Tag: Shipping

January 20, 2017January 19, 2017

January 13 – January 19, 2017

China’s maritime footprint. Judicial independence in China – don’t count on it. Music streaming to the rescue.

Headlines

NYT – Samsung Heir Faces Arrest on Charges of Bribing South Korea’s President 1/15. It appears that no one is ‘safe’ if the arguably the most powerful person in the country can be taken down – it’s like watching House of Cards.

NYT – Earth Sets a Temperature Record for the Third Straight Year 1/18. “The heat extremes were especially pervasive in the Arctic, with temperatures in the fall running 20 to 30 degrees Fahrenheit above normal…”

FT – China’s 2016 capital outflows estimated at over $700bn 1/18. A recent report from Standard Chartered puts the 2016 total at $728bn, slightly less than the record $744bn in 2015.

Briefs

Sue-Lin Wong and Lusha Zhang of Reuters highlighted the continued flow of credit by Chinese banks and the concerning increase in debt levels.
- “China’s banks extended a record 12.56 trillion yuan ($1.82 trillion) of loans in 2016 as the government encouraged more credit-fueled stimulus to meet its economic growth target, despite worries about the risks of an explosive jump in debt.”
- “In December alone, Chinese banks extended 1.04 trillion yuan in net new yuan loans, far more than economists had expected, central bank data showed on Thursday.”
- “Analysts polled by Reuters had expected new lending would fall to 700 billion yuan from November’s 794.6 billion yuan.”
- “New bank loans last year surpassed the levels of China’s massive credit-led stimulus during the global financial crisis in 2009, according to Reuters calculations based on central bank data. The 2016 total was some 8% above the previous all-time high of 11.72 trillion yuan set just the year before.”
Dexter Roberts of Bloomberg Businessweek brought attention to the crisis facing China’s aging rural poor.
- “Unlike people in much of the rest of the world, China’s citizens spend less on their health as they grow older, not more, says Albert Park, an economist at the Hong Kong University of Science and Technology.”
- Why, simply because they seek to avoid healthcare costs due to the cost relative to their incomes.“The average cost of a hospital visit is 50% of the annual income of a city dweller; for rural residents it’s 1.3 times annual income, according to Gerard La Forgia, the lead author of Healthy China: Deepening Health Reform in China, a joint report by the World Bank, the World Heath Organization, China’s finance ministry, and other government agencies.”
Onur Ant and Benjamin Harvey of Bloomberg Businessweek covered the purge that is paralyzing Turkey.
- Following the failed coup in Turkey,“at least 100 media outlets have been closed and more than 36,000 suspected Gulenists detained.”
- The markets are not amused.“The lira has tumbled more than 18% since the coup attempt, the largest depreciation among major currencies worldwide, data compiled by Bloomberg show. The Borsa Istanbul 100 index fell as much as 28% in dollar terms by early December.”
- Further“on Dec. 12 the Turkish government released third-quarter numbers for gross domestic product, which contracted for the first time in seven years, by 1.8%.”
- Bottom line, now is a terrible time to have any affiliation with Gulenists. If you do have any, be prepared to have assets seized.“If a seizure is endorsed by the courts, the Savings Deposit Insurance Fund, a government-backed fund that manages companies the government takes over, will prepare the underlying assets for sale. The fund estimates the collective value of all the companies seized to date at about $10 billion.”
- As Sevket Pamuk, an economist at Bogazici University in Istanbul puts it“what I find most striking is how easily ownership rights are being ignored. Why would local businesses invest in such an environment?”
Art Patnaude of The Wall Street Journal illustrated the growing amounts of ‘dry powder’ being accumulated by real estate funds as for-sale supply has been limited.
- “Investors are piling money into real-estate funds – but fund managers are finding it a challengeto spend it.”
- “Global fund managers had a record $237 billion available to invest in commercial property at the end of last year, according to data firm Preqin, up from $229 billion at the end of 2015 and $136 billion at the end of 2012.”
- “Global fund managers have raised $446 billion for commercial property in the last four years, on par with the total raised between 2015 and 2008 in the run-up to the global financial crisis, Preqin said.”
- However, there simply has not been enough property to buy. “One reason for the lack of property to buy: Landlords aren’t willing to sell. Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later, analysts said.”
- Another are the“potential returns down the road. Strong levels of demand now suggest that if they wait, the value of their property could rise even more.”
- Further, don’t forget that if they do sell, then there are the taxes to pay and what to do with the proceeds?
Tom Hancock of the Financial Times highlighted a recent acknowledgement by a Chinese provincial governor that they had been falsifying fiscal data.
- “The Chinese province of Liaoning fabricated fiscal data for four years, a senior official has admitted, the latest blow to the already shaky reputation of China’s economic statistics.”
- “Fiscal revenues in the province were inflated by at least 20% from 2011 to 2014, said provincial governor Chen Qiufa, according to Communist party mouthpiece The People’s Daily.”
- “Economists and investors have long expressed doubts about Chinese economic data, particularly gross domestic product figures.Compared with other countries, China’s inflation-adjusted GDP growth rates are remarkably stable from quarter to quarter.”
- “Following Mr. Chen’s admission, respected Chinese financial publication Caijing said it had already exposed Liaoning’s fake data in a 2015 report… that report dated the falsification of the data back to 2009, earlier than the 2011 date given by Mr. Chen, who became provincial governor in 2015.”
Yuan Yang of the Financial Times covered that China’s housing boom appears to have ended now that prices have fallen in its top cities.
- “House prices have fallen across most of China’s hottest property markets for the first time in almost two years, marking an end to the enormous growth that saw prices rise as much as 40% last year.”
- “Prices of newly built residential properties dropped between 0.1 and 0.4% in December from the previous month in 12 out of 15 ‘hotspot’ cities, according to data released by the National Bureau of Statistics on Wednesday.”
- “Although many analysts expect property prices to fall at most 5% year on year in the current downturn, local governments are ready to move to avoid sharper crashes.”

Graphics

WSJ – Daily Shot: China’s credit-driven Growth Model 01/12

WSJ – Forecasters See Upside Risks to Their Economic Outlooks at Highest in More Than Two Years – Josh Zumbrun 1/12

WSJ – Daily Shot: FRED Retail Department Store Sales 01/15

FT – The problem with US healthcare in one chart – Federica Cocco 1/16

NYT – How 2016 Became Earth’s Hottest Year on Record – Jugal K. Patel 1/18

WSJ – Daily Shot: US Cost of Living Changes by Category 01/17

Featured

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

How China rules the waves. James Kynge, Chris Campbell, Amy Kazmin, and Farhan Bokhari. Financial Times. 12 Jan. 2017.

“Investments into a vast network of harbors across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation – five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels.”

“China understands maritime influence in the same way as Alfred Thayer Mahan, the 19th century American strategist. ‘Control of the sea,’ Mr. Mahan wrote, ‘by maritime commerce and naval supremacy, means predominant influence in the world; because, however, great the wealth of the land, nothing facilitates the necessary exchanges as does the sea.”

“‘There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,’ says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. ‘They are great for the soft projection of hard power.’“

“Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18% of all container shipping handed by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group.”

“In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010, according to FT research.”

“And those ports handled 67% of global container volumes, up from 42% in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists.”

“Rounding out a picture of China’s merchant fleet dominance is the country’s fishing fleet, which is by far the largest in the world, according to a recent paper by Michael McDevitt, a former rear admiral in the US navy and now a senior fellow a CNA Strategic Studies, a US think-tank.”

Bottom line, “analysts say that China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the South, a natural maritime barrier called the ‘first island chain’ within which China identifies its strategic sphere of influence.”

China’s top judge denounces judicial independence. Lucy Hornby. Financial Times. 16 Jan. 2017.

“China’s top judge has fired a warning shot at judicial reformers by formally acknowledging that China’s court system is not independent of the Communist Party and rejecting attempts to make it so.”

