Tag: Puerto Rico

July 17, 2018

Worthy Insights / Opinion Pieces / Advice

NYT – Tracking the President’s Visits to Trump Properties – Karen Yourish and Troy Griggs 7/16

Markets / Economy

Bloomberg – Giant Pork Pile Awaits Americans as Trade Wars Risk Exports – Megan Durisin and Justina Vasquez 7/13

  • “American production is poised to reach an all-time high this year, and output is forecast to surge again in 2019. The supply boom comes as tariffs from China and Mexico threaten to curb export demand, leaving Americans with a mountain of cheap meat.”
  • “Total U.S. meat production is forecast at a record in 2018 and is set to climb again next year, the USDA estimates. Cash hogs may average about 42 cents a pound in 2019, down 7.7% from this year, the department predicts.”

NYT – After Storm, Foreclosures in Puerto Rico Stopped. They’re Starting Again. – Matthew Goldstein 7/15

  • Bottom line, the imposed foreclosure moratoriums are ending.

FT – Sovereign wealth funds abandon active managers – Chris Flood 7/15

  • “More problems lie ahead as SWFs look to switch more equity holdings.”

WSJ – Daily Shot: China Beige Book – China Construction Growth YoY Change 7/16

  • “Here is the reason steel rebar futures have been rallying.”

Real Estate

FT – US bankers warn on commercial property risks – Alistair Gray 7/15

  • “US bankers have warned about mounting risks in commercial real estate, with figures showing they are putting the brakes on loans to buyers of office buildings, hotels and shopping malls.”
  • “JPMorgan’s latest quarterly results published on Friday showed its commercial real estate business had its slowest period for at least 10 quarters, with average balances flat from the previous three months.”
  • “Wells Fargo’s CRE loan book shrank by $2.5bn in the second quarter because of declines in construction funding and mortgages on existing properties. In contrast, its non-property commercial portfolio expanded by $1.9bn.”
  • “Default rates remain low but bankers are concerned that CRE loan terms are too loose, especially as the Federal Reserve’s interest rate rises push up their own funding costs.”
  • “Tim Sloan, Wells Fargo’s chief executive, said CRE underwriting standards had been deteriorating ‘for some time’. He added, though, that the slippage was ‘nowhere near what we saw in 2006 and 07’, before the financial crisis.”

Energy

FT – Peak oil demand forecast for 2036 – David Sheppard 7/15

  • “One of the world’s most influential oil consultancies has forecast that global oil demand will peak within 20 years, as a ‘tectonic’ shift in the transport sector towards electric cars and autonomous vehicles gathers pace.”
  • “’A lot of our clients recognize that peak demand is real,’ said Ed Rawle, Wood Mackenzie’s head of crude oil research. ‘It’s just a question of when it arrives.’”
  • “Mr. Rawl at Wood Mackenzie said the consultancy’s thinking on peak demand was driven by a renewed assessment of the impact of not just electric cars but growing signs that autonomous electric vehicles will play a major role in the future of transport.”
  • “In the next 10 years the biggest impact on slowing global oil demand growth — which is expected to hit 100m barrels a day for the first time this year — would be fuel efficiency, Mr. Rawl said.”
  • “The improvement in fuel efficiency standards in conventional cars over the past decade has already had an effect, while the coming years should see the retirement of many older, gas-guzzling cars, leaving a less fuel-hungry fleet on the road.”
  • “Petrol demand is expected to be the first component of oil demand to peak around 2030 as a result.”
  • “Seeing peak oil demand on the distant horizon, does not, however, mean lower prices in the short term, Mr. Rawl said.”

Finance

WSJ – Why a $1 Trillion Mountain of Private-Equity Cash Matters – Ben Eisen 7/10

China

FT – Tencent and Alipay set to lose $1bn in revenue from payment rules – Gabriel Wildau 7/15

  • “China’s two mobile payments giants, Alipay and Tencent, are poised to lose around $1bn in combined annual revenue to a new central bank requirement that third-party payment groups hold all customer funds in reserve.” 
  • “Chinese mobile payment transactions reached Rmb109tn ($16tn) last year, according to research firm Analysys Mason, as consumers switched to smartphones from cash for supermarkets, taxis, and payments to friends. The platforms are also increasingly used to purchase mutual funds, peer-to-peer loans and other wealth management products.” 
  • “Ant Financial’s Alipay and Tencent’s WeChat Pay dominate the industry, with market shares of 54% and 39% respectively in the first quarter. Ant Financial is the finance affiliate of Alibaba.” 
  • “Together the two groups control hundreds of billions of renminbi in customer funds that accumulate on their platforms when users receive payments but do not immediately transfer the funds to a bank account or other investment.” 
  • “Previously, third-party payment groups were permitted to invest customer funds, much as banks use deposits to make loans and other investments, even though unlike banks, the payment groups pay no interest to users.” 
  • “In January 2017, the People’s Bank of China announced that it was requiring third-party payment groups to keep 20% of customer deposits in a single, dedicated custodial account at a commercial bank and specified that this account would pay no interest.”
  • “In April, the ratio was increased to 50%, and last month, the central bank announced that it would raise the reserve requirement to 100% by next January. At that point, payment groups will earn zero interest on all customer funds.”
  • “The ostensible reason for the change is to prevent fraud and protect customers.” 
  • “Large players like Alipay and Tencent handled customer funds conservatively, but they were still able to earn significant revenue by depositing funds in interest-bearing accounts at commercial banks. Tencent earned Rmb3.9bn in interest income in 2017, or 1.7% of total revenues, according to its annual report.” 
  • “The PBoC’s balance sheet shows that ‘deposits of non-financial Institutions’ — a category that mainly includes payment companies — increased from nothing in May 2017 to Rmb501bn by the end of May. Before the implementation of reserve requirements, nearly all that money would have been generating interest for Alipay, Tencent, and their smaller rivals.” 
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April 5, 2018

Perspective

The Verge – South Korean millennials are reeling from the Bitcoin bust – Rachel Premack 4/3

  • “From the outside, the Korean economy appears to be flourishing: the country is home to major industry leaders such as Samsung, Hyundai, and Kia. It’s the 11th-largest economy in the world, with semiconductors, car LCDs, and other high-tech products dominating its exports. The overall unemployment rate is just 4.6%.”
  • “Still, young people can’t find jobs. Youth unemployment has hovered around 10% in Korea for the past five years. The underemployment rate — defined by those involuntarily working jobs they’re overqualified for or are part-time — is even higher as of this year: it hovered at 38% in 2016, according to Dongseo University professor Justin Fendos.”
  • “In this highly educated economy, it can be hard for young Koreans to distinguish themselves from their peers. Nearly 70% of all Koreans ages 25–34 have a post-secondary degree, the highest of all Organization for Economic Co-operation and Development (OECD) countries, and a high school degree is nearly universal. Entire neighborhoods in Seoul are full of college graduates studying to pass hiring exams in order to get in at Korea’s biggest companies or the enviable public sector.”
  • “’The design of Korean society is a big reason why the cryptocurrency became so popular,’ says Yohan Yun, a 25-year-old assistant reporter in Seoul who invested around $400 in Ethereum. ‘People here are generally unhappy with their current status in society.’”
  • “Even employed young people are pessimistic about their economic prospects: a survey conducted in 2015 showed that half of young Koreans don’t believe that they will do better than their parents’ generation, compared to 29% in 2006.”
  • “For young Koreans, cryptocurrency seems like a rare shot at prosperity. Months after last year’s bubble started to implode in February, the Korean won remains the third most traded currency for Bitcoin. The country of 52 million comprises 17% of all Ethereum trading, and it was the location of two-thirds of world’s biggest exchanges this winter, Korea Expose reported in February.”
  • “An estimated three in 10 salaried workers in Korea had invested in e-currencies by December 2017, according to a survey by Korean recruiting firm Saramin. Eighty percent of those people were in their 20s and 30s.”
  • “But now that the prices of cryptocurrency coins like Bitcoin, Ethereum, and Ripple have tanked, many Korean youths are dealing with the mental and financial aftermath of their losses. Korean psychologists have reported an uptick of patients from the so-called ‘Bitcoin blues,’ divorce counselors say marriages are splitting from failed investments, and even the country’s prime minister said that virtual currencies are on track to cause ‘serious distortion or pathological social phenomena’ among Korea’s young population.”
  • “Real estate used to be the traditional way to grow one’s fortune in Korea, but prices have become exceedingly expensive for even upper-middle-class people. And interest rates for savings accounts are rarely more than a few percentage points a year.” 
  • “Koreans’ hyperconnectivity helped spur Bitcoin’s popularity. Teens and young adults spend around four hours a day using mobile phones in Korea. Nearly every Korean home has internet access, and 88% have smartphones, the highest percentage globally. Such an abundance of connectivity allowed potential traders of all ages to learn about the craze and hear about the insane amounts of money one could make on trading. Cryptotrading clubs, where people can meet like-minded traders and share tips, popped up at many Korean universities.”
  • “Thanks in part to the frenzy, some coins cost up to 51% more in Korean markets than anywhere else. Bitcoin’s price was up nearly $8,000 in January, Bloomberg reported. The ‘kimchi premium’ drew foreign traders to buy their coins abroad and trade them in the Korean market.”
  • “But then came the crash. From January 6th to January 16th, 2018 the price of Bitcoin to Korean won tumbled from a high of a US-equivalent $25,065 to $13,503, according to Korbit. It continued to fall to $7,410 by February 5th, and as of April 2nd, the price of a bitcoin sits at $7,241.”
  • “In total, the Bitcoin crash wiped out $44 billion of value in January, or more than Ford’s entire market capitalization, according to Bloomberg. New regulations against cryptocurrency trading, particularly ones from a worried South Korean government, helped usher the fall.”

