Tag: Sovereign Wealth Funds

July 17, 2018

Worthy Insights / Opinion Pieces / Advice

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

Markets / Economy

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

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

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

  • Bottom line, the imposed foreclosure moratoriums are ending.

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

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

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

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

Real Estate

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

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

Energy

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

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

Finance

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

China

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

  • “China’s two mobile payments giants, Alipay and Tencent, are poised to lose around $1bn in combined annual revenue to a new central bank requirement that third-party payment groups hold all customer funds in reserve.” 
  • “Chinese mobile payment transactions reached Rmb109tn ($16tn) last year, according to research firm Analysys Mason, as consumers switched to smartphones from cash for supermarkets, taxis, and payments to friends. The platforms are also increasingly used to purchase mutual funds, peer-to-peer loans and other wealth management products.” 
  • “Ant Financial’s Alipay and Tencent’s WeChat Pay dominate the industry, with market shares of 54% and 39% respectively in the first quarter. Ant Financial is the finance affiliate of Alibaba.” 
  • “Together the two groups control hundreds of billions of renminbi in customer funds that accumulate on their platforms when users receive payments but do not immediately transfer the funds to a bank account or other investment.” 
  • “Previously, third-party payment groups were permitted to invest customer funds, much as banks use deposits to make loans and other investments, even though unlike banks, the payment groups pay no interest to users.” 
  • “In January 2017, the People’s Bank of China announced that it was requiring third-party payment groups to keep 20% of customer deposits in a single, dedicated custodial account at a commercial bank and specified that this account would pay no interest.”
  • “In April, the ratio was increased to 50%, and last month, the central bank announced that it would raise the reserve requirement to 100% by next January. At that point, payment groups will earn zero interest on all customer funds.”
  • “The ostensible reason for the change is to prevent fraud and protect customers.” 
  • “Large players like Alipay and Tencent handled customer funds conservatively, but they were still able to earn significant revenue by depositing funds in interest-bearing accounts at commercial banks. Tencent earned Rmb3.9bn in interest income in 2017, or 1.7% of total revenues, according to its annual report.” 
  • “The PBoC’s balance sheet shows that ‘deposits of non-financial Institutions’ — a category that mainly includes payment companies — increased from nothing in May 2017 to Rmb501bn by the end of May. Before the implementation of reserve requirements, nearly all that money would have been generating interest for Alipay, Tencent, and their smaller rivals.” 
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April 23, 2018

If you were only to read one thing…

FT – Spanish now richer than Italians, IMF data show – Valentina Romei 4/19

  • “Spaniards have become richer than Italians — a heartening indication of Spain’s economic revival but a worrying sign for Italy, the eurozone’s third-largest economy, which is stuck in political gridlock.”
  • “Spain’s per capita gross domestic product exceeded that of Italy in 2017, according to IMF data published this week that compare countries on a so-called ‘purchasing power parity’ basis. The IMF also forecast that Spain would become 7% richer than Italy over the next five years. A decade ago Italy was 10% richer on the same basis.”
  • “By 2023 some former Soviet bloc countries, including Slovakia and the Czech Republic, are also expected to become richer than Italy on a per capita basis, the IMF forecasts show.”
  • “Italy’s stagnation is one of the main causes of the country’s increasingly bitter political divisions, with the electorate losing faith in the ability of its traditional parties to create jobs and restore growth. Anti-establishment and protest parties emerged as the big winners of Italy’s inconclusive general election last month, where voters deserted more moderate center-left and center-right forces.”
  • “Italy’s underperformance — and in particular any threat to its ability to service its debt, the largest in the eurozone after Greece’s relative to the size of the economy — is also seen as one of the biggest risks for the single-currency area.”
  • “The fact that Spain has overtaken Italy owes more to Italy’s problems than Spain’s economic progress, which has only recently gathered pace.”
  • “At the end of the 1990s, Italy — which now has almost 15m more people than Spain — had an economy twice as large as that of Spain. It is now only 50% larger and the difference is expected to shrink even further in the next five years.”
  • “Back in 1997, Italy was the 18th richest economy on a per capita basis among the countries for which the IMF has a complete data set. After 10 years, its ranking dropped 10 positions — and it has now slipped five more positions in the decade to 2017.”
  • “By 2023 Italy is expected to be only the 37th richest country on a per capita basis.”

Perspective

FT – Young buyers are being priced out of global city property – George Hammond 4/18

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – Mexico Didn’t Hit the Jackpot With Nafta – Justin Fox 4/18

FT – The quiet revolution: China’s millennial backlash – Yuan Yang 4/17

WSJ – Chines Banks Find Another Funding Wheeze – Andrew Peaple 4/20

  • “Pressure from regulators means it’s been getting harder for the country’s banks to get enough money.”

WP – Trump lied to me about his wealth to get onto the Forbes 400. Here are the tapes. – Jonathan Greenberg 4/20

WP – The staggering environmental footprint of all the food that we just throw in the trash – Chris Mooney 4/18

Markets / Economy

WSJ – Daily Shot: Morgan Stanley Research – Country Inflation Targets and Actuals 4/20

WSJ – Daily Shot: @Not_Jim_Cramer – Major Central Bank Balance Sheets 4/20

WSJ – Daily Shot: IMF – Global Debt to GDP 4/20

Real Estate

John Burns RE Consulting – Challenges Mount for First-Time Buyers – Devyn Bachman 4/20

WSJ – Rising Sea Levels Reshape Miami’s Housing Market – Laura Kusisto and Arian Campo-Flores 4/20

Energy

FT – Major dilemma: oil companies hedge bets on low-carbon future – Andrew Ward and Leslie Hook 4/17

  • For the world to attain lower carbon dioxide emissions, the oil majors will need to be leaders in this initiative. They’ve taken on the charge to some degree committing larger sums to renewable energy sources; however, it’s hard when they’re so good at making money with carbon dioxide emitting sources.

