“The global construction industry is a $10 trillion behemoth whose structures determine where people live, how they get to work and what cities look like. It is also one of the world’s least efficient businesses. The construction productivity rate — how much building workers do for each hour of labor they put in — has been flat since 1945, according to the McKinsey Global Institute. Over that period, sectors like agriculture, manufacturing and retail saw their productivity rates surge by as much as 1,500%. In other words, while the rest of the economy has been supercharged by machines, computers and robots, construction companies are about as efficient as they were in World War II.”
“Erratic US policy and fraying alliances give China a free hand.”
“What China is winning is de facto control of nearly the entire South China Sea, including all activities and resources in it, despite the other surrounding Southeast Asian states’ respective legal rights and entitlements under international law.” – Jay Batongbacal, director of the University of the Philippines Institute for Maritime Affairs and Law of the Sea
“At stake is the huge commercial and military leverage that comes with controlling one of the world’s most important shipping lanes, through which up to $5 trillion worth of trade passes each year.”
“The country’s economic output is smaller now than it was in 2004, and employment policies are skewed to protecting jobs, not creating them. The number of Italians registered as living abroad rose 60% from 2006 to 2017, to almost 5 million. Among those who stay, it’s common for unemployed young people to live with their parents instead of starting their own families, which is one reason the country has one of the world’s lowest birthrates.”
The corporate drug industry has had many friends in Washington D.C. until now… Amazon is taking over the package room of your apartment building. China’s property boom unlikely to end anytime soon.
FT – Wanda golf courses closed in China austerity push 10/15. The two courses are in the $3bn Changbaishan resort in Fusong. The why – because new courses were banned in 2004; however, many developers were able to work their way around the rules…until now.
WSJ – Nordstrom Family Suspends Effort to Take Retailer Private 10/16. That’s how strong the narrative is right now against the retail industry, even the Nordstrom family is having difficulty finding investors to fund the debt of the acquisition (despite the world being awash in cash and the tight spreads on high yield products).
WSJ – Hedge Fund Maverick Capital Debuts 0% Performance Fees 10/19. After losing 10% in 2016 and being down 2% so far this year (mind you that the market is up over the same time period), Maverick is offering some investors a 0% performance fee and 1% management fee on new money for its “recovery shares”.
“The S&P 500 Index has recorded more than 150 new all-time highs since eclipsing its previous peak in late March of 2013. In 2017 alone, there have been 30 new record highs through the end of last week. To put this into perspective, there were only 13 new highs for the entire decade of the 2000s.”
“The rejection of ‘western’ political systems has been made easier recently by what the Chinese see as the ludicrous buffoonery of Donald Trump and, to a lesser extent, the self-inflicted damage of Brexit and EU infighting.”
“As a top foreign policy adviser recently told one of my colleagues: ‘Trump never talks about democracy or American leadership or liberty — we should not be so stupid to worship things that in the western world are now in doubt.’”
Be cautious in your use of ‘private’ messaging services such as WeChat. Big brother is watching.
“The west of the United States has endured some 50,000 wildfires this year, and over 8.5m acres (3.4m hectares) have burned. Northern California has suffered in particular recently as flames have swept through parts of the landscape, killing at least 23 people and devastating wineries. In Canada, as of August 30th (the latest available figure), 7.4m acres had burned.”
“Ernesto Alvarado of the University of Washington, who specializes in large fires, says that historically portions of the forests of America’s north-west would burn every five to 20 years. In many areas, however, these fires have been suppressed for over a century by the needs of loggers and residents. Over time, undergrowth, saplings and dead trees accumulate, creating conditions in which a fire can spread very rapidly. Furthermore, a recent reduction in logging has led to an even closer packing together of trees. ‘To maintain good forest health in many of these forests, you need fire,’ says Dr. Alvarado. While some burns are prescribed, they are a fraction of what is required. In Washington, for instance, between 2001 and 2014 the Forest Service burned just 2% of the state’s 9.3m acres of forest.”
“In terms of scale, 2017 is not actually an outlier. In the past decade, wildfires have burned an average of 6.6m acres each year in the United States and 6.2m acres in Canada. The particular problem this year is the dispersed nature of the blazes.”
“The current state of the north-western forests, combined with the effects of climate change, increase the likelihood that wildfires will be worse in future… Little can be done to reduce the danger without a dramatic increase in prescribed burns, and these are unlikely as people continue to move into forested areas. One further consequence: the smoke and ash that drift across densely inhabited areas affect human health, too. A study by the universities of Harvard and Columbia of slash-and-burn fires in Indonesia in 2015 blamed the fires for 100,000 additional deaths and 500,000 injuries in Indonesia, Singapore and Malaysia. Where there’s smoke, there’s fire: this year’s haze presages years of potentially more ferocious burns.”
“Canada’s banking watchdog unveiled tougher mortgage-financing rules that take effect on Jan. 1 that real estate watchers and economists say could dramatically slow house buying and borrowing.”
“The most notable measure is a provision that would require all prospective buyers—even those with a down payment of over 20%—to undergo a so-called stress test before a bank can issue a loan. Previously, only buyers with a down payment of less than 20% had to undergo a stress test. Under the stress test, prospective buyers would have to qualify for a mortgage at a rate at whichever is greater: either 2 percentage points above the negotiated rate, or the Bank of Canada’s five-year benchmark rate. The central bank’s five-year rate stands at 4.89%. The regulator originally proposed the test just cover two percentages point above the negotiated mortgage.”
“Robert McLister, founder of the Canadian mortgage-rate comparison site RateSpy.com, said the new rules target the fastest-growing part of the mortgage market—uninsured mortgages—and could affect one out of every six prospective home buyers. In Canada, mortgage insurance is mandatory unless the buyer has a down payment of 20% and over.”
“’This is easily the most groundshaking mortgage rule of all time, and that’s not an understatement,’ Mr. McLister said in an interview.”
“Economists said the tougher mortgage regulations will further hit a softening housing market. Recent data from the Canadian Real Estate Association indicated unadjusted sales in September were 11% below year-ago levels, and price growth has slowed considerably, especially in the Toronto market after the introduction of a foreign-buyer’s tax in southern Ontario.”
“TD Bank’s economics team said it anticipates the measures will depress housing demand by 5% to 10% once fully implemented.”
“Qatar’s sovereign wealth fund has brought more than $20bn back onshore to cushion the impact of a regional embargo imposed on the Gulf state.”
“Ali Shareef al-Emadi, Qatar’s finance minister, told the Financial Times that Qatar Investment Authority deposits were being used to create a ‘buffer’ and provide liquidity in the banking system after the gas-rich state suffered capital outflows of more than $30bn.”
“That followed the decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut diplomatic and transport links with the nation in June. The move has triggered the Gulf’s worst crisis in years.”
“Moody’s, the rating agency, said last month that Qatar had injected $38.5bn into its economy since the crisis erupted.”
