Tag: Student Loans

Student Loans Scammers

WSJ – Soaring Student Debt Opens Door to Relief Scams – Jean Eaglesham, Michael Tobin, and Coulter Jones 8/26/19

Student debt is soaring—it is now nearly $1.5 trillion—and defaults are at a record. That has been fertile ground for companies that promise to help stretched borrowers by navigating the maze of federal programs that can reduce or forgive debts for those who qualify, such as public-service workers or people on low incomes.

Some companies operate legally, although there is nothing they offer that borrowers can’t get free, regulators say. Other firms are outright scams, or make promises to borrowers that are illegal, regulators and consumer advocates warn.

A record $89.2 billion of student loans was in default at the end of June, New York Federal Reserve data show. Of the $1.48 trillion outstanding, 11%, or $160 billion, was at least 90 days behind on repayments—and the true rate is likely double that, because only half the loans are currently in repayment.

“We’ll do the work for you,” Financial Preparation Services says on its website. “No more drowning in a sea of confusing paperwork and processing!” Its fee: $1,195 for document preparation, then $40 a month for almost 20 years—a total of $10,555—according to a 2018 client agreement reviewed by the Journal.

Many of the FTC cases allege that the companies charged upfront fees for debt relief, which is illegal, or engaged in other prohibited practices such as masquerading as being government-approved, or faking information on applications for federal relief.

Red Flags for a Student Loan Debt-Relief Scam

The Federal Trade Commission says borrowers should beware of companies that:

  • Charge upfront fees. It is illegal for companies to make you pay before they help you.
  • Promise fast loan forgiveness. Scammers may pretend to offer an easy way to wipe out loans—it doesn’t exist.
  • Pretend to have official endorsements, such as using Department of Education logos. The government doesn’t approve any debt relief companies: it advises if you have federal loans to go direct to https://studentaid.ed.gov/sa/
  • Try to rush you into signing up. Companies may say you have to act fast to qualify for programs: Check them out before you commit to anything.
  • Demands your student loan ID, or asks you to sign a power of attorney, to deal with the government on your behalf. You can lose control of your finances, and be cut off from information on what’s happening to your loans.

June 18, 2018

Worthy Insights / Opinion Pieces / Advice

Bloomberg Businessweek – Could Ocean’s 8 Actually Work? – James Tarmy 6/5

  • “Why stealing giant diamonds is a terrible, no good, very bad idea.”

Bloomberg Businessweek – Tears ‘R’ Us: The World’s Biggest Toy Store Didn’t Have to Die – Susan Berfield, Eliza Ronalds-Hannon, Matthew Townsend, and Lauren Coleman-Lochner 6/6

FT – Trump is trading on the protectionist mood – Rana Foroohar 6/10

  • “When even centrists are circling the wagons, we know we have entered a different world.”

FT – Forecasters have an awful record in predicting energy markets – Nick Butler 6/14

  • “Wider uncertainty increases appeal of large, low-cost power projects.”

WSJ – The Stock-Market Price Can Be Wrong. Very Wrong. – Jason Zweig 6/15

  • “Researchers have caught investors in the act of wildly – and unnecessarily – overpaying for a stock.”

WSJ – Venezuela’s Long Road to Ruin – Mary Anastasia O’Grady 6/10

  • “Few countries have provided such a perfect example of socialist policies in practice.”

Markets / Economy

NYT – Power Companies’ Mistakes Can Cost Billions. Who Should Pay? – Ivan Penn 6/14

  • “Utilities say they must be shielded from liability or the electric grid will suffer. Critics say that puts the burden on ratepayers, not investors.”

Real Estate

WSJ – Daily Shot: Bianco Research – Value of US Real Estate relative to GDP 6/15

WSJ – Daily Shot: John Burns RE Consulting – Burns Home Value Index 6/15

WSJ – Daily Shot: John Burns RE Consulting – Burns Intrinsic Home Value Index 6/15

Energy

WSJ – Global Investment in Wind and Solar Energy Is Outshining Fossil Fuels – Russell Gold 6/11

Finance

WSJ – Daily Shot: MagnifyMoney – Auto Loan Rates vs. Fed Funds Rate 6/15

WSJ – Daily Shot: MagnifyMoney – Student Loan Rates vs. Fed Funds Rate 6/15

Fishing

NYT – In the Philippines, Dynamite Fishing Decimates Entire Ocean Food Chains – Aurora Almendral 6/15

Construction

NYT – Piece by Piece, a Factory-Made Answer for a Housing Squeeze – Conor Dougherty 6/7

  • “The global construction industry is a $10 trillion behemoth whose structures determine where people live, how they get to work and what cities look like. It is also one of the world’s least efficient businesses. The construction productivity rate — how much building workers do for each hour of labor they put in — has been flat since 1945, according to the McKinsey Global Institute. Over that period, sectors like agriculture, manufacturing and retail saw their productivity rates surge by as much as 1,500%. In other words, while the rest of the economy has been supercharged by machines, computers and robots, construction companies are about as efficient as they were in World War II.”

WSJ – Historic Rise in Lumber Costs Ripples Through Economy – Ryan Dezember 6/5

Education

WSJ – Judges Wouldn’t Consider Forgiving Crippling Student Loans – Until Now – Katy Stech Ferek 6/14

  • “For decades, college debt was immune from the bankruptcy process. Judges are actively seeking ways to help debtors.”

Africa

NYT – Corruption Gutted South Africa’s Tax Agency. Now the Nation Is Paying the Price. – Selam Gebrekidan and Norimitsu Onishi 6/10

Britain

FT – Average-sized English homes too pricey for average earners – Judith Evans 6/15

China

FT – Tycoon abducted by China works with authorities to sell assets – Don Weinland and Lucy Hornby 6/10

  • “Xiao Jianhua (Tomorrow Group company) said to be detained in Shanghai a year after being seized in Hong Kong.”

Nikkei Asian Review – How Beijing is winning control of the South China Sea – Simon Roughneen 6/13

  • “Erratic US policy and fraying alliances give China a free hand.”
  • “What China is winning is de facto control of nearly the entire South China Sea, including all activities and resources in it, despite the other surrounding Southeast Asian states’ respective legal rights and entitlements under international law.” – Jay Batongbacal, director of the University of the Philippines Institute for Maritime Affairs and Law of the Sea
  • “At stake is the huge commercial and military leverage that comes with controlling one of the world’s most important shipping lanes, through which up to $5 trillion worth of trade passes each year.”

Europe

Bloomberg Businessweek – Italy’s Young Populists Are Coddling the Old – and Holding the Country Back – Peter Coy 6/6

  • “The country’s economic output is smaller now than it was in 2004, and employment policies are skewed to protecting jobs, not creating them. The number of Italians registered as living abroad rose 60% from 2006 to 2017, to almost 5 million. Among those who stay, it’s common for unemployed young people to live with their parents instead of starting their own families, which is one reason the country has one of the world’s lowest birthrates.”