Finance

FT – Sovereign wealth fund assets ‘could reach $15tn in two years’ – Chris Flood 4/20

  • “Assets managed by SWFs globally reached $7.45tn spread across 78 funds as at March 2018, an increase of $866bn, or 13%, over the past 12 months, according to data provider Preqin.”  
  • “A recovery in oil prices and strong gains for equity markets drove the increase in assets, which will come as welcome news to investment managers as SWFs are among their most prestigious clients. SWFs pulled about $85bn from asset managers over the 24 months ending on December 16 as low oil prices forced governments in the Middle East to raid these rainy-day funds to prop up public spending.”

Environment / Science

Visual Capitalist – Visualizing the Prolific Plastic Problem in Our Oceans – Nick Routley 4/21

China

FT – Tencent and JD.com lead $437m investment in LeEco unit – Emily Feng 4/18

India

Hindustan Times – Cash crunch at ATMs could be the after-effects of demonetization – Roshan Kishore 4/18

  • “Analysis suggests shortage of cash in ATMs could be a result of persistence of tightness in overall money supply after demonetization.”

NYT – India’s A.T.M.s Are Running Out of Cash. Again. – Hari Kumar and Vindu Goel 4/20

March 01, 2018

Perspective

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

Worthy Insights / Opinion Pieces / Advice

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

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

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

WSJ – The Wayfair Riddle – Elizabeth Winkler 2/26

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

Energy

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

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

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

Finance

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

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

Health / Medicine

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

Agriculture

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

Sovereign Wealth Funds

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

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

China

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

India

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

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

Japan

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

Puerto Rico

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

South America

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

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

February 15, 2018

Perspective

WEF – Norway’s Central Bank has recommended oil and gas holdings are removed from its sovereign wealth fund – Thomas Colson 11/20/17

Worthy Insights / Opinion Pieces / Advice

Bloomberg Businessweek – Ten Years After the Crisis, Banks Win Big in Trump’s Washington – Robert Schmidt and Jesse Hamilton 2/9

Economist – As California’s fires died down, fraudsters arrived 2/8

  • “David Passey, a spokesperson for FEMA, says that more than 200,000 applications for relief related to the hurricanes and northern California wildfires are suspected to be fraudulent.”

Economist – China is in a muddle over population policy 2/8

Economist – The merits of revisiting Michael Young – Bagehot 2/8

  • “A book published 60 years ago predicted most of the tensions tearing contemporary Britain apart.”

Markets / Economy

Bloomberg – Teslas Are Finally Replacing Porsches on the Autobahn – Elisabeth Behrmann 2/12

WSJ – Daily Shot: NY Fed – US Consumer Debt Balance 2/14

WSJ – Daily Shot: NY Fed – US Consumer Delinquent Debt Percentage 2/14

WSJ – Brace Yourself for Higher Cellphone Bills This Year – Drew FitzGerald 2/8

Real Estate

Economist – How a brothel owner created the world’s biggest industrial park 2/10

  • “Google, eBay, Tesla and dozens of other tech firms have bought nearly all of the Tahoe Reno Industrial Center’s vast tract of land.”

Energy

Bloomberg Gadfly – OPEC’s Oil Price Nightmare Is Coming True – Julian Lee 2/11

Tech

NYT – The Autonomous Selfie Drone Is Here. Is Society Ready for it? – Farhad Manjoo 2/13

  • “Autonomous drones have long been hyped, but until recently they’ve been little more than that. The technology in Skydio’s machine suggests a new turn. Drones that fly themselves — whether following people for outdoor self-photography, which is Skydio’s intended use, or for longer-range applications like delivery, monitoring and surveillance — are coming faster than you think.”

Environment / Science

Economist – Antidepressants are finding their way into fish brains 2/8

China

Bloomberg Businessweek – China Takes a Hard Look at Corporate Borrowers – Enda Curran 2/6

  • “China’s total debt equaled 162% of gross domestic product in 2008. By 2016 it had climbed to 259%, an increase of more than $22 trillion, in large part because of massive corporate borrowing. And even with the current push to deleverage, it could reach 327% by 2022, according to Bloomberg Economics.”

  • “China’s banking regulator last summer ordered lenders to examine their exposure to private conglomerates, which was a way to slow borrowing by corporations without raising benchmark interest rates. In China, the amount of lending, rather than official interest rates, is the best indicator of how tight or loose government monetary policy is. And the picture is pretty clear: Broad-based money supply growth slowed to 8.2% in December, the weakest since data became available in 1998. ‘They are tightening,’ says Chetan Ahya, chief Asia economist at Morgan Stanley. ‘China has always relied more on actually controlling the flow of credit through direct measures’.”

Bloomberg – China’s War on Risk Has Banks Fleeing Shadowy Wealth Products – Jun Luo 2/7

  • “Chinese regulators appear to be winning their war against risk in one of the more dangerous corners of the country’s shadow banking industry — the so-called wealth management products that banks buy from each other in a search for easy profits.”
  • “Interbank holdings of WMPs more than halved last year, to 3.25 trillion yuan ($514 billion) in December from 6.65 trillion yuan a year earlier, according to the annual report of China Central Depository & Clearing Co., an industry body. That suggests higher interest rates and increased scrutiny by regulators are deterring Chinese banks from their previous practice of using cheap interbank borrowing to invest in each others’ higher-yielding WMPs.”
  • “The interbank WMP market will continue to contract this year, as China keeps interest rates high as part of its campaign against financial-sector risk, according to analysts from Shenwan Hongyuan Group Co. and Macquarie Group Ltd. Higher rates make it less profitable to use interbank borrowings to invest in WMPs. And many were deterred after the China Banking Regulatory Commission (CBRC) ordered banks to ‘self-review’ their interbank and shadow banking exposures in April, widely seen as a move to rein in the lenders.”
  • “The CBRC and other regulators are working closely in an unprecedented campaign to curb the $16 trillion shadow banking industry, of which WMPs issued by banks are the largest component. Another risky area that is contracting rapidly is some $3.8 trillion of so-called trust products, which have been a popular way for debt-ridden property developers and local governments to raise funds. That market has been hit by delayed payments as wealthy Chinese savers turn sour on the products.”
  • “Despite the retreat in the interbank sector, the wider WMP market continued to grow last year, albeit at a slower pace, according to the industry body. Strong appetite among individual investors helped the outstanding balance of WMPs rise 1.7% to 29.5 trillion yuan in December from a year earlier. Still, the escalating clampdown on all types of asset management products slowed the growth rate markedly from an average compound rate of about 50% between 2013 and 2015.”

