“American shale drillers are still spending more money than they are making, even as oil prices rise.”
“Of the top 20 U.S. oil companies that focus mostly on fracking, only five managed to generate more cash than they spent in the first quarter, according to a Wall Street Journal analysis of FactSet data.”
“Shale companies have helped propel U.S. oil output to all-time highs, surpassing 10 million barrels a day and rivaling Russia and Saudi Arabia. But the top 20 companies by market capitalization collectively spent almost $2 billion more in the quarter than they took in from operations, largely due to bad bets hedging crude prices, as well as transportation bottlenecks, labor and material shortages that raised costs.”
Cryptocurrency / ICOs
FT – Tax havens take the ICO lead – Don Weinland 5/21
“It’s tempting to look at the housing crisis in Boise as just a miniature version of what’s already happened in the Bay Area and the Pacific Northwest and the Northeastern corridor. But in the last 10 years, the American economy has transformed in ways that are going to make it even harder for smaller cities to respond to growth.”
“In 2007, the city of Boise was issuing more than twice as many building permits as it is now. Despite having 125,000 more residents, Boise’s metro area built fewer homes in 2016 than it did in 2004.”
“The reason, says Gary Hanes, a retired HUD administrator based in Boise, is that the recession wiped out the city’s construction sector. Between 2008 and 2012, Boise home prices fell by 40%. With homebuilding stalled, thousands of construction workers took other jobs or left for North Dakota or Alaska. By 2012, once all the low-cost and foreclosed homes had been scooped up and the city needed new housing again, there was no one left to build it.”
“This isn’t just a Boise problem. Construction workers, even in high-paid jobs and booming cities, are in short supply. Plus, thanks to increasing international demand, prices for timber, steel and concrete are going up nationwide.”
“The higher costs of materials, financing and labor, combined with the years-long lag in homebuilding, have made construction unbearably expensive. Fred Cornforth, the CEO of the CDI/Idaho Development and Housing Organization, builds affordable housing in 17 states. He tells me that his last project in Boise cost around $155,000 per apartment ― cheaper than Seattle, where he also develops properties, but not by as much as you’d think.”
“This, Cornforth says, is the fundamental challenge of the housing crisis in Boise and everywhere else: The only way make prices fall is to overbuild. You need vacancy rates of 8% or more before rents start to come down. But the backlog is so great, and the costs of building are so high, that it’s impossible even to meet the current demand. Every year, he says, as the backlog grows, the costs go up and the challenge of meeting the need gets worse.”
“Ultimately, the housing crisis is not about housing. It is about the inability of American cities to grow.”
“’It’s hard to acknowledge change,’ says Mike Kazmierski, the president of the Economic Development Authority of Western Nevada. He’s been watching Reno, another medium-size boomtown, play out the same debates as Boise for over six years now. ‘If you say your city is going to grow, that means you need another fire station, more schools, more staff. Cities don’t have the budgets for that, and asking for it means raising taxes. The pushback is, ‘We don’t want to pay for that growth. Let them pay for it when they get here.’”
“This is where Boise starts to look depressingly familiar. In the last few years, as the city’s growth has become more visible, NIMBY groups have taken over the political conversation. Of the 21 speakers at a town hall meeting last month, only two said they welcomed more growth. Signs reading ‘OVERCROWDING IS NOT SUSTAINABLE’ are showing up in front yards. Some local residents, taking a page from the San Francisco playbook, are trying to get their neighborhood classified as a ‘conservation district‘ to block new buildings from going in.”
“Some of the complaints have merit ― it’s hard not to be sympathetic to residents asking for sidewalks on their streets or more frequent bus service ― but many are simply pleas for the growth itself to stop. A comment on the Facebook page for Vanishing Boise, one of the local anti-development groups, is emblematic of the argument: ‘Why are they coming in the first place?????’”
“As in other cities, this dynamic reveals a fundamental weakness in the American political system: Opposition to growth comes from homeowners and voters, entrenched interests who already have the ear of local politicians. Supporters of growth, the beneficiaries of all the new development, haven’t even moved here yet.”