Worthy Insights / Opinion Pieces / Advice

Business Insider – People have stopped paying their mobile-home loans, and it’s a warning sign of the economy – Matt Turner 4/3

  • “The mobile-home market is showing signs of stress.”
  • “The delinquency rate on mobile-home loans has increased by 200 basis points, or 2 percentage points, over the past year, according to research cited by UBS. The 30-day-plus delinquency level is now about 5%, the highest level since 2005.”
  • “The increase in the number of struggling mobile-home borrowers suggests that a large chunk of these people haven’t benefitted from the economic growth of the past few years, despite the low unemployment level.”
  • “This data represents a piece of a jigsaw puzzle of the condition of consumer finances in the US. And the picture that’s emerging, according to UBS, is of a two-speed economy, with lower-income consumers and younger borrowers with substantial student debt moving at a slower pace than more affluent and established participants.”
  • “‘We believe weakness in these two groups (lower-income consumers and younger borrowers) will drive higher credit losses at some stage over the next few years — particularly in credit card, installment, and student loans — with macroeconomic inflection from job growth to job loss as a likely catalyst,’ UBS said.”

NYT – How Dr. King Lived Is Why He Died – Jesse Jackson 4/3

WSJ – Telsa’s Model 3 Is No Model T – Charley Grant 4/3

  • “First-quarter production is not as rosy as the electric-car maker believes.”

Markets / Economy

WSJ – Daily Shot: Deutsche Bank – US Actual vs Potential GDP 4/4

WSJ – Iowa’s Employment Problem: Too Many Jobs, Not Enough People – Shayndi Raice and Eric Morath 4/1

Real Estate

John Burns RE Consulting – California Has Density Solutions, but Not Enough New Housing – Pete Reeb 4/3

Finance

WSJ – Daily Shot: Deutsche Bank – European Bond Issuance v ECB Purchases 4/4

WSJ – Daily Shot: Deutsche Bank – Emerging Market USD & EUR Debt Issuance 4/4

China

WSJ – Daily Shot: Deutsche Bank – Credit Expansion in BRIC Countries 4/4

WSJ – Daily Shot: Hong Kong Retail Sales 4/4

  • “Hong Kong’s retail sales jumped by most in eight years as wealthy shoppers from the mainland return.”

Japan

WSJ – Daily Shot: Deutsche Bank – Declining Service Quality in Japan 4/4

  • “Instead of inflation, Japan’s extremely tight labor markets are translating into reduced-quality services for consumers. The US is starting to experience this trend as well.”

Puerto Rico

Bloomberg – Stunned Investors Reap 95% Gains on Defaulted Puerto Rico Bonds – Michelle Kaske 4/3

  • “Not only are Puerto Rico’s bonds the top performer in the $3.9 trillion municipal market, they’ve gained more than any other dollar-denominated debt in the world, according to data compiled by Bloomberg.”

WSJ – Daily Shot: Puerto Rico General Obligation Bonds 4/4

April 4, 2018

Perspective

FT – Naspers trims Tencent stake with $10bn share sale – Joseph Cotterill and Louise Lucas 3/22

  • “Naspers, the South African media company that is one of the biggest shareholders in Tencent, said that it would sell down part of its stake in the Chinese technology giant for the first time in almost two decades.”
  • “In a statement on Thursday, Naspers said that it would sell stock worth more than $10bn, equivalent to 2% of the shares in Asia’s biggest company by market capitalization, to fund investments elsewhere.”
  • “The transaction would reduce Naspers’ stake in Tencent, the world’s biggest gaming company and the owner of China’s WeChat and QQ social networks, from 33% to 31%.”
  • “Naspers added that it did not plan to sell any more of its Tencent shares for at least the next three years.”
  • “But even Thursday’s limited sell down is a landmark for what has been one of the most successful venture capital investments in history, and comes as Hong Kong-listed Tencent shifts strategy after years of explosive growth.”
  • Naspers’ investment of $32m in Tencent in 2001, now worth $175bn, powered its rise from a publisher and pay-TV operator to Africa’s biggest company by market capitalization.”
  • Approximately a 65.91% compound growth rate over 17 years. How do you like them apples?

Worthy Insights / Opinion Pieces / Advice

Forbes – Canadian Real Estabe Bubble Blowing Up North – Bob Haber 4/2

  • “According to the Real Estate Board of Greater Vancouver, single detached homes in Vancouver (on a local currency basis) have risen from approximately $400K CAD to $1.75 million CAD since 2002. That’s a 337% increase in 15 years. With incredibly fast rising prices, a large portion of the population is engaged in real estate brokerage, real estate development, construction, renovations, and everything that goes along with that. The echoes of Phoenix, Las Vegas, and San Diego from 2006 cannot be ignored.”
  • “…Taxation and interest rates are going higher. Cap rates on rentals or commercial properties are shockingly low (think 1% to 3% in most circumstances). In fact, Canada’s price-to-rent ratios are now well above what they were in the U.S. during the 2006 housing debacle. According to the Bank of Canada, 47% of Canada’s mortgages will reset in the next 12 months. To put that in perspective, a five-year fixed mortgage rate in Canada averages approximately 5.14%. This is 11% higher versus the 4.64% that it averaged for most of the past 2 years.”

NYT – Teachers in Oklahoma and Kentucky Walk Out: ‘It Really Is a Wildfire’ – Dana Goldstein 4/2

Markets / Economy

engadget – New York approves surcharge for Uber and Lyft rides in Manhattan – David Lumb 4/2

  • “As part of the budget that New York lawmakers passed last Friday, ride-hailing services and taxis face a new fee if they drive in Manhattan. These aren’t nickel-and-dime increases, either: Uber, Lyft and the like face a $2.75 charge for each ride, taxis get a $2.50 increase and group ride services like Via and uberPOOL will be charged $0.75 per customer. It’s meant to combat congestion and help fund subway repair and improvements, providing an expected $400 million per year going forward for the MTA.”
  • “Unsurprisingly, it’s already catching flak from customers and from taxi drivers, who have become far outnumbered by ride-sharing cars in the last several years. Of the 103,000 vehicles for hire in NYC, 65,000 are driven by Uber contractors alone, while taxis remain capped by law at 13,600, The New York Times reported. As a result, average traffic in Manhattan has slowed from 6.5 miles per hour to 4.7.”
  • “Other cities have enacted their own surcharges for ride-hailing services in recent years, but they are far lower than those New York just passed. Seattle instated a $0.24 charge for each trip in 2014, Portland, OR agreed to levy a $0.50 fee per customer in 2016, both of which funnel money collected toward regulating ride-sharing services. Chicago passed one in 2014 that will reach $0.65 this year and directs part of the funds raised toward public transit, much like New York’s will.”

FT – Walmart extends money transfer operation to 200 countries – Anna Nicolaou and Ben McLannahan 4/2

  • “Walmart is expanding its money transfer operation to 200 countries, the latest move in the retail giant’s slow but steady push into financial services.”
  • “Through the new scheme, people will be able to deliver money from Walmart’s nearly 5,000 US stores to locations abroad within 10 minutes, the company said.” 
  • “Arkansas-based Walmart first unveiled a money transfer service four years ago, allowing customers to send funds between its stores, and aiming to reach the “underbanked” — about 27% of Americans have limited access to traditional banking, according to the Federal Deposit Insurance Corporation. Walmart claims it has saved customers $700m in fees because it charges cheaper rates.” 
  • “The retailer has partnered with MoneyGram, one of the big wire transfer groups, to expand globally this month. The service will allow US residents to send money to countries such as Mexico, which received nearly $30bn in remittances last year, according to Mexico’s central bank.”
  • “Walmart’s push into money transfers comes a few months after it announced it was partnering with PayActiv and Even, two financial-technology firms, to offer its 1.4m US employees tools for money management and on-demand access to their earned wages.”
  • “The moves suggest the retailer may see itself as a partner of the big financial services companies rather than a direct rival going head to head with basic products such as checking accounts or credit cards.”

WSJ – Daily Shot: Political Calculations – Why Bad News for Big Tech Is Bad for Stocks 3/29

WSJ – Daily Shot: SPDR Americas – Equity Geographical Flows 4/3

WSJ – Daily Shot: Deutsche Bank – Drawdown Durations 4/3

Real Estate

FT – Manhattan apartment sales plunge – Lindsay Fortado 4/2

  • “The number of co-op and condominium sales in Manhattan fell nearly 25% during the first quarter compared to the same period last year, according to new research by Miller Samuel real estate appraisers and Douglas Elliman real estate brokers.”
  • “It was the largest annual decline in sales in nine years, according to the report.”
  • “The average sale price across Manhattan fell by 8.1% from the year-earlier quarter, and the average price per square foot also recorded a sharp decline, falling by 18.5% to $1,697.”
  • “Luxury apartment sales, considered the most expensive 10% of all properties, were hit particularly hard, as were new developments.”
  • “The average sales price of a luxury apartment fell 15.1%, down from $9.36m in the first quarter of 2017 to $7.94m in the first quarter of this year, and the number of sales was down 24.1%. The number of newly built apartments that went into contract fell 54%.”

WSJ – Daily Shot: Black Knight – Mortgage Equity 4/3

  • “Turning to consumer credit, how much borrowing capacity do households have against their homes? The answer is $5.4 trillion. $2.8 trillion of that capacity is with borrowers who have the highest credit scores.”

WSJ – Daily Shot: Black Knight – Hurricane-related mortgage delinquencies in Florida and Puerto Rico 4/3

Finance

WSJ – Daily Shot: Deutsche Bank – Countries with Negative-Yielding Bonds 4/3

Cryptocurrency / ICOs

Bloomberg – The Crypto Hedge-Fund Bubble Is Starting to Deflate – Olga Kharif 4/2

Tech

FT – Why south-east Asia’s politics are proving  problem for Facebook – John Reed and Hannah Kuchler 4/2

  • “One of the company’s fastest-growing markets is also one of its most complex where hate speech and political manipulation are making it hard to remain neutral.”