Economist – Creditors call time on China’s HNA 2/8

  • “Analysts had foreseen an unravelling for some time, before even the regulatory wrist-slapping. A Chinese business expert calls HNA’s empire-building ‘a classic case of overextending’. For five years it has only been able to service its debts by taking on new ones. Returns on its investments have not exceeded 2% in almost a decade, according to calculations by Bloomberg, a data provider. As a result, HNA’s ratio of debt to earnings before interest, depreciation and amortization is around a lofty ten, estimates Standard & Poor’s, a ratings agency. Bond investors have grown nervous, and the firm’s financing costs have soared.”

South America

WSJ – Daily Shot: Venezuela Official Exchange Rate VEF/USD 2/13

  • “Venezuela has devalued its official exchange rate to be closer to the levels seen in the black market. This chart shows how many (bags of) bolivares are needed to buy one dollar – the official rate.”

  • “This move eliminated a major source of corruption.”
    • “BMI Research: – The move to … devalue the … official exchange rate is a positive step, as it will help to correct some of the extreme distortions in the market for foreign exchange. The massive discrepancy between the official and black market exchange rates has been a major source of corruption and arbitrage over recent years. Those with access to the subsidized exchange rate typically re-sell dollars on the black market at a substantial profit, rather than using the currency to import goods that must be sold at artificially low prices due to the country’s system of price controls. The market has reacted positively to the news of the devalued exchange rate, with the black market value of the bolivar rising to VEF233,531.1/USD as of February 6, up from a low of VEF266,630.7/USD on January 28.”

WSJ – Daily Shot: BMI Research – Venezuela Black Market Exchange Rate VEF/USD 2/14

 

October 2, 2017

If you were to read only one thing…

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

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

Perspective

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

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

Worthy Insights / Opinion Pieces / Advice

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

Markets / Economy

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

Real Estate

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

Finance

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

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

Health / Medicine

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

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

Sovereign Wealth Funds

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

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

September 21, 2017

Perspective

NYT – Before Wisconsin, Foxconn Vowed Big Spending in Brazil. Few Jobs Have Come. – David Barboza 9/20

  • “Before the Taiwanese manufacturing giant Foxconn pledged to spend $10 billion and create 13,000 jobs in Wisconsin, the company made a similar promise in Brazil.”
  • “At a news conference in Brazil, Foxconn officials unveiled plans to invest billions of dollars and build one of the world’s biggest manufacturing hubs in the state of São Paulo. The government had high expectations that the project would yield 100,000 jobs.”
  • “Six years later, Brazil is still waiting for most of those jobs to materialize.”
  • “Foxconn’s experience in Brazil and other parts of the world illustrates how difficult it has been for it to replicate its enormously successful Chinese manufacturing model elsewhere.”
  • “In China, Foxconn has built vast factories backed by large government subsidies. Its operations — assembling iPhones for Apple, Kindles for Amazon and PlayStations for Sony — employ legions of young assembly-line workers who often toil 60 hours a week for about $2.50 an hour. Labor protests in China are rare, or quashed swiftly.”
  • “But the model does not translate easily to other countries, where Foxconn must navigate different social, political and labor conditions.”

VC – These Maps Show Where a Dollar Goes Furthest in the U.S. – Jeff Desjardins 9/20

WSJ – Some NYC K-12 Schools Cross $50,000-a-Year Mark – Leslie Brody 9/18

  • “Five years ago, parents gulped when the price for attending some private K-12 schools in New York City hit $40,000 a year.”
  • “Now, a few have crossed the $50,000 threshold.”
  • “The cost of private education in the city has long risen faster than inflation, and is almost double the national average for such schools. Median tuition and fees at Manhattan private schools climbed to $44,050 last school year, up 23% from $35,867 five years earlier, according to the National Association of Independent Schools.”
  • “The charges, many private-school leaders say, don’t cover the full cost of the rigorous educations provided. Their customers want small classes, arts, extracurricular activities, intensive college advising and teachers with advanced degrees. Leaders of these institutions say most depend on fundraising to fill the yearly shortfalls, in addition to holding capital campaigns for new construction.”
  • “Drivers of mounting tuitions include teacher salaries, health insurance, technology upgrades, more services for students with learning disabilities, and maintenance for expanded facilities, school leaders said.”

Worthy Insights / Opinion Pieces / Advice

Medium – Starting Your Day on the Internet Is Damaging Your Brain – Srinivas Rao 9/18

  • “If we start our days by checking email, instagram, or the internet, we keep reinforcing the behavior of distraction until it becomes our new habit. Some of the smartest behavioral scientist and designers in the world have worked really hard to make sure that their products are addictive, habit forming, and only provide you with a temporary sense of fulfillment so the you are always jonesing for your next fix. As Mark Manson so brilliantly said, cell phones are the new cigarettes, And a significant amount of what’s on the internet is nothing more than junk food for the brain.”

