New York leads all U.S. metro areas as the largest
net loser with 277 people moving every day — more than double the exodus of
132 just one year ago. Los Angeles and Chicago were next with triple digit
daily losses of 201 and 161 residents, respectively.
This is according to 2018 Census data on migration
flows to the 100 largest U.S. metropolitan areas compiled by Bloomberg News.
At the other end of the spectrum, seven cities had on
average more than 100 new arrivals every day. Dallas, Phoenix, Tampa, Orlando,
Atlanta, Las Vegas and Austin saw substantial inflows from both domestic and
international migration. Sun Belt cities Houston and Miami claimed the 8th and
9th spots in the ranking. Seattle was the only cold-weather destination among
the top 10.
The migration figures exclude the natural increase in
population, which is the difference between the number of live births and the
number of deaths.
In 10 of the top 100 metros, deaths exceed births.
Thus, without migration these cities would be shrinking. Half of the 10 are
located in Florida. In 11 more cities, mostly in Utah and Texas, there are more
than twice as many births as deaths. Provo, which ranks first in births and
last in deaths, had a 5-1 ratio.
While New York is experiencing the biggest net
exodus, the blow is being softened by international migrant inflows. From July
2017 to July 2018, a net of close to 200,000 New Yorkers sought a new life
outside the Big Apple while the area welcomed almost 100,000 net international
migrants.
The second most attractive locale for international
migrants was Miami with an addition of 93,000, followed by Los Angeles,
Houston, Boston and the nation’s capital, Washington D.C.
Phoenix passed Dallas as the greatest beneficiary of
domestic migration, adding more than 62,000 residents between July 1, 2017 to
July 1, 2018. Dallas got an influx of 46,000, while Las Vegas, Tampa and Austin
rounded out the top five metro areas.
Some areas are affected by high home prices and local
taxes, which are pushing residents out and deterring potential movers from
other parts of the country. About 200,000 residents left New York last year.
Los Angeles had a decline of nearly 120,000 and Chicago fell by 84,000. Miami,
Washington D.C., San Francisco and San Jose experienced similar trends.
WSJ – Daily Shot: US Crude Oil Production (Select States) 8/30/19
Note
that BP just sold out of all its Alaska operations this last week after having
been in business in the State for 60 years
Few places on Earth feel the impact of the automobile
quite so keenly as Singapore. Car ownership rates are low — around 11%,
compared to 80% in the United States — but that still amounts to nearly 1
million vehicles (600,000 of which are private and rental cars) packed into an
island city-state half the size of Los Angeles. Roads account for at
least 12% of the total land mass.
To manage the traffic and other impacts on urban
livability, Singapore imposed the world’s first congestion pricing
scheme in 1975. Initially, it applied only to morning rush hour in the
central business district. But as the numbers of humans and cars expanded, so
too did efforts to control the impacts via such schemes. They were
effective in controlling traffic, but did little to crimp the appetite of
upwardly mobile Singaporeans for new cars that would contribute to traffic.
Indeed, between 1975 and 1989, the annual rate of automotive growth
averaged 4.4% (it peaked at 9.6% in 1980).
So in 1990, Singapore established
a quota for the number of new vehicles annually allowed on its roads.
Aspiring car owners bid for 10-year ownership permits. The cost of
these permits, combined with other taxes, have made Singapore the most
expensive place in the world to own a car, forcing buyers to regularly pay
three or four times more for a model than they would elsewhere. And ownership
is only going to become more expensive: in 2018, Singapore cut the
annual growth rate of new vehicles to 0% (commercial vehicles are excluded from
the policy until 2021). The government justified the cut “in view of
Singapore’s land constraints and our commitment to continually improve our
public transport system.”
They aren’t joking. In 2014, Prime Minister Lee Hsien
Loong unveiled his commitment to a “car-lite Singapore” and a
15-year, $1.5 billion program to boost public transportation. Among other
initiatives, the subway system will double by 2030, to 224 miles (at
a cost of more than $21 billion). The goal is to boost the number of commuters
using public transit at rush hour to 75% and to ensure that
90% of journeys to the city center can reach there within 45 minutes.
Singapore’s government hasn’t been nearly as
aggressive when it comes to aiding the deployment of personalized electrified
automobiles. Just ask Elon Musk: in 2018, he tweeted that
“Singapore govt is not supportive of electric vehicles.”
His grudge, it appears, dates back to 2016, when
Singapore imposed a $10,850 carbon emissions surcharge on a Tesla
Model S to account for carbon emitted during the electricity generation process
(Singapore is heavily reliant on fossil fuels). There is also
Singapore’s slow deployment of battery-charging infrastructure
compared to other countries.