China

FT – China moves its factories back to the countryside – Emily Feng 4/2

  • “After decades of urbanization and rural neglect, China’s Communist party is seeking to revitalize the countryside, where wages and standards of living have stagnated compared with those of big cities.”

FT – Chinese developers seek piece of booming education market – Emily Feng 4/2

  • “When China’s premier Li Keqiang recently vowed progress on a property tax intended to rein in home prices, it signaled to the country’s real estate developers that more than a decade of double-digit growth would soon end.”
  • “Facing slowing growth in their core business, top developers are betting on the education market, building and operating international schools for tens of thousands of students.”
  • “The country’s three biggest property developers — Country Garden, Evergrande and Vanke — have seen sales slow in the first quarter of this year, according to an industry ranking compiled by research agency China Real Estate Information Corp. Meanwhile, home price growth has dipped following a clampdown on lending and property speculation.”
  • “That has already made a dent in developers’ financials. Dalian Wanda reported a revenue drop of almost 11% in 2017 while other residential developers are girding for longer-term impact. JPMorgan Chase has forecast as much as a 6% decline in mainland Chinese home sales this year.
  • “Now developers are ‘looking at other sectors in which to invest in order to get the returns that they need to continue growth’, says John Mortensen, regional director of real estate investment and management company JLL, which often works with universities.”
  • “Meanwhile, China’s education market is booming. The sector will grow from Rmb1.64tn ($261bn) in revenue in 2015 to Rmb2.9tn ($461bn) in 2020, according to Deloitte, with particularly high demand for English-language curriculums.”
  • “Amid fierce competition to get into good universities at home and overseas, proximity to a good school is often a key factor in determining Chinese property prices. A 2012 study of Shanghai housing found that prices were more than 40% higher in top-rated school districts.”
  • “That has prompted residential developers to build new complexes with schools within walking distance of apartments, hiring or building in-house education teams to recruit teachers and design bilingual curriculums.”
  • “Guangzhou-based Country Garden, China’s top residential developer by sales, is now also among the country’s biggest private education providers. Its education subsidiary, Bright Scholar, runs 52 bilingual international schools that each offer a full education from kindergarten to secondary school. Bright Scholar listed on the New York Stock Exchange last year, raising more than $150m.”
  • “Vanke Group, China’s second biggest residential developer by sales, set up its own education group in 2015 as part of a strategic shift aimed at offering a ‘full ecology’ to families.”
  • “Dalian Wanda is another property group with a growing interest in schools — its children’s education and entertainment group almost tripled its sales last year even as the group’s total revenues fell more than 10%.”

India

NYT – Jeweler to the Stars Flees as India Seethes Over Bank Fraud – Maria Abi-Habib 4/3

  • “About a week after Mr. Modi grinned for the cameras with the prime minister, a state-run Indian bank told regulators that it had found nearly $1.8 billion in fraudulent transactions linked to the jeweler’s account. Indian officials now accuse Mr. Modi, his family and business associates of assembling a global empire with nearly $3 billion in money obtained illegally, mostly from government-run banks. He denies wrongdoing.”
  • “For many Indians, the allegations against Mr. Modi further cement the notion that taxpayer-owned banks are footing the bill for the lavish lifestyles of a rising elite. That idea has particular resonance in a country where stark poverty — India is home to a third of the world’s poorest people — remains dire.”
  • “Just a decade ago, during the global financial crisis, Indian lenders were held up as a bastion of stability. Today, they are considered more vulnerable than those in other leading emerging markets, mostly because state-controlled lenders dominate the sector, according to the International Monetary Fund.”
  • “Of the $6.5 billion in fraudulent loans that have hit the industry over the past two years, the most egregious cases were at government-owned banks, according to figures released by Parliament. Executives at those lenders are more likely to be appointed for their political connections than for their talent, financial analysts say.”

Russia

FT – Russia plans ‘bad bank’ for $19bn in toxic assets – Max Seddon 4/2

  • “Russia’s central bank is to create a ‘bad bank’ to ringfence Rbs1.1tn ($19bn) in toxic assets from three nationalized top-10 lenders, vastly increasing the total bill for bailing them out.” 
  • “Vasily Pozdyshev, a deputy central bank governor, told Russian news agencies on Monday that the central bank would transfer assets from three collapsed banks into Trust, another failed lender.” 
  • “Taxpayers are footing the largest bank rescue bill in Russia’s history to fund the central bank’s takeover of three privately held banks last year to stave off a collapse in the sector.”
  • “The largest of them, Otkritie, was Russia’s biggest privately held bank by assets until it was nationalized in August. The central bank then nationalized B & N Bank, another top-10 lender, and Promsvyazbank to stop them from going under.” 
  • “Under Ms Nabiullina (Elvira Nabiullina, Russian central bank governor), the central bank is conducting an unprecedented clear-up of the sector under which it has wound down more than 300 banks since 2013. To rescue the three top-10 lenders, however, Ms Nabiullina had to create a separate bailout mechanism that allowed the central bank to take direct stakes in their capital.” 

FT – Russia’s $55bn pipeline gamble on China’s demand for gas – Henry Foy 4/2

  • “The pipeline is Russia’s most ambitious, costly and geopolitically critical energy project since the fall of the Soviet Union, and represents a $55bn bet on uncharted territory by the world’s biggest gas company.”
  • “Russia’s first eastern pipeline is the most striking physical manifestation of President Vladimir Putin’s diplomatic pivot towards China amid rapidly worsening relations with the west. It is the biggest and most critical element in a suite of energy deals, funding packages and asset sales that seek to warm a once frosty relationship.”
  • “For Gazprom, the Kremlin-controlled gas export monopoly behind the pipeline, the mega-project is the largest and most expensive in its history. When the taps are switched on in December 2019, the world’s largest gas exporter will be connected for the first time with its largest energy importer.”

March 8, 2018

If you were only to read one thing…

FT Alphaville – China’s household debt problem – Matthew C Klein 3/6

  • “The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s — are not encouraging.”
  • “Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.”
  • “Chinese households, however, are quickly catching up. This is bad news.”
  • “The simple story of China’s debt boom is that government-backed companies borrow from government-controlled banks to pay for wasteful investments to support jobs and other political objectives. This creates lots of problems for China today and in the future, but it does have one virtue: the losses from centralized credit allocation can be distributed over a broad population over a long period of time.”
  • “Household debt is different. Borrowers are widely dispersed and lack political power. The lenders are often newer finance companies or loan sharks. Worst of all, there is essentially zero chance that additional household borrowing pays for productive investment. Some of China’s additional infrastructure and manufacturing capacity may prove valuable one day. Household debt probably won’t. Atif Mian and Amir Sufi have ably shown that increases in household borrowing tend to predict slower income growth and higher joblessness.”
  • “This chart is therefore cause for concern:”
  • “As of mid-2017, Chinese households had debts worth about 106% of their disposable incomes. For perspective, Americans currently have debts worth about 105% of their disposable incomes, on average. The difference is that American indebtedness has been basically flat the past few years after steady declines since 2007.”
  • “Chinese households have been experiencing rapid income growth by rich-country standards for a long time, but their debts have grown far faster:”
  • “Since the start of 2007, Chinese disposable household income has grown about 12% each year on average, while Chinese household debt has grown about 23% each year on average. The cumulative effect is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. The mismatch has been getting worse recently, as can be seen in the kink in the pink line towards the end.”
  • “All this is finally starting to affect the aggregate debt numbers. Household debt in China is still small relative to the total — about 18% as of mid-2017 — but household borrowers are now responsible for about one third of the growth in total nonfinancial debt:”
  • “The problem is that households cannot service their debts out of GDP. Instead they have to rely on their meagre incomes. Since 2007 the share of Chinese national output going to households has ranged from as high as 46% to as low as 42% of GDP. (The rest of China’s national income is mostly captured by government-controlled enterprises and their elite managers.) The household share of income has dropped by about 1 percentage point just in 2017:”
  • “For comparison, disposable income in the US has tended to hover between 71% and 76% of GDP over the past few decades.”
  • “The trick for Beijing now is to bring non-productive investment down as rapidly as it can without causing unemployment to rise to dangerous levels. Because it has proven difficult to replace non-productive investment with productive investment (and, I have long argued, unrealistic even to expect it could happen), the only way to do so is to replace it with consumption. But levered consumption obviously cannot solve the problem of rapid debt growth, so rising consumption must be driven by rising household income, even as declining investment causes workers on investment projects to be fired. In the end this may be politically a difficult problem, but economically it is just an arithmetic problem about wealth reallocation.” – Michael Pettis

Perspective

CNBC – 42% of Americans are at risk of retiring broke – Jessica Dickler 3/6

© GOBankingRates

US Census Bureau – Irish-American Heritage Month and St. Patrick’s Day 2/6

Worthy Insights / Opinion Pieces / Advice

Business Insider – Underpaying drivers is ‘essential’ to Uber’s business model, according to a new study on low wages – Shona Ghosh 3/7

Economist – How the West got China wrong – Leaders 3/1

  • “It bet that China would head towards democracy and the market economy. The gamble has failed.”

FT – Forget flu, it’s time for your fake-news jab – Hannah Kuchler 3/6

  • “News literacy should be taught like sex and drugs education, to protect individuals and society as a whole.”

Medium – A Lack of Clarity is The Biggest Inhibitor of Progress Towards Your Goals – Srinivas Rao 3/5

Real Estate

WSJ – Daily Shot: Cresset Wealth Advisors – US Housing Price Change from Pre-Crisis Peak 3/7

WSJ – New York Housing Is Getting (Gasp!) More Affordable – Josh Barbanel 3/7

  • “Housing costs are taking a smaller bite out of the typical household’s monthly budget, according to a new U.S. Census Bureau survey that is conducted every three years. The survey also shows a record amount of new housing and the third-highest rental-vacancy rate since the bureau’s first survey in 1965.”