“…most local advocacy groups are making the same argument San Francisco homeowners have made for decades: If we don’t build it, they won’t come.”
“Over a million more people moved out of California from 2006 to 2016 than moved in, according to a new report, due mainly to the high cost of housing that hits lower-income people the hardest.”
“There are many reasons for the housing crunch, but the lack of new construction may be the most significant. According to the report, from 2008 to 2017, an average of 24.7 new housing permits were filed for every 100 new residents in California. That’s well below the national average of 43.1 permits per 100 people.”
“If this trend persists, the researchers argued, analysts forecast the state will be about 3 million homes short by 2025.”
“California homeowners spend an average of 21.9% of their income on housing costs, the 49th worst in the nation, while renters spend 32.8%, the 48th worst. The median rent statewide in 2016 was $1,375, which is 40.2% higher than the national average. And the median home price was — wait for it — more than double that of the national average.”
“One coping strategy: California residents are more likely to double up. Nearly 14% of renter households had more than one person per bedroom, the highest reading for this category in the nation.”
“Coping can also mean leaving.”
“The Next 10 and Beacon Economics researchers used Census data to track migration patterns by demographic characteristics. More than 20% of the 1.1 million people who moved in the decade they tracked did so in 2006, at the height of the housing bubble, when prices were, as they write, ‘sky-high’.”
“As the housing market imploded and prices came back to earth, migration out of the state slowed. But as prices recovered, ‘out-migration’ has not only picked up steam, it’s accelerated.”
“Those migration patterns are shaped by socioeconomics. Most people leaving the state earn less than $30,000 per year, even as those who can afford higher housing costs are still arriving. As the report noted, California was also a net importer of highly skilled professionals from the information, professional and technical services, and arts and entertainment industries. On the other hand, California saw the largest exodus of workers in accommodation, construction, manufacturing and retail trade industries.”
“House prices are soaring and, despite warnings from some analysts, most Americans believe they will continue to soar.”
“A majority of U.S. adults (64%) continue to believe home prices in their local area will increase over the next year, a survey released Monday by polling firm Gallup concluded. That’s up nine percentage points over the past two years and is the highest percentage since before the housing market crash and Great Recession in the mid-2000s.”
Affiliate networks (‘affiliates’) = companies/brokers that design advertisements and pay to place them on social media sites on behalf of merchants.
“Granted anonymity, affiliates were happy to detail their tricks. They told me that Facebook had revolutionized scamming. The company built tools with its trove of user data that made it the go-to platform for big brands. Affiliates hijacked them. Facebook’s targeting algorithm is so powerful, they said, they don’t need to identify suckers themselves—Facebook does it automatically.”
“The basic process isn’t complicated. For example: A maker of bogus diet pills wants to sell them for $100 a month and doesn’t care how it’s done. The pill vendor approaches a broker, called an affiliate network, and offers to pay a $60 commission per sign-up. The network spreads the word to affiliates, who design ads and pay to place them on Facebook and other places in hopes of earning the commissions. The affiliate takes a risk, paying to run ads without knowing if they’ll work, but if even a small percentage of the people who see them become buyers, the profits can be huge.”
“Affiliates once had to guess what kind of person might fall for their unsophisticated cons, targeting ads by age, geography, or interests. Now Facebook does that work for them. The social network tracks who clicks on the ad and who buys the pills, then starts targeting others whom its algorithm thinks are likely to buy. Affiliates describe watching their ad campaigns lose money for a few days as Facebook gathers data through trial and error, then seeing the sales take off exponentially. ‘They go out and find the morons for me,’ I was told by an affiliate who sells deceptively priced skin-care creams with fake endorsements from Chelsea Clinton.”
“In a sense, affiliate scammers are much like Cambridge Analytica. Because Facebook is so effective at vacuuming up people and information about them, anyone who lacks scruples and knows how to access the system can begin to wreak havoc or earn money at astonishing scale.”
This is not a new game.
