Tag: Private Equity

December 6, 2017

Perspective

Visual Capitalist – Visualizing the 4,000 Year History of Global Power – Nick Routley 12/2

The Verge – The Winklevoss twins are now Bitcoin billionaires – Thuy Ong 12/4

WSJ – Daily Shot: Global Market Cap as % of GDP 12/5

Worthy Insights / Opinion Pieces / Advice

FT – The Republicans’ faith-based tax plan – Rana Foroohar 12/3

Bloomberg Gadfly – 98,750,067,000,000 Reasons to Be Worried About 2018 – Mark Gilbert and Marcus Ashworth 12/4

Markets / Economy

Axios – The U.S. companies with the most cash parked overseas – Bob Herman 12/4

WSJ – Daily Shot: S&P 500 Relative Monthly Performance 12/5

  • “The S&P 500 has not had a down month this year.”

Finance

FT – Bitcoin: an investment mania for the fake news era 12/1

Bloomberg – BlackRock and Vanguard Are Less Than a Decade Away From Managing $20 Trillion – Rachel Evans, Sabrina Willmer, Nick Baker, and Brandon Kochkodin 12/4

FT – Private equity investors are paying through the nose for midsize companies – Matthew C Klein 12/4

China

FT – China banking regulator targets ‘invisible shareholders’ – Gabriel Wildau 12/1

WSJ – How China’s Migrant Crisis Could Hit Alibaba – Jacky Wong 12/5

South America

FT – Maduro’s purge – Gideon Long 12/1

  • “New appointment at state oil company is designed to keep the military sweet.”

October 2, 2017

If you were to read only one thing…

Reuters – Chaos and hackers stalk investors on cryptocurrency exchanges – Steve Stecklow, Alexandra Harney, Anna Irrera and Jemima Kelly 9/29

  • “Online exchanges for trading bitcoins and other virtual currencies can make fortunes for their owners. But they are largely unregulated, besieged by hackers and thieves, and fraught with risk for consumers.”
  • “Cryptocurrencies were supposed to offer a secure, digital way to conduct financial transactions, but they have been dogged by doubts. Concerns have largely focused on their astronomical gains in value and the likelihood of painful price crashes. Equally perilous, though, are the exchanges where virtual currencies are bought, sold and stored. These exchanges, which match buyers and sellers and sometimes hold traders’ funds, have become magnets for fraud and mires of technological dysfunction, a Reuters examination shows, posing an underappreciated risk to anyone who trades digital coins.”
  • “Huge sums are at stake. As the prices of bitcoin and other virtual currencies have soared this year – bitcoin has quadrupled – legions of investors and speculators have turned to online exchanges. Billions of dollars’ worth of bitcoins and other cryptocurrencies – which aren’t backed by any governments or central banks – are now traded on exchanges every day.”
  • “’These are new assets. No one really knows what to make of them,’ said David L. Yermack, chairman of the finance department at New York University’s Stern School of Business. ‘If you’re a consumer, there’s nothing to protect you.’”
  • There have been at least three dozen heists of cryptocurrency exchanges since 2011; many of the hacked exchanges later shut down. More than 980,000 bitcoins have been stolen, which today would be worth about $4 billion. Few have been recovered. Burned investors have been left at the mercy of exchanges as to whether they will receive any compensation.”
  • “Nearly 25,000 customers of Mt. Gox, once the world’s largest bitcoin exchange, are still waiting for compensation more than three years after its collapse into bankruptcy in Japan. The exchange said it lost about 650,000 bitcoins. Claims approved by the bankruptcy trustee total more than $400 million.”
  • “So-called ‘flash crashes’ – when cryptocurrencies suddenly plummet in value – are also a threat. Unlike regulated U.S. stock exchanges, cryptocurrency exchanges aren’t required to have circuit breakers in place to halt trading during wild price swings. Digital coin exchanges are also frequently under assault by hackers, resulting in down times that can sideline traders at critical moments.”
  • Caveat emptor.

Perspective

Vox – What every American needs to know about Puerto Rico’s hurricane disaster – Brian Resnick and Eliza Barclay 9/29

