“It’s time for investors to stop fighting the last war. The next downturn most likely won’t be triggered by another meltdown of the financial system.”
“Investors didn’t need the Fed to tell them that banks are in better shape than they were a decade ago. The signs are everywhere. Profits have fallen across the industry since the financial crisis, an indication that banks are taking on less risk. Profit margins for the S&P 500 Financials Index averaged 9.3% from 2008 to 2017, down from an average of 13.8% from 2003 to 2007, the years leading up to the crisis. Return on equity is down to an average of 5.2% from 14.5% over the same periods.”
“The biggest of those risks is leverage — or piling on debt to boost profits — and banks have a lot less of it than they used to. The debt-to-equity ratio of the financials index has dropped to 159% as of the first quarter from 563% at the end of 2007. The debt-to-assets ratio has fallen to 19% from 43% over the same period.”
“But if the numbers don’t persuade investors that the next crisis won’t look like the last one, then maybe a look at previous bear markets would. In reverse chronological order: The bursting of the dot-com bubble was behind the downturn from 2000 to 2002. A mass panic or newly introduced computerized trading, depending on whom you ask, set off the 1987 crash. Stagflation brought down the market from 1980 to 1982. A global oil embargo hit stocks from 1973 to 1974. I could keep going, but you get the idea.”
“There is a common thread running through the scariest episodes: high stock prices. The average cyclically adjusted price-to-earnings, or CAPE, ratio for the S&P 500 has been 18 since 1928, according to numbers compiled by Yale professor Robert Shiller. The five worst bear markets during those nine decades, as measured by peak to trough declines, commenced in 1929, 1937, 1973, 2000 and 2007. The average CAPE ratio on the eve of those downturns was 29 and the median was 27.”
“The current CAPE ratio: 32. And it’s never just stocks. Other assets in the U.S. look frothy, too, such as private equity and real estate.”
“Americans were not set up for success in recycling plastics. Even before China stopped accepting plastic refuse from abroad, 9% of potentially recyclable plastic in the U.S. ended up in landfills – or worse, in the oceans. Europe does a little better, with only 70% getting tossed.”
“Why such terrible rates? Partly because some changes that were supposed to make recycling simpler ended up making it almost impossible.”
“University of Georgia engineering professor Jenna Jambeck said that indeed, part of the reason China is now refusing to process American and European plastic is that so many people tossed waste into the wrong bin, resulting in a contaminated mix difficult or impossible to recycle.”
“In a paper published last week in Science Advances, she and her colleagues calculated that between now and 2030, 111 million metric tons of potentially recyclable plastic will be diverted from Chinese plants into landfills.”
“Plastic matters because it takes centuries to degrade, and there’s a lot of it. Jambeck has estimated that the world has produced more than 8 billion metric tons since the 1950s. To help grasp this quantity, paleontologist Jan Zalasiewicz has estimated that this is enough to wrap our entire planet in cling wrap. Others have calculated that it would make four mountains the size of Everest.”
“Given what scientists already know how to do, the future could bring a greener, more fool-proof system. Right now, she said, she and other scientists are starting to develop ways to recycle mixtures of plastics – a tough job because many plastics repel one another like oil and water. One of the reasons China imported recycling was that it was possible there to hire cheap labor to sort the different plastic types by hand.”
“Curing the plastic problem is a lot like fighting cancer. Even if everyone stopped smoking, there would still be cancer. And even if we all figure out whether our municipalities accept yogurt containers, plastic waste will still pollute the environment. Compliance won’t be a cure until innovations from the lab set us up for success.”
“Sea level rise driven by climate change is set to pose an existential crisis to many US coastal communities, with new research finding that as many as 311,000 homes face being flooded every two weeks within the next 30 years.”
“The UCS used federal data from a high sea level rise scenario projected by the National Oceanic and Atmospheric Administration, and combined it with property data from the online real estate company Zillow to quantify the level of risk across the lower 48 states.”
“Under this scenario, where planet-warming emissions are barely constrained and the seas rise by about 6.5 feet globally by the end of the century, 311,000 homes along the US coastline would face flooding on average 26 times a year within the next 30 years—a typical lifespan for a new mortgage.”
“The losses would multiply by the end of the century, with the research warning that as many as 2.4 million homes, worth around a trillion dollars, could be put at risk. Low-lying states would be particularly prone, with a million homes in Florida, 250,000 homes in New Jersey and 143,000 homes in New York at risk of chronic flooding by 2100.”
“The oceans are rising by about 3 mm a year due to the thermal expansion of seawater that’s warming because of the burning of fossil fuels by humans. The melting of massive glaciers in Greenland and Antarctica is also pushing up the seas—NASA announced last week that the amount of ice lost annually from Antartica has tripled since 2012 to an enormous 241 billion tons a year.”
“This slowly unfolding scenario is set to pose wrenching choices for many in the US. Previous research has suggested that about 13 million Americans may have to move due to sea level rise by the end of the century, with landlocked states such as Arizona and Wyoming set for a population surge.”
“Farmers planted 89.6m acres with soya beans this spring, the government reported Friday, surpassing the 89.1m acres planted with corn. The only other year soya topped corn was in 1983, because of a one-off quirk of agricultural policy.”
“After eight years of budget cutting, Britain is looking less like the rest of Europe and more like the United States, with a shrinking welfare state and spreading poverty.”
“Monthly premiums for care insurance have doubled from ¥3,000 to almost ¥6,000 ($55) since the system began in 2000. Meanwhile, the average annual cost of employer-based health insurance is up from ¥386,038 in 2008 to ¥486,042 this year, equivalent to a two percentage point rise in income tax.”
“The rise in health and care costs helps to explain why moderate wage growth, after five years of economic stimulus under prime minister Shinzo Abe, is doing so little to boost consumption. It poses a conundrum for the Bank of Japan, which is relying on spending pressure to push inflation towards its 2% objective.”
“Japan’s future holds more of the same, especially after 2020, when the baby boom generation starts to reach the age of 75 and needs more care. Recent government figures suggest that by 2040 social insurance costs will rise another 2.5 percentage points to 24% of gross domestic product.”
“Less than two years ago, a cup of coffee cost 450 bolivars in Venezuela. Today, as the nation’s hyperinflation continues to skyrocket, a cafe con leche costs 1 million bolivars — or a mere 29 U.S. cents, according to Bloomberg.”
“The most troubling takeaway from two days of congressional hearings on Facebook Inc. was this: Mark Zuckerberg didn’t want to explain how the social network operates.”
“Zuckerberg found it hard to plainly acknowledge that Facebook tracks users from device to device, collects information on websites people visit and apps they use, gathers information on people’s physical locations, collects phone call logs from Android smartphones and pulls in some online activity from people who don’t even have Facebook accounts.”
“Zuckerberg declined to acknowledge that Facebook’s ad system and products are informed by all of this information gathering on and off the social network. If Facebook were a true bargain with users — they get a useful, free service in exchange for seeing advertising based on their interests and activity — then Zuckerberg should be comfortable explaining how it all works.”
“Instead, given the option to articulate Facebook’s relationship with users (and non-users), he dodged. A lot.”
“He said he couldn’t answer queries from Senator Roy Blunt, who asked on Tuesday whether Facebook tracks users across their computing devices or tracks offline activity. The answer to both is yes. During the House committee hearing on Wednesday, Zuckerberg claimed not to know what ‘shadow profiles’ are, even though this term has been used for years to describe Facebook’s collection of data about people who don’t use its services by harvesting the inboxes and smartphone contacts of active Facebook users. (Zuckerberg reluctantly acknowledged that Facebook gathers information on people who aren’t signed up for Facebook for what he said were ‘security purposes.’)”