Affiliates are “…applying tricks on Facebook that had been invented by email spammers, who’d in turn borrowed the tactics of fax spammers in the 1980s and ’90s. New forms of media have always been hijacked by misleading advertising: 19th century American newspapers were funded in part by dishonest patent medicine ads. Within days of Abraham Lincoln’s inauguration, the makers of Bellingham’s Onguent were placing ads claiming the president had used their product to grow his trendy whiskers.”
“Fake personal endorsements and news reports are still the most effective tricks. Dr. Oz, the Shark Tank judges, and Fixer Upper co-host Joanna Gaines are among the most popular imprimaturs…”
“In the political realm, however, Mr. Xi enjoys advantages that may allow him to cope with the economic fallout far better than Mr. Trump can. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, even as Mr. Trump must contend with complaints from American companies and consumers before important midterm elections in November.”
“The Chinese government also has much greater control over the economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy.”
“’The American agricultural sector is quite influential in the Congress,’ said Wang Yong, a professor of economics at Peking University, explaining why China has targeted farm products such as soybeans with possible retaliatory tariffs. ‘China wants the American domestic political system to do the work.’”
“Alphabet bought enough renewable energy last year to match the power needs of all its data centers and global operations, making it the biggest corporate buyer of renewable power in the US.”
“The company has secured 3GW of renewable energy, making it the largest corporate buyer of renewable power, according to Bloomberg New Energy Finance, while Amazon and Apple are in second and third place.”
“Amazon has pledged that its cloud computing business will be 50% matched by renewables in 2017, while Apple has promised to source four gigawatts of renewable power by 2020, and has been trying to reduce the emission footprint of its supply chain.”
“From the outside, the Korean economy appears to be flourishing: the country is home to major industry leaders such as Samsung, Hyundai, and Kia. It’s the 11th-largest economy in the world, with semiconductors, car LCDs, and other high-tech products dominating its exports. The overall unemployment rate is just 4.6%.”
“Still, young people can’t find jobs. Youth unemployment has hovered around 10% in Korea for the past five years. The underemployment rate — defined by those involuntarily working jobs they’re overqualified for or are part-time — is even higher as of this year: it hovered at 38% in 2016, according to Dongseo University professor Justin Fendos.”
“In this highly educated economy, it can be hard for young Koreans to distinguish themselves from their peers. Nearly 70% of all Koreans ages 25–34 have a post-secondary degree, the highest of all Organization for Economic Co-operation and Development (OECD) countries, and a high school degree is nearly universal. Entire neighborhoods in Seoul are full of college graduates studying to pass hiring exams in order to get in at Korea’s biggest companies or the enviable public sector.”
“’The design of Korean society is a big reason why the cryptocurrency became so popular,’ says Yohan Yun, a 25-year-old assistant reporter in Seoul who invested around $400 in Ethereum. ‘People here are generally unhappy with their current status in society.’”
“Even employed young people are pessimistic about their economic prospects: a survey conducted in 2015 showed that half of young Koreans don’t believe that they will do better than their parents’ generation, compared to 29% in 2006.”
“For young Koreans, cryptocurrency seems like a rare shot at prosperity. Months after last year’s bubble started to implode in February, the Korean won remains the third most traded currency for Bitcoin. The country of 52 million comprises 17% of all Ethereum trading, and it was the location of two-thirds of world’s biggest exchanges this winter, Korea Expose reported in February.”
“An estimated three in 10 salaried workers in Korea had invested in e-currencies by December 2017, according to a survey by Korean recruiting firm Saramin. Eighty percent of those people were in their 20s and 30s.”
“But now that the prices of cryptocurrency coins like Bitcoin, Ethereum, and Ripple have tanked, many Korean youths are dealing with the mental and financial aftermath of their losses. Korean psychologists have reported an uptick of patients from the so-called ‘Bitcoin blues,’ divorce counselors say marriages are splitting from failed investments, and even the country’s prime minister said that virtual currencies are on track to cause ‘serious distortion or pathological social phenomena’ among Korea’s young population.”