“‘Bare your swords towards false western ideals like judicial independence,’ Mr Zhou told a gathering of higher court officials. Only two months before, he had said that party committees should not interfere in the judicial process.”

“‘This statement is the most enormous ideological setback for decades of halting, uneven progress toward the creation of a professional, impartial judiciary,’ said Jerome Cohen, an 86-year old American lawyer who has spent most of his career promoting legal exchanges between the US and China. ‘It has already provoked some of China’s most admirable legal scholars to speak out in defiance, and I fear not only for their academic careers but also for their personal safety.'”

“Mr. Zhou, once seen as a reformist, is one of the highest-ranking members of the Communist Youth League faction, which Mr. Xi moved to neutralize last summer ahead of a leadership reshuffle later this year.”

Further, “a crackdown on lawyers has intensified since 2015, ‘disappearing’ hundreds of lawyers. The most recent is Jiang Tianyong, a particularly active civil rights lawyer, who has been missing since November.”

How streaming saved the music industry. Anna Nicolaou. Financial Times. 16 Jan. 2017.

“Thanks to growth in Spotify and Apple Music, music streaming has passed the milestone of 100m paying subscribers worldwide, a feat few imagined possible a few years ago. The US music industry is on track to record a second consecutive year of growth – something that has not happened since 1999, the year Napster launched. Some analysts and executives are beginning to confidently predict a new golden age.”

“It has been hard to imagine how the music industry could ever match its pre-Napster performance in the 1990s, when compact disc sales ruled. But now one monthly payment zaps 30m songs into your smartphone, tablet or desktop app, enabling artists like Drake to notch up streams by the billions. The Canadian rapper’s music was streamed more than 4.7bn times on Spotify alone last year. Every hour, his songs are streamed more than 500,000 times on the service.”

“Artists like Drake helped power Universal to profitability last year, earning the company $.1bn in streaming revenues in the first nine months – enough to offset the fall in sales of digital downloads and CDs.”

“In a research note called Music in the Air, Goldman Sachs projected that streaming will help revenues double to $104bn by 2030.”

“Each year more people are buying access to digital music; Americans streamed 431bn songs on demand in 2016.”

Doesn’t mean there aren’t detractors – i.e. Taylor Swift – but the format continues to gain momentum.

As to control of this pipeline, “the music groups hold the leverage. The source of their power is…through ownership of the rights to… master recordings, Vivendi-owned Universal, Warner Music and Sony together control 80% of all recorded music, with Universal having a one-third share.”

Further, “streaming is a high-margin business. The labels no longer face the costs of hauling truckloads of CDs to Walmart. Instead of ownership, they are selling access to a digital music fortress.”

“This compares well with television studios, which have lost some grip over content as video streaming services like Netflix make shows and offer a limited selection of programs. Music fans, though, expect streaming services to offer more comprehensive digital back-catalogues, forcing them to cut deals with the labels. As one label executive puts it: ‘TV and film studios have to coexist with Netflix now. We haven’t made that mistake.'”

However, the “one large thorn in the labels’ side is Google-owned YouTube, whose music draws more regular listeners than Spotify and Apple Music combined. Most music consumption on YouTube takes place on its free, ad-supported tier, a revenue stream vulnerable to the fortunes of the advertising market.”

At this point “streaming is the industry’s latest white knight but after decades of grappling with pirates, new technologies and evaporating sales, music executives know there will be twists to come.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – How smartphones are transforming healthcare 1/12

FT – Over half of China’s white-collar workers go without year-end bonus 1/12

FT – Toyota marks break from past with fund for tech investments 1/15

FT – US companies rush to reprice debt as higher rates loom 1/15

FT – China’s energy strategy: power and independence 1/15

FT – Fingerprint theft points to digital danger 1/16

FT – Saudi Arabia energy minister downplays US shale threat 1/17

FT – Mall staple Claire’s pulls IPO 1/17

FT – Capital Group chief says post-Trump change in markets ‘is real’ 1/17

NYT – With the Rain Comes Hope That 6-Year California Drought Is Ending 1/13

WSJ – Pulling Retirement Cash, but Not by Choice 1/16

WSJ – Mall Owners Find Relief From Unlikely Source: Online Retailers 1/17

WSJ – Mortgage-Rate Rise Hits Coastal Property Markets Hardest 1/18

September 16, 2016September 16, 2016

September 9 – September 15, 2016

It appears there is no “too big to fail” in South Korea. US inflation coming only from a few unproductive sectors. China’s credit hose targeted at housing.

Headlines

NYT – Oceans Are Absorbing Almost All of the Globe’s Excess Heat 9/12. “Since 1955, more than 90% of the excess heat retained by the Earth as a result of increased greenhouse gases has been absorbed by the oceans, leaving ocean scientists like Eric Leuliette at the National Oceanic and Atmospheric Administration feeling that 90% of the climate change story is being ignored.”
NYT – ‘Lula,’ Brazil’s Ex-President, Is Charged With Corruption 9/14. It was only a matter of time once Rousseff went down.

Briefs

Richard Barley of the Wall Street Journal wrote an interesting piece on how bond markets are just waking up to their own craziness.

“Yields on “junk”-rated euro-denominated debt hit a record low of 3.35% last week.”
“Traditional signals of risk aren’t as reliable as they might be in markets that have been so distorted by central-bank policies.”
“Take the developments in junk bonds. Ultralow yields and issuance of PIK (payment-in-kind) notes might usually suggest a market that is too bullish for its own good. Demand was so strong for Schaeffler’s (bearings maker) sale that it was able to sell €3.6 billion of debt in euros and dollars, versus an originally planned €2.5 billion; in the process it refinanced debt that carried rates ranging from 5.75% to 6.875% with notes paying from 2.75% to 4.75%. Moreover, it Ardagh’s (packaging group) case, some of the proceeds were used to pay a dividend to shareholders, another sign that borrowers have the upper hand.”

Ben Bland of the Financial Times highlighted how Hong Kong is losing its status as China’s ‘great mall.’

“Retail sales in Hong Kong fell by 10% in the first seven months of the year, compared with the same period in 2015, with purchases of jewelry and watches declining by 22%.”
“‘Our customer flow has dropped 60-70%’ since the peak of Chinese luxury spending in 2013, says manager (Kingdom Jewelry) Jacky Sze. ‘I don’t have much hope for the rest of this year, or next.'”

The Economist gave some perspective on Turkey’s Gulen purges.

First there was the failed coup d’etat on President Recep Tayyip Erdogan, now there is the purge of detractors and then sum…
For those not familiar, the coup is being blamed on the Gulen community, aka the cemaat, an Islamist sect that promotes an interchange/dialogue with science. The imam that founded the movement is Fethullah Gulen who now lives in Pennsylvania.
Over 100,000 Gulen sympathizers have been rounded up so far.
“According to one minister, the state has seized more than $4 billion-worth of Gulenist assets.”
And following on the maxim to ‘never waste a good crisis.’ President Erdogan is also targeting Kurdish minorities.
However, for a little bit of context, the “secular Turks (of which President Erdogan is one) have no love for the Gulenist, who targeted them in their own purges in the 2000s.”

Also in the Economist was a piece on how shipping profits are going overboard.
- “Of the biggest 12 shipping companies that have published results for the past quarter, 11 have announced huge losses. Several weaker outfits are teetering on the edge of bankruptcy.”
- “The industry could lose as much as $10 billion this year on revenues of $170 billion, reckons Drewry, a consultancy.”
- Essentially, two primary forces are at play 1) world trade is down/slowing and many multinationals are creating manufacturing operations near their customers, and 2) there is overcapacity in the industry from the recent commodity boom.
- As a result, “sending a container from Shanghai to Europe now costs half of what it did in 2014.”

