“US utilities, sustained for years in a warm bath of favorable financial conditions, are facing a cold shower.”
“An expected rise in interest rates and the shake-up of the tax system passed into law at the end of last year are threatening to squeeze utilities’ finances. Already, the S&P 500 utility sector index has dropped 13% from its peak in November.”
“Developed nations face a rising tide of government debt that poses ‘a significant challenge’ to budgets as interest rates increase around the world, the OECD has warned.”
“Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the ‘relatively favorable’ sovereign funding environment ‘may not be a permanent feature of financial markets’.”
“The warning on the longer-term consequences of high public borrowing marks a shift in stance by the OECD, which as recently as November was praising countries for easing fiscal policy to help global growth.”
“In an Economic Outlook, published at that time, the Paris-based organization said that ‘even a lasting increase in 10-year government bond yields of 1 percentage point . . . might worsen budget balances on average by only between 0.1% and 0.3% of GDP annually in the following three years’.”
“The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year. Debt to GDP ratios across the OECD averaged 73% last year, and its members are set to borrow £10.5tn from the markets this year.”
“Because much of the debt raised in the aftermath of the financial crisis is set to mature in the coming years, developed nations will have to refinance 40% of their total debt stock in the next three years, the OECD said.”
“In 1969, India’s then prime minister, Indira Gandhi, transformed the country’s banking landscape when she nationalized its 14 biggest commercial lenders, which together accounted for around 70% of the system’s deposits.”
“Nationalization was touted as way to protect depositors and force banks — which mainly catered to big industrial houses — to lend to a broader swath of the population, including farmers, traders and small businesses.”
“State dominance over the banking system has not worked out so well for India. Politically driven lending decisions, difficulties agreeing realistic debt workouts when loans sour, as well as uninspired, even fearful bureaucratic management and outdated IT systems have left state lenders with a far higher bad debt burden than their private rivals, hindering India’s economic prospects.”
“Now, the discovery of an alleged $1.8bn fraud at India’s second-largest state lender, Punjab National Bank, is prompting vigorous and concerted calls for New Delhi to admit the failure of Mrs. Gandhi’s bank nationalization — and reverse it.”
“According to PNB, staff at one of its Mumbai branches issued fraudulent bank guarantees for luxury jeweler Nirav Modi, and his diamond-trader uncle Mehul Choksi, to take cash advances from the overseas branches of other Indian banks — all ostensibly guaranteed by PNB.”
“Antiquated software systems — guarantees were issued without requisite documents or collateral — meant PNB’s management had no idea of the obligations mounting in its name. Nor did the banks that received the guarantees, mostly other state lenders, suspect any impropriety.”
“Analysts say the scam, which PNB says went on for several years without detection, highlights the rot in state banks and the need for radical change.”
“At the heart of India’s banking crisis, however, is New Delhi’s political control over what should be run as commercial entities and the inherent conflict of interest in the state’s multiple roles as economic policymaker, the largest bank owner and the industry regulator.”
“While New Delhi is now in the middle of a $32bn recapitalization scheme to shore up bank balance sheets after the last wave of bad debts, the PNB fraud has raised fears the government is simply throwing good money after bad.”
“Privatization of some, or even most, of India’s state banks is not a simple or quick solution to the sector’s problems. Analysts say the legacy of five decades of state ownership — and its impact on personnel, incentives and decision-making — will take years to undo. But the PNB fraud has persuaded many Indians it is time to start.”
WSJ – Daily Shot: TD Securities – Japanese Investors Looking For Returns Abroad 2/27
“Amazon is planning to expand its lending to small businesses in the US, the UK and Japan, in a direct challenge to the big banks which have historically dominated.”
“The Seattle-based company launched Amazon Lending with little fanfare six years ago, offering select sellers on its platform instant loans for up to 12 months at annual interest rates ranging from about 6 to 17%.”
“Now, having done about $3bn of originations in total and $1bn within the past year, Amazon is expanding offers to more of the 2m or so businesses on its ‘marketplace’ platform. Such independent sellers — many of which pay Amazon to store, package and ship merchandise to customers on their behalf — account for about half of Amazon’s total units sold worldwide.”
“Amazon supplies funds from its own balance sheet within 24 hours, then deducts loan payments every two weeks automatically from the seller’s account. If the account runs dry, or if sales suddenly dip, Amazon can put a freeze on any merchandise held in its warehouses until the seller pays up.”
“’It’s a ‘can’t lose’ proposition for Amazon,’ said Jordan Malik, a Las Vegas-based publisher, noting that the company has a near-perfect view of any seller’s cash flows. ‘It’s a very clever thing they’ve done.’”
“The median size of a new single-family home slipped by a scant 2% to 2,422 square feet in 2016, according to Census Bureau data released last week. While that’s a small adjustment, it’s the first time since 2009 and only the third time in the last 20 years it’s fallen.”