“Real estate used to be the traditional way to grow one’s fortune in Korea, but prices have become exceedingly expensive for even upper-middle-class people. And interest rates for savings accounts are rarely more than a few percentage points a year.”
“Koreans’ hyperconnectivity helped spur Bitcoin’s popularity. Teens and young adults spend around four hours a day using mobile phones in Korea. Nearly every Korean home has internet access, and 88% have smartphones, the highest percentage globally. Such an abundance of connectivity allowed potential traders of all ages to learn about the craze and hear about the insane amounts of money one could make on trading. Cryptotrading clubs, where people can meet like-minded traders and share tips, popped up at many Korean universities.”
“Thanks in part to the frenzy, some coins cost up to 51% more in Korean markets than anywhere else. Bitcoin’s price was up nearly $8,000 in January, Bloomberg reported. The ‘kimchi premium’ drew foreign traders to buy their coins abroad and trade them in the Korean market.”
“But then came the crash. From January 6th to January 16th, 2018 the price of Bitcoin to Korean won tumbled from a high of a US-equivalent $25,065 to $13,503, according to Korbit. It continued to fall to $7,410 by February 5th, and as of April 2nd, the price of a bitcoin sits at $7,241.”
“In total, the Bitcoin crash wiped out $44 billion of value in January, or more than Ford’s entire market capitalization, according to Bloomberg. New regulations against cryptocurrency trading, particularly ones from a worried South Korean government, helped usher the fall.”
“The mobile-home market is showing signs of stress.”
“The delinquency rate on mobile-home loans has increased by 200 basis points, or 2 percentage points, over the past year, according to research cited by UBS. The 30-day-plus delinquency level is now about 5%, the highest level since 2005.”
“The increase in the number of struggling mobile-home borrowers suggests that a large chunk of these people haven’t benefitted from the economic growth of the past few years, despite the low unemployment level.”
“This data represents a piece of a jigsaw puzzle of the condition of consumer finances in the US. And the picture that’s emerging, according to UBS, is of a two-speed economy, with lower-income consumers and younger borrowers with substantial student debt moving at a slower pace than more affluent and established participants.”
“‘We believe weakness in these two groups (lower-income consumers and younger borrowers) will drive higher credit losses at some stage over the next few years — particularly in credit card, installment, and student loans — with macroeconomic inflection from job growth to job loss as a likely catalyst,’ UBS said.”
John Burns RE Consulting – California Has Density Solutions, but Not Enough New Housing – Pete Reeb 4/3
Finance
WSJ – Daily Shot: Deutsche Bank – European Bond Issuance v ECB Purchases 4/4
WSJ – Daily Shot: Deutsche Bank – Emerging Market USD & EUR Debt Issuance 4/4
China
WSJ – Daily Shot: Deutsche Bank – Credit Expansion in BRIC Countries 4/4
WSJ – Daily Shot: Hong Kong Retail Sales 4/4
“Hong Kong’s retail sales jumped by most in eight years as wealthy shoppers from the mainland return.”
Japan
WSJ – Daily Shot: Deutsche Bank – Declining Service Quality in Japan 4/4
“Instead of inflation, Japan’s extremely tight labor markets are translating into reduced-quality services for consumers. The US is starting to experience this trend as well.”
“Not only are Puerto Rico’s bonds the top performer in the $3.9 trillion municipal market, they’ve gained more than any other dollar-denominated debt in the world, according to data compiled by Bloomberg.”
WSJ – Daily Shot: Puerto Rico General Obligation Bonds 4/4
“This year’s box office so far has been a story of one completely dominant movie, ‘Black Panther,’ highlighting a potentially troubling trend for Hollywood in which ticket sales are increasingly concentrated among just a few ultra-successful pictures.”
“With $650.7 million and counting, ‘Black Panther’ is on track to become the third highest grossing movie ever in the U.S. and Canada. It accounted for 23% of all ticket sales in the first three months of the year, ending Saturday, according to comScore. That is the second-highest percentage ever behind only ‘Titanic,’ which took 25% in the winter of 1998.”