WSJ – Daily Shot: BMI Research – Saudi Arabia GDP Change Year-over-Year 10/17
Let it be noted the power of this reporting resulted in Rep. Tom Marino withdrawing from consideration to lead the Office of National Drug Control Policy and it appears that the public is more aware of this problem…
“In April 2016, at the height of the deadliest drug epidemic in U.S. history, Congress effectively stripped the Drug Enforcement Administration of its most potent weapon against large drug companies suspected of spilling prescription narcotics onto the nation’s streets.”
“By then, the opioid war had claimed 200,000 lives, more than three times the number of U.S. military deaths in the Vietnam War. Overdose deaths continue to rise. There is no end in sight.”
“A handful of members of Congress, allied with the nation’s major drug distributors, prevailed upon the DEA and the Justice Department to agree to a more industry-friendly law, undermining efforts to stanch the flow of pain pills, according to an investigation by The Washington Post and ’60 Minutes.’ The DEA had opposed the effort for years.”
“The law was the crowning achievement of a multifaceted campaign by the drug industry to weaken aggressive DEA enforcement efforts against drug distribution companies that were supplying corrupt doctors and pharmacists who peddled narcotics to the black market. The industry worked behind the scenes with lobbyists and key members of Congress, pouring more than a million dollars into their election campaigns.”
“The chief advocate of the law that hobbled the DEA was Rep. Tom Marino, a Pennsylvania Republican who is now President Trump’s nominee to become the nation’s next drug czar. Marino spent years trying to move the law through Congress. It passed after Sen. Orrin G. Hatch (R-Utah) negotiated a final version with the DEA.”
“For years, some drug distributors were fined for repeatedly ignoring warnings from the DEA to shut down suspicious sales of hundreds of millions of pills, while they racked up billions of dollars in sales.”
“The new law makes it virtually impossible for the DEA to freeze suspicious narcotic shipments from the companies, according to internal agency and Justice Department documents and an independent assessment by the DEA’s chief administrative law judge in a soon-to-be-published law review article. That powerful tool had allowed the agency to immediately prevent drugs from reaching the street.”
“Political action committees representing the industry contributed at least $1.5 million to the 23 lawmakers who sponsored or co-sponsored four versions of the bill, including nearly $100,000 to Marino and $177,000 to Hatch. Overall, the drug industry spent $106 million lobbying Congress on the bill and other legislation between 2014 and 2016, according to lobbying reports.”
“Amazon.com Inc. is taking over the package rooms of some of the country’s largest apartment landlords, in a move that could help consolidate its control over how goods make it from the warehouse floor to the front door.”
“Amazon has signed contracts with apartment owners and managers representing more than 850,000 units across the U.S. to begin installing Amazon locker systems in their buildings, according to the landlords. Amazon has commitments to install the lockers in thousands of properties, many before the peak holiday shopping season, according to a person familiar with the matter.”
“Several of the nation’s largest operators, AvalonBay Communities Inc., Equity Residential , Greystar and Bozzuto Group, have signed up, company executives said.
For several years, landlords have struggled with how to manage the mountains of packages they receive each day. Staff at larger buildings end up devoting several hours a day sorting mail, while boxes are piled in every spare cranny. Most say it is the single largest problem they face.”
“The locker program, dubbed Hub by Amazon, will accept packages from all carriers and not just for purchases made on Amazon. They will be open only to residents, not the wider community. Residents will receive a notification when they have a package and a code allowing them to open one of the slots.”
“Apartment owners pay about $10,000 to $20,000 to purchase the lockers initially and don’t pay a monthly fee. Most landlords said they don’t plan to charge residents initially but to offer it as an amenity. They could also make back some of that cost in savings on staff labor.”
“Karen Hollinger, vice president of corporate initiatives at AvalonBay, which has an ownership interest in about 80,000 apartments, said the average apartment community in the company’s portfolio receives some 1,000 packages a month, up from 650 a year ago. She said AvalonBay has seen a 20% to 30% annual increase in the volume of packages it receives for the past four years.”
“Amazon has been searching for ways to make deliveries cheaper. It has recruited a fleet of citizen drivers via its Flex program, which allows people to drop off packages from their cars. It has developed its own air and cargo networks, too.”
“The most expensive leg of any delivery is known as the last mile: getting a package to the doorstep. Amazon already has added lockers throughout the U.S., including an announcement that it is rolling them out at its newly acquired Whole Foods stores.”
“As China’s Communist party elite gather in Beijing this week to select its top leaders, President Xi Jinping has benefited from the strong recent performance of the economy, which is poised for its first year-on-year acceleration in growth since 2010. On Thursday China reported that gross domestic product grew 6.8% in the third quarter, ahead of Beijing’s full-year target.”
“That rebound owes much to the confidence of homebuyers. Housing prices and construction starts rebounded from a slump in 2014-15, boosting overall business investment and driving demand for output from China’s huge manufacturing sector.”
“The property sector has been given a helping hand. Urged on by Beijing, 38% of all bank loans issued in the 12 months to August were home mortgages, according to official data, and local governments purchased 18% of all residential floor space sold last year as part of a drive to provide affordable housing, according to estimates by E-House China Research Institute.”
“The result has been another heady boom in construction. Rome was not built in a day, but based on residential floor area completed last year, China built the equivalent of a new Rome about every six weeks.”
“With the surge in housing investment has come a round of questions about a potential bubble in the market and the implications for the long-term health of China’s economy.”
“Some economists and investors warn that short-term growth from the latest housing boom has come at a cost: inflating a property bubble whose eventual bursting will inflict great pain. A senior Chinese legislator recently warned in unusually blunt terms that the economy has been ‘kidnapped’ by property.”
“But others insist that fears of a bubble are overstated. On this view, economic fundamentals justify substantial investment in housing, especially in inland cities where development still lags far behind wealthy coastal areas. These more sanguine observers also note that outrageous price levels for Chinese apartments are mainly restricted to the megacities like Beijing and Shanghai.”
“The stakes in this debate are high. Chinese residential property is arguably the world’s most important asset market. The sector drives global commodity prices, making the difference between growth and stagnation for resource exporters like Australia and Brazil.”
“’It’s never wrong to express worry over China’s housing market,’ says Larry Hu, China economist for Macquarie Securities in Hong Kong. ‘But it’s interesting to consider why the housing sector has become the Bermuda Triangle for economic forecasters. So many smart people have made wrong predictions about it.’”
“The leading claim of the housing bears is that after a 15-year construction boom, China has built most of the housing it needs to meet fundamental demand. On this view, investors speculating on price gains, not families seeking shelter, now drive the market.”
“’People buy property not because they like the property, but because the price is rising,’ says Ning Zhu, professor at the Shanghai Advanced Institute of Finance and author of China’s Guaranteed Bubble. ‘It’s this panic that if they don’t buy now they will never be able to afford it.’”