“Most people do not understand the scope of Facebook’s data collection. Lawmakers tried more than once to get Zuckerberg to say this, but he never did. Here’s a piece of evidence lawmakers could have showed the CEO: In a survey conducted recently by Digital Content Next, a trade group of news organizations that is frequently critical of Facebook, a majority of respondents said they didn’t expect the social network to track use of non-Facebook apps to target ads, collect their physical location when they’re not using Facebook or harvest information from non-Facebook websites that people visit. Spoiler alert: Facebook does all of those things.”
“It’s not people’s fault if they don’t know how Facebook works. If Zuckerberg and Facebook were comfortable with the data-based bedrock of their business, he should be able and willing to explain all the ways Facebook collects data on everyone and how it uses it.”
“It felt as though the company made a calculated decision to deflect rather than talk openly about the scope of Facebook data collection and its data-based ad system. And to me, that was a sign that Facebook is embarrassed about what it does for a living.”
“Don’t panic, but there is now a 70% chance of a U.S. stock market correction, according to research conducted by fund giant Vanguard Group. There is always the risk of a correction in stocks, but the Vanguard research shows that the current probability is 30% higher than what has been typical over the past six decades.”
“‘It’s about having reasonable expectations,’ Davis (Joe Davis, Vanguard chief economist) said of the research, which attempts to provide investors with a view of what can occur in the markets in the next five years. ‘Having a 10% negative return in the U.S. market in a calendar year [within a five-year forward period] has happened 40% of the time since 1960. That goes with the territory of being a stock investor.’ He added, ‘It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue.'”
“In its annual economic and investing outlook published last week, Vanguard told investors to expect no better than 4% to 6% returns from stocks in the next five years, its least bullish outlook since the post-financial crisis recovery began.”
“For Vanguard the research is a chance to remind investors that overreaching is no better a solution for a lower-return environment than getting out of the market entirely. Davis worries some investors will hear ‘lower returns’ and view it as a catalyst to become more aggressive as a way to generate the returns they have been used to in recent years.”
“As long as an investor is in a financial situation in which they can cope with a single down year, ‘you need to stay invested, because of lower expected returns,’ Davis said. But he added, ‘Don’t become overly aggressive. The next five years will be challenging, and investors need to have their eyes wide open.'”
“One of the main reasons why millions of people jump on investment manias and get crushed by them is because of a simple Fear Of Missing Out. Your co-worker made $10,000 investing in Fidget Spinners and now you feel like you weren’t enough of a dumbass with your dumbass money so you invest your dumbass money in something that is truly for dumbasses and you lose your (dumb) ass.”
“Saudi Arabia’s crown prince has pledged to rid the world of Islamist terrorism as he launched a military alliance that critics fear will deepen rifts between the kingdom and its arch-rival Iran.”
“Prince Mohammed has vowed to restore moderate Islam in the kingdom, where puritanical strains of the faith that encouraged violence have been promoted for decades. The launch of the alliance follows Friday’s jihadist attack on a mosque in Egypt that left more than 300 people dead. ‘The greatest danger of extremist terrorism is in distorting the reputation of our tolerant religion,’ the prince said.”
“One of Europe’s leading energy consultancies has estimated that Tesla’s electric haulage truck will require the same energy as up to 4,000 homes to recharge, calculations that raise questions over the project’s viability.”
“The US electric carmaker unveiled a battery-powered lorry earlier this month, promising haulage drivers they could add 400 miles of charge in as little as 30 minutes using a new ‘megacharger’ to be made by the company.”
“John Feddersen, chief executive of Aurora Energy Research, a consultancy set up in 2013 by a group of Oxford university professors, said the power required for the megacharger to fill a battery in that amount of time would be 1,600 kilowatts.”
“That is the equivalent of providing 3,000-4,000 ‘average’ houses, he told a London conference last week, ten times as powerful as Tesla’s current network of ‘superchargers’ for its electric cars.”
“Pressured by low yields and political issues at home, cash-rich private investors from China and Hong Kong are snapping up trophy buildings in the U.K. capital. Often prepared to spend whatever it takes, these wealthy investors are pricing institutional investors out of the market. And because they don’t need to borrow to buy, U.K. lenders are feeling the pinch.”
“Of the £12.2 billion ($16.1 billion) spent on central London offices in the first three quarters this year, almost half came from private Chinese and Hong Kong buyers, according to real-estate consultant Knight Frank. That is a big jump from last year, when the group accounted for just less than a quarter of overall spending, and from 2015, when the figure was 7%.”
“By borrowing money at home, Chinese and Hong Kong investors have also pushed down property lending in London. According to a report by De Montfort University, the volume of new loans in the U.K. has fallen 18% year-over-year in the first half of 2017 due to a ‘slowdown in purchasing activity of new properties requiring debt during 2017’.”
“U.K. institutional investors such as asset managers are also dialing back. In all, they have bought £880 million of central London real estate so far this year, out of a total £15.68 billion spent by all investors, according to www.propertydata.com. Two years ago, U.K. institutions bought £2.89 billion worth of property.”
“’London is a two-tier market right now—the Asian investors and everybody else,’ said Joe Valente, head of research and strategy of European real estate at J.P. Morgan Asset Management, adding that the firm is waiting for the prices to fall before entering the market again.”
Finance
WSJ – Daily Shot: FRED – Commercial and Industrial Loan Growth 11/27
“Japanese companies are scouring the country for workers and offering more attractive permanent contracts as they struggle to overcome the worst labor shortages in 40 years.”
“Companies across a range of sectors — from construction to aged care — have warned in recent days that a lack of staff is starting to hit their business.”
“The hiring difficulties highlight Japan’s declining population and the strength of its economy after five years of economic stimulus under Prime Minister Shinzo Abe.”
“’Delays to construction projects are becoming chronic,’ said Motohiro Nagashima, president of Toli Corporation, one of Japan’s biggest makers of floor coverings.”
“One way companies are tackling shortages is by offering more generous permanent contracts, which provide job security and pension benefits. That policy has broken a decades-long trend towards more part-time and contract work.”
“The way companies are responding — using every means other than wage increases — suggests that shortages will not yet turn into higher inflation.”
“Irregular work has risen relentlessly from about 19% of total employment when Japan’s bubble burst in 1990, to a peak of 37.9% in 2015.”
“But there are now signs of stabilization, with the percentage of irregular staff falling to 37.4% in the third quarter of this year.”
“Sales of nontraded real estate investment trusts are headed for their worst year since 2002, with the industry on track to raise just $4.4 billion in equity in 2017, about $100,000 less than a year earlier, according to data from Robert A. Stanger & Co.”
“Making matters worse for the industry is that one newcomer to selling nontraded REITs, The Blackstone Group, has the highest sales for the year to date through September. Blackstone had almost $1.4 billion in sales with its new REIT, the Blackstone Real Estate Income Trust, over the first nine months of the year, according to Stanger.”
“That means traditional nontraded REIT managers – including Griffin Capital Co., Carter/Validus Advisors, Cole Capital and others – will likely raise about $3 billion this year, about one third less than the 2016 total. And independent broker-dealers are struggling without the lucrative commissions formerly generated by product sales.”