South America

NYT – Workers Flee and Thieves Loot Venezuela’s Reeling Oil Giant – William Neuman and Clifford Krauss 6/14

Other Interesting Links

Tax Foundation – How High Are Beer Taxes in Your State? – Katherine Loughead 5/24

May 29, 2018

If you were only to read one thing…

WSJ – The Tragedy of Venezuela – Anatoly Kurmanaev 5/24

  • “Last weekend, Venezuela’s President Nicolás Maduro dragged his Socialist government into a third decade in power by winning elections that were boycotted by the opposition, ignored by most of his countrymen and rejected by the international community. As sluggish voting drew to a close, a smiling and confident Mr. Maduro posted a video of himself waving not to throngs of adoring supporters but to a largely empty public square.”
  • “By the end of 2018, it will have shrunk by an estimated 35% since 2013, the steepest contraction in the country’s 200-year history and the deepest recession anywhere in the world in decades. From 2014 to 2017, the poverty rate rose from 48% to 87%, according to a survey by the country’s top universities. Some nine out of 10 Venezuelans don’t earn enough to meet basic needs. Children die from malnutrition and medicine shortages. An estimated three million Venezuelans, 10% of the population, have left the country in the two decades of Socialist rule, almost half of them in the past two years, according to Tomás Páez, a researcher at the Central University of Venezuela.”
  • “If Mr. Maduro didn’t know when to stop the music, the idea for the endless party came from his predecessor, Hugo Chávez, who died just a month before I arrived in 2013. The strongman charmed his countrymen with a silver tongue, his love of dancing and singing and his disdain for the hated austerity packages imposed by previous Venezuelan presidents. As oil prices shot up in his last decade, Mr. Chavez not only failed to save any of the windfall but buried the country in debt.”
  • “Along the way, he imposed capital controls to try to stop money from fleeing the country. The arbitrary exchange rate system suffocated private enterprise and investment, but the poor got subsidized food and free housing. The middle class got up to $8,000 of almost-free credit card allowances a year for travel and shopping. And the rich and politically connected siphoned off up to $30 billion a year of heavily subsidized dollars through shell companies, according to the planning minister at the time.”
  • “The currency and price controls implemented by Mr. Chávez broke the basic link between supply and demand, creating surreal economic distortions. A business-class Air France return ticket from Caracas to my hometown in Siberia would cost me $400, yet a 15-year-old Suzuki jalopy with no air conditioning and 150,000 miles set me back $4,600.”
  • “Caracas in 2013 reminded me of a tropical version of the Soviet periphery. Basic goods like flour and aspirin had fixed prices and were so cheap that companies had no incentive to make them. When you did find them, it made sense to grab as much as you could carry. Who knew when you would find them again? Like Russia in the 1980s, people dealt with shortages by resorting to the black market, hoarding goods and trading perks of their jobs, like bureaucratic stamps of approval or access to car batteries, for other favors or products.”
  • “But Venezuela’s collapse has been far worse than the chaos that I experienced in the post-Soviet meltdown. As a young person, I was still able to get a good education in a public school with subsidized meals and decent free hospital treatment. By contrast, as the recession took hold in Venezuela, the so-called Socialist government made no attempt to shield health care and education, the two supposed pillars of its program. This wasn’t Socialism. It was kleptocracy—the rule of thieves.”
  • “In Venezuela, I saw children abandon schools that had stopped serving meals and teachers trade their lesson books for pickaxes to work in dangerous mines. I saw pictures of horse carcasses on the grounds of the top university’s veterinary school—killed and eaten because of the lack of food.”
  • “Hyperinflation, set to reach 14,000% this year, has transformed the most basic transactions into Kafkaesque trials. Cash is extremely scarce, card payment networks are overloaded, cell phone coverage is worse than in Syria, and online banking systems constantly crash because of underinvestment. Paying for a cup of coffee can take an hour.”
  • “The crisis has even made it harder for the ruling elite to enjoy its privileged status. Despite access to official dollars and the protection of security details, top apparatchiks now avoid the best restaurants, the plushest resorts and business-class lounges, where they fear encountering the hatred of their compatriots. Sanctions and fears of corruption probes have barred many of them from trips to the U.S. and much of Europe.”
  • “After 2016, I no longer had to travel to report on the toll of the economic crisis. It was visible all around me: in the sagging skin of neighbors, the dimming eyes of janitors and security guards, the children’s scuffles for mangos from a nearby tree. It is profoundly depressing to watch people you know grow thinner and more dejected day by day, year after year. When I look back at my five years in Venezuela, it’s not the time I spent covering riots, violent street protests or armed gangs that stirs the most feeling. It’s the slow decay of the people I encountered every day.”
  • “For most ordinary Venezuelans I know, Mr. Maduro’s foreordained victory last weekend snuffed out the last glimmer of hope that their lives can improve through democratic and peaceful means. What’s left is exile or further misery.”

Perspective

WSJ – Daily Shot: CNN – Global School Shootings Since 2009 5/25

Slate – Eighties Babies Are Officially the Brokest Generation, Federal Reserve Study Concludes – Jordan Weissmann 5/23

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – When Fees Go Up in Seconds, It’s Time to Go – Dina Isola 5/25

FT – New York property jitters herald declines elsewhere – Gillian Tett 5/24

  • “Clouds are hovering over New York’s housing market. A couple of years ago, property prices were spiraling ever higher — much like the new luxury skyscrapers now springing up in midtown Manhattan.”
  • “But estate agents say that sales volumes in the first quarter of 2018 were at their lowest level for six years. Meanwhile the median price per square foot was 18% lower than a year earlier, according to some reports.”
  • For those of you not living in Manhattan and that don’t own property there, you think, so what? The thing is … “last month the IMF published its first comprehensive analysis of global property and this suggests that real estate is becoming prone to synchronization too. Two decades ago, only 10% of property price movements could be blamed on global — not local — factors. Now it is 30%.”
  • “…What is striking is that this real estate synchronization is affecting urban centers in both emerging and advanced economies. Or as the report notes: ‘House prices in major cities outside the United States — Beijing, Dublin, Hong Kong SAR, London, Seoul, Shanghai, Singapore, Tokyo, Toronto and Vancouver — are positively associated with US house price dispersions’.”
  • “This might seem unsurprising. After all, the global elite hop across borders at dizzying speed. So does financial capital, and sentiment-shaping news. Meanwhile, the market capitalization of the real estate investment trust sector has tripled in the past 15 years, and large asset managers allocate on average of 11% of their portfolios to property.”
  • “This has made the housing market more ‘financialized’, since some investors are treating housing more like a tradeable asset, chasing yields around the world. No wonder that a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats.”
  • “…the key point is this: if (or when) global financial conditions eventually become less benign, there will probably be downward movement in housing markets too, with some unexpected spillover effects.”
  • “Indeed, the most intriguing point in the IMF report is that ‘heightened synchronicity of house prices can signal a downside tail risk to real economic activity, especially when taking place in a buoyant credit environment’.”
  • “In plain English, this means that a correlated boom in global real estate markets can signal trouble ahead. We should keep a close eye on those estate agents’ reports in New York — as well as London or Hong Kong. The Big Apple’s jitters might yet be a canary in the coal-mine.”