“Central to this narrative is the notion of ‘ghost cities’ — huge blocks of empty apartments where expected demand never materialized.”
“In Mr. Xi’s speech at the opening of the congress on Wednesday, he repeated his mantra that ‘houses are for living in, not for speculation’.”
“Yet even in major cities, evidence suggests that there are a substantial number of empty flats held for investment purposes. A survey by FT Confidential Research, an independent research service owned by the Financial Times, found that 32% of families own at least one home that is vacant.”
“An estimated 50m homes, or 22% of the total urban housing stock, were vacant in 2013, according to the most recent data from the China Household Finance Survey led by Li Gan, economics professor at Texas A&M University.”
“Further underpinning the bearish outlook is the belief that fundamental demand for new housing is drying up.”
“The extraordinary transformation of China’s economy over the past 40 years was driven by the migration of farmers into cities. That urbanization process is now slowing, however, as relatively few young people remain in rural China.”
“The number of migrant workers living outside their home province rose by 12m in the five years through to June this year, compared with an increase of 26m in the five years ending June 2012, according to official data.”
Says Mr. Xie (Andy Xie, an independent economist and former Morgan Stanley chief Asia-Pacific economist): ‘If you go into villages, there are no young and middle-aged people any more. Where is this next wave of urbanization supposed to come from?’”
“To longtime observers of China’s economy, the current hand-wringing over the property market feels familiar.”
“After two years of falling prices and sluggish sales, analysts were warning in early 2016 that some smaller cities had enough unsold inventory to last for years.”
“Yet by August this year, inventories in the 80 cities tracked by E-House China Research Institute stood at their lowest level in almost five years.”
“Perceptions of unreasonably high housing prices appear to be disproportionately influenced by trends in first-tier cities — Beijing, Shanghai and Shenzhen. All three rank among the world’s most expensive in terms of price-to-income ratio.”
“Of the 70 cities in the official price survey, however, 12 have seen outright price falls in the three years through to August this year. In a further 29 cities, prices rose by less than 10% in the same period. Meanwhile, median per capital disposable income has grown 28% in roughly the same period.”
“Despite major concerns about Chinese corporate debt, household borrowing remains low by international standards at 37% of GDP, compared with 79% in the US and 59% in the euro area, according to the Bank for International Settlements. And Chinese homebuyers use less debt and more equity than counterparts in the US. The average down payment on Chinese home mortgages extended in 2016 was 40%.”
“Despite their differences, both sides in the debate mostly agree that an outright crash of the housing market is unlikely. Chinese savers have few options for investing their money. The stock market is volatile, returns on bank deposits are meagre and foreign exchange controls largely prevent households from buying foreign assets. Housing is the least bad option for many investors.”
“The combination of capital controls with years of monetary stimulus virtually ensures that ‘trapped cash’ will slosh through different asset classes, creating bubble-like conditions that the government either encourages or struggles to contain.”
“Still, given the pain that would result from an abrupt policy shift, analysts widely expect that Beijing will continue the current approach, tightening controls when the market gets too hot, while priming it with cash when it slows too sharply.”
“’The government is really losing its credibility,’ says Mr. Ning. ‘At this point everyone realizes they don’t really intend to crack down on the housing market.’”
“Prior to January 2009, the Bank (of England) had never lowered its lending rate below 2%. But it was then lowered to 1.5%, on its way to 0.5% in March 2009 and 0.25% in August 2016. This ultra-easy policy was further buttressed by a huge expansion of the Bank’s balance sheet, which now contains £435bn in UK government ‘gilt-edged’ securities and £10bn in corporate bonds.”
“Throughout this prolonged recent period of ultra-easy monetary policy, the concern has never been one of runaway inflation, but rather of the opposite. This time really has been different. What does it mean for the future? Nobody knows.”
“While companies have been trimming Venezuelan imports for months, the nation is still a key supplier for some of America’s biggest refineries. Last month, the country accounted for a more than a quarter of capacity at Valero’s Port Arthur complex in Texas, according to U.S. Customs data compiled by Bloomberg. It was 43% at Chevron’s facility in Pascagoula…”
The conspiracy theorist in me wonders (although it is highly unlikely) if OPEC members are issuing shadow loans to the Maduro regime to keep this chaos going. The intent being to limit production efficiencies from Venezuela (the country with largest known oil reserves) – which of course, helps ease the production cut burdens on the more stable OPEC members and Russia.
“A massive consolidation is underway in the $500 billion global industry and the survivors now enjoy big economies of scale and increased demand, one year after excess capacity caused the sector’s worst-ever crisis — the bankruptcy of South Korea’s Hanjin Shipping Co.”
“The five biggest container lines control about 60% of the global market, according to data provider Alphaliner. Shipping rates are climbing, and an index tracking cargo rates on major routes from Asia is about 22% higher than it was a year earlier.”
“’Container shipping is now a game only for big boys with deep pockets,’ said Corrine Png, chief executive officer at Crucial Perspective, a Singapore-based transportation research firm. The rising market concentration will ‘give the liners greater pricing and bargaining power,’ she predicts.”
“Hanjin’s collapse, in August last year, upended the industry in much the same way that the bankruptcy of Lehman Brothers roiled the financial sector during the 2008 crisis. One of the world’s largest shipping firms at the time, Hanjin faced a cash crunch as supply outstripped demand in the industry, weakening pricing power and profits for carriers.”
“’Since the demise of Hanjin Shipping, flight to quality has become more noticeable in the container shipping business,’ said Um Kyung-a, an analyst at Shinyoung Securities Co. in Seoul. ‘That’s why the market is becoming more and more dominated by top players with big ships and those that don’t have could become more and more obsolete.’”
“The growing use of mammoth ships is key to the turnaround. Companies who own them are able to deploy fewer vessels and move more cargo on a single journey to benefit from higher rates, said Um.”
“By her estimates, there are now about 58 of these huge carriers worldwide that can transport more than 18,000 containers, and the number is expected to double in two years. About half the new vessels will be added by the biggest firms.”
“The excess supply that derailed growth last year hasn’t completely disappeared as new entrants expand and as older vessels still remain. Capacity in the container shipping industry is expected to grow 3.4% this year and 3.6% in 2018, according to Crucial Perspective.”
“Still, recovery in demand seems to be on track. After posting losses in 2016, companies are seeing signs of business picking up.”
“Earlier this year, Maersk, South Korea’s Hyundai Merchant Marine Co. and other shipping lines reached agreements with their customers to raise annual rates from May for cargo headed from Asia to U.S. stores like Wal-Mart and Target. Retailers in the U.S. usually increase inventory during the third quarter, ahead of the year-end holidays, and Lee said freight rates are expected to rise further as the peak season for the container shipping industry kicks off.”