“In 2002, $3.8 billion worth of nontraded REITs were sold. Nontraded REIT sales were $11.5 billion in 2007, according to Stanger, just as the real estate crash was beginning. Sales of nontraded REITs hit their peak in 2013, when independent broker-dealers sold $19.6 billion of the products.”
In addition to an accounting scandal at industry behemoth, American Realty Capital (ARC), new securities rules have hurt sales.
“New securities industry rules and regulations, including the Department of Labor’s fiduciary rule, have hurt sales of high commission products like nontraded REITs. The fiduciary rule has flattened the levels of commissions that brokers charge clients for products such as mutual funds.”
“The Financial Industry Regulatory Authority also recently put into place a new rule, known as 15-02, that makes pricing of illiquid securities like nontraded REITs more transparent to investors. In the past, client account statements showed illiquid securities like REITs at the value they were bought by the client and did not subtract commissions, which were high.”
“With the DOL fiduciary rule flattening commissions, many REIT managers began selling T shares, which cut the upfront load by more than half. After initially paying a 3% commission, the broker is then paid up to 7% over several years. An annual commission of 80 basis points is paid from the return generated by the REIT manager.”
“Many economists have long predicted an end to the dollar reign that was established after World War II, especially after President Richard Nixon unpegged the greenback from gold in 1971. The creation of the euro in 1999 and the breakneck growth of the Chinese economy led many analysts to say the dollar would need to share the limelight.”
“But the euro became politically unpopular during the European debt crisis, and Chinese capital controls to peg the yuan are anathema to global investors. Meanwhile, the share of official reserves held in dollars recently stopped its multiyear decline, and in the second quarter of 2017, foreign-country dollar-denominated debt rose to an all-time high of $8.6 trillion, according to the BIS.
“’The dollar’s downward trend of the last 40 years is over,’ said Paresh Upadhyaya, fund manager at Amundi Pioneer, Europe’s largest asset manager.”
“A one-currency dominance challenges economic models that see global financial markets as a flat surface where, on average, investors shouldn’t be better or worse off depending on which currency they trade.”
“The thefts — which occur on average more than once an hour and are often staged by scores of criminals carrying assault rifles — have reportedly forced the national postal service to stop street deliveries in some neighborhoods of Rio, while supermarkets have raised their prices by up to 20 per cent to pay for the losses.”
“Recession-induced budget crises across governments in Latin America’s largest economy have led to the spike in crime, analysts say. One state — Espírito Santo — recorded 128 murders during eight days of uncontrolled street crime in February when police went on strike after budget cuts.”
“Cargo theft in Rio de Janeiro, whose greater metropolitan area has a population of 12m people, has increased sharply from 5,890 incidents in 2014 at the start of the economic downturn to a record 9,862 last year, says the local industry association Firjan. The state is on track to top a similar number this year, with food, beverages, electronic appliances and cigarettes among the preferred targets.”
“According to a 2017 report by the Inter-American Development Bank, crime and the efforts to combat it cost Brazil some $120bn a year, three times the toll on Mexico, which is ravaged by drug-cartel violence.“
Is this what happens when a society becomes too unequal? Politicians play their hand at their ability to regulate with intent to collect personal payoffs – graft becomes endemic – the people go on a corruption hunt – political infrastructure suffers – basic services decline – theft and looting become common place. I would imagine that the walls around the wealthy compounds are getting higher with more armed guards.
Another example of how easy it is to manipulate people. Seemingly the spread of the internet was meant to give people access to factual information to make better decisions and to be better informed. Rather it seems that while more information is available, the habit of selection bias has only amplified.
“The oil price has risen by almost 20% over the last four weeks. Does anything in the market justify such an increase, or is the change driven simply by speculation about the dangers of a direct conflict between Saudi Arabia and Iran?”
“The real explanation for the rise in prices clearly lies not in the physical balance of supply and demand but in speculation. Once again traders have been bidding up prices on the basis of fears about what could happen next.”
“An open conflict between Saudi Arabia and Iran would expose numerous oil fields and installations on both sides of the Gulf to attack. The Straits of Hormuz are still a potential choke point for the global flow of oil. Some 17m barrels a day – almost a quarter of world traded oil – goes through the straits.”
“War would be an illogical step, but since when has logic been the ruling force in the Middle East? If the risk of conflict recedes so will the oil price – there is nothing in the fundamentals to justify a price much over $50 or $55 a barrel. But if open war between the two major Gulf powers did break out the price rise we have seen so far would look trivial.”
“When Saudi Crown Prince Mohammed bin Salman spoke to his nation six months ago, he pledged to crack down on corruption. ‘I assure you that nobody who is involved in corruption will escape, regardless if he was minister or a prince or anyone,’ he said.”
“But few people could have expected the sudden storm this month when a new anti-graft committee ordered the arrest of more than 200 suspects, including princes, prominent businessmen and former senior officials, on allegations related to at least $100bn in corruption.”
“The arrest of so many big names has been hailed within the country as proof ‘no one is above the law’. But others have raised questions about the motivations behind a probe that also targeted a member of the royal family once seen as a contender for the throne.”
“Executives estimate that anywhere between 10% and 25% of the value of government contracts is routinely skimmed, with the proceeds used to fund lavish regal lifestyles, channel money to loyal tribes and grease the palms of favored functionaries. ‘This is how the kingdom of Saudi Arabia has balanced power historically,’ said one executive.”
“While fully eliminating corruption is unlikely, experts say limiting the presence of princes in government could help. King Salman has significantly decreased the number of family members in cabinet — today only the ministers of defense, the interior and the national guard are royals.”
“Some suggest that, even if corruption by the royals continues, the crackdown could still bring important dividends.”
“’Centralized corruption is better because you have one rent-seeker on top.’ said Steffen Hertog, an expert on Saudi political economy at the London School of Economics. ‘That actor has an interest in keeping the whole system efficient and stable, and keeping it from collapsing.’”
“After plunging as much as 29% from a record high following the cancellation of a technology upgrade on Nov. 8, the largest cryptocurrency came roaring back in early trading Monday before fluctuating between gains and losses.”
“While multiple reasons are being cited for the price volatility, one of the more viable is that some investors are switching to alternative coins. Bitcoin cash, an offshoot of bitcoin that includes many of the technical upgrades being debated by developers, has more than doubled in the same period.”
“The resulting volatility has been extreme even by bitcoin’s wild standards and comes amid growing interest in cryptocurrencies among regulators, banks and fund managers. While skeptics have called its rapid advance a bubble, the asset has become too big for many on Wall Street to ignore. Even after shrinking as much as $38 billion since Nov. 8, bitcoin boasts a market value of about $110 billion.”
Real Estate
WSJ – Daily Shot: Homeownership and Apartment Vacancy Rates by US Region 11/12
“Stronger Chinese economic growth will push global greenhouse gas emissions to a record high in 2017 after remaining flat for three years, dashing tentative hopes of a turning point in the world’s efforts to curb climate change.”
“A new report by the Global Carbon Project, an international research consortium, predicts that carbon dioxide emissions from fossil fuels and industry will rise 2% this year. The report was released at the UN climate change meeting in Bonn on Monday.”
“The increase — which is largely caused by China and developing countries — suggests the world is straying further from the course set at the landmark UN conference in Paris two years ago.”
“This year’s rise is especially disappointing as it follows three years of almost no growth in emissions despite a world economy expanding at a steady clip. In 2016, emissions were flat even though the world economy grew 3.2%. One explanation for the uptick is that China’s economic slowdown in the middle part of this decade was more pronounced than official figures suggested.”
“The GPC report concludes: ‘The world has not reached peak emissions yet.’”