  • “3.4 million US citizens live in Puerto Rico, and they are entitled to the same government response as any state. But half of Americans don’t even know that.”
  • “Puerto Ricans have been citizens of the United States since 1917, when President Woodrow Wilson signed the Jones-Shafroth Act. Citizens mean citizens. Puerto Ricans can travel freely to and from the continental United States without a passport. They’re protected by the same Bill of Rights as anyone else born in the United States. They vote in presidential primaries.”
  • “The island does not get electoral votes in general presidential elections. It also does not have voting representatives in Congress. Jenniffer González-Colón serves as resident commissioner of Puerto Rico, a non-voting member of the US House of Representatives.”
  • “If Puerto Rico were a state, it would be the 30th most populated — with more people than Wyoming, Vermont, and Alaska combined.”
  • “This hurricane season has been punishing for Puerto Rico. First, it got clipped by Hurricane Irma, a huge Category 5 storm whose eye passed just north of the island. That storm — which had ravaged several Caribbean islands — left 1 million people without power on Puerto Rico. By the time Maria hit, 60,000 people were still without electricity. That means there are many people on the island who haven’t had power for 20 days (Irma passed by on September 7).”
  • “Maria was a slightly smaller storm, but it was far, far more devastating. That’s because it charted a course directly over Puerto Rico, hit near its peak intensity, and passed around 25 miles away from San Juan, the capital, which is home to about 400,000 people. No nation or territory could suffer such a direct hit without some damage.”
  • “’It was as if a 50- to 60-mile-wide tornado raged across Puerto Rico, like a buzz saw,’ Jeff Weber, a meteorologist with the National Center for Atmospheric Research, says. ‘It’s almost as strong as a hurricane can get in a direct hit.’”
  • “By the record books, it was the fifth-strongest storm ever to hit the US, and the strongest storm to hit the island in 80 years.”
  • “Exact figures on the extent of the damage and the costs of repairs on the island are not yet known. This is partly due to the fact that communications on the island are strained. But it’s also because many roads are damaged and it’s hard to get around. AIR Worldwide, a catastrophe risk consultancy, estimates the storm caused $40 billion to $85 billion in insurance claims throughout the Caribbean, with 85% of those losses in Puerto Rico.”
  • “It could be four to six months before power is fully restored on the island. That’s half a year with Puerto Rico’s 3.4 million residents relying on generators, half a year without air conditioning in the tropical climate, half a year that electric pumps can’t bring running water into homes, half a year when even the most basic tasks of modern life are made difficult.”
  • “PREPA, the electric company on the island, has a massive $9 billion debt, as Vox’s Alexia Fernández Campbell has explained, and in July it defaulted on an interest payment. For years, it hasn’t had the money to invest in modernizing Puerto Rico’s electrical systems. Even without hurricanes, power outages are frequent on the island. Making things worse: There aren’t enough workers to fix the infrastructure. Young people have been leaving the island in droves as the economy has tightened, and older workers have been retiring en masse, securing their pensions.”
  • “No electricity means no power to pump water into homes, no water to bathe or flush toilets. FEMA said Saturday that 55% of people on the island still are without potable water.”
  • “The storm knocked out 1,360 out of 1,600 cellphone towers on the island. Many communities have been isolated from the outside world for days, relying only on radios for news.”
  • It’s bad. And of course, Puerto Rico is not alone. “The island of Barbuda has been completely abandoned, and residents still can’t return home. Twenty-seven people died in Dominica. And 48,000 people are still without power in the US Virgin Islands.”

Worthy Insights / Opinion Pieces / Advice

NYT – For Homeless Advocates, a Discouraging Lesson in Los Angeles: Money Is Not Enough – Adam Nagourney 9/29

Markets / Economy

FT – Value of private equity dealmaking at highest level since 2007 – Javier Espinoza, Robert Smith, and Arash Massoudi 9/28

Real Estate

WSJ – Daily Shot: UBS Global Real Estate Bubble Index 9/29

Finance

FT – South Korea joins global backlash against initial coin offerings – Bryan Harris and Edward White 9/29

  • “Country is latest to ban the fundraising platform involving digital currencies.”

Health / Medicine

Bloomberg – This State Has the Best Health Care in America – Vincent Del Giudice and Wei Lu 9/28

  • Hint, according to Bloomberg, it’s Hawaii.

Sovereign Wealth Funds

FT – SWFs pull money from asset managers for 12th consecutive quarter – Jennifer Thompson 9/29

  • “Sovereign wealth funds have withdrawn billions of dollars from asset managers for a 12th consecutive quarter as low oil prices continue to take their toll. The net amount repatriated in the past three years has reached $182bn.”
  • “The state-backed funds, which many oil-rich nations use to save for a rainy day or to provide money for future generations, withdrew a net $6bn in the three months to the end of June, according to eVestment, the data provider.”
  • “Redemptions by SWFs began in the latter half of 2014, shortly after a glut in oil supply, due to increased US shale production, triggered a sharp drop in the oil price.”
  • “However, disenchantment with high fees charged by fund managers as well as a desire by some state-backed vehicles to put cash to work themselves are additional inducements for SWFs to take back control.”
  • “There are signs of moderation. The net outflow in the second quarter of 2017 was below the quarterly average of the past three years, which has been around $15.1bn every three months.”

September 22, 2017

Perspective

Economist – Daily Chart: Modern slavery is disturbingly common 9/20

Worthy Insights / Opinion Pieces / Advice

Economist – In Detroit, the end of blight is in sight 9/16

  • “What happens when a city accustomed to bad government elects a good one.”
  • A good test case for a city in transition from a larger population/footprint to a smaller one and what to do with all of that excess infrastructure.

Economist – Buttonwood: Initial Coin Offering means investor caution obligatory 9/16

  • A good primer on ICOs.
  • “Nothing makes individuals more willing to take risks than the sight of other people getting rich.”

Markets / Economy

FT – Toys R Us buckled under private equity ownership – Anna Nicolaou and Kara Scannell 9/19

  • “Retailer’s debts played a bigger role than Amazon or Walmart in its bankruptcy.”

September 20, 2017

Perspective

Economist – Ryanair’s mass cancellations are a problem of its own making – Gulliver 9/19

  • “When Ryanair convinced many of its pilots to take fewer holidays during peak summer-travel season, it probably thought it was being clever. But poor planning and a bit of bad luck have left the airline with a shortage of working pilots, many of whom have now taken time off, for the autumn. The shortfall has forced Ryanair to cancel some 2,100 flights starting on September 16th and continuing through October.” 
  • “Ryanair’s woes were caused in part by a change in the way the airline determines employee leave. Previously, Ryanair counted holidays in the year from April. In 2016, under pressure from the Irish Aviation Authority, Ryanair adopted the calendar year instead. As part of the transition, it needed to allow its employees to take the entirety of their leave between April and December of this year, leaving it with a staff shortage. As a result, the airline will probably have to scrap around 50 flights every day until the end of October.”