“For retailers, ‘if container costs go higher, obviously it’s a headwind,’ said Brian Yarbrough, an analyst at Edward Jones. ‘Retailers have three choices: They can pass that through to the customer or find efficiencies to offset that within the organization, or they come out and say gross margins will be pressured due to higher freight costs.’
“BIG SHIPPING DEALS:”
“In 2015, Cosco Group and China Shipping Group announced a merger to create Asia’s biggest container line, Cosco Shipping Holdings Co.”
“In 2016, CMA CGM SA bought Singapore’s Neptune Orient Lines Ltd.; Maersk agreed to buy Hamburg Süd and Japan’s three shipping companies agreed to consolidate their container shipping businesses.”
“In 2017, Hapag-Lloyd AG completed its acquisition of United Arab Shipping Co. and Cosco Shipping offered to buy Orient Overseas International of Hong Kong.”
“Dr. Ann McKee, a neuropathologist, has examined the brains of 202 deceased football players. A broad survey of her findings was published on Tuesday in The Journal of the American Medical Association.”
“Of the 202 players, 111 of them played in the N.F.L. – and 110 of those were found to have chronic traumatic encephalopathy, or C.T.E., the degenerative disease believed to be caused by repeated blows to the head.”
“The brains here are from players who died as young as 23 and as old as 89. And they are from every position on the field – quarterbacks, running backs and linebackers, and even a place-kicker and a punter.”
It’s a 3,475 sq. ft. space, so $37.41 per sq. ft. per month. Mind you, “the most expensive Trump Tower listing recently was a 3,725 sq. ft., three-bedroom apartment on the 62nd floor. It was listed in the spring of 2016 for $50,000 a month unfurnished and $60,000 a month furnished, according to Streeteasy.com.”
Basically, Trump’s neighbor recognizes they have a captive audience.
“As one international oil analyst says, though: ‘The Permian is preventing high prices today, but ensuring high oil prices tomorrow. The low prices are holding back investment in most of the world, and that is storing up a significant problem in meeting demand in the future.'”
“That is the argument to be a buyer of the Saudi Aramco IPO.”
“There are two bets involved in the listing. Can Saudi Arabia contain the social and strategic pressures caused by cheap oil? And will the capital markets eventually stop subsidizing shale producers?”
“U.S. college tuition is growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt.”
“Abundant supply is running up against demand constraints. The number of two-year and four-year colleges increased 33% between 1990 and 2012 to 4,726, Education Department data show. But college enrollment is down more than 4% from a peak in 2010, partly because a healthy job market means fewer people are going back to school to learn new skills.”
“Longer-running economic and demographic shifts also are at play. Lower birthrates and the aging of baby boomer children have reduced the pool of traditional college-age Americans. The number of new high-school graduates grew 18% between 2000 and 2010 but only 2% in the first seven years of this decade, Education Department data show.”
“Another factor: Congress last increased the maximum amount undergraduates could borrow from the government in 2008. Some economists have concluded schools raise prices along with increases in federal financial aid. A clampdown on aid, in turn, could limit the ability of schools to charge more.”
“But other factors could keep cost pressures rising. George Pernsteiner, head of State Higher Education Executive Officers, a trade group that tracks state funding for schools, notes that many states are on track to experience budget crunches as the population ages and health-care and public pension costs rise. That could squeeze public support for schools.”
“A shortage of new single-family homes across the U.S. is pushing up prices and locking many buyers out of the market. The silver lining: a boom in renovations of existing homes.”
“Americans are expected to pour a record $316 billion into home remodeling this year, up from $296 billion a year earlier, according to Harvard University’s Joint Center for Housing Studies.”
“A defining feature of the financial crisis was a group of hedge funds making vast sums by wagering against supposedly AAA-rated mortgage debt well before markets imploded in 2008.”
“Now some believe a similar story will play out for US shopping malls — that the most risky investments will end up being those that investors now believe to be the safest. Central to their premise is the idea that too much faith may be being placed in a classification system used for shopping malls that is little known outside of the real estate sector.”
“Malls are given ratings by a small group of property consultants generally ranging from A++ to C based on factors that include their sales per square foot and location. While there is no universally accepted system for ranking the malls, with each consultant having slightly different methodologies, banks and investors tend to rely on these ratings to make decisions over how secure each mall is as a creditor or investment.”
“The stock market has until recently appeared to believe that prime ‘A’ malls are largely insulated from the pain being felt across a US retail sector being shaken by e-commerce.”
“Yet there is growing evidence to suggest that these prime malls, which have been treated by investors and lenders alike as rock solid bets in the face of the internet headwinds, are not as protected as once thought.”
“The hedge funds wagering against the highest quality malls believe that the wider market will come to believe these A-quality malls are far more similar to lesser ranked ones. ‘This idea that there are these magic malls in America that are immune to secular change is a myth,’ the US-based hedge fund manager says.”
“Some argue that the market underappreciates that A class mall operators and B and C class mall operators all have very similar tenant bases, in spite of being in different locations.”
“We may be about to see the first sovereign producer to unequivocally fail.”
“The oil producer in question is Venezuela, and that assessment comes courtesy of Helima Croft, who is global head of commodity strategy at RBC Capital Markets and formerly worked with both the Council on Foreign Relations and the CIA.”
“But things are building to a head, partly due to the relentless logic of the bond market and partly due to the more proprietary logic of U.S. foreign policy.”
“Venezuelan bonds, which haven’t looked rock-solid for a few years, crashed this week as embattled President Nicola Maduro renewed calls to rewrite the country’s constitution, which would effectively disenfranchise the millions of Venezuelans who oppose him and entrench his regime. The U.S. has warned it may impose much tougher sanctions if Maduro goes ahead with his plan.”
“Venezuela’s economy is in free-fall: By the end of this year, it will have shrunk by 32% compared to where it was at the end of 2013, according to International Monetary Fund forecasts. Also by the end of this year, the government is on the hook to pay back more than $5 billion in debt — including bonds owed by the state-owned oil champion, Petróleos de Venezuela, S.A., or PdVSA — plus billions more in interest. As of this week, Venezuela’s international reserves stood at less than $10 billion.”
“Meanwhile, mismanagement, a lack of investment and re-nationalization of foreign oil companies’ interests have caused Venezuela’s oil production to slump from around 3.3 million barrels a day a decade ago to about 2 million now. Even allowing for the fact that domestic consumption has dwindled along with GDP, Venezuela’s surplus of oil available for earning export dollars has shrunk considerably.”
“Compounding this is the fact that the country must devote a lot of its output to paying off loans from China and Russia, further reducing the actual amount it can use to generate cash. Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute for Public Policy, estimates that could be as little as 800,000 barrels a day.”
“For three years, oil watchers have been waiting for a chaotic wave of bankruptcies in places like Texas and North Dakota to jolt the market. They’ve been looking in the wrong place.”