“’Black Panther’ is an extreme example of the trend that Hollywood has been struggling with for some years. In 2015, 2016 and 2017, the top 10 movies raked in between 32% and 35% of total box office, comScore said. Previously, that figure never exceeded 30%. So far this year, it is 58%.“
“After a decade as one of the world’s hottest housing markets, Toronto is moving in two directions. Transactions have certainly cooled since May as the government introduced new rules to tame runaway prices. But the impact has been largely on big, expensive detached homes, with sales plunging 41% in February from a year earlier, and prices dropping 12% since hitting a record last year. Condo prices, in contrast, soared about 20% since last February.”
“The deviation is largely as a result of mortgage regulations that went into effect on Jan. 1 as well as rising interest rates. The rule requires that even people with a 20% down payment, who don’t require mortgage insurance, prove they can make payments at least 2% points above the rates under which they go into contract.”
“That’s pushing buyers out of the detached segment and right into the condo market.”
“Thousands of online lenders could be facing extinction as China rolls out a new licensing framework, amid complaints about a lack of clarity on how the regime will work.”
“P2P platforms match borrowers with investors online. China’s P2P lending industry recorded transactions valued at $445bn in 2017, according to Online Lending Club, a data company.”
“Many P2P lenders, including one of the largest, Hongling Capital, were weeded out in crackdowns in 2016 and 2017 after agencies reporting to China’s central bank began closing fraudulent platforms and those selling high-interest loans.”
“Of more than 6,000 online lending platforms launched over the past several years, fewer than 2,000 were still in operation at the end of February, according to Online Lending House, a data provider — a sign of how regulation, competition and fraud have thinned the industry’s ranks.”
“As part of the regulatory overhaul, P2P lenders are barred from guaranteeing principal or interest on loans they facilitate; are limited to loans of no more than Rmb1m ($159,000) for individual borrowers and Rmb5m for companies; and must use custodian banks.”
“After years of delay and quiet opposition from vested interests, China will push ahead with a property tax that is viewed as crucial to taming the country’s housing bubble.”
“House prices in major Chinese cities are among the highest in the world in terms of price-income ratios, with speculative demand from Chinese investors — who see few other good places to park their savings — as a major driver. The result is an estimated 50m empty homes, according to a broad survey by researchers from Southwestern University of Finance and Economics in Chengdu.”
“A landmark blueprint for economic reform that the Communist party leadership approved five years ago included a pledge to push ahead with a property tax. But a subsequent slowdown in the economy, including a housing-market downturn in 2014-15, prompted authorities to shelve those plans.”
“Quiet opposition from wealthy urbanites, including government officials who own multiple homes, also hindered progress.”
“’When will the tax actually come out is difficult to say, but at least the intention has strengthened,’ said Chen Shen, head of property research at China Securities in Shanghai. ‘Two years ago everyone was discussing whether it would ever happen, but now it’s very clear that it will’.”
Japan
WSJ – Daily Shot: @NickTimiraos – Change in Home Prices – Japan & U.S. 4/2
“On Wednesday, Tesla’s notes plunged to a low of 86 cents on the dollar, the clearest sign yet creditors aren’t totally sure the company will be money good.”
“Chinese prosecutors have accused the former chairman of acquisitive conglomerate Anbang Insurance Group of fraud and embezzlement, offering the first detailed explanation of why authorities toppled the once high-flying tycoon.”
“Prosecutors on Wednesday accused Mr Wu of issuing false financial statements, marketing materials and regulatory filings to gain approval to sell such products. He also exceeded fundraising limits approved by the China Insurance Regulatory Commission, prosecutors alleged.”
“A whiff of political prosecution remains because the basic business model of selling universal insurance to finance high-profile acquisitions was not limited to Anbang, although Mr Wu’s group was the most aggressive.”
“Prosecutors alleged Mr Wu oversold Rmb724bn ($115bn) in insurance products, diverting Rmb65bn to another company he controlled, which he used for overseas investments, debt repayment and ‘lavish personal spending’. Mr Wu was also accused of concealing his control of Anbang through the other company.”