Markets / Economy

WSJ – The Fed, a Decade After the Crisis, Is About to Embark on the Great Unwinding – Nick Timiraos 9/18

  • “The central bank is likely to announce Wednesday it will start slowly shrinking its $4.2 trillion portfolio of mortgage and Treasury bonds purchased during and after the financial crisis. It will do so passively by allowing some bonds to mature without replacing them next month.”
  • “In June, the Fed said when it started to shrink its balance sheet it would do so by allowing a small initial amount of bonds—$4 billion of mortgages and $6 billion in Treasurys per month—to run off the portfolio without reinvestment. Every quarter, it will let a slightly larger amount do so, up to a maximum of $20 billion in mortgages and $30 billion in Treasurys per month.”
  • “For the next year or so, the Fed should still end up buying bonds in most months, since only a small fraction will mature and go not replaced, said Richard Clarida, an economist at Pacific Investment Management Co., or Pimco. He compared the start of the plan to losing weight by eating only two desserts a day instead of three.”
  • “One question the central bank hasn’t yet decided: How large should its balance sheet be at the end of the process?”
  • “Its holdings have swelled to $4.5 trillion from less than $900 billion before 2008. Though they will fall, the Fed will end up with more assets than it had before the crisis because its liabilities have grown—there’s more currency in circulation. The balance sheet size could settle out at between $2.4 trillion and $3.5 trillion sometime early next decade, New York Fed President William Dudley said in a speech earlier this month.”
  • “That would mean the Fed would end up allowing only around $1 trillion to $2 trillion in securities to mature, after having added $3.7 trillion between 2008 and 2014.”
  • “One reason markets have been relatively unfazed is that central banks in Europe and Japan are still purchasing assets. Mr. Spector (David Spector, CEO) of PennyMac expects the start of the Fed’s unwinding to have little effect on mortgage rates, which in early September hit their lowest levels of the year.”

FT – Private equity: wing and a prayer – Lex 9/18

China

WSJ – China’s Backdoor Real-Estate Bailout – Nathaniel Taplin 9/18

  • “Chinese property data out Monday showed housing prices weakening across the board in August. Usually this would be a good point to exit China growth plays.”
  • “But another 2015-style collapse in Chinese commodity demand remains unlikely. The reason? Slum clearance. Local governments are directly buying up large quantities of houses developers haven’t been able to sell and filling them with citizens relocated from what they call ‘slums’—old, sometimes dilapidated neighborhoods.”
  • “That helps explain why the drop in unsold inventories of apartments over the past year has been so sharp—down 22% on the year in August. That has helped prop up the market, especially in China’s smaller cities, despite more restrictions on housing purchases and slowing official figures on sales growth.”
  • “The scale of the program is large, accounting for 18% of floor space sold in 2016, according to Rosealea Yao, senior analyst at Gavekal Dragonomics, and is being partly funded by state policy banks like China Development Bank. That fits with Beijing’s broader strategy to head off a debt crisis by helping overextended property and industrial companies shift their debts and bad assets onto the government. Part of that is through a massive expansion of municipal debt and by getting consumers to carry more of the load through cheap mortgages. China Development Bank’s slum-redevelopment lending hit nearly one trillion yuan ($152.6 billion) last year, more than half of which went to purchasing existing commercial housing.”
  • “As a result, real-estate investment has held up reasonably well this year and inventories continue to fall: Vacant residential floor space was down another 10 million square meters in August, even though traditional sales have been lukewarm for months.”

September 11, 2017

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics – Irving Fisher and Japan – Charles Gave 8/23

Oaktree – Yet Again? – Howard Marks 9/7

WSJ – Why American Students Need Chinese Schools – Lenora Chu 9/8

  • “After putting her son in an elite state-run school in Shanghai, an American mother finds that the U.S. education system could learn a few things from China – most of all that teacher knows best.”

Finance

FT – Red hot competition for private equity deals will hit returns – Chris Flood 9/9

  • “Private equity managers have raised around $260bn so far this year and are on track to surpass the industry’s annual fundraising record of $369bn registered in 2007, according to Prequin. The data supplier reckons that 811 managers are currently on the road looking to raise a further $578bn. “
  • “As a result, competition for deals among private equity managers is red hot at a time when many equity markets are trading at or close to their all-time highs. This is fueling concerns that profitable deals are becoming increasingly difficult to identify for private equity managers, which are now sitting on a record $1tn of excess capital that they have been unable to put to work.”
  • “Thomas Toth, a managing director at Wilshire Associates, the consultancy, says the amount of excess capital is ‘very substantial’ and has helped push up prices paid for deals. He says assets are being acquired on multiples of 10 (measured as total enterprise value as a multiple of underlying earnings), beyond the previous peak of 9.7 times, registered in 2007 before the financial crisis.”
  • “’We don’t expect to see private equity managers generate the same levels of returns that investors have been accustomed to,’ says Mr. Toth.”
  • “Wilshire’s working assumption is that private equity managers, on average, will generate annualized returns of 9.4% over the next decade, down from its 11.2% 10-year estimate in 2009.”
  • “He says that any rush to put money to work by private equity managers will ‘further compress’ future returns.”
  • “But just 6% of private equity managers plan to invest less money over the next 12 months, while 62% plan to invest more, according to Preqin.”
  • As to whom is raising this money,
  • “Apollo Global raised the bar for private equity fundraising to a fresh high last month when the New York-based investment manager said it had gathered $24.7bn for its latest buyout fund, the largest of its kind.”
  • “CVC Capital Partners raised around €16bn while Silver Lake gathered $15bn for its fifth buyout fund. KKR attracted $13.9bn for its 12th Americas fund and a further $9.3bn for an Asia-focused fund, while 3G and Bain are looking to raise $10bn and $7bn respectively.”
  • “Jeffrey Hooke, a finance lecturer at Johns Hopkins Carey Business School, says that institutional investors, such as US public pension schemes, and their consultants feel more comfortable with established ‘name brand’ managers, even if smaller, lesser-known companies might offer better return prospects.”
  • “Mr. Hooke examined funds run by the 18 largest private equity managers and found that three-quarters, including some funds run by KKR, Silver Lake and Bain, failed to beat the S&P 500 consistently between 2006 and 2016.”
  • “Mr. Hooke says the lavish marketing budgets of large private equity managers entice potential clients and that institutional investors could achieve better results if they themselves acquired holdings in the types of companies targeted by buyout funds.”
  • Not surprisingly, “those funds that have performed better than average tend to launch during periods of notable equity market weakness.”