“It finds that carbon dioxide emissions decreased in 22 countries accounting for 20% of global emissions, but rose in 101 countries that together represent 50% of pollution. China is predicted to see a 3.5% jump in emissions in 2017. As the biggest producer of carbon dioxide in the world, China plays a crucial role in shifting the global trend.”
“Italy’s economy is doing its best for years, but Italians are still pouring out of the country.
Gross domestic product is growing faster than at any point since 2010, employment is back to pre-crisis levels and the labor inactivity rate is close to an all-time low.”
“So why has the number of Italians living outside the country reached 5.4m — a figure that represents almost 10% of the population and which grew 3.5% last year?”
“The data highlight a story of a dysfunctional labor market, a society in which young, ambitious people often feel unfairly treated, and an economic recovery from which, in large part, they have yet to benefit.”
“Overall, the official figures show that 1.5m people have moved abroad since the crisis broke in 2008.“
“Nor is that the end of it. Foreigners are also leaving: 45,000 non-Italians left the country in 2015, more than three times as many as the figure for 2007.”
“The consequences of the phenomenon could be grave, despite Italy’s recent economic good news.”
“Since the country has long contended with low fertility rates, emigration is a particular threat to Italy’s workforce. Italy is second only to Japan in terms of the proportion of the population accounted for by people aged 65 and over, and in the 25 years to 2015 the working age population as a share of the total population dropped 5 percentage points.”
“In the past five years alone, the number of those aged between 18 and 44 contracted 6%, while the overall population rose 2%.”
“Both the Italian and the British data also show that young people account for the bulk of Italian emigration. The UK National Insurance statistics show that since 2002 more than 90% of Italians registering to work in Britain were under 44 years old. Some 77% were aged between 18 and 34 years old.”
“Italian emigrants are also more highly educated than the overall Italian population and university trained people are leaving in increasing numbers. Graduates make up about 30% of emigrants from Italy, up from 12% in 2002, according to official statistics.”
“The causes of this brain drain are deep-set, writes Guido Tintori, Research Associate at Fieri — International and European Forum on Migration Research, in a forthcoming academic paper on the issue.”
“He argues that skilled young Italian graduates ‘not only are underemployed and underpaid, but constantly frustrated by a society and a labor market that hinge on relationships and seniority over competence’.”
“Furthermore, the economic recovery has yet to touch them. The proportion of young people who are unemployed in Italy is a daunting 35% and has barely changed over the past year.”
“The share of under-34s who are neither in employment nor in education is the highest in the EU and more than half of under-25s in employment are working under temporary contracts. Nearly one in four is working part time because of the unavailability of a full-time job — a higher proportion than in any other high-income economy.”
“Riskier ‘covenant-lite’ loans now account for about 70% of new leveraged loans, up from 30% before the Lehman Brothers crisis. Protections that were standard back then have now vanished altogether.”
“’As long as investors keep buying these loans, there’s nothing really to put the brakes on,’ says Derek Gluckman, a vice-president at Moody’s. ‘Things just keep getting worse.’”
“’Loan terms never got this bad in ‘07,’ says Mr. Cohen (founder and CEO of Covenant Review). ‘The contracts … are the worst they’ve ever been. Period, full stop.’”
“A string of natural disasters from Hurricane Harvey in the US to earthquakes in Mexico have left the insurance industry facing one of its most expensive years on record.”
“The catastrophes have wiped more than $35bn from insurers’ profits, according to a Financial Times analysis of third-quarter results that have laid bare the scale of the damage. Berkshire Hathaway, run by billionaire Warren Buffett, and AIG were among the hardest hit in the US, while in Europe Swiss Re and Munich Re face large claims. Lloyd’s, the London-based insurance market, expects to pay out a total of $4.5bn.”
“Insurers say the final cost is likely to be larger and push up premiums. Commercial insurance and reinsurance have suffered from years of falling rates, as excess capacity and a lack of big claims combined to drive prices down.”
“’The losses have been extensive across reinsurance, commercial insurance and personal lines,’ said Kurt Karl, chief economist at Swiss Re. ‘There were $20bn of natural catastrophe losses across the industry in the first half. Hurricanes Harvey, Irma and Maria, combined with the earthquakes in Mexico, will create about $95bn of insured losses.’”
“Added together, the industry is facing more than $110bn of insured losses from natural catastrophes. Only 2005 — when Hurricane Katrina hit the US — and 2011 — when there were earthquakes in Japan and New Zealand — were more costly.”
“The $35bn figure, taken from company reports, does not include losses from unlisted companies, or from insurance-linked securities in which investors’ capital is used to directly back insurance risk.”
“This year, the ozone hole is the smallest it has been since 1985. NASA and NOAA scientists have been studying the ozone layer and monitoring its hole over Antarctica for years. This year, the ozone hole is the smallest it has been since 1985.”
“Here’s a rare piece of good news about the environment: The giant hole in the Earth’s protective ozone layer is shrinking and has shriveled to its smallest peak since 1988, NASA scientists said.”
“The largest the hole became this year was about 7.6 million square miles wide, about two and a half times the size of the United States, in September. But it was still 1.3 million square miles smaller than last year, scientists said, and has shrunk more since September.”
“Warmer-than-usual weather conditions in the stratosphere are to thank for the shrinkage since 2016, as the warmer air helped fend off chemicals like chlorine and bromine that eat away at the ozone layer, scientists said. But the hole’s overall reduction can be traced to global efforts since the mid-1980s to ban the emission of ozone-depleting chemicals.”
“The ozone hole was largest in 2000, when it was 11.5 million square miles wide, according to NASA.”
“As Indian politicians squabble over who is to blame for the thick smog that has descended over the north of the country this week, citizens have been looking enviously over the border at China, where particulate levels have been falling for years.”
“Many in India believe Beijing has been better able to combat its air pollution problem because it does not get bogged down in political infighting. They blame India’s problems on the country’s raucous but inefficient democracy.”
“This week, pollution in Delhi literally went off the charts, hitting the top reading of 999 on the US embassy’s air quality index. Anything over a reading of 100 is considered unhealthy.”
“By Wednesday afternoon, Delhi saw airborne levels of tiny damaging particles known as PM2.5 hit 833 parts per million, while in Beijing the level was 76. Anything over 50 is considered unhealthy, and anything over 300 hazardous.“
“The difference between the two cities reflects a broader divergence over recent years, during which Delhi has taken over from Beijing as the world’s most polluted megacity.”
“’Indian politicians have this very weird idea that we will do something about pollution when we are developed, but we won’t develop unless they invest in public health,’ says TK Joshi, director of the Centre for Occupational and Environmental Health in Delhi.”
“He adds: ‘Beijing has tackled this problem much better, but then it is much easier to control things in an authoritarian regime than in a democracy, especially one like India, where 50% of the people are so badly educated about the problem.’”
“The Saudi government is aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite, according to people familiar with the matter.”
“The country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of ‘persons of interest’ and said the move is ‘in response to the Attorney General’s request pending the legal cases against them.’”
“Much of that money is abroad, which will complicate efforts to reclaim it, people familiar with the matter said. But even a portion of that amount could help Saudi Arabia’s finances. A prolonged period of low oil prices forced the government to borrow money on the international bond market and to draw extensively from the country’s foreign reserves, which dropped from $730 billion at their peak in 2014 to $487.6 billion in August, the latest available government data.”
“Bitcoin’s incredible price run to break over $7,000 this year has sent its overall electricity consumption soaring, as people worldwide bring more energy-hungry computers online to mine the digital currency.”