Special Reports / Opinion Pieces

FT – The twisted logic of negative interest rates – John Kay 9/9
- “All told, the primary effect of monetary policy since 2008 has been to transfer wealth to those who already hold long-term assets – both real and financial – from those who now never will. This week’s debt sale reinforces this. Henkel and Sanofi are not borrowing at negative interest rates to invest in new productive facilities. Both companies have large cash piles, and the cash generated from their operations far exceeds their investment needs.”
FT – Mongolia: Living from loan to loan – Lucy Hornby 9/12
- “Mongolia was a darling among emerging markets during the commodities boom. Foreign miners flocked to exploit the mineral wealth under its grasslands and deserts, pushing up growth in gross domestic product by 17% in 2011. But after a debt-fueled spending spree at the peak of the cycle, the landlocked country is now one of the worst hit by the downturn.”
- “Mongolia’s efforts to extricate itself highlight the dangers of the ‘resource curse’ – the notion that countries blessed with tremendous natural resources find themselves at the mercy of wealth-destroying boom-bust cycles.”

Graphics

FT – Air pollution deaths cost global economy $5tn annually – Shawn Donnan 9/8

Bloomberg – San Francisco Housing Frenzy Shifts Across the Bay to Oakland – Alison Vekshin 8/22

WSJ – Paradise Lost: Why the Good Times Are Over for Global Bonds – Richard Barley 9/14

FT – Vantage to break famine for energy IPOs – Eric Platt and Ed Crooks 9/14

Featured

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

Seoul signals tougher stance with Hanjin demise. Song Jung-a. Financial Times. 11 Sep. 2016.

“Hanjin’s move to seek bankruptcy protection last month was the first time a big container shipping line had done so for 30 years, and it caught out many in the industry. As recently as a couple of months ago, shipping executives considered the failure of Hanjin Shipping – the world’s seventh-largest container line and South Korea’s largest – unthinkable.”

“Hanjin Shipping and its rival Hyundai Merchant Marine handled the bulk of South Korea’s exports, which account for more than half of the country’s $1.4tn economy.”

“Until now, Seoul has spent decades keeping lossmaking companies afloat with cheap state loans. In the case of its embattled shipbuilders, it has injected billions of dollars, despite next to no progress in turning them around.”

“How Seoul ultimately handles Hanjin Shipping’s collapse will set the tone for future restructuring of Korea Inc.”

“Many of the country’s smokestack industries – including steel, chemicals and construction – are similarly suffering from overcapacity.”

“The government has set up the principle that it will no longer support ailing companies with taxpayers’ money just because they are too big.” – Yoo Il-ho, South Korea’s finance minister

Alphaville – Least productive sectors only thing keeping inflation going. Matthew C. Klein. Financial Times. 12 Sep. 2016.

Since 1990 “…the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88% of the total rise in the price level boils down to four sectors of the US economy.”

1) Healthcare services, 2) Housing, 3) Education, and 4) Prescription drugs

“In January 1990, those four product categories only accounted for 30% of the money spent on consumption by the average American.”

And within education the main culprit has been the textbook. Akin to prescription drugs, supply in both industries is tightly controlled by regulation.

“By contrast, thanks to astounding technological innovation, television prices have plunged at an average rate of 12% each year since 1990 and computer prices have fallen more than 18% per year.”

“In general, the prices of durable goods are about a third lower now than in 1990, while the prices of nondurable goods excluding commodity products (food, drinks, and fuel, which tend to rise at the same rate as the broader price level over time) and excluding prescription drugs, have also fallen, albeit not by as much. Inflation outside of healthcare and education has generally been modest, with the notable exception of a few small professional services such as tax preparation, lawyers, and funeral homes.”

China’s Credit Fire Hose Floods Housing Market. Anjani Trivedi. Wall Street Journal. 15 Sep. 2016.

“More than 70% of new loans in August were to households, much of that in the form of mortgages, going by historical averages, a remarkable shifting of the fire hose of credit. It also helps explain why China’s property market has raced higher despite broader economic worries.”

“China’s stock of mortgages stood at 16.9 trillion yuan ($2.5 trillion) as of June 30. Almost a quarter of that was built up in just the past year, according to ANZ. Mortgage loans outstanding now account for 18% of total loans, the highest since at least 2008.”

“Local regulators are imposing clampdowns on mortgage lending and property speculation in the hottest cities such as Shanghai and Shenzhen. They are right to do so, as this leg of China’s multi-decade property bubble is clearly being fueled by leverage in a way that it wasn’t in the past.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Building materials – Top of the tree: The case for wooden skyscrapers is not barking

Bloomberg – How Big Sugar Enlisted Harvard Scientist to Influence How We Eat – in 1965 9/12

Bloomberg – What’s Wrong With America’s Dream of City Living 9/14

Economist – Why does Thailand keep changing its constitution? 9/12

FT – When will the ECB run out of bonds to buy? 9/8

FT – China infrastructure investment model under fire 9/10

FT – Twitter and tech: hardly working 9/11

FT – What investors should know about R star 9/11

FT – Oil market braces for Kashagan field’s October debut 9/12

FT – The Swiss and negative rates: how is the experiment going? 9/12

FT – Philippines pivots away from the US 9/13

FT – Japan opens door to temporary foreign workers 9/13

FT – Manias make markets dance to a different tune 9/13

FT – Mythbusting Uber’s valuation 9/13

FT – China retail: shops will drop 9/14

Trepp – Non-Traded REITs on slowest capital-raising pace in 12 years 9/9

WSJ – Bank of Japan Has Enlarged Target in Corporate Bonds 9/12

Yahoo Finance – The internet is creating a demographic ‘seismic shift’ that is too big to ignore 9/12

Yahoo Finance – Billionaire Paul Singer warns of the ‘biggest bubble in the world’ 9/13

September 9, 2016September 8, 2016

September 2 – September 8, 2016

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

Headlines

WSJ – Hanjin’s Demise: Why Global Shipping Glut Isn’t Going Away 9/2. “Despite efforts to consolidate and idle fleets, container ship capacity is growing at 3.2% a year, while demand for container cargo is a tepid 1.8%…”
WSJ – Now Companies Are Getting Paid to Borrow 9/6. First governments, now companies (in this case Sanofi and Henkel) are issuing debt at negative yields…thank you very much.

Briefs

Mark Melkin of ValueWalk covered a trend that the world seems to be following that Japan is leading.

“The ‘Japanization’ of the global economy marked by transition to low growth and low inflation has started to attract investor attention as a phenomenon in recent years. There has been scarcely any nominal GDP growth over the past 20 years in the Japanese economy.” – Daiju Aoki, analyst at UBS Japan
“Demographics are triggering the lack of GDP growth. As a society ages, its population becomes more dependent on government services and less productive in terms of generating goods and services.”
Japan’s peak worker to dependent ratio was in 1990.

Robin Harding of the Financial Times highlighted how the Bank of Japan vows to keep on keeping on with the easing of monetary policy.

“Mr. Kuroda, governor of the BoJ since 2013, claimed the central bank’s policies ‘have contributed significantly to the positive turnaround in Japan’s economy’ and said there was no chance of reducing the level of monetary accommodation.”
“‘It is often argued that there is a limit to monetary easing but I do not share such a view,’ Mr. Kuroda told an audience in Tokyo. He said there was ample room for the BoJ to buy more government bonds, to cut interest rates further, or to buy other assets such as corporate bonds, equity and real estate funds.”
“Yet despite the high level of monetary stimulus, the latest date show a 0.4% fall in the consumer price index compared with a year ago, and a slowdown in inflation even excluding volatile food and energy prices.”
“Mr. Kuroda argued that the failure to hit 2% inflation so far is because of three shocks: falling oil prices since summer 2014, weakness in demand after raising Japan’s consumption tax in April 2014, and a slowdown in emerging markets from summer 2015.”
“Given that, said Mr. Kuroda, ‘it is imperative for the Bank firmly to maintain its commitment to achieving the price stability target of 2% at the earliest possible time.”

Katie Martin of the Financial Times illustrated a plea by Citi for central banks to not buy so many bonds.