A Wealth of Common Sense – Social Proof in the Markets – Ben Carlson 9/19

  • “Social proof is the idea that we look to others to figure out what the correct behavior should be. We follow narratives instead of evidence. It feels more comfortable to go along with the crowd when making tough decisions because we look at what others are doing in times of uncertainty.”
  • I’m always surprised how people latch on to a narrative because it sounds right, regardless of its likelihood or the conditions that would have to exist to make it so.
  • “Being right is easy. How you handle being wrong is the true test of any successful investor or decision-maker.”
  • “Many investors assume they must be right no matter what the market does.”
  • “‘I’m not wrong, I’m just early. It’s the market that must be wrong and all of those other idiots, but surely not me.'”
  • “One of the most fascinating aspects of the markets today is that most investors assume everyone else must be crazy. Those who have been sitting on the sidelines in cash assume everyone in the markets at current valuation levels must be nuts. And everyone who is sitting on gains from being invested in the markets assumes that those who are worried must be nuts because they’ve missed out. Maybe everyone is right (or no one) depending on the time frame.”
  • Just because something should be so, doesn’t mean it will be so.

Environment / Science

Market Watch – Hurricane Maria upgraded to Category 5 as it smashes into Caribbean – Ciara Linnane 9/19

Health / Medicine

NYT – Playing Tackle Football Before 12 Is Tied to Brain Problems Later – Ken Belson 9/19

  • “Athletes who began playing tackle football before the age of 12 had more behavioral and cognitive problems later in life than those who started playing after they turned 12, a new study released on Tuesday showed.”
  • “The findings, from a long-term study conducted by researchers at Boston University, are likely to add to the debate over when, or even if, children should be allowed to begin playing tackle football.”
  • “In phone interviews and online surveys, the researchers found that players in all three groups who participated in youth football before the age of 12 had a twofold ‘risk of problems with behavioral regulation, apathy and executive function’ and a threefold risk of ‘clinically elevated depression scores.'”
  • “’The brain is going through this incredible time of growth between the years of 10 and 12, and if you subject that developing brain to repetitive head impacts, it may cause problems later in life,’ Robert Stern, one of the authors of the study, said of the findings.”
  • “A growing number of scientists argue that because the human brain develops rapidly at young ages, especially between 10 and 12, children should not play tackle football until their teenage years.”

China

WSJ – Too Little, Too Late? China Can’t Seem to Get a Grip on Fintech Regulation – Chuin-Wei Yap 9/18

Europe

FT – Norway’s oil fund tops $1tn in assets for first time – Richard Milne 9/19

  • “Norway’s oil fund, the world’s largest sovereign wealth fund, has topped $1tn in assets for the first time in its history.”
  • “The oil fund, which started in 1996, reached NKr7,811bn ($1.001tn) in market value on Tuesday. Officials confirmed it was the first time it has breached the trillion-dollar barrier.” 
  • “In a country of just 5.2m people, the oil fund has been an extraordinary success, growing faster than ministers imagined to become one of the world’s largest investors, owning on average 1.3% of every listed company in the world.”
  • “The fund was set up to help manage Norway’s oil wealth for future generations by taking all the revenues the state receives from petroleum and investing it in financial assets abroad.”
  • “The fund has grown at a dizzying pace, with its assets rising 13-fold since 2002.”
  • “At the end of 2016, about half of the fund’s assets were due to the returns on its investments, approximately 45% due to inflows from oil and gas revenues, and the rest due to currency movements.”
  • “The oil fund has undergone significant changes over its history. It started by investing purely in bonds but now holds close to 65% of its assets in shares.”
  • “It made its first investment in property in 2011 and has now built up a $30bn portfolio, mostly in the US and Europe.”

May 23, 2017

Perspective

FT – Elliott makes distressed debt hires in expectation of downturn – Lindsay Fortado 5/17

  • “In a letter to investors earlier this month, explaining why they were opening to new capital, Mr. Singer said he believes ‘that there has never been a larger (and more undeserved) spirit of financial market complacency in our experience.'”

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – This Is Your Brain On Annuities – Anthony Isola 5/22

  • Max out your work-sponsored plans and IRA contributions before you even think about annuities.

FT – How the great bull run can have a constructive end – Mohamed El-Erian 5/21

Tech

BloombergBusinessweek – Waze Wants to Help You Hitch a Ride – Adam Satariano and Mark Bergen 5/18

  • “The traffic app tries its hand at carpooling.”

Sovereign Wealth Funds

FT – Money flowing into sovereign wealth funds declines to $7.4tn – Attracta Mooney 5/21

  • “Sovereign wealth funds are feeling the strain from lower oil prices and government raids on rainy-day funds, with the amount of money managed by state-backed investment vehicles falling slightly to $7.4tn.”
  • “Between March 2015 and March 2017, the collective assets overseen by SWFs — which often owe their origins to money generated from a country’s excess oil revenues — decreased 0.5%. That compares with the 14% increase in the two years to March 2015, according to the Sovereign Wealth Fund Institute, a research organization.”
  • “The fall in assets has raised concerns that state funds will withdraw more money from external investment managers, which have already suffered several years of redemptions from these large investors.”
  • “The oil price has more than halved since its 2014 high of about $115 a barrel, to less than $50 a barrel now, forcing governments to pull money from SWFs to prop up their economies.”
  • “In the two years to the end of 2016, SWFs withdrew at least $85bn from investment houses, according to figures from eVestment, the data provider.”
  • “The assets of Saudi Arabia’s Sama Foreign Holdings fund, the world’s fifth-largest SWF, fell 14% to $514bn in the year to March 2017, while assets at Russia’s reserve fund tumbled by two-thirds to $16.2bn, according to SWFI.”
  • “Assets also fell at China’s Safe vehicle and Azerbaijan’s state oil fund, while the amount of money managed by the Abu Dhabi Investment Authority and the Kuwait Investment Authority, the third- and fourth-largest SWFs, were flat over the past year, SWFI estimated.”
  • “Asset managers including Aberdeen, BlackRock, Franklin Templeton and Invesco were among those who are thought to have suffered large outflows from SWFs, particularly in 2015 and 2016.”
  • “According to SWFI, the assets managed by state-backed vehicles that owe their origin to oil and gas fell 1.5% over the past two years, compared with growth of about 0.7% for non-oil or gas-related funds.”
  • “Sven Behrendt, managing director of GeoEconomica, the consultancy, said: ‘The price of oil has been the largest driver for asset growth across the sovereign fund industry. Since oil has come down, asset growth has shrunk.’”
  • “SWFs have been forced to increase their allocations to riskier investments in an attempt to improve returns and increase assets. The SWFI data show that the value of assets invested in infrastructure, property and private equity grew rapidly over the past two years, while assets invested in fixed income fell.”
  • “He added that many SWFs were set up with the assumption that their financial returns would complement and eventually replace oil revenues as a significant source of funding.
  • “’This is a crucial moment for sovereign wealth funds, in particular oil-based ones,’ he said. ‘With the oil price lower, the question that will be asked of sovereign asset managers is to make good on that promise [to replace oil revenues].'”