“An index from cryptocurrency analyst Alex de Vries, aka Digiconomist, estimates that with prices the way they are now, it would be profitable for Bitcoin miners to burn through over 24 terawatt-hours of electricity annually as they compete to solve increasingly difficult cryptographic puzzles to ‘mine’ more Bitcoins. That’s about as much as Nigeria, a country of 186 million people, uses in a year.”
“This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). Since the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week. On a larger scale, De Vries’ index shows that bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes.”
“It’s worth asking ourselves hard questions about Bitcoin’s environmental footprint.”
“Since 2015, Bitcoin’s electricity consumption has been very high compared to conventional digital payment methods. This is because the dollar price of Bitcoin is directly proportional to the amount of electricity that can profitably be used to mine it. As the price rises, miners add more computing power to chase new Bitcoins and transaction fees.”
“…at a minimum, worldwide Bitcoin mining could power the daily needs of 821,940 average American homes.”
“Put another way, global Bitcoin mining represents a minimum of 77KWh of energy consumed per Bitcoin transaction.”
“Digiconomist’s less optimistic estimate for per-transaction energy costs now sits at around 215 KWh of electricity. That’s more than enough to fill two Tesla batteries, run an efficient fridge/freezer for a full year, or boil 1872 litres of water in a kettle.”
“…it’s quite clear that even at the minimum level of 77 KWh per transaction, we have a problem. At 215 KWh, we have an even bigger problem.”
“That problem is carbon emissions. De Vries has come up with some estimates by diving into data made available on a coal-powered Bitcoin mine in Mongolia. He concluded that this single mine is responsible for 8,000 to 13,000 kg CO2 emissions per Bitcoin it mines, and 24,000 – 40,000 kg of CO2 per hour.”
“As Twitter user Matthias Bartosik noted in some similar estimates, the average European car emits 0.1181 kg of CO2 per kilometer driven. So for every hour the Mongolian Bitcoin mine operates, it’s responsible for (at least) the CO2 equivalent of over 203,000 car kilometers travelled.”
“As goes the Bitcoin price, so goes its electricity consumption, and therefore its overall carbon emissions. I asked de Vries whether it was possible for Bitcoin to scale its way out of this problem.”
“‘Blockchain is inefficient tech by design, as we create trust by building a system based on distrust. If you only trust yourself and a set of rules (the software), then you have to validate everything that happens against these rules yourself. That is the life of a blockchain node,’ he said via direct message.”
“This gets to the heart of Bitcoin’s core innovation, and also its core compromise. In order to achieve a functional, trustworthy decentralized payment system, Bitcoin imposes some very costly inefficiencies on participants, for example voracious electricity consumption and low transaction capacity. Proposed improvements, like SegWit2x, do promise to increase the number of transactions Bitcoin can handle by at least double, and decrease network congestion. But since Bitcoin is thousands of times less efficient per transaction than a credit card network, it will need to get thousands of times better.”
“In the context of climate change, raging wildfires, and record-breaking hurricanes, it’s worth asking ourselves hard questions about Bitcoin’s environmental footprint, and what we want to use it for. Do most transactions actually need to bypass trusted third parties like banks and credit card companies, which can operate much more efficiently than Bitcoin’s decentralized network? Imperfect as these financial institutions are, for most of us, the answer is very likely no.”
“Rarely has a bull market been so unloved. Since March 2009, the Standard & Poor’s 500 stock index has nearly quadrupled in value. This year, not only is the index up 15 percent, but it also seems to have stopped going down at all: October was the 12th straight month that the S.&P. has logged a positive return, the first time that has happened since 1935.”
“Yet in most conversations about the ever-rising stock market, brokers and investment advisers say, are dominated by the question of when it will all come to an end.”
“These days, each successive stock market record seems to spur more hand-wringing than cheerleading. There is anxiety about overhyped shares, about the possibility of central banks withdrawing their support for global economies, even about markets simply being worryingly quiescent, as evidenced by the historically low readings of the volatility index known as the VIX.”
“In fact, many analysts say that this so-called wall of worry is a positive sign. Investors may be piling into stocks and bonds, the thinking goes, but they are doing it with a measure of hesitation, which prevents some of the excesses that preceded previous market corrections.”
“A midnight blitz of arrests ordered by the crown prince of Saudi Arabia over the weekend has ensnared dozens of its most influential figures, including 11 of his royal cousins, in what by Sunday appeared to be the most sweeping transformation in the kingdom’s governance for more than eight decades.”
“The arrests, ordered by Crown Prince Mohammed bin Salman without formal charges or any legal process, were presented as a crackdown on corruption. They caught both the kingdom’s richest investor, Prince Alwaleed bin Talal, and the most potent remaining rival to the crown prince’s power: Prince Mutaib bin Abdullah, a favored son of the late King Abdullah.”
“All members of the royal family were barred from leaving the country, American officials tracking the developments said on Sunday.”
“With the new detentions, Crown Prince Mohammed, King Salman’s favored son and key adviser, now appears to have established control over all three Saudi security services — the military, internal security services and national guard.”
“’It is the coup de grâce of the old system,’ said Chas W. Freeman, a former United States ambassador. ‘Gone. All power has now been concentrated in the hands of Mohammed bin Salman.’”
“Crown Prince Mohammed’s haste, however, may now come at a price, because the lack of transparency or due process surrounding the anticorruption crackdown is sure to unnerve the same private investors he hopes to attract — including through a planned stock offering of the huge state oil company, Aramco.”
“Saudi Arabian businessmen and royals anxious about the crown prince’s plans were quietly moving assets out of the country even before the arrests.”
“The Saudi Arabian news media, however, celebrated the arrests as a long-awaited cleanup, appealing to populist resentment of self-enrichment enjoyed by the sprawling royal family and its closest allies.”
“Almost everyone in the capital, Riyadh, and other big cities like Jidda has heard stories about princes absconding with vast sums that had been allocated for a public project.”
“The arrests are ‘a frontal assault on some members of the royal family and the impunity with which they have operated in the past,’ said Bernard Haykel, a professor at Princeton University who studies Saudi Arabia.”
“’It was something that had to be done,’ he said, even though the absence of a judicial process ‘sends a chill down the spine of foreign investors.’”
South America
WSJ – Daily Shot: Venezuela 10yr Government Bond Yield 11/3
Markets reacting to news that Venezuela wants to restructure its debt (finally…)
“President Nicolás Maduro’s decision to restructure Venezuela’s $89bn of debt is likely to unleash a debt crisis of a size not suffered in Latin America since Argentina’s massive 2001 default, and a bond restructuring that lawyers say would be the world’s most complex yet.”
“In a televised address on Thursday, Mr Maduro said state oil company PDVSA would make one more $1.1bn debt payment on a bond due in 2017 and then restructure its remaining obligations with banks and investors.”
“Economists have long-predicted Venezuela would eventually make such a move as funds drained from the socialist government’s vaults to pay bondholders, forcing an 80% cutback in imports over the past five years. Indeed, Venezuelan bonds already trade at default prices, and foreign reserves of $10bn are near 20-year lows.”
“Yet despite a recession worse than the Great Depression, hyperinflation and falling oil production, debt restructuring was a move Mr Maduro long-rejected. In large part, that was because it could lead to default, and creditors would then seize Venezuelan oil shipments and foreign assets, including PDVSA’S US refinery, Citgo. “
“As a result, the $7bn that Venezuela might save in 2018 from not servicing its debts would be offset by lost oil exports, and there would be no net gain.”