“Please don’t buy so many bonds, Mr. Central Banker. It is rapidly becoming a case of ‘too much of a good thing’.” – Hans Lorenzen, credit strategist at Citi Research
Private investors are being crowed out…
And markets are being driven by macroeconomic policies more and more…

Brian Blackstone and Tom Fairless of the Wall Street Journal posed the question: Could the European Central Bank start buying stocks?
- As the European Central Bank (ECB) is running up against its self-imposed limits on how much of a country’s debt it can hold and since there simply aren’t enough bonds they can buy that qualify under their guidelines, the ECB is contemplating buying European equities.
- “Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola.”
- The Bank of Japan holds ¥10.182 trillion (approx. $98 billion) of “individual stocks and exchange-traded funds as of Aug. 20, in terms of book value.”
- Though “economists have been split over the costs and benefits. Some say that Japan’s capital market can no longer accurately price the value of stocks; too much BOJ money has flown into some specific companies. Others say it has helped prop up share prices, thus producing ‘wealth effects’ to help the economy fight deflation.”
- Interesting times.

Costa Paris and Erica E. Phillips of the Wall Street Journal highlighted how Hanjin’s shipping troubles has resulted in about $14bn of cargo stranded at sea.

“Since Hanjin Shipping Co. of South Korea filed for bankruptcy protection there last week, dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world because of uncertainty about who would pay docking fees, container-storage and unloading bills. Some of those ships have been seized by the company’s creditors.”
According to Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen, “43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.”
All told about $14 billion worth of cargo is stranded at sea with the crews running short on rations…

Special Reports / Opinion Pieces

FT – Taking the Long View in investing: eight lessons – John Authers 9/1
- “To sum up ten years in one paragraph: a historic speculative bubble in credit finally burst, and the US came out ahead thanks to looser monetary policy and swift action to fix its banks, while emerging markets slowed down, and Europe was left behind thanks to its bloated banking system and badly designed currency.”
NYT – Flooding of Coast, Caused by Global Warming, Has Already Begun – Justin Gillis 9/3
- “Once impacts become noticeable, they’re going to be upon you quickly. It’s not a hundred years off – it’s now.” – William V. Sweet, National Oceanic and Atmospheric Administration

WSJ – Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert – Scott Patterson, John W. Miller, & Chuin-Wei Yap 9/8
- So it turns out there is nearly one million metric tons of aluminum being stored in Mexico. “The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory.”

Graphics

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

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

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

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

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

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

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

Featured

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Interesting Articles

Bloomberg Businessweek

The Economist

Uberworld: The world’s most valuable startup is leading the race to transform the future of transport

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

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

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

Economist – That 2008 comparison (again) 9/6

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

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

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

FT – Why negative interest rates sometimes succeed 9/5

FT – Bank of Japan: great expectations 9/5

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

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

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

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

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

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

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

WSJ – The Problem With Dividend Stocks 9/5

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

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

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

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

June 24, 2016June 24, 2016

June 17 – June 23, 2016

Eight massive shifts underway in energy. U.S. men of prime working age are dropping out of the labor force. Venezuela on the brink of social and economic collapse.

Headlines

WSJ – Global Bonds: Even Further Through the Looking Glass 6/16. Long dated bonds continue to fall – generating outsize returns, but a mean reversion would be crushing.
FT – China seeks to renegotiate Venezuela loans 6/19. “One fact we shouldn’t overlook is that Venezuela really doesn’t have the money…”
NYT – Venezuelans Ransack Stores as Hunger Grips the Nation 6/19. “In the last two weeks alone, more than 50 food riots, protests and mass looting have erupted around the country… At least five people have been killed.”
FT – Hong Kong regains crown in ranking of expensive cities for expats 6/21. For all you expats in case you wanted to know.
WSJ – Developer Seeks EB-5 Funding for Luxury New York Tower 6/21. The construction financing market is drying up for certain types of projects, so a project for the superrich needs approx. $200m of zero-to minimal cost funds to move forward.
Bloomberg – Monster Beverage Executives Reap $449 Million From Buyback Offer 6/17. Another of example of compound interest…when the stock awards were granted in 2006 they were projected to appreciate at 10% a year (ending up worth $28.7m each) instead they appreciated at 30% a year (each sitting on gains of $299m).

Briefs

In the Wall Street Journal, Jacky Wong highlighted how developers in China continue to bid up property prices, interestingly, some of the highest cost transactions are by state owned enterprises involved in businesses that don’t need prime property.

“Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby.”
Interestingly, “most of the buyers of the most expensive parcels are state-owned enterprises. A property subsidiary of China Gezhouba Group, a state-owned builder of power plants and dams, spent 3.3 billion yuan last month to buy the most expensive land, in terms of price per square meter, in Nanjing. Another state dam construction company, Power Construction Corp. of China, snapped up a piece of land in China’s bubbliest property market, the southern metropolis of Shenzhen, for 8.3 billion yuan.”
“The domestic bond market and growth in asset-backed securities have made financing easier for developers, causing companies to chase whatever assets they can. Continuing reforms of state-owned enterprises could also be a trigger, as these firms have incentives to inflate their balance sheets to gain clout in consolidation talks. For some which have already invested heavily in real estate, keeping land prices high makes sense.”

The Economist provided a nice summary of the impact that the widening of the Panama Canal may have on global shipping.

In 2015 a record 960m cubic meters of cargo passed through the canal, starting June 26 the canal will have capacity of 1.7 billion cubic meters of cargo annually. “The biggest container ships that could use the old canal, known as Panamaxes, can carry around 5,000 TEUs (20-foot equivalent units, or a standard shipping container). Neo-Panamaxes that will squeeze through the new locks can carry around 13,000 TEUs. Although the world’s largest ships have space for nearly 20,000 TEUs, the majority of the global fleet will now fit through the canal.”
“America’s east-coast ports should get busier… And vessels carrying liquefied natural gas from America’s shale beds will be able to pass through the locks for the first time, heading to Asia. They are expected to account for 20% of cargo by volume by 2020.”

Anjani Trivedi of the Wall Street Journal drew attention to the potential credit black hole brewing in China.
- “China’s M1 money supply, a measure of the most liquid assets in the banking system as cash and certain types of demand deposits, is growing at its fastest pace in six years. Meanwhile, M2 money supply, a broader gauge of liquidity including longer-term deposits, expanded at the slowest rate in a year. The ratio of these two rose to its highest since the data has been tracked.”
- “One of the main sources of the rapid M1 growth is troubling: short-term, higher-yielding investments such as wealth-management products in the form of current deposits that now account for 95% of the growth of M1.”
Yukako Ono and Lucinda Elliott of the Financial Times reported on Nigeria’s recent decision to float its currency on Monday (June 20).
- “Nigeria’s long-awaited flexible foreign exchange rate regime got off to an explosive start on Monday as the naira slid by as much as 27% to N254 to the US dollar.”
- “The currency had been pegged at about N197 per dollar since March 2015. Nigeria, Africa’s biggest economy – where oil exports account for more than 90% of foreign revenue – did not follow other large oil exporting nations which began devaluing their currencies in 2014 as crude prices fell by more than half.”
- “But short-term public finances are still in crisis. ‘Serious domestic reforms are needed that won’t be fixed by the exchange rate normalization,’ Mr. (John) Ashbourne (of Capital Economics) said. As a result of sabotage by resurgent militants in the oil-producing Niger delta, Nigeria has been losing about 700,000 barrels of oil a day. This, and the fall in oil prices since 2014, mean that the state is receiving a quarter or less of what it earned two years ago.”
- As a follow up as of Thursday (6/23), the exchange rate was 283.50 Naira to $1 USD.
Patrick Jenkins of the Financial Times highlighted the slow moving financial crisis that is underfunded pensions.
- “A recent report by Citigroup shone a light on just how big a nightmare is looming. It found most pension plans in the US and UK are underfunded, with an aggregate 18% deficit.”
- “Government pension schemes are in an even worse state. Citi found the value of unfunded or underfunded liabilities for 20 OECD countries is $78tn – nearly double the $44tn published national debt number.”

