Tag: Technology

July 1, 2016July 1, 2016

June 24 – June 30, 2016

Japanese banks wary of property risks. Negative-yielding sovereign debt jumps to $11.7tn.

This week all the media outlets were blanketed with coverage on the Brexit and of course the synopsis varied from catastrophe (a lot of money was lost in the equity markets around the world immediately – which have already made up a lot of lost ground), to concern over the survival of the European Union, to a general ‘meh.’ Remember, the world moves on. Importantly, Britain is still part of the EU. No one has triggered Article 50 of the Lisbon Treaty yet and even when Britain does trigger the article, there is a two-year exit process with the EU. As such, some even think that Britain may not eventually leave. So for now as the Brits like to say, keep calm and carry on.

Headlines

The Real Deal – Anbang to close Waldorf Astoria for three years during $1B condo conversion 6/27. After paying $1.95bn for the hotel in 2014, Anbang is going to close a portion of the property for up to three years to convert 1,100 out of 1,400 rooms into condos at a cost of $1.1bn.

Briefs

Hudson Lockett of the Financial Times drew attention to Moody’s Investor Service having called a peak for China’s home sales growth.

“Moody’s Investors Service is predicting that China’s property markets are facing a double-whammy of growing margin pressures for developers and tapering growth in home sales nationwide.”
“The rapid growth in land costs will raise the developers’ capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate.” – Dylan Yeo, Moody’s analyst
“The report from Moody’s follows a note from S&P Global Ratings last week reiterating expectations for growing bond defaults onshore in China, with those for property developers forecast to have the biggest potential impact.”

The Economist provided an interesting piece on the fast, bizarre, and relatively chaotic ways in which the great cities of Africa and Asia are growing.

“Between 2005 and 2015 the world’s cities swelled by about 750m people, according to the UN. More than four-fifths of that growth was in Africa and Asia; specifically, on the fringes of African and Asian cities. With few exceptions, cities are growing faster in size than in population. Lagos, the capital of Nigeria, is typical: it doubled in population between 1990 and 2010 but tripled in area. In short, almost all urban growth is sprawl.”
“London took two millennia to grow from fewer than 30,000 people to almost 10m; Shenzhen in China managed that within three decades. And most African and Asian cities are growing more chaotically.”
“Like it or not, this is how the great cities of the 21st century are taking shape.”
“Shlomo Angel of New York University has studied seven African cities in detail: Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos, and Luanda. He calculates that only 16% of the land in new residential areas developed since 1990 has been set aside for roads – about half as much as planners think necessary. And 44% of those roads are less than four meters wide.”

Laura Kusisto of the Wall Street Journal highlighted that yes, today’s renters really are worse off than their parents.
- “Inflation-adjusted rents have risen by 64% since 1960, but real household incomes only increased by 18% during that same time period, according to an analysis of U.S. Census data released by Apartment List, a rental listing website.”
- “Renters fared the worst during the decade between 2000 and 2010, when inflation-adjusted household incomes fell by 9%, while rents rose by 18%, according to Apartment List.”
- In regard to inflation “…housing still largely relies on U.S. labor and materials (and zoning restrictions), making it one of the few essentials that haven’t become cheaper with globalization.”
Claire Jones and James Shotter of the Financial Times reported on the IMF’s recent opinion that Germany do more to reform its banks.
- “The International Monetary Fund has warned that ultra-low interest rates pose a threat to the profitability of Germany’s €13tn financial sector, as it steps up its call for the country’s banks and insurance groups to restructure.”
- “The IMF has supported the ECB’s aggressive monetary easing and indicated that the onus was on German banks and their regulators and supervisors to reform.”
- “Given its high share of savings and co-operative banks – whose business revolves around taking deposits from and making loans to local communities – the German banking system is highly dependent on interest rates.”
- “A study by BaFin, the German financial watchdog, and the Bundesbank last year found that Germany’s 1,500 small and midsized banks expected profits to fall by an aggregate of 25% by 2019, mainly owing to the collapse in net interest income. The study projected that if rates fell a further 100 basis points, lenders’ profits would plunge at least 60% by the same date.”