WSJ – That Much Prophesied Commercial Property Bust Still Hasn’t Happened – Esther Fung 3/6

  • “The delinquency rate for securitized loans in the commercial real-estate industry has dropped for eight consecutive months, defying expectations in recent years of a wave of defaults.”
  • “According to real-estate data provider Trepp LLC, the delinquency rate for real-estate loans in commercial mortgage-backed securities clocked in at 4.51% in February, down from 5.31% in the same period a year earlier. The rate hit an all-time high of 10.34% in July 2012.”
  • “Investors had been expecting an increase in defaults in 2016 and 2017 as the large volume of CMBS packaged during the 2006 to 2007 period reached maturity. But rising real-estate values, low interest rates and a surge of debt capital from insurers and other sources have allowed property owners to refinance or restructure their debts.”

Yahoo Finance – Foursquare CEO: There are 2 types of malls that are seeing growth – Melody Hahm 3/6

  • “While consumers are getting lured online by cost savings and the convenience factor, there’s still ample data on foot traffic into physical stores, said Foursquare CEO Jeff Glueck. In fact, he’s found that the rise in online shopping has largely affected middle-market malls. Malls serving high-end and low-end customers are actually seeing growth.”

Finance

WSJ – The New ID Theft: Millions of Credit Applicants Who Don’t Exist – Peter Rudegeair and AnnaMaria Andriotis 3/6

Cryptocurrency / ICOs

Bloomberg – Bitcoin Dives After SEC Says Crypto Platforms Must Be Registered – Camila Russo and Lily Katz 3/7

Construction

WSJ – Daily Shot: Change in Construction Producer Price Index 3/7

  • “US construction firms continue to struggle with rising materials costs. Higher steel prices will exacerbate the problem, especially for commercial property developers.”

Asia – excluding China and Japan

WSJ – In China’s Shadow, Communist Vietnam Links Arms With Old Enemy, the U.S. – Jake Maxwell Watts 3/2

China

WSJ – China’s Financial Reach Leaves Eight Countries Vulnerable, Study Finds – Josh Zumbrum and Jon Emont 3/4

Europe

WSJ – Daily Shot: FRED – European Central Bank Balance Sheet 3/7

Puerto Rico

WP – Exodus from Puerto Rico grows as island struggles to rebound from Hurricane Maria – Arelis R. Hernandez 3/6

March 01, 2018

Perspective

NYT – By Day, a Sunny Smile for Disney Visitors. By Night, an Uneasy Sleep in a Car. – Jennifer Medina 2/27

Worthy Insights / Opinion Pieces / Advice

Economist – How Putin meddles in Western democracies – Leaders 2/22

FT – A world of debt mortgages our economic future – Derek Scissors 2/22

  • “Irresponsible borrowing by the US, China and India imperils global growth.”

WSJ – The Wayfair Riddle – Elizabeth Winkler 2/26

  • “The furniture retailer’s business has serious flaws, but the stock keeps soaring.”

Energy

FT – Rising interest rates punish US power sector – Ed Crooks 2/22

  • “US utilities, sustained for years in a warm bath of favorable financial conditions, are facing a cold shower.”
  • “An expected rise in interest rates and the shake-up of the tax system passed into law at the end of last year are threatening to squeeze utilities’ finances. Already, the S&P 500 utility sector index has dropped 13% from its peak in November.”

FT – Fundamentals do not matter to new breed of oil speculator – Gregory Meyer 2/27

Finance

FT – Rising tide of debt to hit rich countries’ budgets, warns OECD – Kate Allen and Chris Giles 2/22

  • “Developed nations face a rising tide of government debt that poses ‘a significant challenge’ to budgets as interest rates increase around the world, the OECD has warned.”
  • “Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the ‘relatively favorable’ sovereign funding environment ‘may not be a permanent feature of financial markets’.”
  • “The warning on the longer-term consequences of high public borrowing marks a shift in stance by the OECD, which as recently as November was praising countries for easing fiscal policy to help global growth.”
  • “In an Economic Outlook, published at that time, the Paris-based organization said that ‘even a lasting increase in 10-year government bond yields of 1 percentage point . . . might worsen budget balances on average by only between 0.1% and 0.3% of GDP annually in the following three years’.”
  • “The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year. Debt to GDP ratios across the OECD averaged 73% last year, and its members are set to borrow £10.5tn from the markets this year.”
  • “Because much of the debt raised in the aftermath of the financial crisis is set to mature in the coming years, developed nations will have to refinance 40% of their total debt stock in the next three years, the OECD said.”

Health / Medicine

Economist – How to stop lead poisoning – Leaders 2/22

Agriculture

WSJ – Daily Shot: To Stay on the Land, American Farmers Add Extra Jobs – Jacob Bunge and Jesse Newman 2/25

Sovereign Wealth Funds

FT – Norway oil fund posts $131bn return for 2017 – Richard Milne 2/27

  • “Norway’s $1.1tn oil fund returned 13.7% — or NKr1tn ($131bn) — beaten only by 2009 and 2013 in percentage terms.”
  • “Strong stock markets contributed to a 19.4% return for equities while property returned 7.5% and bonds 3.3%.”

China

Nikkei Asian Review – The hidden risks of China’s war on debt – Yusho Cho 2/28

India

FT – Huge fraud at Indian bank spurs privatization calls – Amy Kazmin 2/27

  • “In 1969, India’s then prime minister, Indira Gandhi, transformed the country’s banking landscape when she nationalized its 14 biggest commercial lenders, which together accounted for around 70% of the system’s deposits.”
  • “Nationalization was touted as way to protect depositors and force banks — which mainly catered to big industrial houses — to lend to a broader swath of the population, including farmers, traders and small businesses.” 
  • “State dominance over the banking system has not worked out so well for India. Politically driven lending decisions, difficulties agreeing realistic debt workouts when loans sour, as well as uninspired, even fearful bureaucratic management and outdated IT systems have left state lenders with a far higher bad debt burden than their private rivals, hindering India’s economic prospects.” 
  • “Now, the discovery of an alleged $1.8bn fraud at India’s second-largest state lender, Punjab National Bank, is prompting vigorous and concerted calls for New Delhi to admit the failure of Mrs. Gandhi’s bank nationalization — and reverse it.” 
  • “According to PNB, staff at one of its Mumbai branches issued fraudulent bank guarantees for luxury jeweler Nirav Modi, and his diamond-trader uncle Mehul Choksi, to take cash advances from the overseas branches of other Indian banks — all ostensibly guaranteed by PNB.”
  • “Antiquated software systems — guarantees were issued without requisite documents or collateral — meant PNB’s management had no idea of the obligations mounting in its name. Nor did the banks that received the guarantees, mostly other state lenders, suspect any impropriety.” 
  • “Analysts say the scam, which PNB says went on for several years without detection, highlights the rot in state banks and the need for radical change.” 
  • “At the heart of India’s banking crisis, however, is New Delhi’s political control over what should be run as commercial entities and the inherent conflict of interest in the state’s multiple roles as economic policymaker, the largest bank owner and the industry regulator.” 
  • “While New Delhi is now in the middle of a $32bn recapitalization scheme to shore up bank balance sheets after the last wave of bad debts, the PNB fraud has raised fears the government is simply throwing good money after bad.” 
  • “Privatization of some, or even most, of India’s state banks is not a simple or quick solution to the sector’s problems. Analysts say the legacy of five decades of state ownership — and its impact on personnel, incentives and decision-making — will take years to undo. But the PNB fraud has persuaded many Indians it is time to start.”

Japan

WSJ – Daily Shot: TD Securities – Japanese Investors Looking For Returns Abroad 2/27

Puerto Rico

WSJ – Daily Shot: CNN – ‘Exodus’ from Puerto Rico: A visual guide – John D. Sutter and Sergio Hernandez 2/21

South America

Bloomberg – Hungry Venezuelan Workers Are Collapsing. So Is the Oil Industry – Fabiola Zerpa 2/22

  • “Starving employees are growing too weak for heavy labor, hobbling the refineries that keep the economy running.”