Graphics

WSJ – Why China’s Developers Can’t Stop Overpaying for Property – Jacky Wong 6/19

WSJ – Credit Black Hole – Anjani Trivedi 6/20

FT – Nigeria’s currency tanks against dollar on float – Yukako Ono and Lucinda Elliott 6/20

Featured

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

The World Nears Peak Fossil Fuels for Electricity. Tom Randall. Bloomberg. 12 Jun. 2016.

“The way we get electricity is about to change dramatically, as the era of ever-expanding demand for fossil fuels comes to an end – in less than a decade. That’s according to a new forecast by Bloomberg New Energy Finance (BNEF) that plots out the global power markets for the next 25 years.”

“Call it peak fossil fuels, a turnabout that’s happening not because we’re running out of coal and gas, but because we’re finding cheaper alternatives. Demand is peaking ahead of schedule because electric cars and affordable battery storage for renewable power are arriving faster than expected, as are changes in China’s energy mix.”

The eight massive shifts underway:

There Will Be No Golden Age of Gas
- “The cost of wind and solar power are falling too quickly for gas ever to dominate on a global scale, according to BNEF.”
- “The peak year for coal, gas, and oil: 2025.“

Renewables Attract $7.8 Trillion
- “Humanity’s demand for electricity is still rising, and investments in fossil fuels will add up to $2.1 trillion through 2040. But that will be dwarfed by $7.8 trillion invested in renewables, including $3.4 trillion for solar, $3.1 trillion for wind, and $911 billion for hydro power.”
- “But by 2027, something remarkable happens. At that point, building new wind farms and solar fields will often be cheaper than running the existing coal and gas generators.”
- “By 2028, batteries will be as ubiquitous as rooftop solar is today.”

Electric Cars Rescue Power Markets
- “The adoption of electric cars will vary by country and continent, but overall they’ll add 8% to humanity’s total electricity use by 2040, BNEF found.”

Batteries Join the Grid
- “The scale-up of electric cars increases demand for renewable energy and drives down the cost of batteries. And as those costs fall, batteries can increasingly be used to store solar power.”

Solar and Wind Prices Plummet
- “For every doubling in the world’s solar panels, costs fall by 26%, a number known as solar’s ‘learning rate.’ Solar is a technology, not a fuel, and as such it gets cheaper and more efficient over time. This is the formula that’s driving the energy revolution.”
- “Wind-power prices are also falling fast – 19% for every doubling. Wind and solar will be the cheapest forms of producing electricity in most of the world by the 2030s, according to BNEF.”

Capacity Factors Go Wild
- The capacity factor (essentially the efficiency ratio) for renewable energy technologies is getting much better.
- “Once a solar or wind project is built, the marginal cost of the electricity it produces is pretty much zero–free electricity–while coal and gas plants require more fuel for every new watt produced. If you’re a power company with a choice, you choose the free stuff every time.”

A New Polluter to Worry About
- “China’s evolving economy and its massive shift from coal to renewables mean it will have the greatest reduction in carbon emissions of any country in the next 25 years, according to BNEF.”
- But, “India’s electricity demand is expected to increase fourfold by 2040” and they have tons of coal which they intend to use.

The Transformation Continues
- Unfortunately, the shift to renewables is not happening fast enough…

US low-skill males drop out of jobs market. Sam Fleming. Financial Times. 20 Jun. 2016.

“Labor-force participation among men of prime working age has dropped by more in the US than in any other OECD country apart from Italy in the past quarter century.”

A recent report from the Council of Economic Advisers “shed light on one of the major concerns about America’s recovery: while unemployment has been falling, a large number of people have also been dropping out of the jobs market altogether.”

“Among so-called prime-aged men between the ages of 25 and 54, the participation rate fell more steeply than in all but one other country in the OECD from 1990 to 2014, the report found. It is now the third-lowest among 34 OECD nations.”

The report found that “this fall in the prime-age male labor force participation rate, from a peak of 98% in 1954 to 88% today, is particularly troubling since workers at this age are at their most productive.”

“The analysis shows that participation rates have diverged sharply between people who have a college degree or more, and those who do not. In 1964, some 98% of prime-age, college-educated men participated in the workforce, compared with 97% of those with a high-school degree or less. By 2015, the rate for college-educated men had slipped to 94%, while that for those with a high-school degree or less had plunged to 83%.”

Further, “more than a third of those prime-aged men who are outside the workforce are living in poverty, suggesting their decision to drop out is not a choice they made because they had other sources of income.”

Is Venezuela close to boiling point? Pan Kwan Yuk. Financial Times. 21 Jun. 2016.

You’ll note this week that there is a lot of coverage on this topic from the NYT piece about Venezuelans ransacking stores for basic goods, to the Bloomberg Businessweek article on how weak government structures fall apart when climate stresses get added to the mix, to the Financial Times article on how Chinese government officials have been meeting with the opposition politicians in Caracas to ensure that their loans will eventually be paid. Bottom line, things are coming apart at the seams.

“Venezuela is on the brink of economic and social collapse. There is a high chance of a sovereign default and a removal of the president over the next eighteen months.” – Capital Economics

“The worst part of this story is that Venezuela hasn’t hit bottom yet – the only light at the end of this tunnel seems to be from another of a series of oncoming locomotives.” – Russ Dallen, managing partner at Caracas Capital Markets

“The violent food riots that have swept the country are but the latest sign that things in Venezuela might have reached a boiling point. The collapse in the bolivar “fuerte” – or strong bolivar – which is trading close to 1,100 per dollar in the black market – is another. To put this in perspective, the country’s biggest banknote – the 100 bolivar – is now worth just a mere 9 US cents.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Nigeria changes course with painful devaluation 6/16

FT – Whatever happened to the China crisis? 6/19

FT – Perverse incentives lie behind Microsoft’s LinkedIn purchase 6/19

FT – Egyptians rush to invest in property to counter the pound’s slide 6/19

FT – Hedge funds seek long term money for distressed debt wagers 6/20

FT – Central banks’ front-loading leaves modest pickings for investors 6/20

FT- Chinese banks brace for storm in face of shadow finance calm 6/20

FT – The corn shortage that Brazil really can’t afford 6/21

FT – China bankruptcies surge as government targets zombie enterprises 6/22

Investment News – Allianz’ Mohamed El-Erian sees ‘common element’ between Brexit vote, negative rates, strange politics and Fed policy 6/20

MarketWatch – A storm is brewing in the real-estate market, Pimco warns 6/20

Vanity Fair – Leaked Documents Reveal How Much Uber Drivers Really Make 6/23

WSJ – Apartment Boom Needs Cooling-Off Period 6/16

WSJ – China’s Short-Term Lending Boom Won’t End Well 6/16

WSJ – Losers Abound in $7 Billion Chinese Takeover Scuffle 6/20

WSJ – Rents Are Booming, But for How Long? 6/21

Yahoo Finance – Jim Chanos shreds ‘shameful’ Tesla-SolarCity deal 6/22

June 17, 2016June 16, 2016

June 10 – June 16, 2016

The shipping world is about to change with the opening of new Panama Canal locks. U.S. shale reserves: now you see me, now you don’t.

Headlines

FT – Coal use plunges as China cuts back and US turns to gas 6/8. “Global consumption and production levels for coal plunged by the biggest amount since at least 1980, while prices fell about 20%.”
FT – Struggling Chinese P2P lender offers to repay investors with baijiu 6/11. Chinatou.com which owes approximately $35m to 1,850 investors and is seemingly short on cash has offered to pay investors in baijiu (popular Chinese liquor) from an affiliated company.
WSJ – German Benchmark Bond Yield Dips Below Zero 6/14. And that just happened… as of end of day Tuesday the German 10-year bund yield was just minus 0.008%.
WSJ – China’s Suddenly Shrinking Corporate Bond Market 6/15. “China’s corporate bond market, one of the fastest growing sources of cheap credit, did something in May it hasn’t done in six years: It shrank.”