Masagos Zulkifli’s repudiation of Tesla as a lifestyle is
easier to understand. Thanks to Tesla’s premium pricing (and Singapore’s
taxes), a used model S can
exceed $250,000 in the city-state (a new one can be double). In
fairness, other electric vehicles also have eye-popping prices in Singapore —
the Kia Niro is one of the cheapest at $132,600. But from the
perspective of policymakers seeking to electrify transport for as many people
as possible, a car that exceeds the price of some homes isn’t a climate change
solution — it’s a bauble.
“There are endless reasons a big-box toy store would collapse during a retail apocalypse — and Toys R Us acknowledged a number of them in its most recent annual filing: the teetering tower of debt incurred by its private-equity owners, competition from Amazon, Walmart and Target.”
“They even wrung their hands about app stores, labor costs and potential tariffs raising the costs of the imported goods they sell.”
“But one risk stood out. Toys R Us said there just weren’t enough babies…”
“It may not have been the biggest existential threat confronting Geoffrey the Giraffe (the store’s mascot), but it’s the one with the broadest implications outside of the worlds of toys and malls.”
“Measured as a share of overall population, U.S. births have fallen steadily since the Great Recession. They hit their lowest point on record in 2016 — the most recent year for which the Centers for Disease Control and Prevention has comparable data.”
“Even adjusted for the aging population and declining share of women of childbearing age, U.S. fertility rates are at all-time lows.”
“That’s problematic for Toys R Us, which also operates the Babies R Us stores. The company claims in its annual report that its income is linked to birthrates, and it appears to be right.”
“There are, to be sure, numerous other factors at play. The same economic forces that encourage people to have children may also encourage them to splurge on toys, for example.”
“But it’s nonetheless apparent that Toys R Us’s fortunes rise and fall with the population of its target market.”
“And that’s why the company’s demise should worry the rest of us. Toys R Us focuses on kids, so it’s feeling the crunch from declining birthrates long before the rest of the economy. But it’s just a matter of time before the trends that toppled the troubled toy maker put the squeeze on businesses that cater to consumers of all ages.”
“Eventually, unless the country does something significant to encourage larger families or immigration, that narrowing base of the population pyramid will crawl upward.”
“In the end, Toys R Us will just have been the first of many businesses of all descriptions facing the same hard demographic truth: Economic growth is extremely difficult without population growth.“
“‘Thanks to low mortgage rates, buying a home is actually more affordable now than in the past 40 years,’ Alexandra Lee, a housing data analyst at Trulia, told Business Insider.”
“Mortgage interest rates hit 16.6% in 1981 in response to massive inflation in the US. In 2016, interest rates fell to about 3.5%, and they’re about 4.5% right now.”
“Trulia found that the typical household in 1980 could afford only about three-fourths of the median home price, compared with the median household in 2016, which could afford a home 1 1/2 times the median home price.”
“Twenty-two US metros crossed the threshold from unaffordable to affordable over the past four decades, according to the data. The markets that are too expensive for the average buyer now, including San Francisco, Seattle, and San Jose, California, were always too expensive.”
“Trulia ultimately found that Americans’ homebuying power has strengthened in the past 40 years.”
“Take Salt Lake City, for example. From 1990 to 2016, home prices increased 53%, but the affordability index jumped to 131 from 122. That is because interest rates dropped to 3.4% from 10% during that time. Homeownership in Salt Lake City became even more affordable over the 26-year period — and the case appears the same for many of the largest US metros.”
“Only the Denver, Miami, and Portland, Oregon, metro areas dropped in affordability during that time, Lee said.”
“By the end of 2017, a monthly mortgage payment on the median home in the US required just 15.7% of the typical household income, according to a report by Trulia’s parent company Zillow. Back in the late 1980s and 1990s, a mortgage payment took up 21% of the typical American’s income.”
Granted, coming up with a down payment on a house these days is no easy task.
Effect of interest rate rises are starting to bite.
“Interest rates for home loans have risen each week this year, so each week homeowners have had less incentive refinance their mortgages.”
“Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008.”
“Housing is more expensive today than it has been in a decade, and a decade ago credit was a lot easier to get. The average monthly mortgage payment is now up nearly 13% from a year ago, according to Realtor.com — a combination of higher home prices and higher interest rates.”
“Singapore remains the most expensive city in the world for the fifth year running, according to the latest findings of the Worldwide Cost of Living Survey from The Economist Intelligence Unit.”
“Honolulu Mayor Kirk Caldwell signed into law today a bill imposing a moratorium of up to two years on building permits for ‘monster’ houses, giving the city Department of Planning and Permitting time to come up with permanent rules to deal with the growing phenomenon.”