Special Reports

Graphics

FT – Fed on alert for US economic recoil – Sam Fleming 6/24

FT – Unicorns: Between myth and reality – Richard Waters and Leslie Hook 6/27

Bloomberg – San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs – Alison Vekshin 6/28

Economist – Foreign direct investment 6/25

WSJ – Today’s Renters Really Are Worse Off Than Their Parents – Laura Kusisto 6/29

Featured

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

Overheating Risk Makes Japanese Banks Wary of Property Lending. Tesun Oh Katsuyo Kuwako. Bloomberg. 27 Jun. 2016.

“Japanese banks are reining in their exposure to the property market on concern the central bank’s negative-rate policy is fueling overheating.”

“We’re watching the market carefully because we get a strong sense that the market is being pushed up mainly by a lot of lending.” – Michiya Fujii, head of the real estate finance department, Tokyo Star Bank, Ltd.

“Lending to the real estate sector rose to a record high in March, exceeding levels during Japan’s asset bubble in the late-1980s, according to Bank of Japan data.”

When you look at the options for income investors you can understand why. “While the average expected yield for central Tokyo office property fell to 3.7% in the first quarter, its lowest since at least mid-2007, that is still 82 times the 0.045% yield an investor can earn from buying 20-year government debt. Ten-year yields have dropped 10 basis points this month to minus 0.22%.”

“Considering the downside risks, this is not a time when we can aggressively lend. What’s important is, when the time comes and the market turns, how much durability we’ve built into the portfolio.” – Katsumi Taniguchi, head of the planning team of the real estate finance department at Sumitomo Mitsui Trust

Additionally, while rates are low real estate investment trusts and large developers are taking advantage of the opportunity to lower their borrowing costs. “Nippon Building Fund Inc., Japan’s largest REIT, sold 30-year debt this month at a coupon of 1%, while the largest developer Mitsubishi Estate Co. issued 40-year bonds at 0.789%.”

Negative-yield government debt surges $1.3tn to $11.7tn Adam Samson. Financial Times. 30 Jun. 2016.

“The universe of negative-yielding government debt has increased by more than $1tn in the last month to reach a high of almost $12tn in one of the most tangible results of Britain’s decision to leave the EU.”

“Low sovereign bond yields reflect gloomy economic outlooks and expectations of central bank stimulus. In turn a record $11.7tn of global sovereign debt has now entered sub-zero territory – an increase of $1.3tn since the end of May, according to data released by Fitch Ratings.”

“You have to look at the response by central banks after the Brexit shock. You’re seeing a ubiquitous tilt toward easing among G4 central banks (Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England).” – Ben Mandel, a global strategist at JPMorgan Chase

Because of this, “futures markets suggest investors saw a roughly 75% chance that the Federal Reserve will not raise interest rates over the next 12 months.”

Other Interesting Articles

The Economist

Bloomberg – China’s Idled Wind Farms May Spell Trouble for Renewable Energy 6/28

Economist – Why Brexit is grim news for the world economy 6/24

FT – The perfect financial crime 6/25

FT – South Korea plans stimulus boost in wake of Brexit 6/27

FT – Broad, deep and brutal – Asia’s Brexit reaction 6/29

FT – Brazilian bankruptcies create opportunities for debt investors 6/29

Project Syndicate – Brexit and the Future of Europe (George Soros) 6/25

Reuters – Post-Brexit global equity loss of over $2 trillion worst ever: S&P 6/26

The New Yorker – Why Brexit Might Not Happen at All 6/27

WSJ – Shareholder Fight Puts China’s Market Resolve on the Line 6/28

December 18, 2015

December 11 – December 17, 2015

The Fed did it! Diversify, diversify, diversify. Technology offers a chance at low hanging fruit. High Ground Looking over a Swamp, aka Cheniere.