Briefs

Kevin Buckland, Shigeki Nozawa, and Kazumi Miura of Bloomberg highlighted how many in Japan are taking to storing cash as the deflation mindset continues to nest.

“About 40 trillion yen ($365 billion) in cash has piled up in homes across Japan, according to a Dai-ichi Life Research Institute estimate – equivalent to about 8% of GDP.”
“What it means for 40 trillion yen to be sleeping under mattresses is that the deflationary mindset is deeply rooted, and Japanese have become hypersensitive to risk.” – Hideo Kumano, chief economist at Dai-ichi Life
This of course has been a boon to safe manufacturers, with “sales of safes in March were up 86% from a year earlier, the highest level ever, according to government data.”

Gabriel Wildau and Tom Mitchell of the Financial Times recapped how much China has spent recently to maintain confidence in the renminbi.

“The People’s Bank of China has spent about $473bn in foreign exchange reserves since it surprised global markets last August by changing the way it sets its daily guidance rate for the currency, according to Financial Times estimates based on official data.”
As a central bank official so aptly put it “the most important factor is confidence, both globally and within China. The cost of intervention in terms of reserves has been high but this policy can’t be evaluated just in terms of numbers. Once confidence is lost it can’t be easily restored. Then a lot of bad things can happen.”

Shawn Donnan and Tom Mitchell of the Financial Times highlighted how concern over China’s corporate debt balances is spreading, even to the likes of the IMF.
- “China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned.”
- “Mr. Lipton (David Lipton – the IMF’s number 2) highlighted the state-owned enterprises, which he said were responsible for 55% of the corporate debt pile despite representing 22% of economic output and which ‘are essentially on life support.'”
- “While concluding the issue is ‘manageable’, he warned that a recent IMF estimate that put the potential losses for China’s banks from bad corporate loans at 7% of GDP was a conservative estimate that excluded exposures in the ‘shadow banking’ sector.”
With declining investment yields the world over and an abundance of negative government debt, Attracta Mooney of the Financial Times points to how sovereign wealth funds have been piling into real estate to boost returns. As an aside, Yahoo Finance drew attention to a recent Urban Land Institute PricewaterhouseCoopers survey that indicated that many U.S. real estate pros are not as enthusiastic about U.S. property as their foreign counterparts.
- “State-backed investment vehicles, which are used by countries either to save for a rainy day or to provide money for future generations, increased their allocations to property by 29% last year, according to research looking at 77 sovereign funds with $8tn in assets.”
- “The push into property comes as interest rates have reached record lows, forcing investors into alternative asset classes in the search for better returns.”
- “Sovereign wealth funds posted average returns of 4.1% last year, despite having a combined target of 5.9%, according to Invesco, the asset manager that carried out the research.”
- “The study did not provide a breakdown of returns by asset class, but Norway’s fund said in March it had achieved 10% returns from its investments in property last year. Fixed income, in contrast, returned just 0.3%.”
- On an allocation basis, there is plenty of room for increased real estate commitments “property still accounts for a tiny proportion of sovereign funds’ portfolios: 6.5% last year, up from 4.1% in 2014, according to Invesco.”
Data is data. Sometimes it’s good and other times not so much. Further, interpretation varies and can be misleading as the Economist points out in why the weak jobs report belies the resilience of the American economy.
- Despite the weak jobs report, things aren’t that bad in America. “Personal consumption, adjusted for inflation, is up by 3% in the past year, having surged in April.”
- The University of Michigan’s consumer-confidence index has been exceeding the average held during the 2003-2007 boom. “According to a recent Fed survey, 69% of Americans say they are ‘doing okay’ or ‘living comfortably’, up from 62% in 2013.”

Special Reports

Graphics

FT – Stocks under pressure as bond yields rise 6/10

FT – China spent $470bn to maintain confidence in renminbi – Gabriel Wildau and Tom Mitchell 6/12

Mauldin Economics – Hot Summer Economic Weirdness – John Mauldin 6/11

WSJ – German Benchmark Bond Yield Dips Below Zero 6/14

The Big Picture – Foreigners selling US equities at record pace – Torsten Slok 6/15

WSJ – China’s Suddenly Shrinking Corporate Bond Market 6/15

Visual Capitalist – The Shift to a Cashless Society is Snowballing – Jeff Desjardins 5/17

Bloomberg – China Dumping More Than Treasuries as U.S. Stocks Join Fire Sale 6/15

Featured

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

Panama Canal, the Reboot. Alex Nussbaum, Naureen Malik, and Christopher Cannon. Bloomberg. 2 Jun. 2016.

“Nine years of construction work, at a cost of more than $5 billion, have equipped the Panama Canal with a third set of locks and deeper navigation channels, improvements that will double its capacity. When the new locks slide open for the first time in late June, the reverberations will be felt at Asian gas terminals, on Great Plains farms, and in ports from Long Beach, Calif., to Santiago, Chile.”

Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven. Asjylyn Loder. Bloomberg. 14 Jun. 2016.

“Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues, it was worth almost $15 billion at its 2012 peak.”

“Then came the bust. Almost half of Ultra’s reserves were erased from its books this year. The company filed for bankruptcy on April 29 owing $3.9 billion.”

“Proven reserves – gas and oil resources that are among the best measure of a company’s ability to reward its shareholders and repay its debts – are disappearing across the shale patch. This year, 59 U.S. oil and gas companies deleted the equivalent of 9.2 billion barrels, more than 20% of their inventories, according to data compiled by Bloomberg. It’s by far the largest amount since 2009, when the Securities and Exchange Commission tweaked a rule to make it easier for producers to claim wells that wouldn’t be drilled for years.”

For reference, after the 2009 rule change “reserves surged 67%” in the following five years based on the 53 companies with records that far back. “Almost half the gains came from wells that existed only on paper.”

“Drillers face pressure to keep reserves growing. For many, the size of their credit line is tied to the measure.” Thing is that “there are two ways to increase reserves: buy more or find more. Fracking made it easier to do the latter, and the industry lobbied the SEC to count more undeveloped acreage as proved reserves…”

“The SEC agreed, with two key limits. First, the wells must be profitable to drill at a price set by an SEC formula. The companies got a temporary reprieve for 2014 because the SEC number was about $95 a barrel even though crude had plummeted to less than $50 by the time results were reported in early 2015.”

“That advantage has disappeared.”

“The SEC also requires that undeveloped wells be drilled within five years of being added to a company’s books.”

Other Interesting Articles

The Economist

Bloomberg – Earth’s Heat Extends Unprecedented Streak of Shattered Records 6/16

FT – Nigerian economy drops further into freefall 6/8

FT – Chinese tourists search far and wide for Japan’s rare whiskies 6/9

FT – The hedge fund fee structure consumes 80% of alpha 6/11

FT – Why hasn’t the productivity crisis caused a bear market (yet)? 6/12

FT – Tax rises on foreign homebuyers in Australia 6/13

FT – Japanese government bond yields fall to fresh lows 6/13

FT – MSCI A-shares denial sends Beijing clear message 6/15

FT – Gold is no safe port in this storm 6/15

FT – Uber points to profits in all developed markets 6/16

Herald News – Wood tower at the University of British Columbia a game-changer for construction 6/14

NYT – A Russian Cybersleuth Battles the ‘Dark Ages’ of the Internet 6/10

NYT – At the Birthplace of a Graft Scandal, Brazil’s Crisis Is on Full Display 6/10

NYT – The Overinflated Fear of Being Priced Out of Housing (Robert Shiller) 6/10

REBusiness Online – French Billionaire Buys Manhattan Office, Retail Building from Thor Equities for $525M ($5,250 PSF) 6/13

WSJ – These Chinese Developers Shed Property in Name Only 6/10

WSJ – China’s Banks: How Fixing Problems Can Make Them Worse 6/10

WSJ – China Economy: That Sputtering Sound Returns 6/13

WSJ – MSCI and China: Why There’s No Fear of Missing Out 6/15

Yahoo Finance – Real estate pros see recession by 2017, survey shows 6/16

May 27, 2016May 26, 2016

May 20 – May 26, 2016

Venezuela about to become a formal dictatorship. Container shipping industry going through one of its (if not the worst) downturns. A handful of US tech companies are flush with cash.