“One of the largest haulers of US coal says fossil fuels have no future, despite pledges to the contrary from President Donald Trump.”
“CSX, a freight railroad company with origins in the bituminous coal seams of Appalachia, will not buy a single new locomotive to pull coal trains, chief executive Hunter Harrison told analysts on Wednesday.”
“’Fossil fuels are dead,’ Mr Harrison said. ‘That’s a long-term view. It’s not going to happen overnight. It’s not going to be in two or three years. But it’s going away, in my view.’”
“North American railroads have reshaped their asset holdings in acknowledgment that coal’s apex has passed.”
“Lance Fritz, chief executive of the Union Pacific railroad, said in a recent interview that Mr Trump’s move to scrap Clean Power Plan regulations was unlikely to grow its coal business. ‘It takes away a headwind,’ he said.”
“It’s basically like someone who has been training for Olympic taekwondo going up against a street fighter. The Olympic fighter is waiting for the whistle, and the street fighter already has him on the ground hitting him with elbows. There’s no rules.” – Andy Tian, co-founder of Asia Innovations Group and former general manager of Zynga China
“Uber’s reported revenues are being cut in half and sales at Amazon and Microsoft could be higher than previously stated — all thanks to a forthcoming change to accounting rules.”
“An update to generally accepted accounting principles (GAAP) for US companies is turning out to have particularly large consequences in parts of the tech industry, which is having to overhaul the way it reports revenues and costs.”
“One of the more dramatic impacts will affect car-booking services such as Uber, a private company whose GAAP revenue drops by more than half when it adopts the new standard, which it plans to do this year.”
“Uber’s first-quarter revenue this year was $3.4bn under old GAAP accounting, but it says that under the new rules its revenue would have been just $1.5bn for the same period. Uber has already started sharing the lower figure with investors.”
“Under the old standard, car-booking services such as Uber and Lyft counted their commissions from regular rides, plus the entire fare of carpool rides, as revenue. Under the new standard, only the commissions from both regular and carpool rides will count as revenue.”
“The shift is due to changes to the ‘principal versus agent’ rules that determine when a company is acting as a principal and when it is acting as an agent. The car-booking services were previously considered the ‘principal’ for carpooled rides. As private companies, they must adopt the new standard by the beginning of 2019, although Uber has moved to do so much earlier.”
“The new standard, known as Revenue from Contracts with Customers, is designed to narrow the distance between US GAAP rules and International Financial Reporting Standards (IFRS).”
“Philippine Senator Leila de Lima, 57, was arrested at her senate office in February on charges that she received payoffs from jailed drug lords. She has branded the allegations ‘simply surreal’ and said they were part of a ‘personal vendetta’ by a president who is ‘rather obsessed with me’.”
“Ms. de Lima has certainly earned implacable enmity from Mr. Duterte for her efforts to probe his bloody drugs wars first as a provincial mayor and now as president. She maintains her innocence but also accepts her stay in jail could be a long one. The same day she marks five months in detention next week, Mr. Duterte will give an annual state of the nation speech against a background of soaring approval ratings.”
“I think as long as Duterte is president (5 more years), I will be locked up in jail,” Ms. de Lima says. “I have no false hopes about achieving justice very soon.”
“Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about ‘gray rhinos’ — large and visible problems in the economy that are ignored until they start moving fast.”
“The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.”
“Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a ‘gray rhinoceros,’ without naming specific companies.”
Sunac continues to be busy. In addition to its property acquisitions from Dalian Wanda, Sunac’s chairman – Sun Hongbin, is adding a new chairmanship to his belt, that of the struggling Chinese tech company, LeEco.
“Dalian Wanda Group, the Chinese conglomerate, tore up a $9.3 billion agreement to sell a portfolio of hotels and theme parks, unexpectedly reaching new deals on the properties that highlighted uncertainty over the financial health of the country’s biggest companies.”
“Wanda had reached an overall agreement with the property firm Sunac China Holdings last week, but Wanda announced at a signing ceremony on Wednesday that it was backtracking and would instead sell just the theme parks to Sunac. The hotels will instead be sold to R&F Properties, based in the southern Chinese city of Guangzhou.”
“The hasty reorganization of the deals has raised concern about the due diligence conducted by many of China’s first-generation dealmakers as they seek to become bigger players domestically and around the world.”
“The signing was dominated by the announcement that Sunac would pay $6.5 billion for a 91% stake in Wanda’s 13 theme parks across China, while R&F Properties would buy 77 hotels from Wanda for $3 billion. In a sign of the wildly fluctuating valuations of assets, however, Wanda had said last week that it was selling Sunac only 76 hotels, but that they were worth $5 billion.”
“Since then (after the failed attempt to overthrow the government of President Recep Tayyip Erdogan on July 15, 2016), more than 950 companies have been expropriated, all of them purportedly linked to Fethullah Gulen, the Muslim cleric who Turkish leaders say masterminded the putsch.”
“About $11 billion worth of corporate assets — from small baklava chains to large publicly traded conglomerates — have been grabbed by the government, a systematic taking with few precedents in modern economic history. Several thousand dispossessed executives have fled overseas to cities as far-flung as Nashville and Helsinki. The less fortunate were imprisoned, part of a mass incarceration campaign that has included purged members of the military, judiciary, police and news media, adding 50,000 new inmates to the prisons.”
“There is a reason so many Americans choose to develop their net worth through homeownership: It is a proven wealth builder and savings compeller. The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter ($5,400).”
“People who are living in a middle- to-lower-class system, there’s no progressing. You’re stuck in that system. I don’t have subsidies. I work, but I feel stuck in this cycle and can barely make ends meet.’’ – Crisaliz Diaz, renter
Trying to get subsidized housing? Good luck.
“The last time Boston accepted new applications for rental-assistance Section 8 vouchers was nine years ago, when for a few precious weeks you were allowed to place your name on a very long waiting list. Boston is not atypical in that way. In Los Angeles, the estimated wait time for a Section 8 voucher is 11 years. In Washington, the waiting list for housing vouchers is closed indefinitely, and over 40,000 people have applied for public housing alone. While many Americans assume that most poor families live in subsidized housing, the opposite is true; nationwide, only one in four households that qualifies for rental assistance receives it. Most are like Diaz, struggling without government help in the private rental market, where housing costs claim larger and larger chunks of their income.”
“Almost a decade removed from the foreclosure crisis that began in 2008, the nation is facing one of the worst affordable-housing shortages in generations. The standard of “affordable” housing is that which costs roughly 30% or less of a family’s income. Because of rising housing costs and stagnant wages, slightly more than half of all poor renting families in the country spend more than 50% of their income on housing costs, and at least one in four spends more than 70%. Yet America’s national housing policy gives affluent homeowners large benefits; middle-class homeowners, smaller benefits; and most renters, who are disproportionately poor, nothing. It is difficult to think of another social policy that more successfully multiplies America’s inequality in such a sweeping fashion.”