“DPP will, for the most part, not approve building permit applications during the moratorium for houses that cover more than seven-tenths of a lot under Bill 110 (2017). For example, a 5,000-square-foot lot could not have a living space that’s 3,500 square feet or larger.”
Another instance of a market where housing prices have gone well beyond what local incomes can support. As a result, people come up with ‘work-arounds’ which tend to overburden the local infrastructure and upset neighborhoods, resulting in blunt regulatory reaction. Honolulu is not unique to this problem.
“America is facing a new housing crisis. A decade after an epic construction binge, fewer homes are being built per household than at almost any time in U.S. history.“
“Home construction per household a decade after the bust remains near the lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City.”
“What makes the slump puzzling is that by most other measures, the American economy is booming. Jobs are plentiful, wages are on the rise and the stock market is near record highs. Millennials, the largest generation since the baby boomers, are aging into home ownership.”
“A combination of tightened housing regulations, a lack of construction labor and a land shortage in highly prized areas is driving the crisis, according to industry experts.”
“Even during the deep recession of the mid-1970s and the downturn in the early 2000s, builders put up significantly more homes per U.S. household than they are constructing now, in the ninth year of an economic expansion. Only at the bottom of the 1981 and 1991 economic downturns were per-household construction levels near what they are now, according to Jordan Rappaport, an economist at the Kansas City Fed. He says the only period when the U.S. might have built fewer homes by population was during World War II.”
“The National Association of Home Builders estimates builders will start fewer than 900,000 new homes in 2018, less than the roughly 1.3 million homes needed to keep up with population growth. The overall inventory of new and existing homes for sale hit its lowest level on record in the fourth quarter of 2017, at 1.48 million, according to the National Association of Realtors.”
“That, in turn, is pushing up prices at what economists say is an unsustainable pace. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.3% in 2017. That was roughly twice the rate of income growth and three times the rate of inflation.”
“Builders cite numerous factors contributing to the construction slump. A decades long push for young people to go to college has driven down trade-school enrollment, depriving builders of skilled labor. Declining numbers of immigrant construction workers have sapped builders of unskilled labor.”
“The construction workforce in the U.S. declined to 10.5 million in 2016, from 10.6 million in 2010, when the real-estate market was near bottom, according to an analysis of U.S. Census data by Issi Romem, an economist at BuildZoom, a startup that tracks construction data for building contractors.”
“Nationwide, membership in the National Association of Home Builders peaked at 240,000 in 2007, then dropped to 140,000 in 2012, where it has remained throughout the recovery.”
“Builders in far-flung exurbs are encountering stiffer resistance from young buyers even as prices ratchet higher for land closer to cities. Economists say that in many large metropolitan areas, suburbanization might simply have reached its limits, as potential buyers increasingly reject long commutes. During the 1950s, buying a home in a new suburb, where land was plentiful and cheap, often meant driving half an hour to a job in the city. Today, commutes from new developments can be several times that long.”
“’There’s a tremendous mismatch between the places where people want to live and the places where it’s easiest to build,’ says Edward Glaeser, a professor of economics at Harvard University who studies constraints on housing supply.”
“But building remains below historical averages, and economists say it is unlikely to return to those levels before the next recession.”
“’It’s hard for me to see on single-family how you can build your way out of this,’ Mr. Rappaport says. ‘Even with these heroic efforts’ to overcome barriers to building new housing, he says, there is little chance ‘that you’re going to get a new stream of single-family homes that can relieve demand.’”
“Coastal cities such as San Francisco, Los Angeles, New York and Boston have taken criticism for their restrictive building codes, which make it more difficult to create enough housing to keep up with population growth.”
“Even metropolitan areas with more permissive approaches to building are lagging behind their historical construction levels. Housing permits in Memphis, Tenn., were 44% below their historical average in 2017, according to the latest Census figures analyzed by real-estate data firm Trulia, while permits in the Minneapolis metropolitan area were 16% below average.”
“In business, the mantra goes, the customer is always right and should get the best deal.”
“The opposite is happening in private equity where investors, including large pension funds, endowments, sovereign wealth funds and family money, face unfavorable fund terms and, in all likelihood, lower returns.”
“Private equity firms are clearly calling the shots and that is illustrated by the record amount of money they are turning away.”
“Huge institutional investors have so much money burning a hole in their pockets (Singapore’s GIC alone has $100bn of assets under management) they are under enormous pressure to find a home for this cash somewhere.”
“Hence their willingness to commit their cash to funds even if managers cut or reduce the so-called hurdle rate, which is the return that is guaranteed before a buyout group can claim a share of the profits. The industry standard is a preferred return of 8% on deals.”