February 6, 2018

If you were only to read one thing…

Economist – Pyramid schemes cause huge social harm in China 2/3

  • “The authorities call them ‘business cults’. Tens of millions of people are ensnared in these pyramid schemes that use cult-like techniques to brainwash their targets and bilk them out of their money.”
  • “Many countries suffer from Ponzi schemes, which typically sell financial products offering extravagant rewards. They pay old investors out of new deposits, which means their liabilities exceed their assets; when recruitment falters, the schemes collapse. China is no exception. In 2016 it closed down Ezubao, a multi-billion-dollar scam that had drawn in more than 900,000 investors. By number of victims, it was the world’s largest such fraud.”
  • “Chinese pyramid schemes commonly practice ‘multi-level marketing’ (MLM), a system whereby a salesperson earns money not just by selling a company’s goods but also from commissions on sales made by others, whom the first salesperson has recruited. People often earn more by recruiting others than from their own sales. Since 1998 China has banned the use of such methods, although it does allow some, mostly foreign, MLM companies to do business in China as ‘direct sellers’. This involves recruiting people to sell products at work or at home.”
  • “The distinguishing feature of the Chinese scams is the way they combine pyramid-type operations with cult-like brainwashing.”
  • “Many perfectly legal companies try to boost morale by getting staff to sing company songs or organizing awaydays. China’s business cults, however, combine such techniques with violence.”
  • “Business cults seem to be growing. In the first nine months of 2017 the police brought cases against almost 6,000 of them, twice as many as in the whole of 2016 and three times the average annual number in 2005-15. This was just scratching the surface. In July 2017 the police arrested 230 leaders of Shan Xin Hui, a scheme that was launched in May 2016 and had an estimated 5m investors just 15 months later. In August 2017, after the government launched its campaign against ‘diehard scams’, police in the southern port of Beihai, Guangxi province, arrested 1,200 people for defrauding victims of 1.5bn yuan ($223m). One scheme in Guangxi, known as 1040 Project, was reckoned to have fleeced its targets of 600m yuan.”
  • “The scale of the scams worries the government. Their cultish features make it even more anxious. The Communist Party worries about any social organization that it does not control. Cults are especially worrisome because religious and quasi-religious activities give their followers a focus of loyalty that competes with the party.”
  • “The authorities will find it hard to curb the scams for three main reasons. First, in order to encourage cheap loans for industry, the central bank keeps interest rates low. For years they were negative, i.e, below inflation. That built up demand among China’s savers for better returns. With gross savings equal to just under half of GDP, it is not surprising that some of that pool of money should be attracted to schemes promising remarkable dividends.”
  • “Second, it is often hard for consumers to spot frauds. In 2005 China legalized direct selling, arguing that there was a distinction between that practice and the way that Ponzi schemes operate. But Qiao Xinsheng of Zhongnan University of Economics and Law argues that the difference is often ‘blurred’ in the eyes of the public. Scammers can easily pass them themselves off as legitimate. Dodgy companies exploit government propaganda in order to pretend they have official status. For example, they may claim to be ‘new era’ companies, borrowing a catchphrase of China’s president, Xi Jinping.”
  • “Third, argues Mr Li, business cults manipulate traditional attachments to kin. Companies in America often appeal to individual ambition, promising to show investors how to make money for themselves. Those in China offer to help the family, or a wider group. Shan Xin Hui literally means Kind Heart Exchange. It purported to be a charity, offering higher returns to poor investors than to rich ones. (In reality everyone got scammed.) Business cults rely on one family member to recruit another, and upon the obligation that relatives feel to trust each other. This helps explain why investors who have lost life savings continue to support the companies that defrauded them.”

Worthy Insights / Opinion Pieces / Advice

Economist – Why sub-zero interest rates are neither unfair nor unnatural – Free exchange 2/3

NYT – Early Facebook and Google Employees Form Coalition to Fight What They Built – Nellie Bowles 2/4

NYT – Amazon Asked for Patience. Remarkably, Wall Street Complied. – Michael Corkery and Nick Wingfield 2/4

  • “In a business environment that demands, and rewards, quarterly profits and short-term strategic thinking, Amazon showed extraordinary resolve in focusing on long-term goals, somehow persuading investors to go along.”
  • “Over its first decade in existence, including long stretches where it consistently reported losses, Amazon enjoyed a luxury afforded few companies: leeway.”
  • “Amazon has reported an annual profit in only 13 of the 21 years that it has operated as a publicly traded company, according to FactSet, a financial data firm.”
  • “And its profit margins, already low by some measures, have fluctuated from year to year — hardly moving in the straight upward line that Wall Street usually likes to see.”
  • “Yet investors have rewarded Amazon for plowing its profits back into growing its businesses, whether in online retail, cloud computing or, most recently, in grocery stores, with the acquisition of Whole Foods Market.”

Vanity Fair – Twitter’s Dirty Secret – Nick Bilton 2/2

  • “Twitter knew about all its fake followers, and always has – eliminating just enough bots to make it seem like they care, but not enough that it would affect the perceived number of active users on the platform.”

WSJ – China Shows How It Will Fight a Trade War – Nathaniel Taplin 2/5

  • “U.S. agriculture will be in China’s crosshairs if a trade war erupts.”

Real Estate

The Real Deal – Everything must go: Chinese investors sell off their foreign RE holdings – Erin Hudson 2/3

WSJ – Daily Shot: Bankrate.com US 30-Yr Fixed Rate Mortgage Rate 2/2

WSJ – Daily Shot: FRED – Home Equity Loans 2/5

  • “Home equity loan balances continue to slip as Americans remain uneasy tapping this form of credit.”

Finance

Reuters – JGBs pare losses as Bank of Japan offers “unlimited” buying to curb rising yields – Hideyuki Sano 2/1

WSJ – What Markets Are Really Telling Us About Higher Rates – Richard Barley 2/5

  • “Companies are paying slightly more to borrow, but higher risk-free yields haven’t fed through fully. This is significant.”
  • “…the ECB, is still at play. The ECB’s bond-buying actions have a twist: in the first four weeks of January, corporate purchases as a share of government purchases stood at 27%, versus 11.5% when the program was running full-tilt at €80 billion a month, according to Deutsche Bank . In other words, corporates are still getting decent support from ECB purchases.”
  • “One snag is that corporate-bond spreads are already so tight there is little room for error. In Europe, the investment-grade ICE BofAML corporate index yield premium over government bonds is just 0.74 percentage points, its lowest level since August 2007.”
  • “Investors should watch closely if spreads do widen significantly. It would mean either companies are making riskier, top-of-market types of bets or investors are getting concerned about growth and underlying cash flows. For now, the message from higher interest rates is, don’t sweat it.”

Cryptocurrency

FT – ‘Crypto crazy’ Japanese mystified by virtual heist – Leo Lewis and Robin Harding 2/2

  • “The $500m theft of XEM coins by an anonymous hacker is threatening the country’s faith in cryptocurrencies.”

FT – Bitcoin investors find tax demands are not virtual – Ben McLannahan and Vanessa Houlder 2/4

  • “Cryptocurrency traders in many jurisdictions may be liable for hefty capital gains tax bills.”

NYT – Making a Crypto Utopia in Puerto Rico – Nellie Bowles 2/2

Reuters – Bitcoin extends slide, falls below $7,000 – Gertrude Chavez-Dreyfuss 2/5

  • “Digital currency bitcoin BTC=BTSP fell more than 15% on Monday to a nearly three-month low amid a slew of concerns ranging from a global regulatory clampdown to a ban on using credit cards to buy bitcoin by British and U.S. banks.”
  • “On the Luxembourg-based Bitstamp exchange, bitcoin fell as low as $6,853.53 in early afternoon trading in New York. That marked a fall of more than half from a peak of almost $20,000 hit in December.”
  • “Bitcoin has fallen in six of the last eight trading session.”
  • “The currency, which surged more than 1,300% last year, has lost about half its value so far in 2018, as more governments and banks signal their intention for a regulatory crackdown. Last week bitcoin suffered its worst weekly performance since 2013.”

Tech

NYT – Early Facebook and Google Employees Form Coalition to Fight What They Built – Nellie Bowles 2/4

Health / Medicine

Economist – A revolution in health care is coming – Leaders 2/1

Asia – excluding China and Japan

WSJ – Samsung Heir Lee Jae-yong Freed From Prison by Appeals Court – Eun-Young Jeong 2/5

China

The Sydney Morning Herald – China said to mull legal gambling on Hainan – Keith Zhai and Daniela Wei 2/4

India

Bloomberg Businessweek – India’s Phantom Flats Leave Homebuyers’ Dreams in Tatters – Pooja Thakur Mahrotri, Upmanyu Trivedi, and Dhwani Pandya 1/30

  • “Across the metropolitan area that surrounds New Delhi, a string of real-estate developers including Unitech, Jaypee Infratech Ltd. and Amrapali Group have been dragged to court by irate homeowners who shelled out payments for apartments that have yet to be completed. Many of these firms took money from a stream of buyers. As sales slumped and the once red-hot market cooled, their businesses unraveled — leaving them grappling with debt.”
  • “The fallouts from the shakeup in the $126 billion property market are reverberating across companies, markets and the broader economy. Unitech, once India’s largest developer, has plunged to a fraction of its previous valuation. Jaypee is in insolvency court. State-owned banks — the lifeblood of the economy — are grappling with a pile up of bad loans from the industry. Indian families, who have long poured their life savings into real estate, are now pulling back.”
  • “Indian real-estate businesses expanded as long as firm were able to draw new buyers for planned projects. But as the economy slowed and demand softened, many firms were left short of cash and struggling to manage their debt. The downturn only worsened last year after the government tightened regulations to protect homebuyers and separately introduced a new services tax across all industries. India’s residential sector appears to have shrunk to a fraction of its size in less than a decade, according to Shishir Baijal, managing director of Knight Frank India.”
  • “Prices dropped 3% on average across the top six cities, according to Knight Frank, with some declining as much as 15% after accounting for developer discounts. And in the capital region, last year’s prices were 9% below their 2015 peak. The outlook remains bleak.”
  • “The property developers are adding to a pile-up of bad loans in India’s banking sector, which is already struggling to manage a spike in stressed assets across several industries.”
  • “India’s government has stepped in to regulate the real-estate industry with new laws, including one that forces developers to use at least 70% of sale proceeds to complete residential projects, rather than funnel money to different jobs. Other measures prevent them from pre-selling apartments before all building approvals are obtained.”
  • “The pain hasn’t been restricted to the North. India’s financial capital, Mumbai, last year witnessed a decline in residential property prices for the first time in a decade. New residential launches across eight Indian cities dropped 41% last year and were down 78% from their peak in 2010, Knight Frank data show.”

South America

Bloomberg Businessweek – Venezuelan Pirates Rule the Most Lawless Market on Earth – Jonathan Franklin 1/30

Economist – China moves into Latin America – Bello 2/1

  • “The Asian giant is taking advantage of other powers’ lack of interest in the region.”