The Fed finally raised interest rates! Definitely one of the three themes from the week, which I’ll cover only briefly in Christopher Condon’s coverage in BloombergBusiness’ “Fed Ends Zero-Rate Era, Signals 4 Quarter-Point 2016 Increases,” simply because I’m sure you’ve already read about this. The other two themes covered 1) “Beyond Property: Chinese Developers Look to Diversify” by Esther Fung in The Wall Street Journal and 2) “Digital advances uneven across US economy” by Sam Flemington in The Financial Times. In addition, I think it’s worth noting the dismal of Cheniere’s founder and CEO, Charif Souki, this past week – see below.

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

Fed Ends Zero-Rate Era, Signals 4 Quarter-Point 2016 Increases. Christopher Condon. Bloomberg. 16 Dec. 2015.

In a nutshell:

“The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25% to 0.5%, up from zero to 0.25%. Policy makers separately forecast an appropriate rate of 1.375% at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.”

“Prior to 2008, the effective fed funds rate had never dropped below 0.63%, according to data compiled by the St. Louis Fed dating back to 1954.”

While the commentary is that the raising of rates will be gradual, I’m fairly certain that if rates make it to 1.375% by end of next year, it will be jarring. Granted, hopefully the economy will be firing on all cylinders to justify that rate. Already Wells Fargo and others have raised their Prime Rate by a quarter point to 3.50%. The Bank of Mexico has increased rates for the first time since 2008 in order to prevent further weakening of the peso relative to the US dollar. Hong Kong which has a currency peg to the US dollar is also raising rates. This is only part of the knock-on effects – clearly there is a lot at stake.

Beyond Property: Chinese Developers Look to Diversify. Esther Fung. The Wall Street Journal. 10 Dec. 2015.

For those that don’t know, real estate development in China got “a little” over its skis. As result, it’s been tough for real estate developers, especially those not in the first tier cities.

“… a growing number of developers who see no end to the pain in Chinese real estate and are looking to get out. Other developers are branching off into everything from banking to cosmetic surgery to women’s soccer.”

“Some even suggest a long-term de-emphasis on property as China’s birthrates slow and the population ages.”

“According to Moody’s Analytics, housing and its related industries contributed 18% of the country’s gross domestic product in 2014, down from 23% in 2013.”

“The property sector has turned from being China’s economic growth engine into its burden.” – Ma Guangyuan, a Beijing-based independent economist.

“While housing sales are up 7.9% by volume in the first 11 months this year from a year ago, construction starts have been declining at double-digit levels. Growth in investment in residential property slowed to 0.7% growth in the first 11 months of this year, down from 9.2% for last year.”

Consider the “ghost cities” and all of the empty building inventory that is meant to house the hundreds of millions of rural citizen when they migrate into the cities. What happens if they don’t migrate? Consider that the allure of higher wages and the “iron rice bowl” (China’s implicit understanding that companies will look after the welfare of their employees – at least the State-Owned-Enterprises) is fading. See Mark Magnier’s “China’s Workers Are Fighting Back as Economic Dream Fades” in The Wall Street Journal.

It is no surprise that developers are diversifying. Real estate development is a cyclical business (even if this cycle in China has been cranking for decades since Deng Xiaoping came to power).

“In May, real-estate firm Shanghai Duolon Industry changed its name to P2P Financial Information Service Co. to diversify into Internet finance and consultancy services, driving its shares sharply higher.”

“Evergrande Real Estate Group Ltd. (also one of the China’s largest developers), which recently spent $2.1 billion buying uncompleted property projects, has delved over the past two years into mineral water, dairy, grains and oil.”

Other examples include Dalian Wanda’s purchase of the Ironman triathlon group, its creation of a financial holding company and its crowdfunding project “Stable Earner No.1” (promising investors annualized returns of 12% – 6% from income and 6% from appreciation).