“They also accused Mr Wu of using proceeds from the sale of universal insurance to inject capital back into Anbang, a form of circular financing designed to boost the company’s reported capital ratio and create the impression of financial strength.”
“Less than a month after it was seized by the Chinese government, Anbang Insurance Group, the giant conglomerate, is once again offering small investors ‘you snooze, you lose’ investment opportunities — your money back, guaranteed.”
“Sold like stocks or bonds in bank branches around China, the products carry names like Anbang Abundant Stability No. 10, suggesting the investments are conservative. They are anything but.”
“Still, Anbang and other companies keep selling them — and Chinese investors keep buying them. When China took over Anbang, it only underlined the widely held — and potentially dangerous — belief that the Chinese government will always be there to bail them out.”
“China has a problem with debt. Shadowy, underground lenders have flooded the country with a staggering $15 trillion in credit, which threatens to hobble its economy.”
“Beijing now appears to be taking a harder stance with the companies in need of a bail out. On Wednesday, Chinese authorities accused a founder of Anbang, who was the deal maker who bought the Waldorf Astoria, of bilking investors of more than $10 billion. In a country where courts tend to convict, the accusations raised the likelihood that the executive, Wu Xiaohui, could face life in prison.”
“The Chinese authorities have pressured big issuers to slow down. In November, they proposed tightening disclosure rules and stopping firms from guaranteeing payments to investors, among other steps.”
“Data suggest China is making some headway. The total outstanding balance of wealth management products issued by Chinese banks was about $4.7 trillion in 2017, up just 1.7% from a year before, according to China Wealth, a state-backed company that tracks China’s wealth management products. Two years ago, sales were growing at roughly 50%.”
“Zhu Ning, a Tsinghua University economist, said the only way the government can prevent investors from taking on more risk that they can handle is to allow for ‘some real failures’.”
“China has been reluctant to allow for failures. Fearing mass unrest, the ruling Communist Party has repeatedly instructed Chinese banks and local officials to cave in to angry investors, who have protested outside government offices after losing their investments.”
“The real test, according to Mr. Zhu, could come later this year, when wealth management products issued years earlier have to be paid back.”
“’Nonperforming loans are going to be so severe that some of the weaker banks will be forced to face their Judgment Day — whether they are going to be bailed out or whether they are going to die,’ he said.”
“Opinions differ on the exact nature of Tesla, ranging from struggling car manufacturer to tech pioneer to something akin to the second coming. Regardless, it is undoubtedly one thing: a money machine.”
“I don’t mean that in the sense of Tesla making a lot of money; more that it is a machine for the raising and consumption of money.”
“All companies are this to one degree or another, of course; it’s just that Tesla Inc. is more at the ‘another’ end of things. Reliably negative on free cash flow, Tesla depends on a smorgasbord of external funding, from equity raising to vehicle deposits to high-yield bonds to securitized leases to negative working capital. And that smorgasbord rests, of course, on Tesla’s famously gravity-defying stock price and faith in CEO Elon Musk.”
“Which is why these four charts deserve more than a glance from even the most ardent Muskovite:”
“We’re just over a week away from knowing whether or not Tesla has hit its (much reduced) target for producing 2,500 Model 3s per week by the end of the first quarter. The signs thus far aren’t good, which also raises doubts about the 5,000-a-week target for the end of June.”
“Hitting these targets matters for the Tesla money machine on three fronts.”
“First, reducing that risk-laden reliance on negative working capital and getting a return on the money already spent on production lines relies on producing more cars. Second, analysts currently expect Tesla to burn through $2.7 billion of cash this year — and analysts tend to be optimistic on this stuff. Third, when Moody’s rated that bond Tesla sold last August, it was assuming 300,000 Model 3 deliveries this year, which now looks far out of reach.”
“In other words, Tesla’s money machine will almost certainly need to raise more this year due to the Model 3’s problems — but those same problems undermine the pitch for selling more equity or debt.”