January 29, 2018

Perspective

BLS – TED: The Economics Daily – Union Membership Rates in each State, 2017 1/25

  • “New York continued to have the highest union membership rate (23.8%), while South Carolina continued to have the lowest (2.6%).”

statista – The Countries Most Optimistic About 2018 – Niall McCarthy 1/22

Visual Capitalist – Visualizing a Global Shift in Wealth Over 10 Years – Jeff Desjardins 1/26

WSJ – Daily Shot: US Upward Mobility 1/26

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Some Lessons For Living From Older Generations – Ben Carlson 1/25

Project Syndicate – Blockchain’s Broken Promises – Nouriel Roubini 1/26

WSJ – My 10-Year Odyssey Through America’s Housing Crisis – Ryan Dezember 1/26

Markets / Economy

Bloomberg – Worthless Auto Trade-Ins Signal Riskier Loans – Claire Boston 1/25

  • “A growing share of the trade-ins that U.S. auto dealers and lenders accept for car-purchase financing are worthless on paper, a sign that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow.”
  • “Almost a third of cars traded in last year were worth less than the loans that had been financing them, according to car-shopping website Edmunds. That’s up from about a quarter a decade earlier, said Edmunds, which looked at cars traded in as part of financing packages for new auto purchases in the U.S.”
  • “Underwater trade-ins are just one example of the greater risks that lenders are taking now. New vehicle sales fell 1.8% to 17.2 million in 2017, but lending volume for new and used car purchases was on track to be higher than ever, according to data from the Federal Reserve Bank of New York and consumer credit bureau Experian. The growth in the average amount financed for a new car outpaced median income growth between 2013 and 2016, Moody’s said, suggesting borrowers are getting more strained.”
  • “Any pain from car-loan trouble will likely be just a shadow of the housing bubble collapse, because the auto debt market is much smaller. There were around $9 trillion of mortgages outstanding at the end of the third quarter, compared with $1.2 trillion of auto debt, the New York Fed said. And so far, many of the bonds backed by subprime auto loans are performing well thanks to built-in protections for investors. Wells Fargo analysts said in a note Wednesday that bonds issued by two of the biggest subprime auto lenders — Santander Consumer USA Holdings Inc. and General Motors Co.’s finance arm — have room to reach prices not seen since before the financial crisis.”
  • “The higher percentage of underwater loans on trade-ins may be a sign that car owners are trading in their vehicles sooner than they had previously. A consumer is often the most underwater on his or her auto loan in the first few years of ownership, because the value of the vehicle drops fastest over that time.”
  • “For borrowers who do trade in their underwater cars, lenders are essentially giving them the money to pay down their loan. The dealer sells the used car, and whatever balance remains on the old loan is folded into the new loan. The borrower might get a longer-term loan than he or she had before to help keep monthly payments manageable.”

Real Estate

Commercial Property Executive – REIT Gets SEC OK for St. Regis Aspen Resort IPO – Gail Kalinoski 1/26

  • “Aspen REIT Inc. has been given approval by the Securities and Exchange Commission for a $33.5 million initial public offering allowing investors to buy shares in the luxury St. Regis Aspen Resort in Colorado.”
  • “Upon closing of the IPO, Aspen REIT will be the first single-asset REIT to list on a national securities exchange in the U.S., according to the company.”
  • “Aspen REIT is offering 1,675,000 shares at $20 per share in the Regulation A+ IPO. The REIT applied to list its common stock on the NYSE American stock exchange under the ticker symbol AJAX. Aspen REIT intends to use substantially all of the net proceeds from the IPO, together with equity in Aspen REIT’s subsidiary operating partnership, to acquire the St. Regis Aspen Resort, a full-service, 179-key luxury hotel at the base of Aspen Mountain in the Rocky Mountains.”
  • Well that’s another way to ‘crowd source’ / syndicate funds.

Finance

Topdown Charts – ChartBrief 182 – Bond Yield Outlook – Callum Thomas 1/24

  • “There has been a lot of talk lately about trendlines, key levels and breakouts by some of the big names… Ray Dalio, Jeffrey Gundlach, Bill Gross.  But anyway, you don’t need to be a famous hedge fund manager to see the writing slowly showing up on the wall here across the major global sovereign bond markets.  The charts below show US and German 10-year bond yields have already broken out, and Japan/UK are getting close.”

WSJ – Daily Shot: US 3 Month LIBOR Rate 1/24

Cryptocurrency

Bloomberg – Coincheck Says It Lost Crypto Coins Valued at About $400 Million – Yuji Nakamura and Andrea Tan 1/26

Environment / Science

Yale News – 2018 Environmental Performance Index: Air quality top public health threat 1/23

Mexico

Reuters – Mexico’s drug cartels, now hooked on fuel, cripple the country’s refineries – Gabriel Stargardter 1/24

Puerto Rico

NYT – Hurricane-Torn Puerto Rico Says It Can’t Pay Any of Its Debts for 5 Years – Patricia Mazzei and Mary Williams Walsh 1/24

  • “The devastation wrought by Hurricane Maria has made Puerto Rico’s already dire financial situation even worse: The island’s leaders acknowledged late Wednesday that they will not be able to pay down any portion of their more than $70 billion debt for the next five years because of the damage.”
  • “Just before the hurricane, Puerto Rico had made plans to pay creditors a total of $3.6 billion through 2022. That was a fraction of the amount due, had the island, a United States territory, not gone into default.”
  • “Now, Puerto Rico expects its budget to be $3.4 billion in the red this year — a deficit that will take five years to close — because of the storm’s toll.”
  • “Nearly a third of customers remain without electricity, more than four months after the storm.”
  • “The government projects its population will shrink by 19.4% over the next five years, with a total exodus of over 600,000 people.”

 

December 19, 2017

Perspective

WSJ – Daily Shot: Credit Suisse – US Household Net worth by quantile 12/15

WSJ – Daily Shot: Credit Suisse – US Household Ownership of Equities by quantile 12/15

Bloomberg – He Stole $100 Million From His Clients. Now He’s Living in Luxury on the Cote d’Azur – Liam Vaughan 12/17

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Seeing Both Sides – Ben Carlson 12/17

Economist – Why is America more tolerant of inequality than many rich countries? – C.K. 12/18

  • “Ignorance about the scale of the problem is part of the answer.”

Huffpost – Why millennials are facing the scariest financial future of any generation since the Great Depression – Michael Hobbes 12/14

  • A summary of the numbers provided by Erica Pandey of Axios on 12/17:
  • “300% more student debt than their parents, on average.”
  • “1/2 as likely to own a home as young people — ages 25–34 — were in 1975.”
  • “One in five of young adults live in poverty.”
  • “2.9% average annual returns on 401(k) plans, compared to 6.3% returns for baby boomers.”
  • “Many millennials will have to work until the age of 75, based on an analysis of federal data.”
  • “A typical 2009 college graduate could earn up to $58,600 less than a typical 2007 college graduate over a decade, based on current trends.”
  • “The American racial wealth gap is widening, with the median white household projected to have 86 times more wealth than the median black household by 2020.”

NYT – World’s Most Expensive Home? Another Bauble for a Saudi Prince – Nicholas Kulish and Michael Forsythe 12/16

NYT – What Is Bitcoin Really Worth? Don’t Even Ask. – Robert Shiller 12/15

Project Syndicate – Complacency Will Be Tested in 2018 – Stephen S. Roach 12/14

  • “Alas, there is an important twist today that wasn’t in play back then –central banks’ swollen balance sheets. From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies (the United States, the eurozone, and Japan) expanded by $8.3 trillion, according to the Bank for International Settlements. With nominal GDP in these same economies increasing by just $2.1 trillion over the same period, the remaining $6.2 trillion of excess liquidity has distorted asset prices around the world.”
  • “Therein lies the crux of the problem. Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.”

The Reformed Broker – Sometimes it’s not complicated – Joshua M. Brown 12/15

Vanity Fair – Of the 1%, By the 1%, For the 1% – Joseph Stiglitz, May 2011

Markets / Economy

FT – Wildfires in California add to ‘horrific year’ of disaster losses – Alistair Gray and Oliver Ralph 12/17

  • “String of catastrophes expected to drive insurance prices higher.”

Real Estate

MarketWatch – We’re still building the wrong kind of homes for renters – Andrea Riquier 12/14

  • “11 million Americans spend more than 50% of their income on rent.”

NYT – The Next Crisis for Puerto Rico: A Crush of Foreclosures – Matthew Goldstein 12/16

  • “About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages. Tens of thousands have not made payments for months. Some 90,000 borrowers became delinquent as a consequence of Hurricane Maria, according to Black Knight Inc., a data firm formerly known as Black Knight Financial Services.”
  • “Puerto Rico’s 35% foreclosure and delinquency rate is more than double the 14.4% national rate during the depths of the housing implosion in January 2010. And there is no prospect of the problem’s solving itself or quickly.”
  • “At the moment, dealing with a mortgage lender about a missed payment may be a distant concern for many of the 3.4 million people in Puerto Rico. They are literally still picking up the pieces, struggling to live without electricity or trying to get insurance companies to pay claims to repair their homes. More than 100,000 people are believed to have left to go live with friends and family on the mainland.”
  • “Residents won a reprieve when the federal government imposed a temporary moratorium on foreclosures, which stops banks and investors that bought mortgages at cut-rate prices from evicting delinquent borrowers or starting new foreclosures. Many lenders also have agreed to waive missed payments during the moratorium.”
  • “But that moratorium is scheduled to expire in early 2018, and lawyers and housing counselors expect that to trigger a surge in foreclosures.”

Finance

WSJ – Daily Shot: Investing.com – Bitcoin 12/18

  • “The cryptocurrency is gunning for $20k as it hit another record high over the weekend.”

