • Further UnionPay, the state-owned settlement network, and other rank and file banks are missing out on the merchant fees that these third-party platforms are redirecting.
    • “The move by more Chinese consumers to switch from swiping plastic cards to scanning QR codes with mobile wallet apps knocked $20bn from banks’ fee income in 2015, according to Kapronasia, a Shanghai-based fintech consultancy.”
    • While the fees hurt, the key is that third-party payment providers are “depriving lenders of valuable data on consumption patterns.”
    • FT_China payments moving online_8-28-16
    • China’s big-state lenders are making a shift in their lending portfolios from commercial loans to property.  “China Construction Bank (CCB) this week reported residential mortgage lending rose almost 30% in the first half of this year compared with the same period last year. Meanwhile corporate lending fell 2%. At Bank of China, mortgages rose by more than a quarter.”
    • “On the face of it, banks are moving away from risky lending. That helps their capital cushions because for every loan extended to a company, banks assign a 100% risk-weight. For residential mortgages, banks only have to set aside half that.”
    • Of course, it helps that residential prices are rising; however, “lending into the property market would make more sense if the mortgage loans weren’t going bad so fast. At CCB, while mortgage nonperforming loans accounted for only 6% of total NPLs, they rose 67% on the year compared with 26% for all loans. And that’s with prices rising nationally, and rising sharply in the biggest cities.”
  • Leo Lewis and Lucy Colback of the Financial Times covered an interesting development in how the Bank of Japan is distorting the Japanese stock indices through their massive fund flows.
    • “From July 29, when the Bank of Japan said it would nearly double its annual purchases of exchange traded funds from ¥3.3tn ($32bn) to ¥6tn, brokers in Tokyo have been selling stocks with a simple, unsettling message.”
    • “In an equity market where the central bank is the biggest whale, and where the government in various forms has become the biggest shareholder in a quarter of First Section Tokyo stocks, it’s time to buy the fund flows, not the fundamentals.”
    • FT_Stocks with highest indirect ownership by BoJ_8-30-16
    • “Goldman Sachs estimates that the doubling in BoJ buying coupled with the skew towards Nikkei weighting means that the central bank will own at least one-tenth of the equity in 32 companies by this time next year, up from five currently.”
    • “The BoJ, according to its current schedule, must buy an average of ¥70bn worth of ETFs every three trading days throughout the year.”
    • Helicopter money…

Special Reports / Opinion Pieces

Graphics

FT – Puerto Rico: An island’s exodus –  Eric Platt 8/25

FT_Puerto Rico's exodus_8-25-16

Visual Capitalist – Which Countries Are Damaged Most by Low Oil Prices? – Jeff Desjardins 8/26

Visual Capitalist_Which countries hurt the most by low oil prices_8-26-16

WSJ – Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants 8/29

WSJ_Food price deflation_8-29-16

WSJ – China’s Private Investment Crash May Be Mirage, but Pain Is Still Real 8/28

WSJ_China fixed-asset investment_8-28-16

Visual Capitalist – Do Newly Built Skyscrapers Signal The Top of the Stock Market? – Jeff Desjardins 8/29

Visual Capitalist_Skyscraper curse_8-29-16

Featured

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

Falling bond yields save taxpayers $500bn. Eric Platt. Financial Times. 31 Aug. 2016.

“The collapse in sovereign bond yields has saved taxpayers more than $500bn in annual interest expenses, allowing countries to rein in budget deficits and continue government-backed programs that would have otherwise been shelved, according to a new report.”

As of the end of last week there was $13.2tn of debt with negative yields.

“Japan, France, Germany and Switzerland are now paid to issue short-dated sovereign bonds.”

“Benefits have effectively been transferred from global investors to sovereign issuers, as sovereign borrowing costs have dropped. Should rates remain low for an extended period, it would likely erode earnings power for many large investment institutions and pension funds.” – Robert Grossman, analyst with Fitch, a rating agency

“The median 10-year government bond now yields 1.17%, down from 3.87% five years ago. Japan has saved more than $95bn a year as a result of the decline in rates, while the US, UK and Germany collectively pay $104bn less annually, the study estimates.”

“Central banks have cut interest rates more than 670 times since Lehman Brothers filed for bankruptcy in 2008, or roughly one reduction every three trading days of the year, according to JPMorgan.”

