“When oil collapsed in 2014 under the weight of US shale production, it ushered in a new-found belief that prices would remain ‘lower for longer’.”
“The rampant new source of crude supplies was seen to be capable of meeting rising world demand almost single-handedly, obviating the need for extra Opec barrels ever again.”
“As such, the concept of a ‘shale price band’ emerged of roughly $40 to $55 per barrel, reflecting the range within which the majority of US shale producers could turn a profit without the risk of the industry growing so fast that it would again flood the market. And for the better part of three years, from 2015 to 2017, oil prices traded in this range.”
“But in 2018, this narrative has been slowly picked apart and is now in the process of disintegrating.”
“While there has been breathless attention paid to prompt Brent prices climbing to $80 a barrel for the first time since 2014, what has received less attention is that the entire Brent forward curve is now trading above $60, including contracts for delivery as far out as December 2024.”
“This development is an important psychological milestone for the oil market. The market is, in effect, saying that ‘lower for longer’ is dead.”
“The reality is that US shale has been unable to meet rising global oil demand, which has averaged 1.7m b/d per year since 2014 — double the level at the start of this decade — and inventories have drawn down as a consequence, eliminating the buffer that had been built up.”
“This inventory fall has been helped by strong demand growth and the Opec/non-Opec deal to curtail output since January 2017, which has since been superseded by rapid declines in Venezuelan and Angolan production and, more recently, non-Opec production outside of the US.”
“The inevitable supply deficit is very worrying, with very limited spare production capacity available globally.”
“Two main themes are now starting to impact investor thinking and drive the new-found interest in exposure to energy.”
“First, recent supply data are finally reflecting the ill effects from under-investment due to the collapse in capital expenditure since 2015. The data are now showing accelerating decline rates across important suppliers such as Brazil, Norway and Angola.”
“Second, the impressive strength in demand has been overshadowed in the past two years by the narrative dominated by electric cars.”
“But slowly this has given way to a recognition that while electric cars will undoubtedly alter the trajectory for global oil demand in the long term, this trend will not reach critical mass in the medium term (the next five years) to sufficiently make up for the expected fall in oil supplies due to the lack of investment.”
“So, even though expectations are for oil demand growth to slow from current levels, consumption will still be robust enough that — barring a major recession — the market will need new supplies to meet that growth.”
“The physical oil market is only going to face greater strain ahead of the marine fuel specification change in 2020, which is set to boost demand for products such as diesel and ultra-low sulphur fuel oil by 2m to 3m b/d.”
“As a result, we believe that oil prices may spike to above $100 per barrel, a price forecast we have held for the latter half of 2019 for three years now.”
“The shale price band has been decisively broken and 2018 will be a watershed year: the market will realize that US shale alone cannot meet the world’s incremental demand growth and future prices must rise to re-incentivize long-cycle investments (or curtail demand).”
“Nothing ever moves in a straight line, but the broader oil market is perhaps not prepared for what will happen to oil prices over the next couple of years.”
“The age of the unicorn likely peaked a few years ago. In 2014 there were 42 new unicorns in the United States; in 2015 there were 43. The unicorn market hasn’t reached that number again. In 2017, 33 new U.S. companies achieved unicorn status from a total of 53 globally. This year there have been 11 new unicorns, according to PitchBook data as of May 15, but these numbers tend to move around, and I believe the 279 unicorns recorded globally in late February by TechCrunch was the peak, where the start-up bubble was stretched to its limit.”
“A recent study by the National Bureau of Economic Research concludes that, on average, unicorns are roughly 50% overvalued. The research, conducted by Will Gornall at the University of British Columbia and Ilya Strebulaev of Stanford, examined 135 unicorns. Of those 135, the researchers estimate that nearly half, or 65, should be more fairly valued at less than $1 billion.”
“Don’t let the few recent successes in the 2017 IPO market fool you. After two years of stagnation in terms of the number of IPOs being filed in the United States — 275 IPOs (2014), 170 IPOs (2015) and 105 IPOs (2016) — deal counts have dropped to their lowest figure since 2012.”