China

Reuters – Trust issues? China targets a $3 trillion shadow banking industry – Engen Tham 9/9

  • “The trusts, at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed towards greater transparency.”
  • “But the fast-growing 20 trillion yuan ($3 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts.”
  • “One of the biggest challenges facing regulators is that many trusts employ a baffling array of structures, and funnel money through complex webs of beneficiaries, which makes untangling transactions extremely difficult.”
  • “The practices of the trusts, and the speed at which the industry is growing, have made them a target for Beijing as it tries to keep a lid on risky lending, cool overheated markets and control corporate debt.”
  • “In April, Deng Zhiyi, head of the CBRC’s trust department, warned of ‘severe risks’ from funds flowing into the real estate, coal and steel sectors through trusts.”
  • “The industry is now roughly a tenth the size of China’s commercial banking sector.”
  • “However, the regulator set out in detail in April certain structures that the trusts should not use, such as money-pooling schemes and structuring products to avoid restrictions on leverage.”
  • “That was ‘a signal for financial institutions that from a legal and enforcement perspective, we are entering a stricter period,’ said Armstrong Chen, financial compliance partner at King & Wood Mallesons.”
  • “Trust firms will also have to start registering the details of their products, identifying the ultimate borrower of funds, this year, said Chen, who is in regular contact with the regulators.”
  • “Chen said the requirement would improve transparency, but people at trust firms say it will still be difficult to detect the use of the under-the-table agreements typical of the industry.”
  • “Despite these changes, the government’s job managing the trusts keeps growing. In the first half of this year, trust loans increased by 1.31 trillion yuan, which compared with 279.2 billion in the period last year, according to central bank figures.”

Reuters – China studying when to ban sales of traditional fuel cars: Xinhua – Tom Munroe and Yawen Chen 9/9

  • “China has begun studying when to ban the production and sale of cars using traditional fuels, the official Xinhua news agency reported, citing comments by the vice industry minister, who predicted ‘turbulent times’ for automakers forced to adapt.”
  • “Xin Guobin did not give details on when China, the world’s largest auto market, would implement such a ban. The United Kingdom and France have said they will ban new petrol and diesel cars from 2040.”
  • “To combat air pollution and close a competitive gap between its newer domestic automakers and their global rivals, China has set goals for electric and plug-in hybrid cars to make up at least a fifth of Chinese auto sales by 2025.”
  • “Under the latest proposals, 8% of automakers’ sales would have to be battery electric or plug-in hybrid models by next year, rising to 10% in 2019 and 12% in 2020, but the rules would not be enforced until 2019, a year later than initially planned, the sources said.”

September 5, 2017

Perspective

Howmuch.net – The Working Class Can (Not) Afford the American Dream – Raul 8/31

Howmuch.net – The Rising Costs of Sending Your Kids to a Private School – Raul 8/20

Howmuch.net – Status of US State Economies – Raul 8/15

Worthy Insights / Opinion Pieces / Advice

Bloomberg Businessweek – Why Private Equity Has $963 Billion in Dry Powder – Melissa Mittelman 8/31

  • “Investors give private equity managers their capital with the expectation that they’ll make it grow. But today these managers are sitting on a record $963.3 billion of dry powder, as they call money that they’ve raised but have yet to invest. The size of that pile, and the fact that it keeps rising, is making everyone antsy. A little dry powder is great if managers are holding out for better deals. But a lot can make for overly itchy trigger fingers, or can start to make investors wonder if there are cheaper ways to do nothing with cash.”

LA Times – Yes, ExxonMobil misled the public – Naomi Oreskes and Geoffrey Supran 9/1

NYT – To Understand Rising Inequality, Consider the Janitors at Two Top Companies, Then and Now – Neil Irwin 9/3

Bloomberg View – The Flaws in India’s Growth Model Are Becoming Clear – Mihir Sharma 9/3

  • “India has a way of confounding expectations. Analysts agreed that, months after Prime Minister Narendra Modi’s ill-fated decision to withdraw 86 percent of currency from circulation overnight, growth would bounce back. Economists polled by Bloomberg expected growth in the April to June quarter to be 6.5%; other estimates were even higher. So when the government’s official statisticians released the real number last week — 5.7% over the equivalent quarter of the previous year — there was general surprise, even shock.”
  • “India’s economy has been growing less and less healthy for awhile. GDP growth has now declined steadily for six straight quarters. This is a slowdown caused by factors deeper than the cash ban or any other temporary phenomenon. Something is broken in the Indian government’s policy mix.”
  • “…Government spending and low oil prices have deceptively boosted the growth numbers, masking the true state of the economy. In fact, if public spending is excluded, growth in the past quarter barely topped 4%. Export growth is terrible and industrial growth is the lowest in five years. And the government will struggle to keep investing at these levels; it started spending big unusually early in India’s financial year, which starts in April, and has already run through 93% of its budgeted fiscal deficit.”
  • “…Effective reform — and political will — is precisely what’s needed now. The government’s first task should be to clean up bad debts far quicker than it has so far — even if powerful people, including company owners, lose money in the process. Second: The government needs to stop chasing after foreign capital to replace shy domestic capital, if it means that the rupee stays high and exports struggle. And third: Officials must quickly fix those parts of the GST that are putting small companies and exporters out of business.”