FT View – A wise autocrat knows what he does not control 5/23

  • “Turkey’s president risks losing his fight with the financial markets.”

The Irrelevant Investor – Never Begin With the End in Mind – Michael Batnick 5/25

NYT – Elon Musk, the Donald of Silicon Valley – Bret Stephens 5/25

WSJ – Banks Won Big in Washington. What It Means for Investors – Jason Zweig 5/25

Real Estate

WSJ – Daily Shot: US Existing Homes Sales 5/24

WSJ – Daily Shot: NAR US Existing Homes Months Supply 5/25

WSJ – Daily Shot: Change in US Single-Family Homes Sales 5/25

WSJ – Daily Shot: Bloomberg – Zillow – Rise in Home Sales – Select markets 5/25

Energy

WSJ – Daily Shot: eia – US Average regular gasoline price 5/25

Shipping

FT – Maersk raises shipping rates as oil price spike bites – Joe Leahy and Richard Milne 5/24

  • “The world’s biggest container shipping group Maersk Line told customers it is raising prices in response to increased marine fuel costs, showing how the surge in oil prices to their highest levels in four years is rippling through the global supply chain.” 
  • “Bunker prices, as marine fuel is known, have risen more than 20% since the start of the year, and in Europe have hit $440 per metric ton, the highest since 2014. That has forced Maersk to introduce an ’emergency bunker surcharge’, the company told customers in a note.” 

Education

WSJ – Mike Meru Has $1 Million in Student Loans. How Did That Happen? – Josh Mitchell 5/25

  • “Due to escalating tuition and easy credit, the U.S. has 101 people who owe at least $1 million in federal student loans, according to the Education Department. Five years ago, 14 people owed that much.”
  • “More could join that group. While the typical student borrower owes $17,000, the number of those who owe at least $100,000 has risen to around 2.5 million, nearly 6% of the borrowing pool, Education Department data show.”
  • “For graduate-school students especially, there is little incentive for universities to help put the brakes on big borrowing. The government essentially allows grad students to borrow any amount to cover tuition and living costs, with few guardrails on how the final sum will be repaid.”
  • “More than a third of borrowers from one of the government’s main graduate school lending programs have enrolled in some form of federal loan-forgiveness plan.”
  • “Dental school is the costliest higher-education program in the U.S. Private nonprofit schools during the 2015-2016 school year charged an average of $71,820 a year, the Urban Institute found. The USC program now costs $91,000 a year, and $137,000 when living expenses are included.”
  • “Mr. Meru’s financial records—provided to The Wall Street Journal—show he borrowed $601,506 to attend USC—a debt swelled to more than $1 million by fees and interest.”

Asia – excluding China and Japan

FT – Malaysia police seized $28.6m cash in 1MDB probe raid – Ben Bland 5/25

  • “The cash confiscated last week from a luxury Kuala Lumpur apartment linked to the 1Malaysia Development Berhad investigation was worth RM114m ($28.6m), Malaysian police said on Friday.”
  • “The hoard, composed of Malaysian ringgit, US dollars and 24 other currencies, was seized alongside 284 luxury handbags and 37 other bags full of jewelry and watches from an empty apartment at the Pavilion Residences condominiums.”
  • We’re talking liquid-hard currency…
  • “Amar Singh, the head of the commercial crime unit, said it took police and 21 officers from Malaysia’s central bank three days to count the stash, which is now being held in the bank’s vaults.”

Japan

WSJ – In Booming Japan, the Phillips Curve Is Dead – Greg Ip 5/23

February 22, 2018

Markets / Economy

Bloomberg – Walmart’s Margins Hit Record Low as Fight With Amazon Takes Toll – Matthew Boyle 2/20

WSJ – Daily Shot: FAANG Basket vs S&P 500 – Relative Performance 2/20

WSJ – Daily Shot: Consumer Staples SPDR ETF vs S&P 500 – Relative Performance 2/20

WSJ – Daily Shot: Vanguard Real Estate ETF vs S&P 500 – Relative Performance 2/20

  • Rising bond yields…

WSJ – Daily Shot: Shifting Tastes – Coca-Cola 2/21

Insurance

WSJ – Reinsurers Hit by Catastrophe Losses, Rising Competition – William Wilkes 2/19

Construction

WSJ – Daily Shot: CME Lumber Futures 2/20

Education

WSJ – Daily Shot: The Rise of the Jumbo Student Loan – Josh Mitchell 2/16

February 9, 2018

Perspective

Economist – When the prices are too damn high – Daily Chart 2/5

WSJ – Hard Lessons From the Federal Student-Loan Program’s Coming $36 Billion Shortfall – Josh Mitchell 2/4

  • “U.S. officials have long maintained the federal government would make a profit on its $1.4 trillion student loan portfolio or at least break even, but two recent reports suggest just the opposite will be the case. Government lending to college and graduate students could soon become an immense drain on federal coffers, worsening an already deteriorating U.S. budget picture.”
  • “The Education Department’s inspector general, an agency watchdog, in a report released last week said the profitability of the U.S. federal student-lending program is being squeezed because millions of Americans who borrowed heavily in recent years—including many graduate students—are flocking into a program to have substantial portions of their debts forgiven.”
  • “Students who borrowed in the fiscal year ended Sep. 30, 2015, and enrolled in such ‘income-driven repayment’ plans, for example, are expected to pay back $11.5 billion less than they took to pay tuition and other schooling costs.”
  • “The government still earns billions of dollars every year in interest on the loans it has made to 43 million American undergraduates, graduate students and parents of undergrads. But the losses from those not repaying are now projected to mount and could eat up all of the gains. It is hard to get precise estimates, but the Education Department’s annual financial report, released in November, offered a clue. A footnote in the report projected that money coming in for government student loan and guarantee programs will be $36 billion short of what’s needed to cover outstanding debt and accrued interest.”
  • “A year earlier, the department projected the shortfall at $8.4 billion, while in prior years it projected the program would generate billions of dollars in taxpayer surpluses. The latest report explained that one reason for the sharp switch was the rise of income-driven repayment plans. These plans set monthly payments as a share of a borrower’s income and then forgive any balance that remains after 10, 20 or 25 years, depending on the borrower’s work status and loan size.”
  • “While that $36 billion projection doesn’t quite compare to the $4 trillion federal budget, it’s still an immense sum. To put it in perspective, the government ultimately paid $33 billion in its response to the financial crisis through the Troubled Asset Relief Program, according to the Congressional Budget Office.”