“Seventy-six percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to data compiled by Jay Ritter, a professor at the University of Florida’s Warrington College of Business, and recently featured in The New York Times. This is the largest number since the peak of the dot-com boom in 2000, when 81% of newly public companies were unprofitable.”
“The current volatility and correction evolving in the private market will be amplified for companies that have yet to make money and are burning cash faster than they’re bringing it in. Growth at all costs will not weather an economic storm.”
“Since the Snap IPO in March 2017 at $17 a share, when its shares surged 44% during its first day of trading, they have now declined to $11. Dropbox also went public. It had a first-day pop of 36%; however, with only 200,000 paying customers compared to its 500 million users, I would be hesitant to rush in to buy, even as it comes off that year-to-date high considerably. Another highly valued start-up, Blue Apron, went public at $10 a share in June and is now trading at $3. Remember Fitbit was a $45 stock in 2015 — it’s currently trading at just over $5.”
“Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy.”
“Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace. The measures are in the spot market, where vendors that don’t contract their deliveries find drivers for their products.”
“Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain.”
“Loads on the spot market in general are up 100% from the same period a year ago. Another measure, the flatbed load-to-truck comparison, which tracks the amount of vendors looking for flatbeds and is generally the highest of all truck types, is up 142%.”
“The numbers by themselves, though, don’t indicate that inflation is ready to strike soon. Indeed, the most recent readings, such as the consumer and producer price indexes, show inflation pressures rising though relatively benign.”
“But they do jibe with some other indicators showing inflation is rising beneath the surface.”
“The US’s banks have largely sat out the mergers and acquisitions wave of recent years. While deal records have fallen in almost every other sector, big banks have done almost nothing, shrinking rather than expanding. And merger activity among small and mid-sized banks — some 5,607 of them, at last count — has been subdued.”
“But when Fifth Third Bancorp of Cincinnati revealed its $4.7bn swoop for Chicago’s MB Financial on Monday morning, shares in other Chicago-area banks began to move, too. Wintrust, a similar-sized bank based in Rosemont, Illinois, ended the day up almost 4%, while First Midwest of Itasca closed up 3%.”
“The implications were obvious: after years of thin activity in bank M&A, this deal could mark a turn.”
“The conditions for dealmaking look better than at any time since the financial crisis. Higher interest rates and lower taxes have pumped up bank profits, giving management teams stronger platforms from which to contemplate doing something radical.”
“Oil has had a leading role in geopolitics over the past 100 years, sucking western powers into an often disastrous dependence on the Middle East.”
“While black gold, as oil is sometimes known, is not always the overt cause of conflict, it is linked to between one quarter and a half of all interstate conflicts globally between 1973 and 2012, according to a 2013 study by Jeff Colgan of Brown University.”
“But it would be a mistake to assume that geopolitical tensions will miraculously ease in a future in which renewable energy sources dominate. Building wind turbines and creating lithium-ion batteries requires metals and raw materials from those countries which are blessed, or potentially cursed, with them.”
“And for some of these commodities, their high concentration in particular parts of the world sharpens the risks.”
“A clean energy economy will require a staggering volume of metals to be prized from the ground.”
“For example, Olivier Vidal of the University Grenoble Alpes estimates that to build the infrastructure for clean energy the amount of copper needed amounts to almost half the total mined since 1900.”
“There is also the real risk that the age of the electric car will generate corporate monopolies, echoing those of Standard Oil whose founder John D Rockefeller cornered the oil market more than a century ago as the combustion engine took off.”
“Glencore, the Switzerland-based and London-listed miner, is expanding its production of cobalt which is set to give it a 40% share of global supply by 2020.”
“The production of lithium, a key ingredient for batteries in electric cars as well as smartphones, is controlled by just five companies.”
“However, rather than tensions with the Middle East, the advent of the electric car will usher in greater friction with China. Beijing’s ambitions in clean energy are enormous.”