“That calculus still holds. Indeed, a desire to remain on good terms with creditors may explain Mr Maduro’s apparently nonsensical decision to restructure debts after making a particularly large bond payment this week — more than $1bn that instead could be used to import desperately-needed medicine and food. (A more cynical rumor is that the money went to government insiders who own the paid 2017 bond.)”
“Venezuelan imports are forecast to be just $13bn this year. Against that, the country has $63bn of traded debt, owes another $5bn to international lenders such as InterAmerican Development Bank, $17bn to China and another $3bn to Russia.
One reason why Mr Maduro may feel he can get away with it is that he feels empowered politically at home.”
“Although Mr Maduro may feel in control domestically, abroad is another matter. Any debt restructuring is complicated by US sanctions imposed in August, which block US-regulated institutions and investors from buying new Venezuelan bonds, as would be issued in a typical debt restructuring.”
“Adding to the difficulties, vice-president Tareck El-Aissami, who will lead the process, has been sanctioned by the US for alleged drug-trafficking and money laundering.”
“Furthermore, even if Venezuela seeks to get around the US sanctions by issuing restructured bonds in other currencies, authority for that would come from the Constituent Assembly — which Canada, the EU, the US, and 11 of Latin America’s biggest countries, including Brazil and Mexico, do not recognize.”
“Renowned economists such as Ricardo Hausmann have long said Venezuela should restructure its debt, as they consider paying bondholders while Venezuelans go hungry to be immoral. But they recommend it as part of a broader economic restructuring backed by the International Monetary Fund.”
“Indeed, the IMF has already crunched the numbers on the amount of help — upwards of $30bn annually — that could accompany such an approach. But international institutions will not extend such help to a government that has become a by-word in corruption and economic mismanagement — and is now near-bankrupt despite the world’s largest energy reserves.”
“Government insiders stole $300bn of the $1tn windfall that Venezuela received during the oil price boom of the 2000s, according to disaffected former ministers. Meanwhile, a socialist government that claims to help the poor presides over a country where 82% of households live in poverty — twice as high as when it came to power in 1999.”
“A new online interactive tool helps Americans visualize just how economically divided the nation has become — and it’s not a pretty picture.”
“The country’s deep income and wealth inequalities, which match levels not seen since before the Great Depression, have been widely reported.”
“But the Distressed Communities Index, published by a Washington-based nonprofit called Economic Innovation Group (EIG), adds some startling new detail and localized specificity to the widening and persistent gap between the country’s rich and poor, the worst of any ‘advanced’ economy.”
“The US economy has, on paper, been recovering from the Great Recession since the summer of 2009. Recently, growth has hovered around 2% a year, and the unemployment rate has fallen to just 4.4%.”
“Still, many have yet to feel the gains of this rebound, which is among the longest in modern history but also the weakest.”
“‘It is fair to wonder whether a recovery that excludes tens of millions of Americans and thousands of communities deserves to be called a recovery at all,’ EIG says in its Distressed Communities Index report.”
“Here are some depressing findings from the EIG report, which finds that more than 52 million Americans are living in distressed ZIP codes:”
“Job growth in distressed ZIP codes was negative on average from 2011 to 2015, trailing the average prosperous ZIP code by more than 30 percentage points.”
“Distressed ZIP codes were the only group in which the number of both jobs and business establishments declined during the national recovery.”
“Most distressed ZIP codes contain fewer jobs and places of business today than they did in 2000.”
“Distressed ZIP codes contain 35% of the country’s ‘brownfield’ sites marked by ‘the presence or potential presence of a hazardous substance, pollutant, or contaminant.'”
“58% of adults in distressed ZIP codes have no education beyond high school.”
“Meanwhile, on the right side of the tracks:”
“88% of prosperous ZIP codes experienced job growth from 2011 to 2015, and 85% saw rising numbers of business establishments.”
“Prosperous ZIP codes have dominated the recovery, generating 52% of the country’s new jobs and 57% of its net new business establishments from 2011 to 2015.”
“Adults with any level of postsecondary education are more likely to live in a prosperous ZIP code than any other type of community.”
“45% of those with advanced degrees live in prosperous ZIP codes, more than in the bottom three quintiles of ZIP codes combined.”
“For the poorest Americans, ‘stagnation and decline were the rule, not the exception.'”
“The big three U.S. light-lager brands—Bud Light, Coors Light and Miller Lite—are all losing volume as consumers shift to craft and Mexican import beers as well as to wine and spirits.”
“Retail store sales of Bud Light, Coors Light and Miller Lite are down 5.7%, 3.6% and 1.6%, respectively, this year through Oct. 21, according to Nielsen data compiled by Beer Marketer’s Insights. From 2010 through 2016, overall volumes in the light-lager category fell 14% to 65 million barrels.”
“The silver lining, at least for Molson Coors, is that both Miller Lite and Coors Light are gaining share on market leader Bud Light.”
“Meanwhile, Denver-based Molson Coors has a team looking at the potential impact legalized cannabis could have on its beer sales, as well as possible opportunities for investment, Mr. Hunter (Mark Hunter, CEO of Molson Coors) said. Constellation Brands said earlier this week that it is taking a 9.9% stake in Canadian cannabis company Canopy Growth Corp. and plans to develop nonalcoholic, marijuana-infused beverages.”
WSJ – Daily Shot: J.D. Power – American Awareness of the Equifax Data Breach 11/3
While I already covered this from a Jacky Wong article in the WSJ, here are some more details.
Li Ka-shing’s “CK Asset stands to make a gain of HK$14.5bn ($1.88bn) on the sale of The Center, according to a stock exchange filing.”
And this was only on a portion of the building…
“CK Asset owns 48 floors of office space in the 73-story building, as well as shopping space, car parks, basements and the entrance hall. The sale of those properties equates to HK$33,000 ($4,269) per square foot.”
For the buyer, CHMT Peaceful Development Asia Property Limited (majority controlled by China Energy Reserve & Chemicals Group), “the investment yield on the building was about 2.5%, according to Mr Cheng” (Raymond Cheng, an analyst at CIMB Securities).
“China’s state planning agency issued draft guidelines on outbound investment on Friday that require companies to seek approval for some foreign deals even if they are conducted through an offshore entity, an effort to assert greater control over even some foreign activities that don’t involve cross-border fund flows.”
“In an explanatory notice accompanying the new rules issued for public comment, the National Development and Reform Commission said that ‘some foreign investment activities have drifted outside the boundaries of current supervision, and definite hidden risks exist.’”
“Deals that don’t involve investment by mainland Chinese entities or cross-border fund movements are generally not subject to regulation by Chinese authorities. But the latest rules from NDRC require that a Chinese parent company get the agency’s approval for deals worth more than $300m in ‘sensitive’ sectors, even if the deal is conducted purely through offshore subsidiaries.”
The corporate drug industry has had many friends in Washington D.C. until now… Amazon is taking over the package room of your apartment building. China’s property boom unlikely to end anytime soon.
FT – Wanda golf courses closed in China austerity push 10/15. The two courses are in the $3bn Changbaishan resort in Fusong. The why – because new courses were banned in 2004; however, many developers were able to work their way around the rules…until now.
WSJ – Nordstrom Family Suspends Effort to Take Retailer Private 10/16. That’s how strong the narrative is right now against the retail industry, even the Nordstrom family is having difficulty finding investors to fund the debt of the acquisition (despite the world being awash in cash and the tight spreads on high yield products).