“Advent International, the Boston and London-based group, raised eyebrows in 2016 when it announced it was closing a mega $13bn buyout fund without offering minimum returns to its investors. Last year, CVC, the former owner of F1, also said it was cutting its hurdle rate from 8% to 6%. The buyout firm also scrapped early-bird discounts given to new investors.”
“Rather than take their money and run from unfavorable terms, investors have doubled down on these private equity funds, which raised record amounts of cash in their fastest time ever. Advent had set out to raise $12bn and received more than $20bn of interest from investors. CVC raised €16bn but closed the door on billions more because demand was close to €30bn.”
“Rubbing salt into the wound of poorer terms, private equity managers are also warning them that returns should come down.”
“’The investors have accepted the idea of lower returns as OK,’ said the head of a private equity group. ‘It used to be that investors would earn 20% net internal rate of returns. Now they are happy with 14% or 15% net internal rate of returns.’”
“JPMorgan Chase has given a big boost to the old business heart of midtown Manhattan, agreeing a deal to tear down its 60-year-old Park Avenue headquarters and replace it with one of the tallest towers in New York City.”
“The biggest US bank by assets had been considering a move from its 270 Park Avenue location to the west side of Manhattan, as an anchor tenant of a new development known as Hudson Yards. But on Wednesday the bank said that it had struck a deal with Mayor Bill de Blasio to stay put, moving staff from several buildings in the Park Avenue area into a new, 2.5m sq ft tower.”
“At 70 to 75 floors, it should be the tallest bank building in the country upon completion in 2024, topping Bank of America’s 55-floor tower a few streets away, on the north-west corner of Bryant Park. It will also surpass BofA’s 60-floor headquarters in Charlotte, North Carolina, which looms over the 42-floor Wells Fargo Tower.”
“Stuart Saft, head of the New York real estate practice at Holland & Knight, described the deal as a ‘fabulous’ one for midtown Manhattan, likening the threat from Hudson Yards to the development of Canary Wharf in London in the late 1980s. Already, white-shoe law firms such as Milbank, Tweed, Hadley & McCloy and Boies Schiller Flexner have agreed to move to the complex emerging by the Hudson River.”
“JPMorgan will expand its floor area by buying unused development credits, known as ‘air rights’, from landmark properties in the area such as St Patrick’s Cathedral, St Bartholomew’s Church and Central Synagogue.”
“Blockchain could save asset managers $2.7bn a year if the investment industry shunned the laborious manual practices involved in buying and selling funds in favor of using online ledger technology, according to research published on Thursday.”
“Technology company Calastone said blockchain, which is a giant online ledger, could revolutionize the processes involved in buying and selling funds, generating large savings for investors in the process.”
“It estimated that based on daily trade volumes of funds in the UK, Ireland, Luxembourg, Hong Kong, Singapore, Taiwan and Australia, £1.9bn — or $2.7bn — in savings was possible.”
“Earlier this year, BNP Paribas Asset Management said it had successfully completed a full end-to-end fund transaction test using blockchain technology. The project involved a tie-up between BNP Paribas Securities Services’ blockchain program, Fund Link, and FundsDLT, a blockchain-based decentralized platform for fund transaction processing.”
“Indonesians declared more than 750tn rupiah ($52.5bn) worth of assets in Singapore during Indonesia’s tax amnesty program — which gave immunity from prosecution to those who came clean about untaxed wealth and paid a small penalty — ended last March. That is more than the combined total they declared in the next four top destinations — British Virgin Islands, Hong Kong, Cayman Islands and Australia.”
“Tencent, a Chinese technology group with an equity value greater than Facebook’s, said 768m people sent and received hongbao, the red packets stuffed with cash, over Weixin Pay, its third-party payments business, during the six-day holiday period. Typically people will hand out scores or even hundreds of hongbao: according to Tencent, one person sent 2,723 while another received 3,429.”
“Nowhere is demand more pent up than in the San Francisco Bay Area. In the past four months, 39 homes in Silicon Valley have sold for $500,000 or more over the listing price, says Mark Wong, a real-estate broker with Alain Pinel Realtors, based in Saratoga, Calif..”
“That figure includes a ‘lovingly cared for and well maintained home’ (read: not updated). The 53-year-old, three-bedroom, one-story house on 0.197 acre in West San Jose got 15 offers and sold to an all-cash buyer for $2.5 million—$815,000 over asking. A three-bedroom, 2,040-square-foot house in the Glen Park neighborhood sold in October for $2.6 million—nearly $1 million over its listing price of $1.675 million.”