“As part of the ‘Made in China 2025’ plan to advance high-end manufacturing, the government wants to establish a grip on the production of electric cars and clean energy technology.”
“The rest of the year will provide further signs of the capital and scale that China is bringing to this competition.”
“No one is giving China a free run at the metals that have emerged as central to electric cars.”
“Trade tensions with US President Donald Trump are already brewing. This month his administration released a list of 35 minerals, including lithium and cobalt, that are ‘considered critical to the economic and national security of the United States.’”
“Chile, which has the world’s largest lithium reserves, is looking to build battery components, while South Africa, a producer of vanadium, wants to produce electrolytes for vanadium batteries, which are used to store energy for the electric grid.”
“Europe, too, is beginning to build its own giant battery factories to supply Germany’s car companies and the UK’s innovation agency has backed a study that uses satellites to look for lithium in Cornwall.”
“The geopolitics of the era of the electric car are in their infancy. While it is unlikely to lead to military conflict, the tensions, especially with China, over who will control the resources and technologies that will underpin electric cars will be heightened.”
“Over the long term, the winners are likely to be those countries and companies that can develop battery technology that relies on materials that are abundant rather than scarce. It might even help make the geopolitics a little less fraught.”
“Malaysia has paid almost RM7bn ($1.8bn) to service debt owed by 1MDB, the south-east Asian nation’s finance ministry said on Tuesday, as investigators ratcheted up their probe into the state investment fund from which $4.5bn is alleged to have gone missing.”
“Two weeks after voters ousted the government of Najib Razak, the finance ministry said it had been ‘bailing out’ the 1Malaysia Development Berhad fund since April 2017, adding that another RM144m interest payment was due on May 30.”
“The revelation ‘confirms the public suspicion that 1MDB had essentially deceived Malaysians by claiming that [the payments] have been paid via a ‘successful rationalization exercise’,’ the ministry said in a statement. ‘All the while it has been the MoF [ministry of finance] who has bailed out 1MDB.'”
“Earlier on Tuesday, Malaysia’s new anti-corruption chief said he had been harassed and received a death threat after he pursued a 2015 investigation into 1MDB.”
“In 2016 — as global crude oil prices fell to about $40 per barrel — India, which imports nearly 80% of its petroleum, levied new excise duties on petrol and diesel to stabilize prices and prevent a surge in demand.”
“Since then, New Delhi has come to depend heavily on those revenues to shore up its fragile public finances, especially as receipts from the goods and services tax introduced last year have failed to stabilize at expected levels.”
“But after global crude oil prices hit a four-year high of more than $80 per barrel last week, India’s fuel pump prices — for decades subsidized by the government and held artificially low — have jumped to among the highest in south Asia.”
“Industry groups are pressing New Delhi to pare back excise duties on fuel, warning that the high prices will undermine an economy only now recovering from the successive disruption of a dramatic cash ban and the introduction of the goods and services tax.”
“But any meaningful rollback to ease pressure on consumers will raise doubts over the ability of Mr Modi’s administration to meet its target of cutting the fiscal deficit to just 3.3% of gross domestic product.”
“’India’s reliance on oil revenue has now surpassed the Malaysian government’s reliance on oil revenues — and Malaysia is an oil exporter,’ said Vikas Halan, senior vice-president at Moody’s Investors Service, the rating agency. ‘The government can always roll back excise duty — there is no one stopping them — but the issue is, how will they compensate for the loss of revenue?’”
“Last year, excise duties on petroleum products, which are about a quarter of the retail price of petrol and diesel, accounted for 17% of New Delhi’s total revenue collection. For every R1 that the government pares back these excise duties, it will lose an estimated $1.8bn in revenues, or about 0.1% of annual GDP.”
“Adding to the overall pressure is the recent weakening of the Indian rupee, which has fallen 6% this year to a 16-month low of Rs68.1 per dollar. Further depreciation will mean even higher local fuel prices. Bond markets are also jittery, with yields rising.”