China

FT – China looks to capture millions of tons of CO2 – Emily Feng 5/21

  • “China is planning to capture millions of tons of carbon dioxide generated by its energy and steel plants for use in extracting crude oil from the country’s increasingly barren oilfields.”

April 7, 2017

Okay, I’m prototyping here.  Bottom line it’s finally gotten through my thick skull that assembling a weeks worth of content and putting it out there once-a-week is a LOT to consume all-at-once. So I’m going to try a new angle here. I’m not going to post every day – rather almost every day.

I will post when there is content I think is worthy of posting – also conditioned on when I come across it (sometimes I just don’t get around to it – day job you know).

Some days will be light and others heavy.

Some posts will include a summary like those found in the Featured or Briefs section and at other times there will only be links.  Additionally I’ll sort the links now by categories and will post graphics within those categories as well.

Hopefully this makes the experience better for you and for me.

If you disagree, let me know.

Cheers,
Duff

Markets

WSJ – Not a Dot-Com Bubbles, Not 2007, but a Nasty Mix of Both – James Mackintosh 4/6

  • “There is so much more debt than usual being piled up by companies outside the finance sector.”

Sovereign Wealth Funds

FT – Norway’s oil fund wants CEO incentive plans scrapped – Richard Milne 4/6

  • “Norway’s $910bn oil fund, which on average owns 1.3% of every listed company in the world, will start pressing companies to end such incentives [long-term incentive plans] and instead force chief executives to own substantial stakes in their companies for periods of at least five and preferably 10 years. It will also urge boards to name a ceiling for possible pay.”

Asia – excluding China and Japan

NYT – Duterte Orders Military to Parts of South China Sea Claimed by Philippines – Felipe Villamor 4/6

  • “We tried to be friends with everybody, but we have to maintain our jurisdiction now, at least the areas under our control.” – President Rodrigo Duterte

Britain

Economist – The EU27 and the Brexit negotiations – Data Team 4/5

China

FT – Beijing plan to transform village into tech city sparks property frenzy – Charles Clover and Sherry Fei Ju 4/6

  • China has decided to make a new economic zone in the Hebei province outside of Beijing to be named Xiongan New Area.

Europe

FT – Spain: Boom to bust and back again – Tobias Buck 4/6

  • “The economy is finally set to return to its pre-crisis level. But have the reforms come at too high a price?”

South America

NYT – Mud Erased a Village in Peru, a Sign of Larger Perils in South America – Nicholas Casey and Andrea Zarate 4/6

Other Links

February 3 – February 9, 2017

Chinese companies stashing cash ($110bn) in wealth management products. Italian banking sector depending on UniCredit?

Headlines

FT – Bank of Japan intervenes to buy 10-year JGBs 2/3. Well for now it appears that the Bank of Japan’s tolerance for the Japanese 10-year bond is about 0.11% – the point at which it just intervened in the market indicating it would buy an unlimited amount of bonds to keep them at that rate or less.

FT – Overseas Chinese acquisitions worth $75bn cancelled last year 2/5. “Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through.”

WSJ – U.S. Firms Slash Interest Tab in $100 Billion Refinancing Blitz 2/8. Borrowers are using investor demand for yield to impose rate reductions on their debt.

NYT – A Crack in an Antarctic Ice Shelf Grew 17 Miles in the Last Two Months 2/7. A rift in the Larsen C ice shelf (one of the largest) that started in late 2014 is about 2 months away from pushing a very large glacier into the sea and leading to an eventual collapse of the Larsen C – which is not good.

Bloomberg – Supply Is the Technical Factor Behind Global Rally in Markets 2/8. “In short, a world with excess savings is still struggling to sate its appetite for investable assets in public markets, amid a net shortage of new stocks and corporate bonds.”