“Year after year… 0.5% to 2% of revenue was directed to illicit payoffs, mainly to Brazilian politicians and executives of state companies, particularly the national oil producer, Petrobas. Some years graft expenses neared 2 billion reais ($611 million). It just depended on the demands of Odebrecht’s political contacts.”
Evergrande Real Estate is asking its bond holders to relax its borrowing limits despite the reality that it is paying out increasing dividends to its shareholders all the while having “reported negative operating cash flows over the past five years.”
ChemChina is acquiring Syngenta for $34bn should the authorities agree; it will be largest outbound acquisition by a Chinese company, but more importantly it appears to me that this will become a key method for wealthy Chinese to get around tightening capital controls for getting money out of China.
The liquid natural gas market should brace itself for a price war now that U.S. producers are sending their first shipments of LNG to Europe, Russia will be damn sure to make it unprofitable for U.S. companies like the Saudi’s have been doing to the Shale gas providers. Not so good for Cheniere…
Because I forgot to mention this last week, in case you were wondering, Malaysian Prime Minister Najib Razak was cleared by the newly appointed Attorney General (the last one was sacked) for the $680 million that was found deposited into his personal bank accounts. All a big misunderstanding. The money was a personal donation by the Saudi royal family and all but $61 million has been returned. Well the Swiss authorities are calling BS and have “found ‘serious indications’ that about $4bn was misappropriated” from Malaysia through the 1MDB investment fund.
From Bloomberg Graphics, passive investment managers winning at the expense of active managers.
From the Financial Times, US junk debt yields rated triple C and lower have jumped.
*Note: bold emphasis is mine, italic sections are from the articles.
This article really speaks to why for most people in the U.S. it does not feel that the economy is on firmer footing or is growing for that matter. Bottom line, wages in most cities have not recovered in most cities and especially for minorities.
“American cities powered the U.S. economy out of the recession and into its recovery. Out of America’s 100 largest metro areas, almost each one improved on some measure of economic growth, employment, productivity or average wealth per person. The one red flag: wages.”
“Median wages declined in 80 of those cities between 2009 and 2014, according to a new study released Thursday by the Brookings Institution. The wage declines were more pronounced among minorities than whites. Also, the wage gapes widened between races in cities with economies that ranked high overall.”
“Only eight cities out of the largest 100 saw median wages and employment rates rise while its poverty rate fell.”
“Denver, San Jose, Calif., Provo, Utah and Charleston, S.C. are among those few metro areas that saw economic inequality decrease overall… However, the median wages of white workers in Provo rose about 2% between 2009 and 2014. And the paychecks of black workers declined by nearly 20% in that time period.”
“Wage growth has been largely absent during the U.S. economic recovery, and it’s a big reason why many middle class Americans feel they haven’t benefited. Only in recent months has wage growth started to move in the right direction nationally.”
“There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.”
“Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.“
“While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too… Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years.”
“Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009.”
“Much of the cheap credit accumulated by companies was spent on a $3.8 trillion M&A binge, and to fund share buybacks and dividend payments. While that tends to push up share prices in the short term, bond investors would rather see that money spent on strengthening the business in the long term.”
But… “S&P’s global credit market outlook is stable and analysts estimate earnings will recover this year. Investment-grade firms have accumulated record amounts of cash, which will insulate them from market turbulence, according to a report from Citigroup Inc. this month.”
“At about 3%, overall borrowing costs for companies around the world remain below the average of 4.5% in the preceding two decades even as spreads have widened.”
“As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysis.”
“Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.”
“Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.”
“In Europe, analysts say bad loans total more than $1 trillion.”
Bad loans are on the rise in the energy and commodities sectors, in Brazil and elsewhere…
“If you have a boom and then a bust, you create economic losses. You can hope the losses one day turn into profits, but if they don’t, they are a drag on the economy.” – Alberto Gallo, head of global macro credit research at the Royal Bank of Scotland.
“China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.”
According to Chu, “the world has never seen credit growth of this magnitude over such a short time. We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”
“Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22% of the Chinese financial system’s loans and assets will be ‘nonperforming.’ In dollar terms, that works out to $6.6 trillion of troubled loans and assets.”
Ms. Chu “estimates that the bad loans could lead to $4.4 trillion of actual losses.”
For those that haven’t been following the falling knife that Venezuela has become…
“Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”
“Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugh Chavez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111.”
“The year 2015 was an annus horribilis in Venezuela with a 10% decline in gross domestic product, following a 4% fall in 2014. Inflation reached over 200%. The fiscal deficit ballooned to 20% of GDP.”
“In the free market, the bolivar has lost 92% of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered.”
“As bad as these numbers are, 2016 looks dramatically worse.”
President Nicolas Maduro is at odds with the National Assembly (opposition candidates were recently elected despite the government controlling the media and many opposition members having been locked up as a matter of practice since Chavez and his successor have been in power) “…the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.“
“The fallout for Venezuela’s neighbors and the global economy will be substantial… Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.
Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable.”
While the IMF was set up to help avoid situations like this, Venezuela “has not let the IMF in (the country) since 2004.”