FT_Central bank stimulus weighs on sovereign bond yields_8-31-16

Nigeria falls into recession as economy shrinks in second quarter. Maggie Fick. Financial Times. 31 Aug. 2016.

“Nigeria has slipped into recession for the first time in more than two decades as growth in Africa’s top oil producer shrank for the second consecutive quarter.”

“The economy contracted 2.1% in the three months to the end of June, worse than analysts expected, while inflation hit a 11-year high of 17.1%, underlining the depth of the west African nation’s crisis.”

“Nigeria, which depends on petrodollars for 70% of state revenues and 90% of export earnings, has been battered by the slump in oil prices. The economy shrank 0.4% in the first three months of the year and the International Monetary Fund is forecasting that growth in 2016 will contract 1.8%.”

“The central bank increased the main interest rate by 200 basis points last month in an attempt to combat inflation, but it rose for the ninth consecutive month in July.”

“The continent’s most populous nation was one of the world’s fastest growing economies during the oil boom, but Mr. Buhari (President Muhammadu Buhari) said this month that Nigeria ‘suddenly appears to be a poor country.'”

FT_Nigeria GDP growth_8-31-16

It’s currency is having difficulties as well, “in the official market, the naira is trading below N300 to the dollar, having lost more than 40% of its value since its peg was lifted in June (to ease the country’s quickly depleting reserves of hard currency), but on the black market the currency is far weaker – it has been trading at below N400 to the dollar this week.”

FT_Nigerian Naira currency to the USD_8-31-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – J.C. Penny Aims to Be King of the Mall as Rivals Retreat 8/25

CoStar – Disparity in Mall Values Driven by Powerful Combination of Forces 8/31

Economist – Grim employment prospects for young people around the world 8/26

FT – How the super-rich are making their homes ‘invisible’ 8/24

FT – Chinese banks braced over industrial restructuring 8/28

FT – Mexico spends $1bn to lock in oil export prices for 2017 8/29

FT – Apple’s EU tax dispute explained 8/29

FT – DBS sells $750m in cocos at record-low yield 8/30

FT – Chinese future looms for Hong Kong’s real estate sector 8/30

FT – China turns away from the market 8/31

Inhabitat – The world’s tallest timber building was just topped off ahead of schedule 8/26

National Real Estate Investor – 2016 Could Signal a Cyclical Peak in Commercial Construction 8/25

NYT – Today’s Inequality Could Easily Become Tomorrow’s Catastrophe 8/26

NYT – Crackdown on For-Profit Colleges May Free Students and Trap Taxpayers 8/28

Zero Hedge – “I’ve Never Seen Anything Like This Before” – The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing 8/28

WSJ – Which State Is a Big Renewable Energy Pioneer? Texas 8/29

WSJ – Housing Market: Why Millennials Are Getting Priced Out 8/29

WSJ – What Happens When a Central Bank Buys Property Stocks 8/30

WSJ – Shopping Malls’ New Product: Fun 8/30

WSJ – Chinese Cash Pours Into U.S. Real Estate 8/30

WSJ – Emerging Markets: Catch the Yield Where You Can 8/31

WSJ – Birth of the Index Mutual Fund: ‘Bogle’s Folly’ Turns 40 8/31

 

August 19 – August 25, 2016

It’s getting hot out there. When picking your emerging market investments, be mindful of its exposure.