Special Reports / Opinion Pieces

Briefs

  • Stephen Foley and Hannah Kuchler of the Financial Times elaborated on institutional investor anger over Snap’s decision to offer voteless shares.
    • Snapchat (Snap) is a first in pursuing an IPO that will issue shares to the market with NO voting power. “The two founders, Evan Spiegel, chief executive, and Bobby Murphy, chief technology officer, will control the company and continue to do so even if they step down.”
    • “The prospectus says a founder’s voting power will only be diluted if he cuts his stake substantially or ‘nine months after his death.'”
    • “Other technology companies, including Google and Facebook, have concentrated control in the hands of their founders, creating different classes of stock. But none has gone public with a class that has no votes whatsoever.”
    • The pros – management can focus on long-term value. The cons – management is not accountable to its outside shareholders.
    • The downside to index funds – “many funds will be forced to own Snap when it is included in major stock market indices…”
    • The concern is the precedent this could set…
  • Anne Richards of the Financial Times discussed the challenges posed to markets by long-term demographic trends.
    • “The global economy has now passed an important tipping point. For the first time in recorded history, children under the age of five no longer outnumber those aged 65 and above. We have arrived at ‘peak child.'”
    • “The United Nations has estimated that the global population will continue to age and, by 2050, more than 15% of the global population will be aged over 65. Economists often point to the challenges that Japan faces as the population ages; by 2050, most of the G7 will have a similar demographic profile as Japan does today, as will China, Brazil and Russia.”
    • “In a world where immigration policy reform is increasingly dominating political agendas, policymakers should recognize that gross domestic product largely reflects a demographic profile where more workers enter the workforce, who (if everything goes to plan) will then produce, earn and consume more than the previous quarter.”
    • “Naturally, as the workforce shrinks due to aging, the reverse will be true. However, it does not necessarily mean than an economy is underperforming if the trend rate of growth is falling to reflect a smaller workforce.”
  • Peter Grant of The Wall Street Journal highlighted that several large investors have cut back on their property exposure due to the bull market losing steam.
    • Some prominent real-estate investors (i.e. Blackstone Group, Brookfield Asset Management, United Parcel Service Inc’s pension trust and Harvard Management Company) are reducing their holdings and getting more selective about new deals, in a sign that the eight-year bull market for U.S. commercial property is coming to a close.”
    • “Deal volume decreased by $58.3 billion, or 11% in 2016, the first annual decrease since 2009, according to data firm Real Capital Analytics.
    • “Caution among investors in the $11 trillion U.S. commercial property sector is being driven by lofty prices, the length of the market cycle so far and the recent rise in interest rates, which makes bonds look more attractive compared with commercial property. Also, developers are adding new supply of some property types at the fastest rate since the recovery began.”
    • “For example, more than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real-estate tracker Axiometrics Inc.”
  • Lucy Hornby of the Financial Times covered the vow made by Beijing’s mayor to banish parts of the city to the provinces.
    • “Beijing’s new mayor has vowed to gut the city of all functions unrelated to its status as national capital, in an effort to push the growing population into the surrounding provinces.”
    • “Mr. Cai said he would reduce Beijing’s land zoned for construction and cap the city’s population at 23m.”
    • “Almost 22m people now live in Beijing or surrounding satellite cities, up from 4m in 1950 and 9m in 1980.”
  • Robin Wigglesworth of the Financial Times pointed US small-caps guru Henry Ellenbogen’s recent concerns over the post-election rally.
    • “US small stocks guru Henry Ellenbogen is concerned that the ferocious post-election equity rally could unravel unless the economy accelerates sharply to justify the frothy valuations, warning that most of the gains were powered by fickle inflows into exchange traded funds.”
    • “Over $20.6bn has gushed into US small-caps ETFs since early November, according to EPFR, while dedicated small-caps mutual funds have actually suffered some outflows, underscoring the role of passive investment vehicles in the move.”
    • “‘When you have those kind of flows into an illiquid asset class, you can really drive performance. Stuff that was outside the index has been roughly flat, while everything in the index has risen significantly,’ Mr. Ellenbogen said. ‘If there is a setback, the fund flows that drove small-caps higher will be just as aggressive on the way out.'”

Graphics

WSJ – Daily Shot: US Major Inflation Components 02/02

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WSJ – Daily Shot: US Cord Cutting 02/02

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WSJ – Daily Shot: FRED – Domestic Bank Demand for Commercial Real Estate Loans 02/06

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WSJ – Daily Shot: S&P Retail – S&P 500 Relative Performance 02/06

  • “US retail shares continue to underperform as investors question business models.”

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WSJ – Daily Shot: Domestic Water Use Per Capita by U.S. State 02/06

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WSJ – Daily Shot: FRED – US Student Loan Balance 02/07

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WSJ – Daily Shot: Statista – Lawsuits filed against US Administrations in first 14 days 02/07

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WSJ – Daily Shot: Global Skyscraper Construction 02/07

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FT – China forex reserves dip under $3tn to touch 5-year low – Gabriel Wildau 2/7

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FT – Investors pile into risky bonds in bet on Trump economy – Eric Platt 2/8

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WSJ – Daily Shot: EIA – US Electricity Production 02/08

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WSJ – Daily Shot: US Market Volatility 02/08

  • “Volatility is dead. We’ve now hit 85 consecutive days without a 1% drop in the S&P 500. The last time this occurred was in 2006.”

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Bloomberg – The Race to the Speed of Light Is Accelerating – John Detrixhe 2/8

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WSJ – For Chinese Home Buyers, Seattle Is the New Vancouver – Laura Kusisto and Kim Mackrael 2/7

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WSJ – Daily Shot: Pew Research – US Religiosity Index 02/08

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Economist – Emerging markets’ Trump tantrum abates, except in Turkey 2/4

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Featured

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

Chinese companies park record $110bn in wealth products. Don Weinland. Financial Times. 6 Feb. 2017.

“Cash-rich Chinese corporations are running out of places to invest.”

“As economic growth cooled and investment opportunities ebbed in China last year, listed companies moved a record $110bn of idle cash into financial products, mainly at banks, according to data from Wind Financial Information.”

“The flood of company funds into wealth management products – up some 40% on the previous year – was a sign that many groups in the country shunned risky corporate expansion amid the economic slowdown, instead preferring short-duration investments.”

“About $64bn of the cash companies invested in wealth products had been raised from investors through initial public offerings and private placements…” Why raise cash if you’re not going to use it?

“Over the past four years, Chinese regulators have leaned on listed groups to pay out regular dividends in the hope of bringing mainland bourses more in line with international standards.”

“The wealth management investments show that many state-held groups still refuse to return cash to shareholders.”

“‘The state still has strong holdings in many of these companies, often more than 50%. So institutional investors cannot put pressure on companies to pay out dividends,’ said Wong Chi-man, executive director at China Galaxy International Securities.”