“This is happening against a backdrop of rising interest rates. Tesla’s debt has jumped in recent years, especially after it took on SolarCity Corp.’s obligations. Interest expense more than doubled in 2017 and reached the astounding level of one-third of gross profit in the final quarter of 2017:”
“At the same time, Tesla is moving closer to a maturity wall, with $3.7 billion of bonds and credit lines needing refinancing by the end of 2020.”
“Some $1.7 billion of that consists of three convertible bonds falling due between this coming November and the next one. Almost half of it — inherited from SolarCity — is hopelessly out of the money, with conversion prices starting at $560 (Tesla closed Thursday at $309 and change). The rest of it, a $920 million convertible due next March, sports a conversion price of just under $360; still underwater but within sight of the surface.”
“Converting that last one to equity would dilute Tesla’s free float by 2%. But that could be more palatable than the alternative of replacing it with a straight bond.”
“As of now, those three bonds pay a weighted-average coupon of just over 1%, or about $18 million a year. All else equal, assuming they were all refinanced at spreads similar to where Tesla’s 2025 bonds trade now, but factoring in the forecast increase in Treasury yields, that would jump to 7%, or $120 million. Putting that in context, Tesla’s entire interest expense last year was $471 million.”
“A rebound in the stock price would take much of this pain away, of course.”
“Today, established carmakers flaunt their ability to manufacture all kinds of models, from hatchbacks to sport utility vehicles, on a single production line. Their challenge is to revamp these operations to produce electric vehicles in high volumes, reinforcing barriers to entry in an industry under siege from technology companies and start-ups.”
“Instead of coming out with an array of unprofitable electric cars today, the incumbents are putting the bulk of resources into production facilities that will mass-produce models from 2020, once battery costs fall and economies of scale kick in. Analysts suggest this approach leaves the impression the incumbents are lagging far behind Tesla. But once the game actually starts, say experts, the carmakers will be in a strong position to dominate the market.”
“’None of the traditional car manufacturers will have problems scaling up electric vehicle production,’ says Klaus Stricker, co-head of the global automotive practice at Bain & Company. ‘That’s exactly what they do best’.”
“Yet if the stock market is any guide, investors are more skeptical. Valuations of the big carmakers are among the most depressed on the S&P 500, Germany’s DAX and Japan’s Nikkei indices, according to Bernstein. Yet Tesla is valued like its products are set to dominate the car market the way Apple conquered mobile phones.”
“Tesla’s market value of $55bn is about $2.3bn more than GM’s, though for every car it built last year the latter group produced 100.”
“Tesla’s production troubles are a reminder that in automotive history, it is how to build cars, rather than the merits of any particular model, that is key to success. After Ford displaced craft production with mass assembly in 1908, it was overtaken by GM in the 1920s with ‘flexible mass production’ that could produce an array of models, from entry-level to luxury brands, and respond to customer preferences. In the 1980s, both companies were disrupted by Honda and Toyota’s methods of lean production. The Japanese groups outsourced a majority of tasks previously considered critical. With parts arriving ‘just in time’ on the assembly line, they largely did away with inventories.”
“The success of German manufacturers, whose volumes more than trebled from 4m units in 1990 to 15m last year, was largely based on ‘platform sharing’ that let multiple models use the same design underpinnings. VW Group, the world’s largest carmaker, uses common building blocks under ‘the Lego principle’ to share engines, transmissions and components across its 12 brands.”
“These progressive changes were all based on superior methods of producing cars, forcing rivals to adapt or die. ‘Efficiency was always the cornerstone of success in the automotive industry,’ says Oliver Zipse, head of production at BMW. ‘As soon as you were not able to produce in a particular cost frame, you were out of the market’.”
Ms. Webb offers an interesting perspective at why inflation may not be that far away. Why…because the primary source of deflation – China – appears to have changed tact.
“For years, party officials have been incentivized to force growth out of their regions, regardless of the effects on prices, global macroeconomics or, for that matter, pollution. But in the party conference in October, Xi Jinping shifted emphasis.”