Finance

Visual Capitalist – The Unparalleled Explosion in Cryptocurrencies – Jeff Desjardins 9/1

FT – University start-ups aim for the Facebook formula – Hugo Greenhalgh 8/31

  • Rather than watch their students leave University to pursue a worthwhile business start-up, Universities are getting in on the venture capital business seeking to support and nurture the talent within.

FT – Credit cards: dealing with delinquency – Lex 8/31

Tech

Fortune – Everything You Needed to Know About Overvalued Unicorns in One Chart – Anne VanderMey 8/24

Fortune – 5 Ways Businesses Are Already Using Blockchains – Jeff John Roberts – 8/21

Health / Medicine

NYT – The First Count of Fentanyl Deaths in 2016: Up 540% in Three Years – Josh Katz 9/2

  • “The first governmental account of nationwide drug deaths in 2016 shows overdose deaths growing even faster than previously thought.”
  • “Drug overdoses killed roughly 64,000 people in the United States last year, according to the first governmental account of nationwide drug deaths to cover all of 2016. It’s a staggering rise of more than 22% over the 52,404 drug deaths recorded the previous year.”
  • “Drug overdoses are expected to remain the leading cause of death for Americans under 50, as synthetic opioids — primarily fentanyl and its analogues — continue to push the death count higher. Drug deaths involving fentanyl more than doubled from 2015 to 2016, accompanied by an upturn in deaths involving cocaine and methamphetamines. Together they add up to an epidemic of drug overdoses that is killing people at a faster rate than the H.I.V. epidemic at its peak.
  • “It’s an epidemic hitting different parts of the country in different ways. People are accustomed to thinking of the opioid crisis as a rural white problem, with accounts of Appalachian despair and the plight of New England heroin addicts. But fentanyls are changing the equation: The death rate in Maryland last year outpaced that in both Kentucky and Maine.”

Canada

WSJ – The Underappreciated Risks to Canadian Banks – Aaron Back 8/31

  • “Americans looking north to Canada see a housing market that echoes their own before the financial crisis. While there are substantial differences that make Canadian lenders more resilient, investors still should be on guard.”
  • “Canadian housing prices have been rapidly rising for years, prompting local governments in frothy areas to take draconian measures such as a 15% tax on foreign buyers.”
  • “It isn’t all foreign cash—Canadian debt levels also have soared. Last year its households had debt equivalent to 176% of disposable income, according to the OECD. That compares to 112% in the U.S., down from a 2007 peak of 144%.”
  • “Canada’s banks, however, are showing no signs of stress. The country’s six biggest lenders that dominate this highly concentrated market have just reported solid quarterly earnings. Mortgage delinquency rates are remarkably low, at only around 0.2%.”
  • “It helps that most Canadian mortgages are ‘full recourse’ loans, making it much harder for borrowers to default and walk away. Around half of the mortgages written by the big six banks are also insured, directly or indirectly, by the Canadian government.”
  • “Nonetheless, the risks are substantial. Unlike in the U.S., where 30-year fixed rates are the norm, the standard Canadian mortgage rate resets every five years. In July, Canada’s central bank raised rates for the first time in seven years. Analysts expect more hikes, especially after Canada reported strong 4.5% annualized gross domestic product growth for the second quarter. That will make regular debt payments even more burdensome for Canadian households.”

China

FT – Beijing’s uneasy deals with overseas car groups under strain – Charles Clover 8/31

  • “A spate of new foreign joint ventures in China’s car industry has revived debate about an often criticized three-decade-old policy of trading market access for technology.”
  • “This week, the Renault-Nissan alliance became the latest car group to sign a joint venture to produce electric vehicles with longtime partner Dongfeng Motor Corporation, based in Wuhan, following an announcement by Ford in August that it plans to partner with little-known Zotye Auto to make EVs.” 
  • “The Renault-Nissan Dongfeng partnership is significant because it goes further than other JVs and calls for the groups to share a common technological platform. It is not clear whether other overseas car groups will follow this course because of issues over trust on the sharing of technology.”
  • “The new EV joint ventures are part of a Chinese effort to master the technology for electric vehicles — and rely on a tried and tested model of working with the global car industry since the 1980s. In a nutshell, joint ventures are the only way for foreign groups to access the world’s largest and most lucrative market. China gives the overseas companies the right to sell cars in exchange for their technology, management expertise and a share of their profits.” 
  • “’China’s central planners said ‘how can we basically force global automakers to participate and bring their very best electric vehicle technology to China?’’ says Michael Dunne, president of Dunne Automotive, a Hong Kong-based car consultancy.” 
  • “Since 1984, starting with Jeeps, foreign carmakers have been allowed to produce cars in China — but only in concert with a local partner holding at least 50 per cent of the venture. In practice, this is almost always one of six anointed state companies.”
  • “The results of the three-decade-old policy have been mixed. Rather than transforming Chinese car companies into technology giants, the joint venture companies have arguably made Chinese carmakers complacent, according to Chinese policymakers. He Guangyang, a former minister of industry, controversially described the JVs as ‘like opium’ in an interview five years ago.”
  • “Bart Demandt of carsalesbase.com says this is a legacy of the joint ventures. ‘The state-owned companies, especially those which have 50/50 joint ventures with foreign automakers, have had little incentive to invest in their domestic brands as the profits have been pouring in from producing import-brand cars for their partners.’” 
  • “However, the Chinese government is still relying on this model, and recently set its sights on the nascent battery powered car industry. Last year it included EVs as one of 10 sectors that it wants to be internationally competitive by 2025 as part of a new industrial policy ‘Made in China 2025’.” 
  • “Foreign carmakers are wary of the new requirements and have pressed on China to delay the EV quotas by at least a year. But they have few alternatives. ‘The global automakers say ‘wow, this really has teeth, because if we want to grow in this market we don’t have a choice. There is no work around’,’ says Mr Dunne.” 
  • “The second prong of the policy is to pressure foreign carmakers to ‘localize’ their electric vehicle technology, meaning in practice to share it with their joint venture partners.” 
  • “Bill Russo, head of Gao Feng Advisory in Shanghai, calls this ‘a real game-changer for the multinational carmakers’.” 
  • “’They must comply with a new set of regulations for both component localization and credits for EV sales in order to be in the game. As carmakers will be required to pay fines if they are not selling EVs, they will be required to add EV production in order to sustain their existing business in China.’” 
  • “This has created fears that their proprietary technology could be stolen. Over the past two decades, foreign makers of everything from high-speed trains to fighter planes have licensed the technology to local Chinese partners only to find a few years later that their partner is a major international competitor.” 