Okay, so if all of these companies (which are traditionally where idle capital is sent to generate economic returns) are preferring to sit on cash for a lack of investment opportunities within their own business, how are the wealth management products being sold going to generate returns – especially at scale?

Is Italy’s financial future resting on UniCredit? Rachel Sanderson, Martin Arnold and Jonathan Ford. Financial Times. 6 Feb. 2017.

“Jean-Pierre Mustier, chief executive of UniCredit, has criss-crossed the world in the past two months seeking to cajole investors into buying 13bn in new shares – a major test of confidence not just for Italy’s largest bank but also the country’s teetering banking sector.”

“As UniCredit launched its bumper rights issue on Monday – at a steep 38% discount to its theoretical ex-rights issue price – bankers in the underwriting consortium said they were confident that it would be successful. It needs to be… Besides worries about profitability and governance, investors fear the industry’s 360bn mountain of doubtful loans, of which 200bn are in default.”

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“The offering comes at a tumultuous moment. The implementation of a government decree – earmarking 20bn to rescue several midsized banks, including Monte dei Paschi di Siena, the world’s oldest lender – remains up in the air.”

“The broader issue is whether a successful fundraising by UniCredit will help draw a line under concerns about Italy’s largest bank by assets, and in turn Italy’s banking sector.”

“Italian banks have long been burdened by a large stock of non-performing loans, which they have valued at prices higher than investors are willing to pay.”

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“Gross non-performing exposures measured 356bn, or 17.7% of total loans, according to the latest financial stability report. That is three times the amount that is normal in most European economies. The stock of gross sofferenze – the worst kind of defaulted loan – remains at about 200bn; net of provisions that the banks themselves have taken these amount to 85bn.”

“Mr. Mustier, speaking to the Financial Times in December, suggested that the problem of its NPLs (Non-Performing Loans) is deeper than many appreciate.”

“He said the issue stems from Italy’s double-dip recession but also from Italian companies’ practice of funding themselves with ‘hot money.’ The companies had ‘the wrong kind of balance sheet,’ he said. ‘They had not enough capital and they were managing their liabilities by having short-term liabilities to cover long-term assets.'”

“It has taken Mr. Mustier, a Frenchman who lived in London for 20 years, to call out the deeper cultural problems facing Italy’s banking sector. The question is whether his remedy will last beyond this month’s share sale.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – What are China’s 12345 hotlines? 2/7

Economist – Buttonwood: Bubbles are rarer than you think 2/8

Economist – Melania Trump’s “once-in-a-lifetime” opportunity to profit 2/9

FT – Snap: clickbait 2/2

FT – Shanghai shows changing face of FDI in China 2/3

FT – US protectionism and deglobalization spell inflation 2/5

FT – Foreign investors cut holdings of China bonds for first time since 2015 2/5

FT – IMF board split over bailout terms for Greece 2/6

FT – Facebook and Google team up to fight fake news in France 2/6

FT – Thinking the unthinkable on Germany going nuclear 2/6

FT – China credit flood set to persist despite PBoC rate rises 2/8

FT – Why is the eurozone back in crisis over Greece? 2/8

FT – South Korean court all but sinks Hanjin Shipping 2/9

FT – US inflation expectations slide 2/9

NYT – Steve Bannon Carries Battles to Another Influential Hub: The Vatican 2/7

WSJ – The Next American Farm Bust Is Upon Us 2/9

WSJ – Landlord Concessions Rising in Manhattan and Brooklyn 2/9

 

 

October 14 – October 20, 2016

The Chinese housing market is looking rather shaky. Investors are going to have to brush up on their social sciences. China is smarting from an aggressive push into developing world loans.

Headlines

Briefs

    • “The collective wealth of the world’s ultra-rich has fallen for the first time since the aftermath of the global financial crisis even as Asia, powered by China, continues to create a billionaire every three days, according to research published on Thursday.”
    • “Last year the world’s billionaires lost 5% of their fortunes, or $300bn, and their wealth growth failed to match stock market performance for the first time in two decades, according to a report by UBS, the world’s largest wealth manager, and PwC, the professional services firm.”
    • “Over the past 20 years billionaires have increased their wealth sevenfold – double the rate of global stock market growth – in what has been termed a second ‘Gilded Age’ for wealth creation.”
    • Easy for some to say.
    • “Among the causes for the fall in billionaires’ fortunes last year were transfers of wealth…, falling commodity prices and a rising US dollar, the currency on which the report is based.”
    • “But such vast wealth can prove fleeting. While 41 billionaires made the cut in the US for the first time last year’s UBS/PwC report, 36 dropped below that level. In China the situation was even more volatile: while Asia generated 113 billionaires last year, 80 dropped below that level, of whom 50 were Chinese. Their declining fortunes were attributed to fluctuating markets and a government crackdown on corruption and graft.”
    • “The new fund, dubbed the SoftBank Vision Fund, will be based in London and seeded with $25bn from SoftBank and up to $45bn from Saudi Arabia’s Public Investment Fund over the next five years, according to a statement from the Japanese telecoms group.”
    • “At $100bn, the new fund would be the same size as all funds raised by US venture capital firms over the past two and a half years, according to data from the National Venture Capital Association.”
    • “SoftBank said the fund would be investing over a five-year time horizon, which at $20bn a year would represent roughly a quarter of total annual investments in US-based venture-backed start-ups.”
    • According to Masayoshi Son, the fund will be “the biggest investor in the technology sector.” Quite a statement.
    • “China, long the world’s factory floor, is taking control of a bigger portion of the world’s supply chains as well, causing a shift in global trade patterns by buying less from abroad.”
    • “Exports to China, which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s. They are down another 8.2% this year, through September. The decline helped shave 0.3 percentage points off world trade growth last year, and is a big reason that growth is expected to slow to 1.7% this year from the 5% a year it has averaged over the last two decades.”
    • One of the reasons, simply Chinese companies have been using less product from foreign sources. “The proportion of foreign-made inputs in Chinese exports has been shrinking by an average 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data.”
    • wsj_china-to-world-we-dont-need-your-factories-anymore_10-18-16
    • “To build domestic capabilities on the high end, the Chinese government last year announced a plan to raise the domestic content of core components and key materials to 40% by 2020 and 70% by 2025. It has been spending large amounts on research and development: $213 billion last year, or 2.1% of gross domestic product, according to state media reports. In June it pledged more money for ‘technological innovation.'”