“Instead of focusing on growth, China’s leader talked of ‘three tough battles’: against preventing major risks (mainly financial — the new target is to be ‘further deleveraging’); poverty (Xi fancies a ‘moderately prosperous society’ in all respects); and pollution (he wants to see the sky blue again).”
“The result has been pretty instant. Almost as the delegates headed home, say the analysts at Gavekal, prices of natural gas (a ‘clean fuel’) doubled; steel output stalled; and cement sector output actually fell even as demand for it and hence prices rose. China doesn’t seem to be adding new capacity to the global economy in the way that it was and that should mean it isn’t exporting deflation to the rest of the world any more either.”
“That is a dynamic that is arguably beginning to show up everywhere else. The slack is disappearing. There is no spare capacity left in Japan (or you would see new cuts to it). Industrial production in the US hit a record high in December, despite the US being too busy with buybacks and financial engineering over the past decade to build new capacity. Manufacturing output in the UK is at its highest in 10 years.”
“This could all lead us to several interesting conclusions. The first, highlighted by Gavekal, is that it is an explanation for the way stock markets in countries that have been hampered with too much productive space in the past are suddenly breaking out. See China, Japan and Korea — markets you might want to stick with for a bit.”
“The second is that, guess what, the boom in the US might not be entirely down to Donald Trump’s policies. The factories could be humming because global capacity constraints are being hit rather than because he’s the best economic manager ever. And the third is that the real inflation our great leaders (the central banks) think is impossible however much they might print, isn’t impossible at all.”
“Just before payday, an email went out to employees from top executives: Give us your money, and we’ll make it worth your while.”
“It was one of many pitches by HNA Group, a Chinese conglomerate struggling under an estimated $90 billion in debt accumulated during a global shopping spree that included buying stakes in multinationals like Hilton Hotels and Deutsche Bank.”
“The company, in an email, advertised an ’employee treasure’ product with an 8.5% return if workers handed over $1,500. A similar one dangled 9%. A third mentioned a return as high as 40% if employees ponied up $15,000.”
“These pitches, more than a dozen of which were reviewed by The New York Times, were not part of an employee stock program. Instead, they appear to be high interest loans, with the company as borrower and its workers as lenders.”
“The conglomerate has seen its borrowing costs rise sharply on the global bond market in recent months, an indication that some investors are increasingly worried about the company’s ability to pay its debts. Seven public companies under the umbrella of HNA have suspended trading of their stock, suggesting that big announcements that could affect key businesses are in the works. The company is also starting to sell assets.”
“It is unclear how much money HNA has raised from employees. The company has long offered such investments to its employees as a way to incentivize them and to share in the company’s success, Thomas A. Clare, an attorney for HNA, said in an email.”
“Companies around the world allow employees to buy stock or provide other ways for workers to invest in the business. But the HNA pitches do not offer direct ownership stakes in the business.”
“The offers reviewed by The Times had similar hallmarks, namely high returns for funding certain operations.”
“Chinese companies have often turned to individual investors or their own workers to raise money. But such moves, according to some China finance experts, can signal problems.”
“’It’s a desperation measure when companies really have no other source of financing and they are stuck,’ said Anne Stevenson-Yang, co-founder of J Capital Research, a corporate research firm.”
“A small company in the southeastern Chinese city of Wenzhou called Wenzhou Liren Educational Group made national news in 2011 after it went bankrupt and was unable to pay nearly $790 million it borrowed from employees and local residents. In 2015, an online peer-to-peer platform called Great Group pressured employees to buy investments in order to raise funds when it found itself in a financial bind, the Chinese news media widely reported. The two companies did not respond to requests for comment.”
“As HNA has faced more questions about its operations by both the local and foreign media, the company has issued groupwide emails urging employees to not speak to reporters. In January, HNA’s human resources department told employees they would be required to take a test on how to deal with the news media, according to an internal document reviewed by The Times.”
“Suncor Energy Inc said on Wednesday that it expected to cut some 400 heavy-equipment operator positions over the next six years as it rolls out a fleet of self-driving trucks at its Canadian oil sand mining operations.”