“Oaktree joins a growing list of major investment firms to expand into non-traded REIT fundraising. The Blackstone Group kicked off the trend in September 2016. So far, other big investors that have followed its lead into the non-traded REIT sector include Nuveen’s TH Real Estate, BGC Partners’ Cantor Fitzgerald, Starwood Capital Group, KKR & Co., and TPG Capital.”
“SpaceX will on Saturday officially enter the race to bring internet access to all parts of the earth’s surface with the planned launch of its first test satellites for a globe-encompassing communications network.”
“The latest trial from Elon Musk’s private space company is a world away from last week’s spectacular first launch of Falcon Heavy, the world’s biggest rocket. Undertaken with none of the Tesla chief executive’s usual showman flair — he has not even mentioned it on Twitter — it is an early technical trial for a communications service that could be years from completion.”
“If successful, however, SpaceX has said it plans to start launching its first commercial satellites next year, with a constellation of more than 11,000 circling the earth in low-earth orbit by the time the network is complete in 2024.”
“SpaceX’s application for approval to test a satellite internet service from the Federal Communications Commission (FCC) is one of 12 made to the US regulators, highlighting the extent of the potential competition.”
“SpaceX plans to connect its constellation of satellites to form a so-called mesh network, passing information among them and blanketing the earth.”
“Researchers are discovering remarkable new links between gut bacteria and the brain. Problems from poor sleep to memory loss could be helped by manipulating the microbiome, the trillions of bacteria living inside healthy human bodies, the American Association for the Advancement of Science heard on Thursday.”
“A growing share of the trade-ins that U.S. auto dealers and lenders accept for car-purchase financing are worthless on paper, a sign that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow.”
“Almost a third of cars traded in last year were worth less than the loans that had been financing them, according to car-shopping website Edmunds. That’s up from about a quarter a decade earlier, said Edmunds, which looked at cars traded in as part of financing packages for new auto purchases in the U.S.”
“Underwater trade-ins are just one example of the greater risks that lenders are taking now. New vehicle sales fell 1.8% to 17.2 million in 2017, but lending volume for new and used car purchases was on track to be higher than ever, according to data from the Federal Reserve Bank of New York and consumer credit bureau Experian. The growth in the average amount financed for a new car outpaced median income growth between 2013 and 2016, Moody’s said, suggesting borrowers are getting more strained.”
“Any pain from car-loan trouble will likely be just a shadow of the housing bubble collapse, because the auto debt market is much smaller. There were around $9 trillion of mortgages outstanding at the end of the third quarter, compared with $1.2 trillion of auto debt, the New York Fed said. And so far, many of the bonds backed by subprime auto loans are performing well thanks to built-in protections for investors. Wells Fargo analysts said in a note Wednesday that bonds issued by two of the biggest subprime auto lenders — Santander Consumer USA Holdings Inc. and General Motors Co.’s finance arm — have room to reach prices not seen since before the financial crisis.”
“The higher percentage of underwater loans on trade-ins may be a sign that car owners are trading in their vehicles sooner than they had previously. A consumer is often the most underwater on his or her auto loan in the first few years of ownership, because the value of the vehicle drops fastest over that time.”
“For borrowers who do trade in their underwater cars, lenders are essentially giving them the money to pay down their loan. The dealer sells the used car, and whatever balance remains on the old loan is folded into the new loan. The borrower might get a longer-term loan than he or she had before to help keep monthly payments manageable.”
“Aspen REIT Inc. has been given approval by the Securities and Exchange Commission for a $33.5 million initial public offering allowing investors to buy shares in the luxury St. Regis Aspen Resort in Colorado.”
“Upon closing of the IPO, Aspen REIT will be the first single-asset REIT to list on a national securities exchange in the U.S., according to the company.”
“Aspen REIT is offering 1,675,000 shares at $20 per share in the Regulation A+ IPO. The REIT applied to list its common stock on the NYSE American stock exchange under the ticker symbol AJAX. Aspen REIT intends to use substantially all of the net proceeds from the IPO, together with equity in Aspen REIT’s subsidiary operating partnership, to acquire the St. Regis Aspen Resort, a full-service, 179-key luxury hotel at the base of Aspen Mountain in the Rocky Mountains.”