Worthy Insights / Opinion Pieces / Advice

FT – The discreet terror of the American bourgeoisie – Edward Luce 2/7

  • “Elites thought they could have it both ways: capital gains and moral certainty.”

Mauldin Economics – Kill the Quants – John Mauldin 2/7: Once Again – “Kill the Quants (and the Levered ETFs and ETNs) Before They Kill Our Markets” – Douglas A. Kass 2/6

Project Syndicate – Justice Without Borders for Venezuela – Ricardo Hausmann 2/7

  • “According to estimates from MIT’s Billion Prices Project, month-on-month food inflation in Venezuela reached 117.6% in January, or the equivalent of 1,130,000% a year. At the same time, the exchange rate depreciated at an annual rate of more than 700,000%, while the real purchasing power of wages – which barely represented 1,400 calories a day in December – was decimated further. A survey published in early January estimated recent out-migration at four million people, nearly as many as from Syria.”

Markets / Economy

Bloomberg – World’s Largest ETF Hit by Biggest Four-Day Outflow on Record – Sid Verma and Dani Burger 2/7

  • “The global market maelstrom spurred money managers to yank a record $17.4 billion from the mighty SPDR S&P 500 ETF over the past four trading sessions. The $8 billion removed on Tuesday alone was the third-largest daily withdrawal in the post-crisis era.”

Real Estate

Bloomberg – HNA Group Puts $4 Billion of U.S. Properties on Market – Sarah Mulholland 2/8

  • “Among the properties on the block is 245 Park Ave., according to a marketing document seen by Bloomberg. HNA bought that skyscraper less than a year ago for $2.21 billion, one of the highest prices ever paid for a New York office building.”

Health / Medicine

NYT – In Sweeping War on Obesity, Chile Slays Tony the Tiger – Andrew Jacobs 2/7

  • “New regulations, which corporate interests delayed for almost a decade, require explicit labeling and limit the marketing of sugary foods to children.”

Canada

FT – Canada’s housing market flirts with disaster – Ben McLannahan 2/7

  • “Canada is in the grip of a housing crisis more severe, by some measures, than anywhere else in the world. Household debt now amounts to more than 100% of the country’s gross domestic product, according to the Basel-based Bank for International Settlements, one of the highest of any developed nation. House prices have raced ahead of wages for years, boosted by loose lending, low interest rates and lax controls on foreign money.”
  • “For now, the number of home loans in arrears across Canada is still very low, suggesting that people are finding ways to cope with ever-larger debts. But rising interest rates are beginning to bite, while a new stress test for mortgages issued by regulated banks has tightened the supply of credit. This week the Toronto Real Estate board said that sales in Canada’s biggest city dropped 22% in January, the weakest for that month since 2009.”
  • “Bullish observers say fears of a meltdown are overblown. Canada can sustain high house prices, they argue, because they reflect the country’s high levels of net migration, restrictive zoning laws and low unemployment.”
  • “Henry Lotin, a retired diplomat and principal at research group Integrative Trade and Economics, says the same forces that have pushed up prices in global hubs such as New York are now doing the same to the most attractive parts of Canada. ‘Torontonians should be thankful and we should manage it as best we can. We really have to be prepared that demand is going to exceed supply for the foreseeable future’.”
  • “Many also note that mortgage books at the big banks look rock-solid. Royal Bank of Canada, for example, which recently joined the club of the world’s most systemically important banks thanks to years of rapid asset growth, had a Canadian residential mortgage portfolio of an average C$231bn in the year to October. Defined as estimates of losses on impaired loans and losses incurred but not yet identified, provisions for credit losses were just C$33m — or one one-hundredth of 1%.”
  • “Others say pristine loan books are not a good indicator of the stress lurking in the system. For one thing, every homebuyer with a down payment of less than 20% of the purchase price (if less than C$1m) has to buy insurance against default. That has the effect of flattering the banks’ books but shifts the risk of default to insurers such as the state-backed Canada Mortgage and Housing Corporation.”
  • “CMHC was set up after the second world war to help returning veterans find housing. These days it insures about C$480bn of residential mortgages, or almost one-third of the outstanding stock in Canada, using an automated system to process about two-thirds of applications.”
  • “Meanwhile, the uninsured segment is growing. As the market has barreled upwards in recent years, borrowers have been able to convert insured mortgages into uninsured mortgages simply by buying a property, waiting for the price to rise, then refinancing.”
  • “Uninsured buyers made up about three-quarters of new loans at federally regulated banks in 2017, up from two-thirds in 2014, according to the Bank of Canada. In Vancouver, where the average sales price of condos hit a record of C$1.1m in January, more than double the level a decade earlier, about 90% of new mortgages are uninsured.”
  • “Laurentian Bank, Canada’s seventh-biggest by assets, said in December that it would have to buy back about C$300m of mortgages it had sold to third parties, having found that borrowers had ’embellished’ income and assets. Last month, the Montreal-based bank said the buyback obligations had increased to about C$400m, and it would have to raise more capital.”
  • “That kind of disclosure — in dribs and drabs, each more alarming than the last — has echoes of the beginning of the US mortgage crisis, when terms such as ‘liar loan’ began to enter the vernacular. ‘Trends are developing . . . that we took for granted were not an issue in Canada,’ says Gabriel Dechaine, an analyst at National Bank of Canada. ‘There are puffs of smoke, but I don’t want to yell fire in a crowded theater’.”
  • “More strains could emerge. With interest rates rising — three increases in the central bank’s policy rate since July has left it at 1.25% — many borrowers may be facing a struggle to refinance in a market where almost all mortgages are renewed every five years or less.”
  • “Anecdotal evidence suggests tougher rules on underwriting are also beginning to curb lending. On January 1 the federal banking regulator, the Office of the Superintendent of Financial Institutions, introduced a rule requiring all new mortgage applicants to show they could cope with interest rates substantially higher than their contracted rate. Previously, stress tests applied only to insured mortgages.”