“Seattle is another hot spot. Over the past year, the city has seen the greatest increase in the country in the share of sales above the asking price, surging to 52% of home sales in 2017 from 20% of sales in 2012, according to Zillow.”
“One can’t begrudge BlackRock for putting out its hand for a small slice of the money on offer. Even if the experiment somehow goes awry, it won’t make much of a dent in a company with $6.3 trillion of assets under management.”
“But the sheer imbalance between the supply of investable funds and suitable outlets for investment that gave rise to this move should ring some alarm bells for investors generally. At market tops when money is desperate to find a home, it often winds up in places it shouldn’t.”
“Homeowners soon will be able to count income they earn from Airbnb Inc. rentals on applications for refinance loans.”
“A new program—expected to be announced on Thursday by Airbnb, mortgage giant Fannie Mae and three big lenders—will allow anyone who has rented out property on Airbnb for a year or longer to count some or all of that money as income.”
“The mortgages will be backed by Fannie Mae, an acknowledgment that Americans today increasingly are earning money through the ‘gig economy,’ such as renting out rooms or ride-sharing.”
“Initially, three lenders, Quicken Loans, Citizens Bank and Better Mortgage, will participate in the program. Fannie will evaluate the initiative and could decide over time to back mortgages from any lender that chooses to count Airbnb income in a refinancing, as long as the short-term rentals aren’t against local laws.”
“Still, the move raises worries about encouraging homeowners to borrow more based on the unpredictable tourism industry.”
“Executives at the three lenders said one crucial difference between the housing bubble and today is technology, which makes it easy to keep track of how much income homeowners are earning from Airbnb.”
“The cut in oil production engineered by OPEC and Russia is now in its second year, defying skeptics and helping to boost crude prices. But the cartel’s compliance owes a big debt these days to a single member: Venezuela.”
“A founding member of the Organization of the Petroleum Exporting Countries, Venezuela pumped only 1.64 million barrels a day last month, well below its 1.97 million barrel a day allocation, according to estimates by S&P Global Platts. That gap of 330,000 barrels a day is marginally more than the amount that the entire cartel is undershooting its 32.73 million barrel-a-day target.”
“Calling even the decline so far in Venezuela’s petroleum industry historic is almost an understatement. Just last year, output was down by almost 30%. In percentage terms, that is worse than in major producing countries that broke apart and saw their economies collapse, such as the former Soviet Union, and Iraq in 2003.”
“Hong Kong is starting to be eclipsed by Singapore as the favorite destination for the wealth of China’s rich.”
“At stake for banks in both cities is a huge pile of money. China’s high-net-worth individuals control an estimated $5.8 trillion—almost half of it already offshore, according to consulting firm Capgemini SE. For some, the city-state of Singapore is preferable because it’s at a safer distance from any potential scrutiny from authorities in Beijing, according to interviews with several wealth managers. Multiple private banking sources in Singapore, who would not comment on the record because of the sensitivity of the subject, report seeing increased flows at the expense of Hong Kong.”
“The rich may be feeling exposed by changing banking practices. Hong Kong has signed tax transparency agreements that for the first time last year required all banks to report their account holders’ information to Hong Kong tax officials, in preparation for giving that information to 75 jurisdictions, including mainland China. Singapore will have similar agreements with 61 jurisdictions. But they don’t include either Hong Kong or Beijing, meaning its accounts and account holders aren’t visible to the Chinese government.”
“Overall, Hong Kong remains the primary destination for China’s offshore money, according to a Capgemini survey, followed by Singapore and New York. Yet the number of Chinese high-net-worth individuals who view Hong Kong as their preferred overseas place of investment is down to 53%, from 71% two years ago, according to a survey in July by Bain & Co. More than 20% favor Singapore, up from 15% two years ago.”
“‘We see Singapore, not Hong Kong, as the bridgehead of China’s investment overseas,’ says Li Qinghao, co-founder of NewBanker Tech Consulting, which organized the Sentosa conference last year. About 78% of S$2.7 trillion ($1.9 trillion) in assets under management in Singapore comes from overseas sources.”
“An elite group of Chinese pigeon fanciers have pushed the prices of racing birds to record highs, reflecting a mood of exuberance among China’s wealthy following a pick-up in economic growth and asset prices that has buoyed luxury spending.”
“Xing Wei, a property tycoon, paid €400,000 ($490,000) to purchase a Belgian pigeon called Nadine, in what is thought to be the largest deal on record. He followed that with a Rmb3m ($475,000) purchase of a champion bird called Extreme Speed Goddess at a Beijing auction in December.”