Headlines

Briefs

    • The nontraded REIT industry is having a hard look at itself.  Inland is eliminating its transaction fees and new entrant to the sector – but definitely not to institutional real estate investment – Blackstone Group has not committed to a specific yield – the primary attribute for selling these investments.
    • The thing is “Cap rates, a key valuation measure for real estate, have decreased dramatically since the credit crisis, while valuations of quality properties have increased. That means commercial real estate is simply too pricey to generate the promised returns (generally 6-7%) brokers need to pitch nontraded REITs to clients.”
    • “The math of these programs is much more challenging today. Cap rates are lower and I think the dividend yields have to come down. The publicly traded REIT market is paying a 3.5% dividend yield, on average.” – Allan Swaringen, president and CEO of JLL Income Property Trust
    • And with a lower fee structure I might add…
    • One thing to be mindful of in investing in nontraded REITs are their dividend coverage ratios.  “That ratio, a REIT’s cash flow versus its dividend, or distribution, is one of the most important metrics for investing in nontraded REITs, which often resort to returning investor cash to pay for or cover the 6% or 7% dividend. Any return of investor money diminishes the REIT’s ability to perform in the long term.”
    • Bottom line, “nontraded REIT sponsors and advisers who sell them can say au revoir to the product’s most important marketing component: the promise of generating annual returns of 6% or 7% to yield-starved investors.”
    • “Trends that slammed profit in the first quarter – a stronger yen, negative interest rates and slumping China growth – haven’t reversed. At stake is a second straight year of earnings decline that could buy Prime Minister Shinzo Abe’s push for companies to boost capital spending and raise wages to spur economic growth.”
    • “With negative interest rates grinding away bank profits and a stronger yen bearing down on carmakers, aggregate operating income plummeted 17% in the June quarter, the biggest quarterly decline since 2011. That’s the year an earthquake in Fukushima and subsequent tsunami caused the yen to gain and stocks to drop.”
    • Bloomberg_Japan Inc profit slump_8-21-16
    • Airbnb has changed the short-term rental business in a big way. The company “now operates in 34,000 cities around the world and was recently valued by investors at $25.5 billion.”
    • On top of that, Airbnb has created an ecosystem of other companies that help landlords rent, maintain, and operate their units…
    • Well one of the recent companies created, Host Compliance, is the ‘tit for tat.’  Rather than assist people to attain the most out of their Airbnb listings, the company actually is set up to help cities and municipalities in the policing of their short-term rental regulations by sifting through the vast amount of listings data and providing reports on violations.
    • No surprise, most governments are overwhelmed and not truly set up to properly track abuses to their rules, hence they’re always playing catch up to tech innovators.  I suppose it won’t be long that other tech innovators will pop up to “check-in” on other tech disrupters…
  • Eliot Brown of the Wall Street Journal focused his spot light on the real estate market of San Francisco and the effects of the surging tech market.
    • As the tech industry continues to boom, its companies continue to crowd out other businesses from San Francisco’s office market, ultimately reducing the city’s “economic diversity, giving it an enormous concentration in an industry that is particularly prone to economic swings.”
    • “Tech companies now occupy more than 29% of the city’s occupied office space, according to real-estate-services firm CBRE Group Inc. That is roughly double what the industry occupied in 2010 as well as the height of the dot-com bubble in 2001, CBRE said.”
    • “What’s more, the bulk of those occupying that office space are startups or those that recently went public, typically unprofitable companies that are considered some of the most volatile.”
    • “Looming in the minds of many in San Francisco is the city’s experience after the dot-com bust of 2001. Even though the tech sector was centered more in Silicon Valley to the south, the local economy was pummeled. Office vacancies soared above 20% from less than 4%, according to Cushman & Wakefield.”
  • Gabriel Wildau of the Financial Times reports that it was only a matter of time that Chinese regulators would tighten the noose on the P2P market.
    • China has just formalized new regulations for the Peer-to-Peer (P2P) market in the country. “Regulators and courts have previously issued many of the prohibitions contained in the latest rules in different forms, but the latest regulations mark the first comprehensive framework for regulating P2P lenders in China.”
    • “The rules, issued on Wednesday, forbid online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. They ban P2P platforms from securitizing assets or offering debt transfer mechanisms that mimic securitization. Companies are prohibited from using P2P platforms to finance their own projects.”
    • “Their fundamental nature is information intermediation, not credit intermediation.” – banking regulator
    • “Outstanding loans from 2,349 P2P platforms totaled Rmb621bn by the end of June, the banking regulator said in a statement on Wednesday. But an additional 1,778 ‘problem platforms’ have also been established, equal to 43% of all platforms.”
    • “The latest rules also prohibit P2P groups from operating ‘fund pools’ in which investor funds are not matched with specific loan assets. The banking regulator noted that ‘Ponzi schemes’ – in which inflows from new investors are used to finance payouts on maturing obligations – have been a problem for the industry.”

Special Reports

Graphics

CBO – Trends in Family Wealth, 1989 to 2013 8/18

CBO_Trends in Family Wealth_8-18-16

FT – Pensions: Low yields, high stress – John Authers and Robin Wigglesworth 8/22

FT_Pension liabilities growing faster than assets_8-22-16

FT – US charitable foundations hit by plunging returns 8/23

FT_US charitable foundations investment returns struggle_8-23-16

Featured

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

Think It’s Hot Now? Just Wait. Heidi Cullen. New York Times. 20 Aug. 2016.