China

Bloomberg – Frenzy of Fines for China’s Bank Is Only Just Getting Started – Jun Luo and Alfred Liu 2/5

  • “China’s banking regulator is increasingly showing its teeth, slapping a record amount of fines on financial institutions in the past several months for transgressions such as lax lending procedures and manipulating bad-loan data. Expect the unprecedented frenzy to continue.”
  • “The China Banking Regulatory Commission (CBRC) announced 3,452 penalties and confiscations of funds involving 1,877 financial institutions and totaling 2.93 billion yuan ($465 million) in 2017, a 10-fold surge from the previous year, according to official data. Some 270 banking executives were punished, including being banned from the industry for life, according to a CBRC official speaking on CCTV.”
  • “The frenzy continues this year, with an average 16 fines imposed every day of January.”
  • “The biggest of 2018 so far was levied against Shanghai Pudong Development Bank Co., fined 462 million yuan for what the CBRC termed ‘a well-organized fraud.’ Last Friday, the CBRC fined Industrial & Commercial Bank of China Ltd. and 18 other banks’ branches in central China 52.5 million yuan for accepting low-quality gold as collateral for 19 billion yuan worth of loans, resulting in the banks being defrauded.”
  • “After his appointment last year as CBRC chairman, Guo Shuqing embarked on a campaign to root out malpractice in the $39 trillion banking industry, improve implementation of lending policies and curb cross-holdings of financial products.”

 

December 15, 2017

Perspective

Visual Capitalist: Overflow Data – The U.S. States With the Most Million Dollar Homes – Jeff Desjardins 12/14

Worthy Insights / Opinion Pieces / Advice

Economist – The choice that could save South Africa, or wreck it – Leaders 12/9

NYT – Trump’s Lies vs. Obama’s – David Leonhardt, Ian Prasad Philbrick, and Stuart A. Thompson 12/14

Markets / Economy

WSJ – Nearly 5 Million Americans in Default on Student Loans – Josh Mitchell 12/13

  • “The number of Americans severely behind on payments on federal student loans reached roughly 4.6 million in the third quarter, a doubling from four years ago, despite a historically long stretch of U.S. job creation and steady economic growth.”
  • “The total number of defaulted borrowers represents about 22% of the Americans who were required to be paying down their federal student loans as of Sept. 30. That figure has increased from 17% four years earlier.”
  • “The money they owe is becoming a bigger share of total outstanding student debt in repayment. Defaulted student loans totaled $84 billion at the end of the quarter, or 13% of the roughly $631 billion that borrowers were required to be paying down.”
  • “The government’s student-loan portfolio now totals $1.37 trillion.”

Energy

WSJ – Daily Shot: US Total Crude Oil Production 12/13

  • “One of the trends spooking oil traders is what appears to be an acceleration in US crude oil production.”

Environment / Science

Economist – A nasty-tasting shellfish could be just the job for cleaning rivers – 12/7

China

FT – China lenders lobby to soften shadow bank rules – Gabriel Wildau and Yizhen Jia 12/13

November 9, 2017

If you were only to read one thing…

Bloomberg – America’s ‘Retail Apocalypse’ Is Really Just Beginning – Matt Townsend, Jenny Surane, Emma Orr, and Christopher Cannon 11/8

  • “The so-called retail apocalypse has become so ingrained in the U.S. that it now has the distinction of its own Wikipedia entry.”
  • “The industry’s response to that kind of doomsday description has included blaming the media for hyping the troubles of a few well-known chains as proof of a systemic meltdown. There is some truth to that. In the U.S., retailers announced more than 3,000 store openings in the first three quarters of this year.”
  • “But chains also said 6,800 would close. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.”
  • “The reason isn’t as simple as Amazon.com Inc. taking market share or twenty-somethings spending more on experiences than things. The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.”
  • “The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.”
  • “Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.”
  • “Making matters more difficult is the explosive amount of risky debt owed by retail coming due over the next five years.”
  • “Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20%, to $35 billion, and the industry’s leveraged loans are up 15%, to $152 billion, according to Bloomberg data.”
  • “Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.”
  • “Retailers have pushed off a reckoning because interest rates have been historically low from all the money the Federal Reserve has pumped into the economy since the financial crisis. That’s made investing in riskier debt—and the higher return it brings—more attractive. But with the Fed now raising rates, that demand will soften. That may leave many chains struggling to refinance, especially with the bearishness on retail only increasing.”
  • “One testament to that negativity on retail came earlier this year, when Nordstrom Inc.’s founding family tried to take the department-store chain private. They eventually gave up because lenders were asking for 13% interest, about twice the typical rate for retailers.”
  • “Store credit cards pose additional worries. Synchrony Financial, the largest private-label card issuer, has already had to increase reserves to help cover loan losses this year. And Citigroup Inc., the world’s largest card issuer, said collection rates on its retail portfolio are declining. One reason that’s been cited is that shoppers are more willing to stop paying back a card from a chain if the store they went to has closed.”
  • “The ripple effect could also be a direct hit to the industry that is the largest employer of Americans at the low end of the income scale. The most recent government statistics show that salespeople and cashiers in the industry total 8 million.”
  • “During the height of the financial crisis, store workers felt the brunt of the pain when 1.2 million jobs disappeared, or one in seven of all the positions lost from 2008 to 2009, according to the Department of Labor. Since the crisis, employment has been increasing, including in the retail industry, but that correlation ended as jobs at stores sank by 101,000 this year.”
  • “The drop coincides with a rapid acceleration in store closings as bankruptcies surge and many of the nation’s largest retailers, including Wal-Mart Stores Inc. and Target Corp., have decided that they have too much space. Even before the e-commerce boom, the U.S. was considered over-stored—the result of investors pouring money into commercial real estate decades earlier as the suburbs boomed. All those buildings needed to be filled with stores, and that demand got the attention of venture capital. The result was the birth of the big-box era of massive stores in nearly every category—from office suppliers like Staples Inc. to pet retailers such as PetSmart Inc. and Petco Animal Supplies, Inc.”
  • “Now that boom is finally going bust. Through the third quarter of this year, 6,752 locations were scheduled to shutter in the U.S., excluding grocery stores and restaurants, according to the International Council of Shopping Centers. That’s more than double the 2016 total and is close to surpassing the all-time high of 6,900 in 2008, during the depths of the financial crisis. Apparel chains have by far taken the biggest hit, with 2,500 locations closing. Department stores were hammered, too, with Macy’s Inc., Sears Holdings Corp. and J.C. Penney Co. downsizing. In all, about 550 department stores closed, equating to 43 million square feet, or about half the total.”
  • “One response to the loss of store-based retail jobs is to note that the industry is adding positions at distribution centers to bolster its online operations. While that is true, many displaced retail workers don’t live near a shipping facility. The hiring also skews more toward men, as they make up two-thirds of the workforce, and retail store employees are 60% women.”
  • “The coming wave of risky retail debt maturities doesn’t take into account that companies currently considered stable by ratings agencies also have loads of borrowings. Just among the eight publicly-traded department stores, there is about $24 billion in debt, and only two of those—Sears Holdings Corp. and Bon-Ton Stores Inc.—are rated distressed by Moody’s.”
  • “’A pall has been cast on retail,’ said Charlie O’Shea, a retail analyst for Moody’s. ‘A day of reckoning is coming.’”