Special Reports / Opinion Pieces

Graphics

Twitter – Nick Grealy @RelmagineGas 10/10

Twitter_Nick Grealy @RelmagineGas_10-10-16

WSJ – Bleak Times at the Mall – Justin Lahart 10/14

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WSJ – China’s Property Frenzy Spurs Risky Business – Lingling Wei 10/19

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FT – Saudi Arabia’s $17.5bn bond sale has lessons for debt market – Elaine Moore and Simeon Kerr 10/20

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Featured

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

China’s Ballooning Mortgage Debt Built on Shaky Foundation. Anjani Trivedi. Wall Street Journal. 14 Oct. 2016.

A brief and well-articulated article on precarious position of the Chinese mortgage/housing market.

“Seeking to quell worries that China’s home-finance market has gotten out of hand, a banking regulator disclosed this week that the loan-to-value ratio in the housing market, or the ratio of the value of mortgage loans to the value of underlying property, was on average 55%.”

“But the absolute level may not matter as much as the pace of increase. UBS estimates the loan-to-value ratio of new-home purchases is even higher, closer to 70%, having surged from 15% in 2012. Much of that rise has happened in the past year.”

“As a comparison, U.S. mortgages before the housing bubble burst had a loan-to-value ratio of less than 60%… In any event, that basic number very quickly rose to over 90% when the bubble popped and prices dropped.”

“Because so many of China’s mortgages are of recent vintage, the value side of their loan-to-value calculation rests on the most recent surge in prices. Simplistically, should prices correct, say, 20%, LTVs would suddenly on average be at 70%. That doesn’t take into account individual markets where leverage and price increases might be higher. Nor does it factor in the vast market for shadow lending, which anecdotally has been helping buyers fund down payments, heaping leverage on top of leverage.”

Keep in mind, “home prices have a way of overcorrecting.”

Granted, with so much at stake for the Chinese economy, I would expect the government will do almost anything to keep the real estate cycle trending up as it moves to the right.

Investors are ill equipped for our unfathomable future. Gillian Tett. Financial Times. 13 Oct. 2016.

Ms. Tett does a good job of highlighting recent remarks by Axel Weber, former head of the Bundesbank and now chairman of UBS, at one of the International Monetary Fund meetings held recently.

Essentially, he sees three primary themes shaping the market today.

First, “the banking system today is much stronger than a decade ago as a result of post-crisis reforms.” Despite the effects of low-to-negative interest rates. So we have that going for us.

Second, “while the banking system looks healthier, markets do not.” Markets are no longer ‘markets’ in the traditional sense. There is too much distortion. For example, “in the government bond markets, where the central banks of Japan, US and eurozone currently hold a third, a fifth and a tenth of the outstanding local government bonds.”

“Central bank purchases are distorting the price of European corporate bonds and Japanese equities, with knock-on effects in numerous other asset classes. ‘I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention,’ Mr. Weber warned.”

Third, “these distorted markets are increasingly hostage to unfathomable political risk.”

“Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as Britain’s vote to leave the EU, herald a new protectionism?”

“Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science.”

China rethinks developing world largesse as deals sour. James Kynge, Jonathan Wheatley, Lucy Hornby, Christian Shepherd and Andres Schipani. Financial Times. 13 Oct. 2016.

Just because you want something to be so, doesn’t mean it will be.

Entering the world of international development finance about a decade ago, China has jumped in head first.  “With a loan portfolio larger than all six western-backed multilateral organizations put together. Outstanding loans form the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions, according to a recent study.”

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Well, the thing is that when they entered the game, they backed a lot of risky players/countries.  As one Chinese official put it “China had no choice but to lend a lot to risky countries because they had the commodities we needed and because the western multilateral organizations already dominated the rest of the world.”

Of course the lesson is being learned. “These days we need viable projects and a good return. We don’t want to back losers.”

All told China has invested $65bn in Venezuela since 2007 in 17 tranches. Which “for context, $65bn is more than the World Bank has lent to any country – with the single exception of India – since 1945, data from the bank show.”

Now, in regard to Venezuela “China is no longer willing to ‘put good money after bad, unless it is the only way for it to avoid losing its entire position through the collapse of the regime.'” A possibility.

“Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the Paris-based OECD. By contrast, only two of the top 10 recipients of World Bank development finance fell into the same category.”

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Lesson learned. We’ll see how it works out.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – China’s uncannily stable growth versus the price of reform 10/19

FT – How the west has lost the world 10/12

FT – Snap: high altitude (Lex) 10/13

FT – Inflation fears cast shadows over long-dated bonds 10/13

FT – China escapes deflation but are rising global prices on the way? 10/14

FT – Didi Chuxing to be hit by rules on migrant drivers 10/15

FT – Investment in UK commercial property sinks after Brexit vote 10/17

FT – Time to buy ‘real assets’ in age of inflation – BAML 10/17

FT – IPOs brought down to earth amid market uncertainty 10/18

FT – Airbnb faces fight for survival in New York City 10/19

Reuters – Manhattan office market booming as asking rents set record: report 10/13

WP – NFL ratings plunge could spell doom for traditional TV 10/14

WSJ – SoftBank’s Elephant Gun Packs a Scare 10/14

WSJ – Immigrant Investor Program for Poor Neighborhoods Benefits Rich Ones More, Study Shows 10/19

WSJ – Here’s Just How Much Building It Would Take to Boost Big-City Affordability 10/20