However, even if the developers themselves are not excited about their prospects, Chinese insurers feel differently. See Jacky Wong’s article in The Wall Street Journal “Why China’s Insurers Are Bidding Up Property Stocks” (it was also listed in last week’s “Other Interesting Articles.”)

Digital advances uneven across US economy. Sam Flemington. The Financial Times. 16 Dec. 2015.

“Research from the McKinsey Global Institute finds that digitization could add $2.2tn to US gross domestic product by 2025 as companies lift productivity by exploiting advanced technologies.

However, the flipside will be further dislocation in the jobs market. Automation could displace between 10-15% of middle-skilled occupations such as clerical, sales and production roles over the period from 2015-25, equivalent to 8m-12m jobs, the report predicts.

That would be nearly twice the displacement rate of recent decades. The report finds that 60% of occupations could have 30% or more of their activities automated.”

The room for improvement in production efficiencies is a case for optimism, but the prospects of job rationalization is cause for concern. Consider that US median wage has been flat for 45 years (GMO third quarter newsletter) largely due to advances in technology, globalization, and policies that have favored capital over labor (as Ice-T said, “don’t hate the player, hate the game.”)

“Looking at just three big areas of potential – online talent platforms, big data analytics and the internet of things – we estimate that digitization could add up to $2.2tn to annual GDP by 2025, although the possibilities are much wider.”

But digitization is happening “unevenly” with “the US only reaching 18% of its digital potential.”

Industries that have a lot of catching up to do: agriculture, construction, and hospitality.

“After the IT sector itself, the most digitally advanced companies are in media, professional services, finance and insurance, and wholesale trade, the report says.”

Cheniere Energy

The reason I bring this up is because it wasn’t long ago that Bloomberg Businessweek had a feature on Cheniere and Charif Souki, “America’s Most Unlikely Energy Project Is Rising From a Louisiana Bayou” (9/2/15), profiling Souki’s rise and decent and rise again – and now post script decent.

From that article:

“Cheniere Energy, based in Houston, has spent more than a decade, and upwards of $20 billion, turning 1,000 acres of swamp into the first LNG export terminal in the continental U.S.”

Still yet to make any money (the terminal is about to be activated).

To get a sense of the scale of the operation, “Sabine Pass makes its own power. Cheniere paid General Electric $1 billion for 24 gas-fired turbines that were initially designed as jet engines. By the time the terminal is fully operational, they’ll generate about 450 megawatts of electricity, enough to power a city of almost 300,000 homes.”

FYI, America’s natural gas pipeline network leads right to the facility.

A little on Souki, Charif Souki after a stint in investment banking used own/run Mezzaluna in Aspen and LA along with two other restaurants in LA . In 1996 he became and oil and gas executive by purchasing a defunct public company. The article is really worth the read. Oh and,

“In 2013 his total compensation was $142 million, good enough to make him the highest-paid CEO of a U.S. public company. About $130 million of that came in the form of company stock.”

As Howard Marks, of Oaktree Capital, says “To succeed in the markets you need 1. Aggressiveness, 2. Timing, and 3. Skill. If you are Aggressive enough and Time it right, you don’t need skill. Only when the market declines or the timing is bad do you see who had/has skill.”

I’m not implying that Souki doesn’t have skill. He clearly has grit (aggressiveness). His timing has been good and bad, but ultimately the commodity slump has been too much and too long leading to Carl Icahn and the board of directors to can him.