FT – Anbang sells stakes in Chinese megabanks amid troubles – Gabriel Wildau 8/31

  • “Anbang Insurance Group, the Chinese conglomerate that captured global attention with splashy foreign acquisitions, sold stakes worth as much as $1bn in the country’s largest banks this year, as the company struggles with a sudden drop in premiums.”
  • “In May, China’s insurance regulator banned Anbang’s life insurance unit from selling policies for three months and accused the group of ‘wreaking havoc’ on the market with aggressive pricing.” 
  • “Anbang had relied on sales of high-yield investment products to fund foreign private-equity acquisitions as well as stakes in Chinese listed companies. Chinese investors flocked to so-called ‘universal insurance’, which combined high yields with short maturities and bore little resemblance to traditional insurance.” 
  • “But an industry-wide crackdown on universal insurance has caused premiums from such products to drop more than half in the first half of the year, according to data from the China Insurance Regulatory Commission. At Anbang, such premiums fell 98%, due in part to the CIRC ban.” 
  • “The sales of shares in China’s ‘big four’ state-owned commercial banks appear to suggest that, with cash inflows from product sales drying up, Anbang sold assets to meet payouts on maturing products. Anbang said the share sales did not reflect cash flow problems.” 
  • “Last month, a Chinese credit-rating agency downgraded Anbang’s Life Insurance, saying that ‘income has fallen substantially [and] the availability of debt financing is reduced’. The agency also noted that Anbang Life posted a net loss in the first half.” 
  • “Anbang dropped off the lists of the top 10 shareholders in three of China’s big four state-owned commercial banks in the second quarter, according to the banks’ financial statements released this week. In the fourth bank, Anbang also reduced holdings but remained in the top 10.” 
  • “Anbang is also not the only insurer to sell stakes in big banks in the second quarter. Ping An Insurance, the country’s largest insurer by assets, sold down in ICBC.”

NYT – As Bike-Sharing Brings Out Bad Manners, China Asks, What’s Wrong With Us? – Javier Hernandez 9/2

  • “There are now more than 16 million shared bicycles on the road in China’s traffic-clogged cities, thanks to a fierce battle for market share among 70-plus companies backed by a total of more than $1 billion in financing. These start-ups have reshaped the urban landscape, putting bikes equipped with GPS and digital locks on almost every street corner in a way that Silicon Valley can only dream of.”
  • “But their popularity has been accompanied by a wave of misbehavior. Because the start-ups do not use fixed docking stations, riders abandon bicycles haphazardly along streets and public squares, snarling traffic and cluttering sidewalks. Thieves have taken them by the tens of thousands, for personal use or selling them for parts. Angry and mischievous vandals hang them in trees, bury them in construction sites and throw them into lakes and rivers.”
  • “Such problems have raised questions about the sustainability of China’s bike-share boom. But the debacle has also led many Chinese to look for deeper explanations and ask if bike-sharing has revealed essential flaws in the national character, prompting a far-reaching debate about social decay and the decline of decorum and morality in the country.”
  • “Some say abuse of the bicycles reflects an every-man-for-himself mentality in China that has its roots in the extreme poverty of the last century. Others are bothered by what they see as a lack of concern for strangers and public resources. The transgressions have been chronicled in the local news media with a tone of disbelief, in part because Chinese generally see themselves as a law-abiding society and crime rates are relatively low.”
  • “In many cities, the supply of bicycles far exceeds demand, bringing chaos to sidewalks, bus stops and intersections and prompting grumbles that excessive competitiveness — seen as a national trait — is spoiling a good thing. In Shanghai, where officials have struggled to maintain order, there is now one shared bike for every 16 people, according to government statistics.
  • “In some places, the authorities have confiscated tens of thousands of bicycles and imposed parking restrictions. News outlets have documented the waste with astounding images of mountains of candy-colored bicycles, each hue representing a different bike-share company.”

FT – China’s migrant workers feel pinch as Beijing pulls back on wages – Tom Hancock 9/3

Europe

Bloomberg Businessweek – Germany’s Housing Market is Red Hot, But Don’t Call It a Bubble – Stephan Kahl and Andrew Blackman 8/21

  • A different way of engaging with rising real estate values…

South America

Bloomberg Businessweek – Brazil’s Lost Decade: The Invisible Costs of an Epic Recession – David Biller and Gabriel Shinohara 8/21

  • “Once the emerging-market darling of Wall Street, Brazil’s economy went from growth of 7.5% in 2010 to shrink by virtually the same amount in the last two years. Unemployment has risen to a near-record high, GDP per capita fell to 2009 levels and the budget deficit is hovering around 10% of GDP. There is no sign the Latin American giant will recover its investment-grade status any time soon.”
  • Fortunately…

FT – Brazil ends worst recession as GDP expands for second straight quarter – Joe Leahy 9/1

  • “Brazil’s gross domestic product expanded for the second consecutive quarter in the three months ended June, officially ending the worst recession in Latin America’s largest economy.”
  • “GDP grew just 0.2% in the quarter compared to the first three months of the year and 0.3% compared with the same quarter a year earlier, the state statistics agency, IBGE, said.”