“Soaring pigeon prices are matched by bigger prizes for pigeon-racing competitions. China’s premier 500km ‘Iron Eagle’ race series held by the Pioneer International club in Beijing boasts a prize pot of Rmb450m ($71.2m).”
“Higher property and equities prices helped the wealth of China’s 2,000 richest people increase nearly 13% last year, according the country’s top rich list. The number of people known to possess assets above $300m grew faster last year than any other in the previous decade, said Rupert Hoogewerf, the compiler of the list.”
“After years of declines following the anti-corruption campaign launched by President Xi Jinping in 2012, sales of luxury goods in China grew 20% last year, according to business consultancy Bain. Art auction sales in Shanghai saw 42% growth last year, according to consultancy ArtTactic.”
“Pigeon industry insiders say just half a dozen enthusiasts are responsible for largest sales. ‘Five years ago Rmb300-Rmb400 ($47 – $63) was a very high price for a pigeon,’ said Zhang Wangbin, who runs a club in the central city of Wuhan whose auctions this winter saw several birds sell for 10 times that amount. ‘It’s the result of economic development,’ he added.”
“Pigeons are not the only animals to catch the eye of China’s business elite, with Japanese Koi carp prices also seeing a China effect. Kentaro Sakai, president of the Sakai Fish Farm, Japan’s biggest Koi breeder, said a single fish could sell for up to ¥42m ($380,000).”
“State Bank of India Ltd. reported a quarterly loss for the first time in at least 17 years as its treasury operations turned unprofitable and provisions for bad loans increased. The public lender reported a significant divergence in bad loans from RBI’s assessment which weighed on the bottom line.”
Other Interesting Links
WSJ – Daily Shot: Number of Times a State has Hosted a Super Bowl 2/8
The markets have “lost all confidence in the power of Saudi Arabia to set prices.”
Why?
“First, US production led by so called tight oil extracted from shale rocks has started to rise. Month by month, production increases and will continue to grow, not least from prolific and low-cost sources such as the Permian basin in Texas. Far from being closed down by the fall in prices over the last three years the US oil sector has demonstrated its resilience and its ability to cut costs.”
The majors have become more efficient as well.
“In contrast, the traditional oil producers have not been able to adjust. A study by the International Monetary Fund published a few weeks ago listed the oil price needed by a range of producers to balance their national budgets. Because of recent increases in production, Iran and Iraq have reduced their fiscal break-even point to just over $50 a barrel, but Libya requires a price of $71, and Saudi itself, despite record production, needs $83.”
Opec agreed to a cut in November and the group is meeting again this month to determine its next steps.
“But the prospect of a coordinated response has diminished as the weeks have passed. There is a big temptation for producers to cheat on any deal. Could the Saudis continue to fill the gap themselves by cutting more? In theory yes, but in practice the kingdom is also short of revenue and clearly unwilling to make the dramatic cut in output — by 1.5m barrels a day to 2m — that would really reset the market.”
“The realization that the market is beyond control in the accustomed way is now changing expectations across the industry. There is still more growth in supply than in demand. New projects are still coming onstream, and among the producers many — from Iran to Libya to Russia — have plans to raise production over the next two years.”
“The fact that the industry has learnt how to operate profitably at $50 suggests that the private sector will also continue to bring projects forward. Several of the major companies have announced planned increases in output in 2018 and 2019.”
“The private sector has passed through the pain barrier of adjustment. The oil-exporting countries have not. Matching lower revenues to the needs of growing populations who have become dependent on oil wealth will not be easy. It is hard to think of an oil-producing country that does not already have deep social and economic problems. Many are deeply in debt.”
“In Nigeria, Venezuela, Russia and even Saudi Arabia itself the latest fall, and the removal of the illusion that prices are about to rise again, could be dangerously disruptive. The effects will be felt well beyond the oil market.”
“Big picture, the near term looks good and the longer term looks scary. That is because:”
“The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,”
“There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,”
“Social and political conflicts are near their worst for the last number of decades, and”
“OPEC is going to have to do much more than simply extend its current production deal when it meets next week if it’s serious about addressing surplus inventory. In fact, its own figures show it needs to double the cut it made in January. That means finding another 1.2 million barrels a day to take out of production.”
“China has terrible air pollution, burns too much coal and pays too much for natural gas. The U.S. has too much gas, trouble financing expensive export terminals, and a huge trade deficit with China. The solution should be obvious.”
“It looks like policy makers in both countries may be thinking along similar lines, according to a preliminary 10-point bilateral trade plan released by the Trump administration Thursday.”
Good for the U.S. and China, bad for existing high cost suppliers to China such as Australia and Russia.