Other Cheniere and Souki related articles:

Other Interesting Articles

Bloomberg Businessweek

Consumer Debt: For Indebted Russians, A Holiday Staycation

The Economist

BloombergBusiness: Blackstone Seeking to Raise $4 Billion for Real Estate Debt Fund 12/10
FT: Wells Fargo warns of ‘stresses’ in its energy portfolio 12/14

FT: Yields on junkiest US bonds breach 18% 12/15

FT: Any end in sight for the big oil slide? 12/15

FT: Celebrate the rise of flawed, febrile China 12/16

FT: Banks raise prime rates after Fed move 12/17

FT: Fed rise – Hong Kong caught between US tightening and China slowdown 12/17

FT: Second rating agency cuts Brazil to junk 12/17

GlobeSt.com: Interest Rates, Cap Rates Don’t Move in Lockstep 12/15

National Real Estate Investor: Net Lease Buyers Develop Bigger Appetite for Medical Properties 12/14

National Real Estate Investor: Private Equity Real Estate Fundraising Surges in 2015 12/16

NYT: China’s Coastal Cities, Underwater 12/11

NYT: Why Very Low Interest Rates May Stick Around 12/14
NYT: Battered, Apologetic and Still Pitching Their Hedge Funds 12/15

WSJ: Private Equity’s ‘Hidden’ Fees Totaled $20 Billion 12/13

WSJ: China’s Workers Are Fighting Back as Economic Dream Fades 12/14

WSJ: The Government’s Financial Watchdog Just Warned Us That Another Third Avenue-Style Bond Fund Run Is Likely 12/15

WSJ: Even as Oil Plummets, China Keeps Prices High 12/16

WSJ: Rent Your Place on Airbnb? The Landlord Wants a Cut 12/16

WSJ: Fed Rate Increase to Cool Hong Kong Property Prices 12/16

Special Reports

November 20, 2015November 20, 2015

November 13 – November 19, 2015

“Peak demand” in oil consumption? Pollution in India, Burbank Interview, and a Breakthrough in Battery Storage technology is near.

Clearly over the last seven days there has been a lot of coverage on the world’s commodity markets as supplies are near all-time highs (oil consumer inventories rose to 487.3m barrels – close to the record of 490.9m barrels; FT Energy Source briefing by Kiran Stacey) and on the upcoming United Nations Climate Change Conference in Paris (Nov. 30 – Dec. 11). However, several articles have stood out as somewhat profound to me along with a video of a guest lecture by John Burbank of Passport Capital at the Haas School of Business on October 5 (I finally got around to watching/finishing it). First the articles, 1) in The Economist “Oil companies and climate change – Nodding donkeys” brings up the changing dynamics of the energy industry particularly in light of summit (UN Conference) goals, 2) was “Pollution in India: Gasping for air” by Amy Kazmin in The Financial Times that illustrates the challenges that India faces as it seeks to modernize/industrialize itself, and 3) was Ed Crooks “Batteries start to compete for power grid” in The Financial Times that discusses one of the technology advances that will assist countries in achieving the Paris Summit goal – keeping global warming below 2⁰C.

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

Oil companies and climate change – Nodding donkeys. The Economist. 14 – 20 Nov. 2015.

“As the Paris summit has approached, ambitious pledges by more than 150 countries to cut greenhouse-gas emissions have taken oil bosses by surprise-even if the pledges are likely to fall short of the target of limiting global warming to two degrees Celsius above pre-industrial levels.”

“The International Energy Agency (IEA), a body that represents oil-consuming countries, says that to keep global warming to two degrees, fossil fuels would need to fall to 60% of the energy mix by 2040.”

“There should be no energy company in the world [which] believes that climate policies will not affect their business.” – Fatih Birol, executive director of IEA

As a result, many oil companies are investing heavily in natural gas as an alternative – “you can argue that Big Oil is becoming Big Gas,” – Occo Roelofsen of McKinsey

“BP executives, also favoring a gassier future, have been modelling potential “demand destruction” scenarios… BP has become one of the first majors to acknowledge the risk that the industry is spending money developing reserves that it may never tap.”

Let that sink in for a minute. Imagine a scenario where oil is left in the ground because we don’t need it. Further, that if we’ve reached peak demand, consider the implications for energy companies and oil rich countries if top line revenues stop growing (at least based on current lines of business)…

“Spencer Dale, its [BP] chief economist (and formerly of the Bank of England), recently estimated that the world has almost three times the reserves of oil, gas and coal that it could burn if it were to hit the two-degree goal.”