In 2015, “the federal government dedicated nearly $134 billion to homeowner subsidies. The MID accounted for the biggest chunk of the total, $71 billion, with real estate tax deductions, capital gains exclusions and other expenditures accounting for the rest. That number, $134 billion, was larger than the entire budgets of the Departments of Education, Justice and Energy combined for that year.”
As a homeowner myself, I fully attest to the wealth effect. While I greatly appreciate the MID, I would understand if it went away.
“When we think of entitlement programs, Social Security and Medicare immediately come to mind. But by any fair standard, the holy trinity of United States social policy should also include the mortgage-interest deduction — an enormous benefit that has also become politically untouchable.”
“The MID came into being in 1913, not to spur homeownership but simply as part of a general policy allowing businesses to deduct interest payments from loans. At that time, most Americans didn’t own their homes and only the rich paid income tax, so the effects of the mortgage deduction on the nation’s tax proceeds were fairly trivial. That began to change in the second half of the 20th century, though, because of two huge transformations in American life. First, income tax was converted from an elite tax to a mass tax: In 1932, the Bureau of Internal Revenue (precursor to the I.R.S.) processed fewer than two million individual tax returns, but 11 years later, it processed over 40 million. At the same time, the federal government began subsidizing homeownership through large-scale initiatives like the G.I. Bill and mortgage insurance. Homeownership grew rapidly in the postwar period, and so did the MID.”
“By the time policy makers realized how extravagant the MID had become, it was too late to do much about it without facing significant backlash. Millions of voters had begun to count on getting that money back. Even President Ronald Reagan, who oversaw drastic cuts to housing programs benefiting low-income Americans, let the MID be. Subsequent politicians followed suit, often eager to discuss reforms to Social Security and Medicare but reluctant to touch the MID, even as the program continued to grow more costly: By 2019, MID expenditures are expected to exceed $96 billion.”
“’Once we’re in a world with a MID, says Todd Sinai, a professor of real estate and public policy at the University of Pennsylvania’s Wharton School, ‘it is very hard to get to a world without the MID.’ That’s in part because the benefit helps to prop up home values. It’s impossible to say how much, but a widely cited 1996 study estimated that eliminating the MID and property-tax deductions would result in a 13% to 17% reduction in housing prices nationwide, though that estimate varies widely by region and more recent analyses have found smaller effects. The MID allows home buyers to collect more after-tax savings if they take on more mortgage debt, which incentivizes them to pay more for properties than they could have otherwise. By inflating home values, the MID benefits Americans who already own homes — and makes joining their ranks harder.”
“The owner-renter divide is as salient as any other in this nation, and this divide is a historical result of statecraft designed to protect and promote inequality. Ours was not always a nation of homeowners; the New Deal fashioned it so, particularly through the G.I. Bill of Rights. The G.I. Bill was enormous, consuming 15% of the federal budget in 1948, and remains unmatched by any other single social policy in the scope and depth of its provisions, which included things like college tuition benefits and small-business loans. The G.I. Bill brought a rollout of veterans’ mortgages, padded with modest interest rates and down payments waived for loans up to 30 years. Returning soldiers lined up and bought new homes by the millions. In the years immediately following World War II, veterans’ mortgages accounted for over 40% of all home loans.”
“But both in its design and its application, the G.I. Bill excluded a large number of citizens. To get the New Deal through Congress, Franklin Roosevelt needed to appease the Southern arm of the Democratic Party. So he acquiesced when Congress blocked many nonwhites, particularly African-Americans, from accessing his newly created ladders of opportunity. Farm work, housekeeping and other jobs disproportionately staffed by African-Americans were omitted from programs like Social Security and unemployment insurance. Local Veterans Affairs centers and other entities loyal to Jim Crow did their parts as well, systematically denying nonwhite veterans access to the G.I. Bill. If those veterans got past the V.A., they still had to contend with the banks, which denied loan applications in nonwhite neighborhoods because the Federal Housing Administration refused to insure mortgages there. From 1934 to 1968, the official F.H.A. policy of redlining made homeownership virtually impossible in black communities. ‘The consequences proved profound,’ writes the historian Ira Katznelson in his perfectly titled book, When Affirmative Action Was White. ‘By 1984, when G.I. Bill mortgages had mainly matured, the median white household had a net worth of $39,135; the comparable figure for black households was only $3,397, or just 9 percent of white holdings. Most of this difference was accounted for by the absence of homeownership.‘”
“This legacy has been passed down to subsequent generations. Today a majority of first-time home buyers get down-payment help from their parents; many of those parents pitch in by refinancing their own homes… Differences in homeownership rates remain the prime driver of the nation’s racial wealth gap. In 2011, the median white household had a net worth of $111,146, compared with $7,113 for the median black household and $8,348 for the median Hispanic household. If black and Hispanic families owned homes at rates similar to whites, the racial wealth gap would be reduced by almost a third.”
“Racial exclusion was Roosevelt’s first concession to pass the New Deal; his second, to avoid a tax revolt, was to rely on regressive and largely hidden payroll taxes to fund generous social-welfare programs. A result, the historian Michelmore observes, is that we ‘never asked ordinary taxpayers to pay for the economic security many soon came to expect as a matter of right.’ In providing millions of middle-class families stealth benefits, the American government rendered itself invisible to those families, who soon came to see their success as wholly self-made. We forgot because we were not meant to remember.”
“So why do we keep this ‘poor instrument’ around, if the overarching goal of American federal housing policy is to create a nation of homeowners? Perhaps because the MID enjoys entrenched, unyielding support from a powerful real estate lobby. We often discuss the influence of the gun and pharmaceutical lobbies, but the real estate lobby has spent much more than either group. According to the Center for Responsive Politics, the National Association of Realtors spent $64.8 million in lobbying efforts in 2016, making it second only to the U.S. Chamber of Commerce in terms of dollars spent. And to 1.2 million Realtors, the mortgage-interest deduction is nonnegotiable. The association calls it a ‘remarkably effective tool that facilitates homeownership.’ Jerry Howard, the chief executive of the National Association of Home Builders, refers to the MID as ‘one of the cornerstones of American housing policy.’ Of course, industry groups have a responsibility to their members, who enjoy profiting from a government subsidy that increases the prices of homes they build and sell.”
Remove the MID or alter it by capping the value on the homes it applies to, etc. The article goes on to discuss the arguments – worth the read.
“In some markets, there are virtually no affordable units left. The median annual rent for a two-bedroom apartment is currently $39,600 in Boston, $49,200 in New York City and $54,720 in San Francisco. Families priced out of large cities have moved to smaller ones, and now those cities are experiencing some of the steepest rent increases in the nation. The poor used to live on the other side of the tracks. Now they live in different towns and counties entirely.”