“Anyone hoping that the cycle of oil prices will soon turn, and that the market will tighten over the next two years, should be watching the Iranian election results very carefully.”
“Tight bank secrecy laws have helped draw $1.1 trillion in foreign funds to the city, according to an estimate from Boston Consulting Group, a consulting firm. Singapore is now growing faster than Switzerland and is set to become the largest cross-border financial center in the world by 2028, the firm forecasts.”
How much spare crude oil is there – hard to tell. Nontraded REIT sales struggling. There are a lot of dangers lurking in the Chinese P2P market, but the yield is just SO GOOD…
NYT – Is China Stealing Jobs? It May Be Losing Them, Instead 7/22. “If anyone is claiming that China is still enjoying a healthy or robust jobs market, they have no idea what they’re talking about.” – Leland Miller, chief executive of China Beige Book International
Star-Advertiser – N. Korea: U.S. has crossed red line, declared war 7/28. By putting Kim Jong Un on the list of sanctioned individuals, N. Korea claims the U.S. has crossed the red line and should the U.S. and S. Korea hold its planned war games next month, it’s on like Donkey Kong – according to N. Korea.
Chinese wealth management products are looking a lot like the junk bonds used for corporate raiding in the late 1980s rather than the traditional insurance policies they are supposed to be.
“China’s insurance regulator has warned against insurers becoming ‘automatic teller machines’ for activist shareholders, in a veiled reference to the battle for control of China Vanke, China’s largest residential developer, by insurance conglomerate Baoneng Group.”
“We will let those that truly want to do insurance come and do insurance and absolutely not allow companies to become financing platforms and ‘ATMs’ for large shareholders.” – Xiang Junbo, chairman of the China Insurance Regulatory Commission
“There are major regulatory gaps that need to be addressed. These ‘universal’ products have absolutely nothing to do with insurance. Some of them are very risky, but commercial banks are distributing them, and people trust the banks.” – senior financial regulator
With Puerto Rico facing approximately a $2bn interest and principal payments due on its general obligation bonds on July 1 and not being able to make the payments, the U.S. Congress recently passed a law that was meant to give Puerto Rico a temporary reprieve from “legal sanctions by creditors so it could restructure its obligations in an orderly way, and to maintain essential services.”
Well, Puerto Rico took this reprieve to pay about half of the amounts due, only they chose to whom went the payments. “Puerto Rico did not pay any interest or principal on the most senior, or general obligation bonds, but did make payments on more junior bonds. The government also paid its employees’ pension funds $170m more than what was required for this year, despite the pensions supposedly being legally subordinated to bondholders.”
The thing is that US Treasury officials advised on some of this reprioritization… you can see the dangerous precedence this sets for municipal bonds…
“The bonds on which interest payments were made on July 1, such as the Puerto Rico convention center district and the Puerto Rico Highways and Transportation Authority, are disproportionately owned by bondholders on the island. Supposedly more-sophisticated mainland US investors had avoided these lower ranked issues on the misinformed premise that financial and legal analysis should outweigh political calculation.”
The Buttonwood column of The Economist highlighted a rather large potential problem the world is facing: the vanishing of working age adults…
“The world is about to experience something not seen since the Black Death in the 14th century-lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.”
“The big question is whether economic growth and rising debt levels go hand-in-hand, or whether the former can continue without the latter. If it can’t, the future can be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labor-force participation among older workers.”
“A spokesman for Beijing Cyber Administration confirmed that state press reports that said conducting original reporting was a gross violation of the regulations (rule in place since 2005) and brought about ‘extremely nasty effects.’ The reports also said that the companies had been given a fixed period to ‘rectify’ the offending sites.”
“The trigger for the shutdown, according to media analysts, was coverage of flooding in northern China which – according to the official count – has left 130 dead and racked up damages of more than Rmb16bn ($2.4bn) in Hebei province alone.”
“The government does not want these platforms to provide their own news. They are only allowed to forward reports by outlets like Xinhua and the People’s Daily.” – Qiao Mu, a journalism professor in Beijing.
“The historic fall in oil prices has created a pileup of inventories, much of it stashed in tanks in the U.S. and other industrialized countries that are committed to disclosing the latest tally, but millions of barrels of oil are flowing to locations outside the scope of industry trackers.”
“At the beginning of July, 23 supertankers capable of holding 43 million barrels of oil were anchored for a month or more in the Singapore straits, according to Thomson Reuters’s vessel-tracking service, up from 15 ships at the start of the year. If they were full, it would be enough to meet the U.S.’s oil needs for more than two days.”