“Mark Carney, governor of the Bank of England, talks about the possibility of many oilfields turning into “stranded assets,” or “unburnable carbon,” if governments get serious about climate-change action.”

Therefore, it’s no surprise that “Faced with a world awash in crude, oil majors are abandoning high-cost reserves in the Arctic, Canada, North Sea and the Gulf of Mexico.”

Pollution in India: Gasping for air. Amy Kazmin. The Financial Times. 17 Nov. 2015.

According to the World Health Organization, India has 13 of the world’s 20 most polluted cities, as measured by average ambient PM2.5 levels (the particulates that lodge deep in the lungs and raise cancer risks). Delhi is the most polluted – even worse than Beijing – “thanks to its toxic brew of diesel exhaust, construction dust, industrial emissions and the widespread burning of biofuels for cooking.”

“India uses dirty diesel – which is often adulterated with subsidized kerosene – and its vehicle emission standards lag 10 to 15 years behind European counterparts.”

Additionally “…Delhi is engulfed each winter by a haze generated by the burning of an estimated 500m tons of post-harvest stubble in the fields in India’s granary states of Punjab and Haryana.”

I can speak from personal experience, pollution can be debilitating (I was hospitalized in Shanghai in January of 2013 – due to high PM2.5 levels). China has a major problem, but they’re actively seeking to address it and they have the benefit of having already achieved mass industrialization. India on the other hand has not and here they are trying to boost GDP growth and achieve mass industrialization while already having most of the worst polluted cities in the world. It is no surprise that India is trying to slow progress for the Paris summit. Yet, if India is to succeed, they will need to utilize the capabilities of its citizens…

“We are working very hard to improve nutrition, education and skills training to give India a competitive workforce, and this [pollution] could really work against it. The health of kids is important if you want to realize the demographic dividend.” – Onno Ruhl, India Country director of the World Bank

Passport Capital: Burbank interview at UC Berkeley 10/05

I bring this video up because it brings up valuable insights and particularly in light of negative global GDP growth (in US dollar terms) and declining corporate profits. Consider that “when growth is scarce, the world is zero-sum.” You see this playing out with Russia annexing Crimea, ISIS being able to attract young and bored males from Europe and the U.S., Venezuela continuing to implement protectionist policies, U.S. corporations seeking tax inversions, etc. More importantly, the technology is having a profound impact on change.

Information, one of the most valuable resources, now moves around free.

The internet boom of the late 1990s basically put in place the technological infrastructure that has enabled the “new” technology companies of today to excel. Efficiencies are rampant and more is being accomplished with less. “Deflation is progress.” Growth will not come from resource consumption and likely will not come from an industrializing India.

The industrialization of China was a one-time event. The largest country (per capita) went from hibernation to mass industrialization within 30 years. Never going to happen again – India won’t come close.

Rather, growth will come from change.

We’re in a world where ‘high-value-added’ things prevail.

The most important things don’t revert to the mean. They Diverge.

Batteries start to compete for power grid. Ed Crooks. The Financial Times. 17 Nov. 2015.

Speaking of change…

“Within five years, Lazard (the investment bank) believes, the price of batteries is likely to have fallen to the point that they will be competitive against back-up fossil fuel power generation for a wide range of uses.”

“New electricity storage installed on to the grid to support wind and solar power is likely to grow more than 60-fold from 196 megawatts of capacity this year to 12,700MW in 2025, according to Navigant, a research firm.”

“Jim Robo, the chief executive of NextEra Energy, told a conference in September he expected that after 2020, “there may never be another peaker (typically a gas-fired power plant to meet high demand and cover uneven supply from renewable energy) built in the United States,” because electricity storage would be used instead.”

Interesting times…

Other Interesting Articles

Bloomberg Businessweek