Of course those different towns are jacking rents with all of this new demand.
“And yet we continue to give the most help to those who least need it — affluent homeowners — while providing nothing to most rent-burdened tenants. If this is our design, our social contract, then we should at least own up to it; we should at least stand up and profess, ‘Yes, this is the kind of nation we want.’ Before us, there are two honest choices: We can endorse this inequality-maximizing arrangement, or we can reject it. What we cannot do is look a mother like Diaz in the face and say, ‘We’d love to help you, but we just can’t afford to.’ Because that is, quite simply, a lie.”
Perspective
WSJ – Daily Shot: California Economy 5/8
“Other than the US, only these four nations have an economy larger than California’s.”
“China’s championing of globalization should be great news for exporters in Latin America, where trade with the Asian giant has ballooned since the early 2000s. But trade growth has stalled and, according to the Inter-American Development Bank (IDB), this is not only because of the bursting of the commodities bubble. High tariffs and other barriers both in China and in Latin America show that free-trade rhetoric has yet to be matched by action.”
“In a recent report, Uncovering the Barriers of the China-Latin America and Caribbean Trade, the IDB details tariffs and other ‘discriminatory’ policies afflicting the relationship. Their presence has contributed to a decline in trade between the two, which slowed to $247bn in 2016, a 7% drop from the previous year and the third consecutive annual fall.”
“According to the IDB, Latin America’s farmers have been hit particularly hard. Beijing imposes tariffs of 17.3% on agricultural produce from Argentina, 17% on that from Brazil and 16.1% from Mexico, compared with its average tariffs of 13.4% for the farm sector worldwide. The difference matters: soya alone represents a fifth of the region’s total exports to China.”
“’During the [commodity] boom years, Latin American countries were very passive, they just sort of expected Chinese demand to continue endlessly and didn’t do much to diversify exports, with [only a few] exceptions,’ says Carlos Casanova, Hong Kong-based economist at BBVA. ‘You keep on hearing ‘la fiesta se acabo’ [the party is over]. I think Latin America is coming to grips with the fact that the Chinese economy is rebalancing and that they need to diversify the export basket.’”
Real Estate
WSJ – Daily Shot: FRED – Tightening Credit Standards for Multifamily Sector 5/8
“In commercial real estate, the multi-family sector continues to struggle as banks tighten lending standards (chart below) while demand wanes (second chart below). These trends will be reflected in slowing multi-family housing starts.”
“Looking at 447 supposedly repeating price patterns identified in the last few decades, academics from Ohio State and the University of Cincinnati contend that more than half are basically figments of their discoverers’ imagination. The study, ‘Replicating Anomalies’ by Kewei Hou, Chen Xue and Lu Zhang, attributed the findings to a statistical sleight of hand known as p-hacking.”
“While lodged squarely in the academic realm, the paper is a broadside against an area of research that has come to dominate financial economics and underpin both quantitative investing and smart beta exchange-traded funds. It joins a growing body of literature that suggests people looking for money-making opportunities within the market’s chaos often see what they want to see, or confuse profitability with luck.”
“Philippine casinos reported as much as 110% increases in VIP revenue from high-rollers – from $27 billion in bets placed last year, and possibly far more if off-books betting were tallied. Phone betting, also known as betting by proxy, has grown to account for as much as 85% of the business at some VIP rooms used by big spenders, according to people familiar with the operations who asked not to be identified as they’re not authorized to speak publicly.”
“While the Philippine Amusement and Gaming Corp., the casino regulator also known as Pagcor, permits phone betting, many other gambling centers ban it because of money-laundering concerns. Macau eliminated betting by proxy last year citing the risk. Not all Philippine casinos engage in proxy betting.”
“Unlike banks, insurance companies and other finance-related firms that must comply with the Philippines’ anti-money laundering law, casinos are exempt from such reporting requirements – an issue the U.S. State Department called ‘an especially critical concern.'”
“Phone betting isn’t the only way the Philippines is trying to attract long-distance gamblers. The regulator issued 35 licenses for online betting operations restricted to foreigners outside the country, Andrea Domingo, chairman and chief executive officer of Pagcor, told a Senate hearing in February. The government expects to ‘make a lot of money’ from these licenses, Domingo said.”
“A country that in 1980 had the highest GDP per capita in Latin America is no longer in the top 10 and its economy is smaller than those of Colombia, Chile and Peru, the IMF data show.”
“Since their inception, financial markets have been driven by greed and fear. No matter how advanced technology becomes, human nature isn’t changing. Or as billionaire Carl Icahn has put it: ‘Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.'”
Markets / Economy
WSJ – Daily Shot: BMI / Federal Reserve – US Credit Growth Drying Up 4/11
“China Huishan Dairy has defaulted on a $200m loan and had assets frozen in China in relation to another $79m debt, in a sign of the troubled dairy operator’s worsening problems.”
“Paul Gillis, an accounting expert at Peking University, said the company’s sudden share collapse ‘raises the question of why short-sellers are able to find these things, but auditors never seem to find them.'”
Okay, I’m prototyping here. Bottom line it’s finally gotten through my thick skull that assembling a weeks worth of content and putting it out there once-a-week is a LOT to consume all-at-once. So I’m going to try a new angle here. I’m not going to post every day – rather almost every day.
I will post when there is content I think is worthy of posting – also conditioned on when I come across it (sometimes I just don’t get around to it – day job you know).
Some days will be light and others heavy.
Some posts will include a summary like those found in the Featured or Briefs section and at other times there will only be links. Additionally I’ll sort the links now by categories and will post graphics within those categories as well.
Hopefully this makes the experience better for you and for me.
“Norway’s $910bn oil fund, which on average owns 1.3% of every listed company in the world, will start pressing companies to end such incentives [long-term incentive plans] and instead force chief executives to own substantial stakes in their companies for periods of at least five and preferably 10 years. It will also urge boards to name a ceiling for possible pay.”
“We tried to be friends with everybody, but we have to maintain our jurisdiction now, at least the areas under our control.” – President Rodrigo Duterte
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.
“Matteo Renzi has joined a long line of Italian prime ministers who failed to ‘reform’ their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would change from being an economy where there was a high probability of many currency devaluations to the certain probability of eventual bankruptcy. Sadly, that moment is not far away.”
“City and strategic planners are starting to see that this is real. We expect there will be a 60% reduction in personal vehicles, and I think that is actually very plausible in the next 20 years.” – Jarrett Walker, public transit consultant
“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.'”
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…
“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.”
“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.”
“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.”
“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…”
“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.”
“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.”
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.”
“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.'”
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.”
“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.”
The Chinese housing market is looking rather shaky. Investors are going to have to brush up on their social sciences. China is smarting from an aggressive push into developing world loans.