“‘OPEC has stopped being a swing supplier,” said Antoine Halff, director of the oil market program at Columbia University’s Center on Global Energy Policy. ‘Given the uncertainty about whether shale-oil production in the U.S. can take the role of swing supplier, it falls on stocks’ to replace lost barrels in the case of a supply disruption.”
“Uncertainty around storage was highlighted after attacks on Nigerian oil facilities in May and June. Following the assaults, some analysts forecast that Nigerian output would fall, which helped push oil prices above $50 a barrel. But shipping data showed Nigerian exports holding steady above 1.5 million barrels a day, according to data provider Windward.”
“Where did the exports come from?”
“In China, another storage mystery is unfolding. Government data show oil imports rising at a faster rate than refiners are processing it. The figures suggest the country has built a surplus 160 million barrels during the first half of the year, enough to meet its oil needs for about two weeks.”
“Analysts believe those barrels have gone to commercial tanks or to government-owned strategic reserves.”
“The distinction is critical. If most of the oil has gone to strategic reserves, demand could shrink once the tanks reach capacity, which some analysts say could happen this year.”
“Over the first five months of the year, sales of full-commission REITs, which typically carry a 7% payout to the adviser and 3% commission to the broker-dealer the adviser works for, have dropped a staggering 70.5% when compared with the same period a year earlier, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”
“Their recent sharp drop in sales is part of a longer cycle. The amount of equity raised, or total sales of nontraded REITs, has been sinking by about $5 billion a year since 2013, when sales hit a high watermark of nearly $20 billion.”
As a result, independent broker-dealer company commissions are down in tandem. “Industry bellwether LPL Financial said in its first-quarter earnings release that commission revenue from alternative investments, the lion’s share of which comes from nontraded REITs, was just $7.8 million, a staggering decline of 86.7% when compared with the first quarter of 2015.”
Four key factors have hit the industry. The blowup of Nicholas Schorsch’s REIT empire, recent FBI raids of United Development Funding (after hedge fund manager Kyle Bass called the company a Ponzi scheme), the Financial Industry Regulatory Authority Inc. rule 15-02, and the new DOL fiduciary rule.
The first two basically have brought the public and regulatory spot light to the industry and has shown the light on the less savory parts of the industry and its excessively high fees.
Finra rule 15-02 basically have caused an increase in transparency in the fees that the industry charges, now making them more accurately reflected on account statements.
And the DOL fiduciary rule “which will be phased in starting April, requires advisers to select investments for retirement accounts that are in the client’s best interest. Investments with high commission structures might not pass that test.” However, this rule also has a flip side, nontraded REITs may now be placed in retirement accounts (also as of April thanks to a Dept. of Labor ruling).
On the plus side, the industry is changing. New T shares are meant to reduce upfront commissions while spreading them over time (still high commissions) and larger financial institutions like Blackstone Group and Cantor Fitzgerald & Co. are looking at getting into the industry. Hence references are made to the evolution of the mutual fund industry that also started out with high commission structures.
As Allan Swaringen, CEO of Jones Lang LaSalle Income Property Trust, put it “nontraded REITs have lived almost exclusively across independent broker-dealer channels. I don’t think that’s a model that will be successful going forward. It has to be sold by a variety of advisers.”
Chinese P2Ps plagued by flaky guarantees (fintech blog). Gabriel Wildau. Financial Times. 25 Jul. 2016.
“‘It’s just too easy to attract investment. That’s why it draws so many scammers,’ says Michael Zhang, chairman of Beijing-based Puhui Finance, a large P2P platform with a clean reputation.”
“Beyond the problem of outright fraud is the thornier issue of raising risk awareness in a culture where debt investments are traditionally seen as carrying an implicit guarantee from issuers who are mainly state-owned institutions.”
“Dianrong.com, one of China’s largest P2P platforms, investment products carry a label that says ‘multiple guarantees.’ While the Chinese term used – baozhang – is distinct from the word for legally binding guarantees, it still translates as ‘guarantee’ or ‘safeguard.’ Many platforms now divert a portion of borrower interest payments into a ‘reserve fund’ used to protect investors from defaults, an arrangement that looks a lot like bank capital.”
“Soul Htite, the co-founder of Dianrong.com who previously co-founded US-based Lending Club, says that in an investing culture where defaults are rare, Chinese investors tend to choose products purely based on yield.”
“In the US we have a very good history of investing and people understand risk. (But) one problem we had in the first couple of years with Chinese investors is, we noticed that when you listed all the loans – this one yields 8% and another one yields 14% – people put all their money on the 14%. And we explained, ‘It’s not guaranteed, it might default.’ Still they put their money there. So that’s when we started forcing diversification on them.” – Soul Htite