Perspective

FT – Forbes says Wilbur Ross lied about being a billionaire – Lindsay Fortado and Shawn Donnan 11/7

  • “Forbes business magazine has booted US secretary of commerce Wilbur Ross off its list of the richest people in America for the first time in 13 years, alleging he lied to them about his net worth by more than $2bn.”

FT – Electric cars’ green image blackens beneath the bonnet – Patrick McGee 11/7

  • “Nico Meilhan, a Paris-based car analyst and energy expert at Frost & Sullivan, says regulators should not encourage this race to sell electric vehicles with bigger batteries. ‘It’s a race, but it’s a very stupid race. It’s not towards a good solution,’ he says. ‘If you switch from oil to cobalt and lithium, you have not addressed any problem, you have just switched your problem.’”
  • “Instead, he says regulators should take weight into account by taxing heavier vehicles and creating incentives for smaller models in both electric and traditional vehicles.”
  • “Mr. Meilhan points out that petrol-engine cars weighing just 500kg — such as the French Ligier microcar or some popular ‘kei cars’ in Japan — emit less lifecycle emissions than a mid-sized electric vehicle even when driven in France, where carbon-free nuclear power generates three-quarters of electricity.”
  • “’If we really cared about CO2,’ he adds, ‘we’d reduce car size and weight.’”

WSJ – Jet-Set Debt Collectors Join a Lucrative Game: Hunting the Superrich – Margot Patrick 11/7

  • “Private investigators spend millions, scour globe, chasing an estimated $2 trillion in pending claims.”

Worthy Insights / Opinion Pieces / Advice

Economist – Asian households binge on debt 11/2

  • “What should be good news for the global economy has its downsides.”

FT – The House of Trump and the House of Saud – Edward Luce 11/8

  • “The blossoming relationship with Riyadh symbolizes the decay of the US-led order.”

Markets / Economy

Business Insider – Someone deleted some code in a popular cryptocurrency wallet – and as much as $280 million in ether is locked up – Becky Peterson 11/7

  • “An estimated $280 million worth of the cryptocurrency ether is locked up because of one person’s mistake.”
  • “An unidentified user accidentally deleted the code library required to use recently created digital wallets within Parity, a popular digital-wallet provider, according to a security alert posted on the company’s blog on Tuesday.”
  • “The freeze affects all multi-signature wallets created on Parity after July 20.”
  • “Multi-sig wallets are especially popular among cryptocurrency startups and other groups because they require more than one person to agree before any currency gets moved around. It’s a safeguard against rogue employees who might want to run off with the money.”

WSJ – Clamor for Tech IPOs Reaches Fever Pitch in Asia – Saumya Vaishampayan and Steven Russolillo 11/8

  • “Nearly three quarters of the 66 tech floats in the first nine months of 2017 have been in Asia, and the companies have raised about 40% of the total $16.8 billion from the sector, according to a report by PricewaterhouseCoopers.”
  • “Shares of newly public companies in Asia, on average, have risen by 141% from their IPO prices this year through the end of October, according to Dealogic. That compares with an average 25% gain for U.S. IPOs and a 13% increase for new issues in Europe.”

WSJ – Daily Shot: FRED – US Student Loan Balance 11/8

Real Estate

WSJ – Republican Tax Plan Would Slam California Housing Market – Laura Kusisto 11/8

  • “Limits on mortgage-interest deduction would affect many buyers in coastal regions around the U.S.”

WSJ – Co-Working Trend Eats Into Office Demand – Peter Grant 11/7

  • “The co-working trend, popularized by startup businesses like WeWork Cos., has been attractive to entrepreneurs and small companies looking for communal office space and short-term commitments.”
  • “But it could turn out badly for landlords, according to a new report from Green Street Advisors. The report predicts co-working will detract from cumulative office demand through 2030 by about 2% to 3% as the shared working space approach spreads from small businesses to large ones.”
  • “The report estimates there will be about 14,000 co-working locations world-wide by the end of this year, compared with 600 in 2010. WeWork alone has more than 20 locations in London and is now among New York’s largest office tenants, it says.”
  • “’The most ominous prospect for landlords is that [corporate] users could ‘outsource’ big chunks of their headquarters and regional offices to co-working operators,’ the report warns.”
  • “Consider the new business that WeWork launched earlier this year that creates tailored WeWork centers for big companies that employ hundreds or even thousands of workers. Named Onsite Solutions, it is marketing itself to employers that have flexible office space requirements or who want to circulate employees through hipper environments than their traditional workplaces.”
  • “Mr. Reagan (Jed Reagan, Green Street analyst) said such initiatives have the potential to hurt office landlords because co-working facilities typically require less space: about 75 square feet per worker compared with 175 square feet in traditional offices. Also, co-working leases for big tenants tend to be six months to five years, much shorter than the common lease term of five to 15 years, he said.”
  • “’That could undermine the stability and security of cash flow for landlords and could create more churn among tenants,’ Mr. Reagan said.”

India

FT – One year on, jury is still out on India’s ‘black money’ ban – Amy Kazmin 11/7

  • “Economy has slowed and cash in circulation is 90% of previous level, data show.”

South America

FT – Venezuela’s debt struggle poses more questions for investors – Robin Wigglesworth 11/7