Headlines

Bloomberg – Venezuela’s Military Needs to Get Out of Business 5/6. “Venezuela has more than 4,000 generals, compared with fewer than 50 in 1993.”
WSJ – Chinese Investors Pour Money Into U.S. Property 5/25. “So far in 2016, Chinese companies have purchased or are buying 47 U.S. properties worth $9.3 billion, according to deal tracker Real Capital Analytics. That makes them the most active foreign buyers in the U.S., with more than double Canada’s $4.2 billion worth of deals.”

Briefs

The world is starving for yield products as Eric Platt of the Financial Times points out that foreign investors in particular have been interested in US bond funds.

“The plunge in yields on corporate and sovereign bonds in Europe and Asia – the value of bonds with a negative yield is nearly $10tn, according to Fitch – has sent investors racing into the US market.”
“The hunt for yield is very high.” – Bob Michele, chief investment officer at JPMorgan Asset Management
“The inflows have suppressed corporate borrowing costs at a time when new debt issuance is accelerating…”
“More than $900bn of corporate bonds have been sold in 2016, including $411bn in the US, according to Dealogic. Seven of the 20 largest bond offerings of the year have been completed this month alone.”

China knows it has a bad debt problem, and as such Don Weinland of the Financial Times highlighted the Country’s stepped up efforts to keep the problem from being debilitating.

“The latest figures for the loans-to-bonds swap, and the debt-to-equity swap initiated last year, show a subtle bailout is already under way.”
“Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.”
So far this year the number of swaps has hit $220bn at the end of April, up from approximately $120bn at the beginning of March, according to Wind Information.
“Up to Rmb1tn ($152bn) has also been approved for a debt-to-equity swap, which forces banks to write off bad debt in exchange for equity in ailing companies, according to Caixin, a respected business news website.”

Things are going downhill fast in Venezuela. This brief on how Venezuela has been selling gold reserves to meet debt obligations by Henry Sanderson and Andres Schipani of the Financial Times goes hand-in-hand with one of headlines and featured articles from this post.

“The Opec member’s gold reserves have dropped almost a third over the past year and it sold over 40 tones in February and March, according to IMF data. Gold now makes up almost 70% of the country’s total reserves, which fell to a low of $12.1bn last week.”
“The IMF forecasts the economy will shrink by 8% this year, and 4.5% in 2017, after a 5.7% contraction in 2015. Inflation is forecast to exceed 1,642% next year, fueled by printing money to fund a fiscal deficit estimated at about 17% of GDP.”
Remember that Venezuela has larger crude reserves than Saudi Arabia…

One of the articles from the print edition of the Economist this week profiled the rapid rise of the insurance industry in China and how the regulators are implementing measures to keep things from getting out of hand.
- “Assets managed by insurers have doubled in less than four years to 13.9 trillion yuan ($2.1 trillion). Their revenues from selling policies have accelerated, climbing 42% year-on-year in the first quarter of 2016. Most remarkable has been the increase in their workforce. Over the past six months alone, they have added 2m to their sales force. They now employ some 7.2m people, up 120% since the start of last year. Put another way, roughly one in every 50 workers in Chinese cities is selling insurance products.“
- “The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products.”
- In an effort to curb speculative behavior, regulators have “barred insurers from selling products with maturities of less than one year and began to phase out those with maturities of less than three years.”
- “The heyday of rapid expansion by opportunistic firms is over, predicts Lee Yuan Siong of Ping An Insurance, one of China’s biggest providers. ‘The government saw the danger early enough before it got out of control.’ If the new rules work, insurers will need to focus on persuading people to buy their policies for protection rather than as an investment. That is a safer bet, but a harder sell.”

Special Reports

FT – Hedge funds: Overpriced, underperforming – John Authers and Mary Childs 5/24

Graphics

Selfstorage.com – Inside America’s Gig Economy (and how to work it) – Alexander Harris 5/17

FT – Triple A quality fades as companies embrace debt 5/24

FT – US productivity slips for first time in three decades 5/25

Economist – Insurance in China: Safe or sorry? 5/21

Featured

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

Venezuela: Trouble on the streets – The country is poised between chaos and dictatorship. Economist. 21 May 2016.

Over the next month, expect Venezuela to become a dictatorship or the current regime will be overthrown.

Currently the government forces are blocking all routes to the National Electoral Council (CNE) to keep any opposition/protestor group from being able to submit a petition that would initiate a process to recall the embattled president (Nicolas Maduro) through a referendum.

“Almost 70% of Venezuelans want Mr. Maduro to leave office this year, according to a recent poll… Venezuela is suffering the world’s deepest recession.”

“After the May 18th protests he (Maduro) threatened to supersede the current economic state of emergency (announced five days earlier) with a ‘state of internal commotion'” which would give the government the “…ability to impose something closer to military rule across the country.”

“Mr. Maduro has already indicated that he will govern without regard to the National Assembly, which came under the control of the opposition after elections last December. ‘It is a matter of time before it disappears,’ he said blithely at a press conference on May 17th.”

The thing is that while opposition politicians are seeking to appeal to the military’s sense of deference to the constitution, Maduro and his predecessor Chavez make sure and made sure that the military is generously compensated while the rest of the country suffers.

“Venezuela’s neighbors are appalled by the prospect that the country might implode. They may not be able to stop it.”

Container shipping lines mired in crisis. Robert Wright. Financial Times. 19 May 2016.

“The industry (container shipping), a vital link in the world’s supply of manufactured goods, is suffering what could well turn out to be the deepest and longest downturn in its 60-year history.”

“Container shipping lines have made a series of investments in new, giant vessels, and this glut of capacity has sent freight rates tumbling. The Shanghai Containerized Freight Index – one of the few public sources of information on what lines are charging to ship a container – last month reached the lowest level since its inception in 1998.”

“Over the next few years, [container shipping is] a sector that’s going to really get slammed,” says Ron Widdows, a shipping consultant and former chief executive of Neptune Orient Lines, the Singapore-based line.”

Consolidation and cooperation (alliances) are common place as container lines are seeking to achieve better efficiencies to cut costs.

“This month, three Japanese lines – Mitsui OSK, K Line and NYK – outlined plans to form a new alliance with Hapag-Lloyd, South Korea’s Hanjin Shipping and Taiwan’s Yang Ming, to be known as The Alliance.”

“CMA CGM announced last month it was forming a new partnership, called the Ocean Alliance, with China Cosco, Taiwan’s Evergreen and Hong Kong’s Orient Overseas Container Line.”

This is all to compete against the P2 Alliance of the two largest container fleets of Maersk Line and Mediterranean Shipping Company.

“In the first quarter of 2016, Maersk generated $1,857 of revenue for each 40ft container it carried on its ships, 25% less than one year earlier, and $203 below the average cost of moving each box.”

US companies’ cash pile hits $1.7tn. Eric Platt. Financial Times. 20 May 2016.

“Apple, Microsoft, Alphabet, Cisco and Oracle had amassed $504bn of cash by the end of 2015, nearly a third of the total $1.7tn held on the balance sheets of US non-financial companies, according to a new report from rating agency Moody’s.”

“It is the first time the top five cash hoarders have been made up exclusively of tech groups, an industry that generates more of its sales abroad than any other sector and one that has been embroiled in tax disputes in both the US and Europe.”

“The ever increasing amount of cash also highlights how US boardrooms are reticent to invest in their businesses, choosing instead to increase dividends, in a sign of the continued anxiety that economic activity could still slow at home or in China.”

“Apple accounted for more than a tenth of the total cash reserves, holding $216bn, 93% of which is overseas.”