August 1, 2017

Perspective

FT – Apple removes apps that bypass China’s censors – Hannah Kuchler and Max Seddon 7/30

  • “Apple has removed from its Chinese app store applications that enable users to bypass China’s ‘Great Firewall’, in a move that developers have condemned as ‘censorship’.”
  • “The Silicon Valley company has withdrawn virtual private network (VPN) apps from the store, as it pulls all software that do not comply with local law, even if the makers are based outside the country.”
  • “VPNs allow users to access content banned by Chinese censors to control access to information online. This has, in effect, created a ‘Chinese internet’, without many western social media or search engine sites.”

Project Syndicate – Venezuela’s Unprecedented Collapse – Ricardo Hausmann 7/31

  • “In a hastily organized plebiscite on July 16, held under the auspices of the opposition-controlled National Assembly to reject President Nicolás Maduro’s call for a National Constituent Assembly, more than 720,000 Venezuelans voted abroad. In the 2013 presidential election, only 62,311 did. Four days before the referendum, 2,117 aspirants took Chile’s medical licensing exam, of which almost 800 were Venezuelans. And on July 22, when the border with Colombia was reopened, 35,000 Venezuelans crossed the narrow bridge between the two countries to buy food and medicines.”
  • “Venezuelans clearly want out – and it’s not hard to see why.”
  • “But is this just another bad run-of-the-mill recession or something more serious?”
  • “The most frequently used indicator to compare recessions is GDP. According to the International Monetary Fund, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%. It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993), but smaller than that experienced by other former Soviet States at the time of transition, such as Georgia, Tajikistan, Azerbaijan, Armenia, and Ukraine, or war-torn countries such as Liberia (1993), Libya (2011), Rwanda (1994), Iran (1981), and, most recently, South Sudan.”
  • “Put another way, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western Europe, or the rest of Latin America. And yet these numbers grossly understate the magnitude of the collapse…”
  • “Inevitably, living standards have collapsed as well. The minimum wage – which in Venezuela is also the income of the median worker, owing to the large share of minimum-wage earners – declined by 75% (in constant prices) from May 2012 to May 2017. Measured in dollars at the black-market exchange rate, it declined by 88%, from $295 per month to just $36.”
  • “Measured in the cheapest available calorie, the minimum wage declined from 52,854 calories per day to just 7,005 during the same period, a decline of 86.7% and insufficient to feed a family of five, assuming that all the income is spent to buy the cheapest calorie. With their minimum wage, Venezuelans could buy less than a fifth of the food that traditionally poorer Colombians could buy with theirs.”

Worthy Insights / Opinion Pieces / Advice

WSJ – Could Football Ever End? – Jason Gay 7/30

  • “A new concussion study provokes more existential worry in the NFL – and, reportedly, an early retirement.”

FT – With oil prices, half a step is not enough – Nick Butler 7/30

  • Saudi Arabia’s additional production curbs are a step in the right direction, but there are just too many other producers that they don’t control.

Markets / Economy

WSJ – Daily Shot: FRED – Velocity of M2 Money Stock 7/31

Real Estate

WSJ – Supermarkets Face a Growing Problem: Too Much Space – Heather Haddon and Julie Jargon 7/31

  • “A massive build-out by retailers has left the country piled up with grocery shelves as consumers are shifting from big weekly shopping trips to more snacking and to-go meals. The mismatch has flattened retail sales and leaves the industry vulnerable to a wave of closures that some executives, bankers and industry experts think is coming soon.”
  • “Commercial square footage of retail food space per capita last year set a record, with 4.15 square feet of food retail per person, according to CoStar Group, a commercial real-estate firm, nearly 30 times the amount of space allocated to groceries at major chains in 1950.”
  • “To be sure, major grocery chains weren’t as numerous decades ago, with many Americans shopping for food at mom and pop stores.”
  • “But the growth in groceries have extended across many types of retailers in recent years. Part of the expansion comes from grocers, who accelerated their store openings as a way to drive sales growth after the 2008 recession. At the same time, club chains, dollar stores, pharmacies—and even gas stations—increased their fresh food offerings to drive traffic and boost profits.”
  • Additionally, this article doesn’t mention the increasing foot prints of these grocers. Many are resembling department stores, but with an emphasis on food.

Finance

WSJ – Private Equity Takes Fire  as Some Retailers Struggle – Lillian Rizzo 7/30

  • “A wave of retail bankruptcies washing through court has revived an old debate about the role of private-equity firms in accelerating the problems of companies in distress.”
  • “Payless ShoeSource Inc., Gymboree Corp., rue21 Inc. and True Religion Apparel Inc. were all acquired by private-equity firms during the past decade. Now, lawyers for creditors have questioned whether private-equity firms share blame for the retailers’ financial collapse, in some cases by loading debt on the companies.”
  • “In the case of Payless, investors Golden Gate Capital and Blum Capital, after a leveraged buyout in 2012, over the next two years paid themselves $350 million in dividends—in total putting more than $700 million in debt on the company. In 2016, Payless said in court papers, it had about $2.3 billion in global net sales, and nearly $840 million in debt.”
  • “Vendors and landlords alleged in court papers that the dividend payouts, along with other payments to the investors, left the retailer particularly vulnerable to collapse just as technology and shifting consumer behavior upended the retail industry.”
  • “In general, private-equity executives say they often help companies improve operations and grow and that, sometimes, economic forces are beyond what any company could weather.”
  • “Moreover, retail woes are much bigger than private equity and extend to many companies that aren’t owned by such investors. Some private-equity investments haven’t had the problems others are experiencing.”
  • “Bankruptcy cases are messy by nature, and creditors—typically facing losses—are often determined to minimize them. In Payless’s case, which moved closer to exiting bankruptcy protection this month, lenders owed a majority of its debts will take control of the company.”