  • “Analysts and investors say there are more questions than answers surrounding Venezuela’s plans to ‘refinance and restructure’ its financial liabilities.”
  • “Venezuela has about $63bn of foreign bonds outstanding, according to Torino Capital, while the central bank estimates the country’s overall foreign debts at about $90bn. The real number say most analysts is much higher.” 
  • “PDVSA, the state oil company, has sold $28.6bn of bonds and owes billions of dollars more in ‘promissory notes’. Venezuela owes another $4bn or so to creditors that have taken it to the World Bank’s ICSID court. Stuart Culverhouse, chief economist at Exotix, thinks total public sector external debts range between $100bn and $150bn.”
  • “Even this is uncertain. Venezuelan president Nicolás Maduro has mentioned ‘refinancing’ and ‘restructuring’ the country’s external liabilities. But a refinancing usually implies something voluntary while a restructuring means forcibly ‘haircutting’ creditors. Crucially, US sanctions imposed this summer in practice means both options are off the table.” 
  • “That Mr. Maduro named vice-president Tareck El Aissami as the lead negotiator with bondholders complicates matters further. Mr. Aissami has himself been sanctioned by the US as an alleged narcotics trafficker, which means US investment groups — the biggest holders of Venezuelan debt — cannot enter talks with him.” 
  • “’The logistics seem almost impossible,’ notes Siobhan Morden, head of Latin American fixed income strategy at Nomura. ‘The cynical interpretation is that the impossible deadline for negotiations conveniently shifts the blame of default to bondholders for their unwillingness (inability) to negotiate.’”
  • “With a competent government and more orthodox economic policies, Venezuela could probably handle its debt burden. Although oil exports are declining, it still boasts the world’s largest proven reserves and prices are at their highest level for more than two years.”
  • “But chronic mismanagement by governments under Hugo Chávez and now Mr. Maduro and the oil slump has taken its toll. According to the IMF, the economy has shrunk by a third over the past five years.”
  • “The country’s options appear limited. Venezuela is overdue on the interest payments on bonds that mature in 2019, 2024, 2025 and 2026, demonstrating the ‘significant fiscal strain’ the country is facing, S&P notes. Foreign currency reserves are below $10bn — and much of this is in gold that will be hard to liquidate. China is wary of deepening its financial exposure to Venezuela while the country has already restructured some of its bilateral loans from Russia.”
  • “The price of Venezuela’s bond maturing in August next year has tumbled from 72 cents on the dollar to about 34 cents this week, as investors panicked after the restructuring announcement and bank traders pulled out of the market, causing prices to ‘gap’ lower.” 
  • “Russia could provide a loan secured by Venezuelan oil assets that the government could either use to pay creditors, or to buy back some of its bonds at their current big price discount.” 
  • “Venezuela could also seek to improve its fiscal space by separating PDVSA from the state, defaulting on the latter debts while staying current on the oil company’s bonds. That could in theory prevent creditors from interrupting PDVSA’s oil sales, while letting Venezuela’s sovereign creditors stew. Suing countries is much harder than companies with assets that can be seized.”
  • “Moreover, ringfencing PDVSA from the government will be tricky. Crystallex, a Canadian miner, is already suing Venezuela and arguing that PSDVA is the ‘alter ego’ of the state. If Crystallex wins, it opens the door for all creditors to try to seize Venezuelan and PDVSA assets interchangeably.” 
  • “The most likely outcome, investors and analysts say, is a protracted period of financial limbo, with a restructuring precluded by US sanctions and Venezuela facing a barrage of lawsuits that will tie it up for years to come.”

April 11, 2017

Worthy Insights / Opinion Pieces / Advice

FT – When it comes to investing, human stupidity beats AI – Miles Johnson 4/10

  • “Since their inception, financial markets have been driven by greed and fear. No matter how advanced technology becomes, human nature isn’t changing. Or as billionaire Carl Icahn has put it: ‘Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.'”

Markets / Economy

WSJ – Daily Shot: BMI / Federal Reserve – US Credit Growth Drying Up 4/11

WSJ – Slowdown in Borrowing Defies Easy Explanation – Aaron Back 4/11

Real Estate

WSJ – Daily Shot: John Burns RE Consulting – US Single-Family Residential Permit Projections 4/11

WSJ – Daily Shot: John Burns RE Consulting – Growth Rate of US Resident Population Aged 20-64 4/11

WSJ – Daily Shot: John Burns RE Consulting – Multifamily Construction Activity 4/11

Asia – excluding China and Japan

FT – Former Philippine police officer reveals more of death squad role – Michael Peel and Grace Ramos 4/10

Australia

WSJ – Daily Shot: Moody’s – Australian House Price Increases 4/11

China

FT – Huishan Dairy defaults on loan as financial woes deepen – Jennifer Hughes, Tom Hancock, and Sherry Fei Ju 4/10

  • “China Huishan Dairy has defaulted on a $200m loan and had assets frozen in China in relation to another $79m debt, in a sign of the troubled dairy operator’s worsening problems.”
  • “Paul Gillis, an accounting expert at Peking University, said the company’s sudden share collapse ‘raises the question of why short-sellers are able to find these things, but auditors never seem to find them.'”

FT – Hong Kong’s Li & Fung faces dilemma of ‘innovate or die’ – Ben Bland 4/10

Other Links

Economist – United bumps more passengers than any other large American airline – Data Team 4/11

Bloomberg – DeVos Undoes Obama Student Loan Protections – Shahien Nasiripour 4/11

April 10, 2017

If you were to read only one thing…

The US college debt bubble is becoming dangerous. Rana Foroohar. Financial Times. 9 Apr. 2017.

“Rapid run-ups in debt are the single biggest predictor of market trouble. So it is worth noting that over the past 10 years the amount of student loan debt in the US has grown by 170%, to a whopping $1.4tn — more than car loans, or credit card debt. Indeed, as an expert at the Consumer Financial Protection Bureau recently pointed out to me, since 2008 we have basically swapped a housing debt bubble for a student loan bubble. No wonder NY Federal Reserve president Bill Dudley fretted last week that high levels of student debt and default are a ‘headwind to economic activity.'”

“In America, 44m people have student debt. Eight million of those borrowers are in default. That’s a default rate which is still higher than pre-crisis levels — unlike the default rate for mortgages, credit cards or even car loans.”

“Rising college education costs will not help shrink those numbers. While the headline consumer price index is 2.7%, between 2016 and 2017 published tuition and fee prices rose by 9% at four-year state institutions, and 13% at posher private colleges.”

“The average debt load individual graduates carry is up 70% over the past decade, to about $34,000.”

“Growing student debt has been linked to everything from decreased rates of first time home ownership, to higher rental prices, to lower purchases of white goods and all the things that people buy to fill homes. Indeed, given their debt loads, I wonder how much of the ‘rent not buy’ spending habits of Millennials are a matter of choice.”

“But there are even more worrisome links between high student debt loads and health issues like depression, and marital failures. The whole thing is compounded by the fact that a large chunk of those holding massive debt do not end up with degrees, having had to drop out from the stress of trying to study, work, and pay back massive loans at the same time. That means they will never even get the income boost that a college degree still provides — creating a snowball cycle of downward mobility in the country’s most vulnerable populations.”

“How did we get here?”

Essentially, “beleaguered governments are pushing more and more of the responsibility for the things that make a person middle class — education, healthcare and pension — on to individuals.”

“What are the fixes? For starters, we should look closely at the for-profit sector, where default rates are more than double those at average private colleges. These institutions receive federal subsidies but typically spend a minuscule part of their budgets on instruction; in the US, nearly 50% goes on marketing to new students. It looks all too much like an educational Ponzi scheme.”

“Transparency is also key — the student loan market as a whole is hopelessly opaque. In one recent US study, only a quarter of first year college students could predict their own debt load to within 10% of the correct amount.  Truth in lending documents would help, as would loan counselling paid for by colleges. Sadly, the agency that is leading the fight on both — the CFPB — is under attack from Trump himself.”

“But the administration will not be able to hide from the student debt bubble. In an eerie echo of the housing crisis, debt is already flowing out of the private sector, and into the public. Before 2007, most student loans were underwritten by banks or other private sector financial institutions. Today, 90% of new loans originate with the Department of Education. Socialization of risk continues to be the way America deals with its debt bubbles. “

“Would that we considered making college free, as Bernie Sanders suggested. Even Mr. Dudley called this ‘a reasonable conversation.’ That way we could socialize the benefits of education too.”