WSJ – Hedge Fund Maverick Capital Debuts 0% Performance Fees 10/19. After losing 10% in 2016 and being down 2% so far this year (mind you that the market is up over the same time period), Maverick is offering some investors a 0% performance fee and 1% management fee on new money for its “recovery shares”.
“The S&P 500 Index has recorded more than 150 new all-time highs since eclipsing its previous peak in late March of 2013. In 2017 alone, there have been 30 new record highs through the end of last week. To put this into perspective, there were only 13 new highs for the entire decade of the 2000s.”
“The rejection of ‘western’ political systems has been made easier recently by what the Chinese see as the ludicrous buffoonery of Donald Trump and, to a lesser extent, the self-inflicted damage of Brexit and EU infighting.”
“As a top foreign policy adviser recently told one of my colleagues: ‘Trump never talks about democracy or American leadership or liberty — we should not be so stupid to worship things that in the western world are now in doubt.’”
Be cautious in your use of ‘private’ messaging services such as WeChat. Big brother is watching.
“The west of the United States has endured some 50,000 wildfires this year, and over 8.5m acres (3.4m hectares) have burned. Northern California has suffered in particular recently as flames have swept through parts of the landscape, killing at least 23 people and devastating wineries. In Canada, as of August 30th (the latest available figure), 7.4m acres had burned.”
“Ernesto Alvarado of the University of Washington, who specializes in large fires, says that historically portions of the forests of America’s north-west would burn every five to 20 years. In many areas, however, these fires have been suppressed for over a century by the needs of loggers and residents. Over time, undergrowth, saplings and dead trees accumulate, creating conditions in which a fire can spread very rapidly. Furthermore, a recent reduction in logging has led to an even closer packing together of trees. ‘To maintain good forest health in many of these forests, you need fire,’ says Dr. Alvarado. While some burns are prescribed, they are a fraction of what is required. In Washington, for instance, between 2001 and 2014 the Forest Service burned just 2% of the state’s 9.3m acres of forest.”
“In terms of scale, 2017 is not actually an outlier. In the past decade, wildfires have burned an average of 6.6m acres each year in the United States and 6.2m acres in Canada. The particular problem this year is the dispersed nature of the blazes.”
“The current state of the north-western forests, combined with the effects of climate change, increase the likelihood that wildfires will be worse in future… Little can be done to reduce the danger without a dramatic increase in prescribed burns, and these are unlikely as people continue to move into forested areas. One further consequence: the smoke and ash that drift across densely inhabited areas affect human health, too. A study by the universities of Harvard and Columbia of slash-and-burn fires in Indonesia in 2015 blamed the fires for 100,000 additional deaths and 500,000 injuries in Indonesia, Singapore and Malaysia. Where there’s smoke, there’s fire: this year’s haze presages years of potentially more ferocious burns.”
“Canada’s banking watchdog unveiled tougher mortgage-financing rules that take effect on Jan. 1 that real estate watchers and economists say could dramatically slow house buying and borrowing.”
“The most notable measure is a provision that would require all prospective buyers—even those with a down payment of over 20%—to undergo a so-called stress test before a bank can issue a loan. Previously, only buyers with a down payment of less than 20% had to undergo a stress test. Under the stress test, prospective buyers would have to qualify for a mortgage at a rate at whichever is greater: either 2 percentage points above the negotiated rate, or the Bank of Canada’s five-year benchmark rate. The central bank’s five-year rate stands at 4.89%. The regulator originally proposed the test just cover two percentages point above the negotiated mortgage.”
“Robert McLister, founder of the Canadian mortgage-rate comparison site RateSpy.com, said the new rules target the fastest-growing part of the mortgage market—uninsured mortgages—and could affect one out of every six prospective home buyers. In Canada, mortgage insurance is mandatory unless the buyer has a down payment of 20% and over.”
“’This is easily the most groundshaking mortgage rule of all time, and that’s not an understatement,’ Mr. McLister said in an interview.”
“Economists said the tougher mortgage regulations will further hit a softening housing market. Recent data from the Canadian Real Estate Association indicated unadjusted sales in September were 11% below year-ago levels, and price growth has slowed considerably, especially in the Toronto market after the introduction of a foreign-buyer’s tax in southern Ontario.”
“TD Bank’s economics team said it anticipates the measures will depress housing demand by 5% to 10% once fully implemented.”
“Qatar’s sovereign wealth fund has brought more than $20bn back onshore to cushion the impact of a regional embargo imposed on the Gulf state.”
“Ali Shareef al-Emadi, Qatar’s finance minister, told the Financial Times that Qatar Investment Authority deposits were being used to create a ‘buffer’ and provide liquidity in the banking system after the gas-rich state suffered capital outflows of more than $30bn.”
“That followed the decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut diplomatic and transport links with the nation in June. The move has triggered the Gulf’s worst crisis in years.”
“Moody’s, the rating agency, said last month that Qatar had injected $38.5bn into its economy since the crisis erupted.”
WSJ – Daily Shot: BMI Research – Saudi Arabia GDP Change Year-over-Year 10/17
Let it be noted the power of this reporting resulted in Rep. Tom Marino withdrawing from consideration to lead the Office of National Drug Control Policy and it appears that the public is more aware of this problem…
“In April 2016, at the height of the deadliest drug epidemic in U.S. history, Congress effectively stripped the Drug Enforcement Administration of its most potent weapon against large drug companies suspected of spilling prescription narcotics onto the nation’s streets.”
“By then, the opioid war had claimed 200,000 lives, more than three times the number of U.S. military deaths in the Vietnam War. Overdose deaths continue to rise. There is no end in sight.”
“A handful of members of Congress, allied with the nation’s major drug distributors, prevailed upon the DEA and the Justice Department to agree to a more industry-friendly law, undermining efforts to stanch the flow of pain pills, according to an investigation by The Washington Post and ’60 Minutes.’ The DEA had opposed the effort for years.”
“The law was the crowning achievement of a multifaceted campaign by the drug industry to weaken aggressive DEA enforcement efforts against drug distribution companies that were supplying corrupt doctors and pharmacists who peddled narcotics to the black market. The industry worked behind the scenes with lobbyists and key members of Congress, pouring more than a million dollars into their election campaigns.”
“The chief advocate of the law that hobbled the DEA was Rep. Tom Marino, a Pennsylvania Republican who is now President Trump’s nominee to become the nation’s next drug czar. Marino spent years trying to move the law through Congress. It passed after Sen. Orrin G. Hatch (R-Utah) negotiated a final version with the DEA.”
“For years, some drug distributors were fined for repeatedly ignoring warnings from the DEA to shut down suspicious sales of hundreds of millions of pills, while they racked up billions of dollars in sales.”
“The new law makes it virtually impossible for the DEA to freeze suspicious narcotic shipments from the companies, according to internal agency and Justice Department documents and an independent assessment by the DEA’s chief administrative law judge in a soon-to-be-published law review article. That powerful tool had allowed the agency to immediately prevent drugs from reaching the street.”
“Political action committees representing the industry contributed at least $1.5 million to the 23 lawmakers who sponsored or co-sponsored four versions of the bill, including nearly $100,000 to Marino and $177,000 to Hatch. Overall, the drug industry spent $106 million lobbying Congress on the bill and other legislation between 2014 and 2016, according to lobbying reports.”
“Amazon.com Inc. is taking over the package rooms of some of the country’s largest apartment landlords, in a move that could help consolidate its control over how goods make it from the warehouse floor to the front door.”