FT – Norway’s oil fund urged to invest billions more in equities 10/18. According to a report commissioned by the $880bn fund, Norway should increase its allocation to equities to 70% from 60% by reducing its allocation to bonds – also worth noting is that the report expects the real rate of return attained by the fund over the next 30 years to be 2.3%…
“The collective wealth of the world’s ultra-rich has fallen for the first time since the aftermath of the global financial crisis even as Asia, powered by China, continues to create a billionaire every three days, according to research published on Thursday.”
“Last year the world’s billionaires lost 5% of their fortunes, or $300bn, and their wealth growth failed to match stock market performance for the first time in two decades, according to a report by UBS, the world’s largest wealth manager, and PwC, the professional services firm.”
“Over the past 20 years billionaires have increased their wealth sevenfold – double the rate of global stock market growth – in what has been termed a second ‘Gilded Age’ for wealth creation.”
Easy for some to say.
“Among the causes for the fall in billionaires’ fortunes last year were transfers of wealth…, falling commodity prices and a rising US dollar, the currency on which the report is based.”
“But such vast wealth can prove fleeting. While 41 billionaires made the cut in the US for the first time last year’s UBS/PwC report, 36 dropped below that level. In China the situation was even more volatile: while Asia generated 113 billionaires last year, 80 dropped below that level, of whom 50 were Chinese. Their declining fortunes were attributed to fluctuating markets and a government crackdown on corruption and graft.”
“The new fund, dubbed the SoftBank Vision Fund, will be based in London and seeded with $25bn from SoftBank and up to $45bn from Saudi Arabia’s Public Investment Fund over the next five years, according to a statement from the Japanese telecoms group.”
“At $100bn, the new fund would be the same size as all funds raised by US venture capital firms over the past two and a half years, according to data from the National Venture Capital Association.”
“SoftBank said the fund would be investing over a five-year time horizon, which at $20bn a year would represent roughly a quarter of total annual investments in US-based venture-backed start-ups.”
According to Masayoshi Son, the fund will be “the biggest investor in the technology sector.” Quite a statement.
“China, long the world’s factory floor, is taking control of a bigger portion of the world’s supply chains as well, causing a shift in global trade patterns by buying less from abroad.”
“Exports to China, which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s. They are down another 8.2% this year, through September. The decline helped shave 0.3 percentage points off world trade growth last year, and is a big reason that growth is expected to slow to 1.7% this year from the 5% a year it has averaged over the last two decades.”
One of the reasons, simply Chinese companies have been using less product from foreign sources. “The proportion of foreign-made inputs in Chinese exports has been shrinking by an average 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data.”
“To build domestic capabilities on the high end, the Chinese government last year announced a plan to raise the domestic content of core components and key materials to 40% by 2020 and 70% by 2025. It has been spending large amounts on research and development: $213 billion last year, or 2.1% of gross domestic product, according to state media reports. In June it pledged more money for ‘technological innovation.'”
A brief and well-articulated article on precarious position of the Chinese mortgage/housing market.
“Seeking to quell worries that China’s home-finance market has gotten out of hand, a banking regulator disclosed this week that the loan-to-value ratio in the housing market, or the ratio of the value of mortgage loans to the value of underlying property, was on average 55%.”
“But the absolute level may not matter as much as the pace of increase. UBS estimates the loan-to-value ratio of new-home purchases is even higher, closer to 70%, having surged from 15% in 2012. Much of that rise has happened in the past year.”
“As a comparison, U.S. mortgages before the housing bubble burst had a loan-to-value ratio of less than 60%… In any event, that basic number very quickly rose to over 90% when the bubble popped and prices dropped.”
“Because so many of China’s mortgages are of recent vintage, the value side of their loan-to-value calculation rests on the most recent surge in prices. Simplistically, should prices correct, say, 20%, LTVs would suddenly on average be at 70%. That doesn’t take into account individual markets where leverage and price increases might be higher. Nor does it factor in the vast market for shadow lending, which anecdotally has been helping buyers fund down payments, heaping leverage on top of leverage.”
Keep in mind, “home prices have a way of overcorrecting.”
Granted, with so much at stake for the Chinese economy, I would expect the government will do almost anything to keep the real estate cycle trending up as it moves to the right.
Ms. Tett does a good job of highlighting recent remarks by Axel Weber, former head of the Bundesbank and now chairman of UBS, at one of the International Monetary Fund meetings held recently.
Essentially, he sees three primary themes shaping the market today.
First, “the banking system today is much stronger than a decade ago as a result of post-crisis reforms.” Despite the effects of low-to-negative interest rates. So we have that going for us.
Second, “while the banking system looks healthier, markets do not.” Markets are no longer ‘markets’ in the traditional sense. There is too much distortion. For example, “in the government bond markets, where the central banks of Japan, US and eurozone currently hold a third, a fifth and a tenth of the outstanding local government bonds.”
“Central bank purchases are distorting the price of European corporate bonds and Japanese equities, with knock-on effects in numerous other asset classes. ‘I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention,’ Mr. Weber warned.”
Third, “these distorted markets are increasingly hostage to unfathomable political risk.”
“Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as Britain’s vote to leave the EU, herald a new protectionism?”
“Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science.”
Just because you want something to be so, doesn’t mean it will be.
Entering the world of international development finance about a decade ago, China has jumped in head first. “With a loan portfolio larger than all six western-backed multilateral organizations put together. Outstanding loans form the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions, according to a recent study.”
Well, the thing is that when they entered the game, they backed a lot of risky players/countries. As one Chinese official put it “China had no choice but to lend a lot to risky countries because they had the commodities we needed and because the western multilateral organizations already dominated the rest of the world.”
Of course the lesson is being learned. “These days we need viable projects and a good return. We don’t want to back losers.”
All told China has invested $65bn in Venezuela since 2007 in 17 tranches. Which “for context, $65bn is more than the World Bank has lent to any country – with the single exception of India – since 1945, data from the bank show.”
Now, in regard to Venezuela “China is no longer willing to ‘put good money after bad, unless it is the only way for it to avoid losing its entire position through the collapse of the regime.'” A possibility.
“Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the Paris-based OECD. By contrast, only two of the top 10 recipients of World Bank development finance fell into the same category.”
WSJ – Oil Market Boost May Come from Venezuela, Not Algeria 8/19. “Venezuela produced the least oil in June in over 13 years and output had declined by more than 200,000 barrels a day in just the first half of 2016. That is half an Alaska’s worth of output.”
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.”
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…
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.”
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.”
With a median 401(k) account balance of $104,000 for US households near retirement, that would imply a $4,000 annual income should they follow standard withdrawal practices.
Italian Prime Minister Matteo Renzi has put forth a referendum to vote this upcoming October that would enable him to move forward some much needed reform in the country. Should a “No” vote succeed, it “…will not just precipitate the fall of Renzi’s government; it could throw Italy’s long term membership of the eurozone into doubt, plunging the single currency area once again into crisis.”
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…