More perspective: NYT – Loans ‘Designed to Fail’: States Say Navient Preyed on Students – Stacy Cowley and Jessica Silver-Greenberg 4/9

Worthy Insights / Opinion Pieces / Advice

NYT – The Gig Economy’s False Promise – The Editorial Board 4/10

  • “In reality, there is no utopia at companies like Uber, Lyft, Instacart and Handy, whose workers are often manipulated into working long hours for low wages while continually chasing the next ride or task. These companies have discovered they can harness advances in software and behavioral sciences to old-fashioned worker exploitation, according to a growing body of evidence, because employees lack the basic protections of American Law.”

WSJ – Should the Social Security Trust Fund Be Allowed to Invest in Stocks? – Alicia Munnell (Boston College) and Michael Tanner (Cato Institute) 4/9

  • In the argument for and against, “what the two sides generally do agree on is that the Social Security trust fund needs shoring up: According to a trustees’ report from last year, the fund is on track to run dry around the mid-2030s, at which point the program would be able to pay out only about 75% of promised benefits.”

Atlantic – What in the World Is Causing the Retail Meltdown of 2017? – Derek Thompson 4/10

  • “Finally, a brief prediction. One of the mistakes people make when thinking about the future is to think that they are watching the final act of the play. Mobile shopping might be the most transformative force in retail—today. But self-driving cars could change retail as much as smartphones.”
  • “Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas. CVS could have hundreds of self-driving minivans stocked with merchandise roving the suburbs all day and night, ready to be summoned to somebody’s home by smartphone. A new luxury-watch brand in 2025 might not spring for an Upper East Side storefront, but maybe its autonomous showroom vehicle could circle the neighborhood, waiting to be summoned to the doorstep of a tony apartment building. Autonomous retail will create new conveniences and traffic headaches, require new regulations, and inspire new business strategies that could take even more businesses out of commercial real estate. The future of retail could be even weirder yet.”

Markets / Economy

FT – Gundlach: appetite for reflation trade will wane further – Eric Platt 4/10

  • “Jeff Gundlach (chief executive of DoubleLine Capital – which manages $105bn on behalf of its clients), the influential bond investor, has warned that appetite for the so-called relation trade will evaporate further in coming months as expectations for an acceleration in US economic growth and inflation are tempered.”
  • Not all that surprising really, and if you’re in the market for a mortgage there should be some relief in pricing (there already has been so far this year).  Then the article goes on to say: “the yield on the 10-year Treasury bond will not be back up to 3% this year, a level he had previously said would spell the end of the bull market. DoubleLine’s founder told investors he believed it would head higher over a longer period and could reach 6% in four or five years.”
  • Come again… please elaborate. No really, the article doesn’t elaborate or link to any reports by Gundlach. Talk about burying the lead.
  • Consider the implications on home pricing if 10-year rates are at 6%. They’re currently at around 4.10% on a 30-year fixed, so about 260bp (basis points) or 2.6% points higher than 10-year rates which are around 2.4%. To translate, if you have a $400,000 mortgage (arbitrary number) you’d be looking at a monthly payment of $1,932.79 at today’s rate.  That same mortgage amount if 30-year fixed rate mortgages hold a similar spread when the 10-year treasury is at 6% would be $3,104.05. A 60.60% increase in the monthly mortgage amount or $14,055.12 additional after tax dollars each year. Or if you could only afford the $1,932.79 monthly payment, then you would only be able to take on a $249,067 mortgage. Presumably that would hurt your purchasing power.
  • Alternatively, consider commercial real estate. If the 10-year moved to 6% in four or five years, what should you be putting in your models for an exit cap rate? Currently the commercial property loans average about 150bp over the 10-year for the primary categories-office, retail, multifamily, and industrial-according to interest rate surveys from Trepp.  Hence, you can buy a going-in cap rate of 5% and have a little spread of 1.10% (110bp) over the cost of your debt.  Fortunately for the last 30 or so years you could model a lower exit cap rate – really accounting for a large part of many investors returns.  Consider if you had to add 350bp to your exit cap rate…
  • Again to translate. Today the idea of purchasing a property that generates $100,000 in triple net (NNN) income-net of all expenses, property taxes, etc.-at a 5% cap rate would imply that you’d be willing to pay $2,000,000 for the property. Okay. What happens if cap rates adjust to maintain a similar spread over the 10-year treasury if it moves to 6%?  Then for the same income you’d want a 8.6% cap or would be willing to pay $1,162,791.  A 41.86% drop in value.
  • Well, the counter argument would be that the economy would have to be cranking along pretty well for the 10-year Treasury rate to move to 6%.  Then some of the effects of the above would be neutralized by increasing incomes, increases in spending, and so on.  However, note that rent from tenants are contracted and increase in defined amounts – so in this case, they’d probably get the better of the landlords – unless there are generous percentage rent terms…
  • Don’t expect this to be a smooth transition, and real estate is not the only industry that relies on a lot of debt capital – think energy…

 

 

Bloomberg – There’s a Big Reason Volatility Might Be Coming Back – Alex Harris 4/8

WSJ – Nothing to Fear but the Lack of Fear in Markets – Steven Russolillo 4/9

Energy

FT – Energy shifts to a buyers’ market – Nick Butler 4/9

  • “Markets have a tendency to swing from side to side. There are times when suppliers can name their prices and times when the advantage is against them. We are the cusp of a major change after half a century of producer control. For the companies involved and their investors this is a hard moment. Some will see it as a cyclical move that will be reversed as demand increases. That is a very risky investment strategy. The better approach for both companies and investors is to assume that we are experiencing a structural shift and that to thrive those involved in the sector must adapt their business model and their investment strategy to a new reality.”

Australia

Rational Radical – Housing bubble is now official, commence arse-covering (panic)! – Matt Ellis 4/7

China

FT – China markets regulator: ‘iron cockerels’ to be dealt with harshly – Hudson Lockett and Jennifer Hughes 4/9

 

FT – HNA’s buying spree surpasses $40bn with CWT deal – Don Weinland, Arash Massoudi, and James Fontanella-Khan 4/9

  • “China’s HNA Group, the small domestic airline operator turned ultra-acquisitive conglomerate, has now struck more than $40bn of deals in little more than two years after announcing plans to buy Singapore logistics provider CWT.”
  • “However, the activity has confounded veteran bankers and China watchers alike, who have raised concerns over its rapid expansion and also questioned its sources of capital for the deals, many of which are done through affiliates. Moreover, the pace of HNA’s foreign dealmaking has quickened in spite of a Chinese clampdown on the flow of capital out of the country since November.”