China

Bloomberg – China Asks Waldorf Owners Anbang to Sell Assets Abroad, Sources Say 7/31

  • “Chinese authorities have asked Anbang Insurance Group Co., the insurer whose chairman was detained in June, to sell its overseas assets, according to people familiar with the matter.”
  • “The government has also asked Anbang to bring the proceeds back to China after disposing of holdings abroad, said the people, who asked not to be identified because details are private. It is not clear yet how Anbang will respond, the people said.”
  • “Anbang was among the most prominent of Chinese insurers that went on a buying binge across the globe, fueled by soaring sales of investment-type insurance policies, with its 2014 acquisition of New York’s Waldorf Astoria hotel catapulting it into the public eye. Chairman Wu Xiaohui has been detained for questioning since mid-June, while the policies fueling its growth have been all but banned by regulators.”
  • “Anbang’s rise in recent years was fueled by sales of lucrative investment products that offered among the highest yields compared with peers. China’s insurance regulator this year started clamping down on what it termed ‘improper innovation’ and tightened rules on high-yield, short-term investment policies. Anbang and other aggressive insurers such as Foresea Life got caught up in the crackdown.”
  • “One Anbang product, called Anbang Longevity Sure Win No. 1, boosted the firm’s life insurance premiums almost 40-fold in 2014 by offering yields as high as 5.8%. That helped provide fuel for the firm’s more than $10 billion of overseas acquisitions since 2014 and equally ambitious investing in the domestic stock market.”

FT – One of China’s biggest P2P lenders quits ahead of clampdown – Louise Lucas and Sherry Fei Ju 7/30

  • “China’s pending regulatory crackdown on the $120bn peer-to-peer lending industry has claimed its first scalp before it has even begun, with one of the biggest players saying it will wind up its business in an industry full of bad loans and no profits.”
  • “Beijing this month said it would delay regulations that will bar online lenders from guaranteeing principal or interest on loans they facilitate, cap the size of loans at Rmb1m for individuals and Rmb5m for companies, and force lenders to use custodian banks — a requirement only a fraction of the industry has met so far.”
  • “Imposition of the new rules has been delayed from next month until June next year to give companies more time to comply.”
  • “But Hongling Capital has already thrown in the towel, with founder and chairman Zhou Shiping last week admitting that ‘P2P lending is not what we are good at, neither is it something we see potential in. This [P2P lending] business of ours would always be cleared out eventually — it’s only a matter of time.'”
  • “Hongling, which has Rmb17.6bn ($2.6bn) in loans, plans to wind down its eight-year online lending business by the end of 2020.”
  • “According to Online Lending House, a website that tracks the industry, the number of P2P lenders peaked at 2,600 in 2015, while 3,795 platforms have collapsed since 2011.”
  • “Outstanding loans from China P2P lending platforms totaled Rmb816.2bn ($121bn) at the end of December, double the figure of a year earlier, according to P2P consultant WDZJ.com.”

WSJ – Chinese Banks’ Dash for Capital Gets Under Way – Anjani Trivedi 7/31

  • “Investors have long questioned when China’s banking system, with its heaps of bad loans and hidden leverage, would resort to raising much-needed equity. From the look of it, the weakest lenders are starting to do so.”
  • The method, convertibles. To start, “Ping An Bank, a midsize lender notorious both for selling piles of high-yielding investment products and for sitting on masses of overdue loans, said last week that it plans to issue 26 billion yuan ($3.9 billion) of convertible bonds—uncommon in China—that can be switched into its Shenzhen-listed shares. While convertibles don’t count as equity straight away, they could help improve Ping An’s equity levels when they are turned into stock.”
  • Debt is the green

South America

FT – Venezuelans snub Maduro vote on day marred by violence – Gideon Long 7/31

  • In a word, impunity…
  • “Venezuelans on Sunday largely snubbed Nicolás Maduro’s election for a new all-powerful political assembly, in a vote marred by violence that killed at least 10 people and left seven police officers injured by a bomb attack.”
  • “Opposition leaders rejected the electoral commission’s turnout figure of 8.1m — 41.5% of the electoral register — saying only about 2m had actually voted. Analysts estimated the turnout at 3m-4m.”
  • “The president’s critics say the new assembly, which will be convened within 72 hours, will snuff out the last vestiges of democracy in Venezuela after nearly two decades of populist leftwing rule, turning the country into a new Cuba. It will have the power to dissolve the democratically elected Congress, where the president’s opponents have a majority, rewrite the constitution, scrap future elections and draft new laws.”
  • “In the run-up to the vote, all reliable polls had suggested that between two-thirds and three-quarters of Venezuelans opposed Mr. Maduro’s assembly. One poll said only about 12% of the electorate would vote for it.”
  • The country’s decent continues.

WSJ – Daily Shot: Venezuela Money Supply YoY Change 7/21

  • “Venezuela’s money printing has accelerated. The broad money supply has risen 400% over the past year.”