“July wasn’t just hot – it was the hottest month ever recorded, according to NASA. And this year is likely to be the hottest year on record.”

“Fourteen of the 15 hottest years have occurred since 2000…”

NYT_Heat Map of US - 1991-2010_8-20-16

NYT_Heat Map of US - 2060_8-20-16

NYT_Heat Map of US - 2100_8-20-16

NYT_Number of Days over 95 degrees_8-20-16

Silver lining…good for solar.

As China nears exhaustion investors must look elsewhere. James Kynge. Financial Times. 24 Aug. 2016.

As yield is vanishing from developed world economies – there is $13tn in negative-yielding debt outstanding at the moment – emerging market economies have seen a lot of interest of late… however, try to see it in context.

“The drive behind this intense demand for EM has nothing to do with EM. The one thing that emerging markets have that everyone wants right now is not raw materials or cheap labor, it’s yield. When you have negative interest rates in Europe and Japan, and zero rates everywhere else, the politics and economics of these countries becomes irrelevant.” – Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch

“Thus, emerging markets are flattered by a perception they are the least bad option for investors.”

However, investors need to be wary of the exposure that many EMs have to China.

China is having ever greater difficulty in producing economic growth – at least of the levels of the past few decades (which is to be expected).  “Before the global financial crisis in 2008, China needed just over one dollar of credit to deliver one dollar of gross domestic product growth, the ratio is now six to one, according to Morgan Stanley.”

“Although the economy is said to be growing at 6.7%, investment growth by private companies slowed to 2% in July, demonstrating that the most potent force in the Chinese economy sees scant hope of a return.”

“Scarcity of opportunity amid an abundance of growth defines China’s enervated state. So generous have banks, capital markets and shadow financial institutions been to virtually anyone who wishes to borrow that almost every industry is in a state of oversupply, slashing profits.”

“Standard & Poor’s, the credit rating agency, is the latest to raise the alarm. The anemic profits of Chinese companies is likely to intensify their need to borrow more merely to repay maturing debts, helping to drive global corporate debt levels to worrying levels by 2020.”

“Corporate debt is set to expand by half to $75tn over the next five years, according to S&P. China’s share of this debt is likely to rise to 43% in 2020 from 35% in 2015, the rating agency said, largely through companies borrowing to repay debts that are coming due.”

Bottom line, don’t throw out your fundamental analysis models just yet…

Other Interesting Articles

The Economist

Bloomberg – Why It’s So Hard to Build Affordable Housing: It’s Not Affordable 7/26

FT – We must protect shareholders from executive wrongdoing 8/18

FT – Retailers reveal why US earnings season was fundamentally weak 8/18

FT – Paul Singer says bond market is ‘broken’ 8/18

FT – Venezuela’s problems can no longer be ignored 8/18

FT – Is greed good? No, it’s seriously bad for your wealth 8/19

FT – Hackers expose holes in road for smarter cars 8/19

FT – Oil company dividends: flare-up ahead 8/21

FT – #fintech Sidelining the mobsters in China 8/22

FT – Forget Fed rate calls – be ready for the return of inflation 8/22

FT – China close to launching credit default swap market 8/22

FT – Mongolia tightens belt as debt payments loom 8/24

FT – The canary in the coal mine for China’s currency 8/24

IPE – Redemption requests begin to build among core US property funds 8/24

National Real Estate Investor – Drop in 10-year Treasury Gives Real Estate Pricing a Lift 8/24

NYT – Chilling Tale in Duterte’s Drug War: Father and Son Killed in Police Custody 8/19

NYT – More of Kremlin’s Opponents Are Ending Up Dead 8/20

NYT – The Housing Market Is Finally Starting to Look Healthy 8/23

WSJ – Chinese Bank Shows How To Move Risks Around 8/19

WSJ – One Policy to Rule Them All: Why Central Bank Divergence Is So Slow 8/22

WSJ – China’s Online Lenders Face Peer-to-Peer Pressure 8/25

WSJ – What to Learn From the ECB’s Great European Corporate Bond Squeeze 8/25