“Amazon has signed contracts with apartment owners and managers representing more than 850,000 units across the U.S. to begin installing Amazon locker systems in their buildings, according to the landlords. Amazon has commitments to install the lockers in thousands of properties, many before the peak holiday shopping season, according to a person familiar with the matter.”
“Several of the nation’s largest operators, AvalonBay Communities Inc., Equity Residential , Greystar and Bozzuto Group, have signed up, company executives said.
For several years, landlords have struggled with how to manage the mountains of packages they receive each day. Staff at larger buildings end up devoting several hours a day sorting mail, while boxes are piled in every spare cranny. Most say it is the single largest problem they face.”
“The locker program, dubbed Hub by Amazon, will accept packages from all carriers and not just for purchases made on Amazon. They will be open only to residents, not the wider community. Residents will receive a notification when they have a package and a code allowing them to open one of the slots.”
“Apartment owners pay about $10,000 to $20,000 to purchase the lockers initially and don’t pay a monthly fee. Most landlords said they don’t plan to charge residents initially but to offer it as an amenity. They could also make back some of that cost in savings on staff labor.”
“Karen Hollinger, vice president of corporate initiatives at AvalonBay, which has an ownership interest in about 80,000 apartments, said the average apartment community in the company’s portfolio receives some 1,000 packages a month, up from 650 a year ago. She said AvalonBay has seen a 20% to 30% annual increase in the volume of packages it receives for the past four years.”
“Amazon has been searching for ways to make deliveries cheaper. It has recruited a fleet of citizen drivers via its Flex program, which allows people to drop off packages from their cars. It has developed its own air and cargo networks, too.”
“The most expensive leg of any delivery is known as the last mile: getting a package to the doorstep. Amazon already has added lockers throughout the U.S., including an announcement that it is rolling them out at its newly acquired Whole Foods stores.”
“As China’s Communist party elite gather in Beijing this week to select its top leaders, President Xi Jinping has benefited from the strong recent performance of the economy, which is poised for its first year-on-year acceleration in growth since 2010. On Thursday China reported that gross domestic product grew 6.8% in the third quarter, ahead of Beijing’s full-year target.”
“That rebound owes much to the confidence of homebuyers. Housing prices and construction starts rebounded from a slump in 2014-15, boosting overall business investment and driving demand for output from China’s huge manufacturing sector.”
“The property sector has been given a helping hand. Urged on by Beijing, 38% of all bank loans issued in the 12 months to August were home mortgages, according to official data, and local governments purchased 18% of all residential floor space sold last year as part of a drive to provide affordable housing, according to estimates by E-House China Research Institute.”
“The result has been another heady boom in construction. Rome was not built in a day, but based on residential floor area completed last year, China built the equivalent of a new Rome about every six weeks.”
“With the surge in housing investment has come a round of questions about a potential bubble in the market and the implications for the long-term health of China’s economy.”
“Some economists and investors warn that short-term growth from the latest housing boom has come at a cost: inflating a property bubble whose eventual bursting will inflict great pain. A senior Chinese legislator recently warned in unusually blunt terms that the economy has been ‘kidnapped’ by property.”
“But others insist that fears of a bubble are overstated. On this view, economic fundamentals justify substantial investment in housing, especially in inland cities where development still lags far behind wealthy coastal areas. These more sanguine observers also note that outrageous price levels for Chinese apartments are mainly restricted to the megacities like Beijing and Shanghai.”
“The stakes in this debate are high. Chinese residential property is arguably the world’s most important asset market. The sector drives global commodity prices, making the difference between growth and stagnation for resource exporters like Australia and Brazil.”
“’It’s never wrong to express worry over China’s housing market,’ says Larry Hu, China economist for Macquarie Securities in Hong Kong. ‘But it’s interesting to consider why the housing sector has become the Bermuda Triangle for economic forecasters. So many smart people have made wrong predictions about it.’”
“The leading claim of the housing bears is that after a 15-year construction boom, China has built most of the housing it needs to meet fundamental demand. On this view, investors speculating on price gains, not families seeking shelter, now drive the market.”
“’People buy property not because they like the property, but because the price is rising,’ says Ning Zhu, professor at the Shanghai Advanced Institute of Finance and author of China’s Guaranteed Bubble. ‘It’s this panic that if they don’t buy now they will never be able to afford it.’”
“Central to this narrative is the notion of ‘ghost cities’ — huge blocks of empty apartments where expected demand never materialized.”
“In Mr. Xi’s speech at the opening of the congress on Wednesday, he repeated his mantra that ‘houses are for living in, not for speculation’.”
“Yet even in major cities, evidence suggests that there are a substantial number of empty flats held for investment purposes. A survey by FT Confidential Research, an independent research service owned by the Financial Times, found that 32% of families own at least one home that is vacant.”
“An estimated 50m homes, or 22% of the total urban housing stock, were vacant in 2013, according to the most recent data from the China Household Finance Survey led by Li Gan, economics professor at Texas A&M University.”
“Further underpinning the bearish outlook is the belief that fundamental demand for new housing is drying up.”
“The extraordinary transformation of China’s economy over the past 40 years was driven by the migration of farmers into cities. That urbanization process is now slowing, however, as relatively few young people remain in rural China.”
“The number of migrant workers living outside their home province rose by 12m in the five years through to June this year, compared with an increase of 26m in the five years ending June 2012, according to official data.”
Says Mr. Xie (Andy Xie, an independent economist and former Morgan Stanley chief Asia-Pacific economist): ‘If you go into villages, there are no young and middle-aged people any more. Where is this next wave of urbanization supposed to come from?’”
“To longtime observers of China’s economy, the current hand-wringing over the property market feels familiar.”
“After two years of falling prices and sluggish sales, analysts were warning in early 2016 that some smaller cities had enough unsold inventory to last for years.”
“Yet by August this year, inventories in the 80 cities tracked by E-House China Research Institute stood at their lowest level in almost five years.”
“Perceptions of unreasonably high housing prices appear to be disproportionately influenced by trends in first-tier cities — Beijing, Shanghai and Shenzhen. All three rank among the world’s most expensive in terms of price-to-income ratio.”
“Of the 70 cities in the official price survey, however, 12 have seen outright price falls in the three years through to August this year. In a further 29 cities, prices rose by less than 10% in the same period. Meanwhile, median per capital disposable income has grown 28% in roughly the same period.”
“Despite major concerns about Chinese corporate debt, household borrowing remains low by international standards at 37% of GDP, compared with 79% in the US and 59% in the euro area, according to the Bank for International Settlements. And Chinese homebuyers use less debt and more equity than counterparts in the US. The average down payment on Chinese home mortgages extended in 2016 was 40%.”
“Despite their differences, both sides in the debate mostly agree that an outright crash of the housing market is unlikely. Chinese savers have few options for investing their money. The stock market is volatile, returns on bank deposits are meagre and foreign exchange controls largely prevent households from buying foreign assets. Housing is the least bad option for many investors.”
“The combination of capital controls with years of monetary stimulus virtually ensures that ‘trapped cash’ will slosh through different asset classes, creating bubble-like conditions that the government either encourages or struggles to contain.”
“Still, given the pain that would result from an abrupt policy shift, analysts widely expect that Beijing will continue the current approach, tightening controls when the market gets too hot, while priming it with cash when it slows too sharply.”
“’The government is really losing its credibility,’ says Mr. Ning. ‘At this point everyone realizes they don’t really intend to crack down on the housing market.’”