Health / Medicine

WP – ‘We feel like our system was hijacked’: DEA agents say a huge opioid case ended in a whimper – Lenny Bernstein and Scott Higham 12/17

South America

NYT – As Venezuela Collapses, Children Are Dying of Hunger – Meridith Kohut and Isayen Herrera 12/17

November 20, 2017

Perspective

VC – Walmart Nation: Mapping the Largest Employers in the U.S. – Jeff Desjardins 11/17

NYT – A Great Migration From Puerto Rico Is Set to Transform Orlando – Lizette Alvarez 11/17

  • “More than 168,000 people have flown or sailed out of Puerto Rico to Florida since the hurricane, landing at airports in Orlando, Miami and Tampa, and the port in Fort Lauderdale. Nearly half are arriving in Orlando, where they are tapping their networks of family and friends. An additional 100,000 are booked on flights to Orlando through Dec. 31, county officials said. Large numbers are also settling in the Tampa, Fort Lauderdale and West Palm Beach areas.”
  • “With so many arriving so abruptly, the migration is expected to transform Orlando, a city that has already become a stronghold of Puerto Ricans, many of them fleeing the island’s economic crisis in recent years. The Puerto Rican population of Florida has exploded from 479,000 in 2000 to well over one million today, according to the Pew Research Center, with the better part settling in Orlando.”

WSJ – Daily Shot: Moody’s – Global Demographic Shifts 11/17

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – If You Are Reading This, You Already Won the Genetic Lottery – Anthony Isola 11/16

A Teachable Moment – 6 Ways to Foil a Financial Predator – Dina Isola 11/17

CNBC – Homeownership doesn’t build wealth, study finds – Diana Olick 11/16

  • Essentially, depends where you live and how disciplined you are with your savings. Further, if you live in a part of the world where home price appreciation has lagged, there is value in having flexibility to move to parts of the country where it hasn’t (which of course further builds on that trend).

FT – Donald Trump’s silence over Roy Moore speaks volumes – Edward Luce 11/16

  • “…Then there is the evangelical vote. Mr Trump appears single-handedly to have changed their moral position. In 2011, 70% of white evangelicals said bad private behavior should disqualify an individual from public office, according to the Public Religion Research Institute. That had dropped to just 28% last year. It is perhaps the most astonishing sea change among any group of voters in recent years. It is also a good example of ‘negative partisanship’ — no matter how bad your candidate might be, he or she could not possibly be worse than the other party’s.”

FT – Prepare to bet against bitcoin as it becomes civilized – Gillian Tett 11/16

  • “If the cryptocurrency ceases to be a ringfenced product, the normal rules of investing will apply.”

NYT – Middle-Class Families Confront Soaring Health Insurance Costs – Robert Pear 11/16

WSJ – Upbeat Moody’s Misses the Mark on India – Anjani Trivedi 11/17

  • “Ratings company’s upgrade is its first in more than a decade, but still looks premature.”

Finance

FT – Investors sue Monte dei Paschi over cancelled bonds – Rachel Sanderson, Robert Smith, and Thomas Hale 11/16

China

Bloomberg – China’s Outbound Investment Plunges as Irrational Deals Curbed – Jeff Kearns and Jessica Sui 11/15

WSJ – Daily Shot: China 5yr AAA Average Corporate Bond Yield 11/16

FT – China tightens rules on asset management to rein in risky lending – Tom Mitchell 11/17

  • “China’s central bank outlined sweeping new regulations aimed at curbing financial risk in the asset management industry on Friday, in the latest signal of its determination to rein in the country’s runaway shadow banking sector.”
  • “The new rules, affecting $15tn of asset-management products, are aimed at unifying regulatory practices across the financial industry and will come into force in June. They will prohibit asset managers from promising investors a guaranteed rate of return, while also requiring them to set aside 10% of the management fees they collect for provisioning purposes.”
  • “Fears about the potential impact of regulatory tightening have contributed to a recent spike in Chinese sovereign bond yields, with the China 10-years rising through 4% this week for the first time since 2014.”
  • “On Thursday the PBoC injected almost $50bn into the financial system to calm investor fears, its largest intervention in almost a year. But Friday’s regulations indicated that Mr Xi’s administration will not back away from the more stringent approach it has adopted towards risk management.”
  • “In a party congress speech last month that marked the beginning of his second five-year term in office, Mr Xi indicated that his administration was prepared to accept lower rates of economic growth in order to defuse financial risks.”
  • “In August the International Monetary Fund warned that non-financial sector debt was poised to exceed 290% of GDP by 2022, compared with 235% at the end of last year.”

South America

WSJ – Daily Shot: Venezuelan Household Purchasing Power 11/17

FT – Exodus the only answer for thousands of Venezuelans – Gideon Long and John Paul Rathbone 11/17

October 31, 2017

Happy Halloween!

If you were only to read one thing…

FT – Billionaire boom is a sign that rates need to rise – Merryn Somerset Webb 10/27

  • “It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product.”
  • “It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalization as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years.”
  • “The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures. Most markets have ended up overvalued (this will really matter one day), while pension fund deficits and a constant sense of crisis have discouraged capital investment — and have possibly held down wages in the UK.”
  • “Set a target, get a distortion. This is standard stuff. But the fact that extreme monetary policy has been going on for so long means that central bankers do not just have macro problems to feel bad about. They are also effectively responsible for the increasingly dodgy micro policies governments have felt forced to put in place in an attempt to alleviate the nasty side effects of very low interest rates, over which they have no control.”
  • “A bit of good news is that this monetary experimentation has been about inflation targeting (everyone, for no obvious reason, is after 2%). And if you set a target and pursue it at the cost of everything else you usually get to it. So inflation is back. In the US, where expectations of inflation are low, September numbers showed average hourly earnings jumping 2.9%, the biggest rise in a decade.”
  • “The Monetary Policy Committee could dig out a list of excuses not to raise rates despite the last GDP growth numbers being rather better than expected. Raising rates will do harm at some point (asset prices will fall and the indebted will suffer). But not reversing is beginning to look like it could do more harm. Unless, of course, you are a billionaire.”

Perspective

Axios – ‘Degree inflation’ may be pushing workers out of the middle class – Christopher Matthews 10/25

  • “A growing number of U.S. employers are requiring bachelor’s degrees for jobs that have long been performed by workers without them, contributing to a rise in income inequality, according to a report published today.”
  • “Why it matters: The report, by Harvard Business School, Accenture, and Grads of Life estimates that 6 million American jobs are at risk of ‘degree inflation,’ a result of employers increasingly using a bachelor’s degree ‘as a proxy for a candidate’s range and depth of skills.'”

  • “‘This phenomenon is a major driver of income inequality,’ Joe Fuller of Harvard Business School tells Axios. ‘We’re hollowing out middle-class jobs and driving everyone to the extremes of the income spectrum.'”
  • “The number of U.S. job openings has reached an all-time high, but more than 13 million Americans — the vast majority with less than a four-year college degree — are unemployed or working part-time when they want full-time positions.”
  • “The costs of the shift are ‘profound’ for the two-thirds of American adults who lack a college degree, Fuller says.”
    • “90% of companies use screening software to weed out applicants lacking the education requirement. That means, even with the right experience, an applicant won’t even be considered by a human.”
    • “‘This puts significant pressure for people with certain aspirations to get a degree even when it’s not directly relevant to their career.'”
    • “When the 6-year graduation rate for 4-year schools in America is just 59%, that means Americans lacking the aptitude to excel in college take on debt for degrees they’ll never receive.”
    • “Hispanics and African Americans are disproportionately hurt by the phenomenon, because they have lower college graduation rates than the population at large.”

Visual Capitalist – Commuters and Computers: Mapping U.S. Megaregions – Nick Routley 10/28

  • “We tend to think of cities as individual economic units, but as they expand outward and bleed together, defining them simply by official jurisdictions and borders becomes difficult. After all, many of the imaginary lines divvying up the country are remnants of decisions from centuries ago – and other county and state lines exist for more counterintuitive reasons such as gerrymandering.”
  • “By ignoring borders and looking purely at commuter data, geographer Garrett Nelson and urban analyst Alasdair Rae looked to map the relationship between population centers in their paper, An Economic Geography of the United States: From Commutes to Mega-regions.”

  • “The study used network partitioning software to link together 4 million commutes between census tracts. This gives us a very granular look at the ‘gravitational pull’ of America’s population centers, and helps us better understand the economic links that bind a region together.”
  • “By combining visual and mathematical approaches, and some creative place-naming, the researchers created a map that they hope reflects America’s true economic geography.”

WSJ – Daily Shot: State College Graduation Rates – Highest & Lowest 10/29

Worthy Insights / Opinion Pieces / Advice

The Atlantic – Harvey Weinstein and the Economics of Consent – Brit Marling 10/23

  • “The blunt power of the gatekeeper is the ability to enforce not just artistic, but also financial, exile.”

Bloomberg View – When Wall Street Looks Pricey, the Rest of the U.S. Thrives – Conor Sen

  • “When stocks are expensive, those with capital are more inclined to expand a business or start a new one.”
  • We’ll see…

Bloomberg View – Faster Growth Begins With a Land Tax in U.S. Cities – Noah Smith 10/24

  • This would cause a major political fight. The odds are that a land value tax would initially be passed onto tenants, until of course there is enough push back.
  • Granted, this goes against the goal of having property in core markets with the ability to benefit from economic rents…

Business Insider – Jeff Flake isn’t brave, he’s helpless – and he doesn’t understand why – Josh Barro 10/24

FT – Investors pass the buck on governance – Rana Foroohar 10/29

  • “Proxy advisers incentivize the wrong company behavior by creating rigid checklists.”

NYT – A Long-Delayed Reckoning of the Cost of Silence on Abuse – Jim Rutenberg 10/22

NYT – Forget Washington. Facebook’s Problems Abroad Are Far More Disturbing. – Kevin Roose 10/29

Real Estate

WSJ – Daily Shot: Moody’s – US Single Family Home Sales 10/29

  • “Moody’s is projecting that many more homes will be sold next year as homeowners finally make their move.”