“But the rising cash piles mask a rapid increase in debt.”

“Total debts rose nearly $850bn last year to $6.6tn, a separate report from S&P showed, which put overall cash levels in the US at a slightly higher $1.8tn. While cash had increased by about $600bn over the past five years, obligations surged by $2.8tn.”

“While the top 25 cash hoarders hold cash in excess of their obligations, the cash-to-debt ratio fell to 12% for low-rated junk companies. In 2010, that figure stood above 20%.”

“‘Companies aren’t exactly flush with cash,’ S&P analyst Andrew Chung added. ‘As the credit cycle ages, rates rise and macroeconomic growth slows, that’s when companies in the bottom 99% who levered up [could have] funding issues.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Murder most foul: When periods of economic growth come to an end, old age is rarely to blame

Bloomberg – Sugar Is So Scarce in Venezuela That Coca-Cola Will Stop Production 5/23

FT – Elizabeth Warren slams Uber and Lyft 5/19

FT – China reopens securitized bad-debt market 5/19

FT – Hanergy founder resigns one year after stock plunge 5/20

FT – Liquid alternative mutual funds leave investors disappointed 5/22

FT – Negative interest rates fuel record Japan share buybacks 5/23

FT – Triple A quality fades as companies embrace debt 5/24

FT – Regulators accuse Swiss bank BSI over 1MDB scandal 5/24

FT – Investing in China debt? Do not forget to factor in the politics 5/24

FT – US fracking bust sparks surge in car debt 5/24

FT – Olivier Blanchard and Adam Posen believe a recovery is on track 5/25

FT – Viacom’s battle is a warning to Silicon Valley 5/25

February 19, 2016

February 12 – February 18, 2016

Chinese seasonal lending binge. CMBS risk premiums are jumping. More shipping woes.

Three key articles that stand out this week are 1) a posting by Bloomberg News “China’s New Credit Surges to Record on Seasonal Lending Binge”, 2) Serena Ng’s “Warning Light Flashes for the Commercial Property Boom” in The Wall Street Journal, and 3) Bruce Einhorn’s “The Shipping Industry Is Suffering From China’s Trade Slowdown” in Bloomberg Businessweek.

Other items that are worth a mention:

It’s good work if you can get it, check out this entertaining and information full article in Bloomberg Businessweek about American Pharoah’s upcoming gig as a $200k-a-Night Stud.
A really good read on the big picture is this interview with Neil Howe that was presented through Mauldin Economics. A long read, but worth it.
Walmart had its first negative growth in annual sales since 1980. Paradigms shift and it’s hard to generate growth in perpetuity.
Thanks to declining oil prices Young Saudis are finding their career prospects to be not as bright and comfortable as their parents.
For the ‘football’ (aka ‘soccer’) fans, the taxman cometh, even if you are Neymar.
A bit of good news about consumer spending (albeit lukewarm).
For more on Prime Minister Razak and 1MDB, here is a good report from the FT.
Then a general comment, lots of news this week on commercial real estate, see the Other Interesting Articles below.

Interesting graphics (none inserted this week):

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

China’s New Credit Surges to Record on Seasonal Lending Binge. Bloomberg News. Bloomberg. 15 Feb. 2016.

What is China doing now that its economy is slowing? Issuing more debt.

“China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices.

Aggregate financing rose to 3.42 trillion yuan ($525 billion) in January, according to a report from the People’s Bank of China on Tuesday, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey. New yuan loans jumped to 2.51 trillion yuan, also a record and beating the median estimate of 1.9 trillion yuan.”

“Chinese banks expanded their balance sheet aggressively in the first month of this year, which implies an implicit support from the government to counter the economic slowdown. In addition, Chinese corporates should have turned to onshore for funding, while offloading some external borrowing.” – Zhou Hao, senior economist at Commerzbank AG in Singapore

“Corporations issued 454.7 billion yuan of notes in January, 2.5 times the amount sold a year earlier, as the yield on top-rated 10-year corporate notes dropped to a decade low in January.“

It makes sense that yields would drop as the outstanding amount of debt increases… oh wait, shouldn’t it be the other way around? But China is not unique in this, recall the run up in US real estate debt prior to 2007-2008.

Granted part of this debt is seasonally related.

“While the jump in new loans is mostly attributable to banks front loading their full-year lending targets and the central bank’s efforts to keep liquidity ample ahead of the week-long Lunar New Year holiday, it also shows increasing financial support to the real economy, according to Chen Ji, a Bank of Communications Co. analyst in Shanghai.”

Understandably, this stimulus is an easier measure than adjusting rates again.

“The central bank has turned to cash injections this year instead of cutting benchmark interest rates, as additional reductions could further exacerbate capital outflows. Net injections since mid-January have been the equivalent to about the same as a 1 percentage point cut to banks’ required reserve ratios.”

And for the property market:

“The PBOC also stepped up support for the property market this month, saying Feb. 2 it would allow banks to cut the minimum required mortgage down payment to 20% for first-home purchases, the lowest level ever, from 25%.”

Warning Light Flashes for the Commercial Property Boom. Serena Ng. The Wall Street Journal. 16 Feb. 2016.

Speaking of the US commercial property market.

“Bonds backed by commercial real-estate loans have weakened significantly since the start of the year amid concerns of an economic slowdown. Risk premiums on some slices of commercial-mortgage-backed securities have jumped 2.75 percentage points since Jan. 1, a move that translates into a roughly 18% drop in prices for Triple-B-rated bonds, according to data from Deutsche Bank.”

“Property owners and developers are now facing the prospect of higher rates on loans, tougher refinancings and diminished property values as debt issuance slows and financing becomes more expensive.”

“It’s not a good dynamic. The cost of financing will increase for borrowers with loans coming due.” – Lea Overby, head of CMBS research at Nomura Securities.

“Billionaire investor George Soros’s family office has been a large seller, according to people familiar with the matter.”

“CMBS with BBB credit ratings now yield more than seven percentage points above benchmark rates – a similar risk premium to U.S. junk bonds, according to data from Morgan Stanley. The bank says CMBS risk premiums are at their highest levels since late 2011.”

Note that the Public REITs are indicating that they will be net sellers this year. It will be interesting to see how values hold up this year – granted I just received an offering for a Zero Cash Flow deal. ZIRP (Zero Interest Rate Policy)! NIRP (Negative Interest Rate Policy))!
The Shipping Industry Is Suffering From China’s Trade Slowdown. Bruce Einhorn. Bloomberg. 11 Feb. 2016.

More on the impact of the oversupply of container ships, declining commodity demand, and falling shipping prices (except for a few select places…Hawaii).

“Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8% in 2015, while its imports tumbled 13.2%. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76% since August and is now at a record low.“

“In Singapore, the world’s second-largest port, container traffic fell 8.7% in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5% last year.”

There is so much oversupply that now is a good time to be in the ship demolition business.

“Globally, orders for new vessels dropped 40% in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15%.”

Global trade is slowing down.

“The yuan has dropped 6% since last August. While that should help exports, Hutchinson Port Holdings Trust, a company controlled by Hong Kong billionaire Li Ka-shing that runs some of China’s top container terminals, has yet to see an uptick in outbound business.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – NYC Tenants Battered by Rising Rents Finally Get a Break 2/11

Bloomberg – The Intriguing Math That Turns Manhattan Properties Into Shekels 2/15

Bloomberg – Goldman Sachs: More and More People Who Use Airbnb Don’t Want to Go Back to Hotels 2/16

Bloomberg – Wall Street Girds for Real Estate Debt It Must Invest In 2/17

Bloomberg – Manhattan Skyscraper New Coup for No. 4 U.S. Office Buyer Korea 2/17

Bloomberg – As Hedge Funds Struggle, REIT Shares Become Their Victims 2/18

CoStar – REITs Projecting to be Big Net Sellers This Year 2/10

FT – Rolls-Royce: first divi cut in 24 years 2/11

FT – Many suspects behind murderous markets 2/11