Others are not as optimistic.

WSJ – Daily Shot: John Burns RE Consulting – US Existing Single Family Home Sales 10/29

FT  – Sand castles on Jersey Shore: property boom defies US flood risk – Gregory Meyer 10/29

  • “Sandy exposed the perils of shoreline living, as the climate warms and sea levels creep higher. In the US alone it left 162 dead, laid waste to 650,000 homes and cost $65bn — the second most expensive weather disaster in history.”
  • “On New Jersey’s fragile barrier islands, the response to Sandy has not been to withdraw inland but rather to build bigger. ‘They did not rebuild bungalows. They knocked those down and built McMansions,’ says Walter LaCicero, Lavallette’s mayor.”
  • That’s one way to do eminent domain.
  • “Improbably, the disaster created a once-in-a-lifetime buying opportunity. Older families unable to pay for repairs sold properties.”
  • “House prices in the worst-hit communities cratered after Sandy. In Lavallette, the median sale price of $532,500 in October 2012 had more than halved to $225,000 by February 2013, according to New Jersey Realtors. This past summer, median prices reached $660,000 and were higher by the beach.”
  • “The Federal Emergency Management Agency has paid out more than $25bn in New Jersey and New York alone, reimbursing towns for the cost of removing debris, repairing roads and bridges, and renting emergency equipment. Gaps in local tax revenue lost when assessed property values collapsed were filled with federal money. The agency granted $1.4bn to 179,000 people and households in the region to cover their costs of shelter and rebuilding.”
  • “Critics say federal policy rewards local officials for hazardous coastal development. ‘If someone told you you’re going to get a new beach every time the oceans washed yours away, you’re probably going to feel more secure allowing high-priced homes to be built there,’ says Rob Moore, senior policy analyst at the NRDC (National Resources Defense Council).”
  • “The aid has strings attached: all new and rebuilt houses must now rest on stilts at least one foot above the estimated crest of a once-in-a-100-year flood.”
  • “Relatively cheap schemes such as hazard zoning and land purchases have typically received about 5% of disaster relief funds, according to a report by the National Research Council, an expert body. Washington is also picking up a bigger tab from coastal disasters, covering 75% of the damages from Sandy compared with 6% for Hurricane Diane in 1955.”
  • “‘Developers, builders and state and local governments reap the rewards of coastal development but do not bear equivalent risk, because the federal government has borne an increasing share of the costs of coastal disasters,’ the council’s study said.”
  • “The prospect of higher and more frequent floods driven by climate change comes as the Trump administration unravels US commitments to rein in carbon emissions, including pulling out of the Paris agreement and abandoning an initiative to factor climate risks into infrastructure spending. As Irma bore down on Florida last month Scott Pruitt, administrator of the Environmental Protection Agency, said the time to discuss the causes and effects of the storm was ‘not now’.”

WSJ – Stuck in Place, U.S. Homeowners Hunker Down as Housing Supply Stays Tight – Laura Kusisto and Christina Rexrode 10/29

FT – Boston prices its graduates out of starter homes – Hugo Cox 10/24

Energy

WSJ – Your Next Home Could Run on Batteries – Christopher Mims 10/15

  • “The rise of these home batteries isn’t just a product of our collective obsession with new tech. Their adoption is being driven by a powerful need, says Ravi Manghani, of GTM Research: renewable energy.”

  • “Without batteries and other means of energy storage, the ability of utility companies to deliver power could eventually be threatened.”
  • “Solar power, especially, tends to generate electricity only at certain times—and it’s rarely in sync with a home’s needs. In some states, such as California and Arizona, there’s an overabundance of solar power in the middle of the day during cool times of the year, then a sudden crash in the evenings, when people get home and energy use spikes.”
  • “For utilities, it’s a headache. The price of electricity on interstate markets can go negative at certain times, forcing them to dump excess electricity or pay others to take it.”
  • “’This is not a long-term theoretical issue that might happen—this is now,’ says Marc Romito, director of customer technology at Arizona Public Service, the state’s largest electric utility.”

Finance

FT – Wall St banks ride boom in leveraged loans as volumes soar – Joe Rennison and Eric Platt 10/29

  • “Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016.”
  • “The overall industry has underwritten leveraged loans worth $1.251tn, and earlier this month eclipsed its previous full-year record set in 2013, according to Dealogic. Volumes are up 38% from a year earlier and more than 60% of the deals have been companies refinancing existing loans.”
  • “The relative dearth of new loans, as opposed to refinancings, has also given borrowers the upper hand. As well as lower rates, borrowers are also able to cut the number of investor protections, called covenants, written into the loans.”
  • “’Net new supply is relatively low so demand is exceeding supply,’ said Christina Padgett, an analyst at Moody’s. ‘Investors are going to get squeezed on price and the issuers are going to take advantage so they have really flexible credit agreements.’”

FT – Why credit is the Hotel California of markets – Michael Mackenzie 10/24

  • “The endless debate over valuation metrics that have accompanied the storming bull run in stocks misses a much bigger point about investing in 2017. Thanks to the outsized role of central banks, it is the credit markets that run the show. If you want clues on when the bull run in equities is entering the red zone, keep your eyes on the corporate debt market.”
  • “Before central banks’ quantitative easing policies engineered the current cycle of financial suppression, credit markets had already established their bona fides as an early warning system for investors. When equities peaked in October 2007, the credit market had already begun turning lower.”
  • “A decade on, the risk premium, or additional yield, offered by corporate bonds over that of a US government bond is at its narrowest since 2007. That provides very little protection for buyers, with even a modest drop in bond prices erasing the meagre fixed income being paid by borrowers.”
  • The big lesson digested by investors since the financial crisis is that you need to own yield, and the money gushing into bond funds remains immense. About $241bn flowed into US high grade bond funds and exchange traded funds in the first nine months of the year, according to Bank of America Merrill Lynch estimates. That’s a whopping 34% higher than 2012’s full-year record of $180bn, the bank says.”
  • “This high tide of money means companies can keep selling debt — running at a record $1.4tn pace this year in the US — at very low interest rates. The resulting higher leverage in the system helps explain why the equity market keeps updating the record books with alacrity.”
  • “’As long as people are tripping over themselves to buy bonds, it remains a very favorable environment for risk taking,’ says Jack Ablin, chief investor officer at BMO Wealth Management.”
  • “True, a number of strategists concede the current credit cycle is looking a little long in the tooth, but they also think the water can remain warm and soapy for a while yet.”
  • “The Federal Reserve may have begun trimming its balance sheet, but other central banks are still buying and the scale of their largesse keeps US credit spreads tight as international money hunts yield. Not until next March will collective bond buying from the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England peak at around $15.3tn, according to BofA.”
  • “But kick the tires of the credit machine a little harder and there are nascent signs of trouble.”
  • “The quality of covenants — designed to protect bondholders from a borrower defaulting — loiters in the gutter, reflecting a market awash with far too much money.”
  • “In another troubling sign, companies have raised just $215bn from the US high yield market in 2017, the second-slowest figure since 2011, as flows of money into the sector have been choppy this year. While this suggests that some money managers are doing their credit homework, the recent bankruptcy filing of Toys R Us sends a grim tiding about market complacency.”
  • “Bonds in the highly indebted retailer were trading near par and then plunged below 30 cents on the dollar.”
  • “So where does this leave investors? Sure the music is still playing and will probably do so for some time yet. But watch the yield curve. The Fed’s autopilot sequence of rate increases has sharply narrowed the difference between yields on short and long dated Treasuries. This reflects expectations that inflation will stay low — bad for debtors — as well as concern that the economy’s growth prospects are limited.”
  • “If there’s further curve flattening after a tax reform deal, that will send a gloomy signal about the economy, finally push credit spreads wider and should worry the most ardent of equity bulls.”
  • “As we know from 2008, there is no exit once the credit market turns. Credit is the Hotel California of markets — and equity investors usually discover they are trapped in the basement.”

China

FT – Inside China’s secret ‘magic weapon’ for worldwide influence – James Kynge, Lucy Hornby, and Jamil Anderlini 10/25

  • “Xi is quietly ramping up a Communist party department to expand Beijing’s soft power.”

India

FT – India agrees $32bn plan to recapitalize state banks – Simon Mundy 10/24

  • “India’s government has announced a $32bn recapitalization plan for the country’s ailing state-controlled banks in a bid to tackle a festering economic problem.”
  • “The finance ministry promised on Tuesday to take a ‘massive step . . . to support credit growth and job creation’ by shoring up bank balance sheets strained by soaring corporate defaults over the past three years.”
  • “The state banks have been faced with weak credit demand this year and have lost market share to private sector rivals.”
  • “Concerns about the condition of the state-owned banks, which account for more than two-thirds of sector assets, have been mounting along with estimates of their bad loans.”
  • “This is because of a spurt in loans to companies in sectors such as steel and infrastructure over much of the past decade, many of which subsequently turned sour. Gross non-performing loans at the state-controlled banks rose to 13.7% of their assets at the end of June, up from 5.4% in March 2015.”
  • “Beyond the recapitalization, the government promised to push the banks to step up their lending to small and medium-sized enterprises, including by partnering with financial technology companies.”
  • “This sector was badly hit by India’s demonetization last year, which triggered a shortage of bank notes that rocked companies long used to dealing entirely in cash.”

Japan

WSJ – Japan to Young Investors: Loosen Up – Suryatapa Bhattacharya 10/29

Puerto Rico

Rhodium Group – America’s Biggest Blackout – Trevor Houser and Peter Marsters 10/26

Russia

NYT – In Russia, a Bribery Case Lifts the Veil on Kremlin Intrigue – Andrew Kramer 10/21

South America

WSJ – Daily Shot: Latinobarometro – Does Your Government Favor the Elite 10/29

  • It would be hard to argue it doesn’t.