Well that’s another way to ‘crowd source’ / syndicate funds.
“There has been a lot of talk lately about trendlines, key levels and breakouts by some of the big names… Ray Dalio, Jeffrey Gundlach, Bill Gross. But anyway, you don’t need to be a famous hedge fund manager to see the writing slowly showing up on the wall here across the major global sovereign bond markets. The charts below show US and German 10-year bond yields have already broken out, and Japan/UK are getting close.”
“The devastation wrought by Hurricane Maria has made Puerto Rico’s already dire financial situation even worse: The island’s leaders acknowledged late Wednesday that they will not be able to pay down any portion of their more than $70 billion debt for the next five years because of the damage.”
“Just before the hurricane, Puerto Rico had made plans to pay creditors a total of $3.6 billion through 2022. That was a fraction of the amount due, had the island, a United States territory, not gone into default.”
“Now, Puerto Rico expects its budget to be $3.4 billion in the red this year — a deficit that will take five years to close — because of the storm’s toll.”
“Nearly a third of customers remain without electricity, more than four months after the storm.”
“The government projects its population will shrink by 19.4% over the next five years, with a total exodus of over 600,000 people.”
“A record month for inflows into corporate bonds is ‘setting up a disaster for when rates rise & `investors’ learn that, yes, these bonds have rate risk’ was yesterday’s latest tweeted warning from Jeffrey Gundlach.”
“French utility Veolia Environnement SA is one of a handful of low-rated borrowers—assessed at BBB or lower by Standard & Poor’s—with fixed-rate debt repayable in three years or longer that trades at yields below zero in euros.”
“Veolia already has three-year paper that trades at a negative yield. Those bonds, however, were sold in 2005 at a yield of almost 4.5%; they dipped below zero for the first time last year, and recently turned negative once more.”
“But on Thursday, Veolia went one better by pulling off the neat trick of persuading investors to pay it directly to borrow, selling 500 million euros of bonds repayable in three years at a negative yield of 0.026%—’a first for a BBB issuer,’ the company trumpeted in a press release. What’s more, the sale was oversubscribed by more than four times.”
“Now, you could view the sale one of two ways. For the optimists, it provides evidence that investors are awash with cash and still confident that the European Central Bank’s bond-buying program will continue to support the market.”
“If, like Gundlach, though, you’re concerned that the world of fixed-income is in for a rude awakening and that the stress will first show up in the corporate bond market, you’ll probably view it as a last hurrah before reality hits home with a vengeance.”
The more our world becomes ‘codified,’ the more insights will be derived, the less privacy we will have, and the more predictive the models will become…
“The total value of all homes in the U.S. increased in 2017 to a total $31.8 trillion, according to the latest report from Zillow.”
“This is up from last year’s record high of $29.6 trillion, data from 2016 shows.”
“This is so high, that total homes in Los Angeles and New York City metro areas are worth $2.7 trillion and $2.6 trillion, respectively, the size of the U.K. and French economies.”
“This is an increase of $1.95 trillion over the past year, more than all of Canada’s GDP or two companies the size of Apple, Zillow’s report showed.”
“And renters are also now spending more money than ever before on housing, spending a record $485.6 billion in 2017. This is an increase of $4.9 billion from 2016.”
“Renting in San Francisco is especially expensive as renters collectively paid $616 million more than renters in Chicago, despite having 467,000 fewer renters in San Francisco.“
“Of the 35 largest U.S. markets, most home value growth occurred in Columbus, Ohio, which saw an increase of 15.1% to $152.3 billion in 2017.”
“The gentrification of the Fishtown neighborhood here looks like something city planners dream of, with developers renovating old row houses as young professionals, along with new restaurants and businesses, pile in.”
“But home prices have shot up so quickly in recent years that the latest wave of young professionals say they are having a hard time making the finances work.”
“Now several Philadelphia City Council members want to pass a law requiring property developers to set aside 10% of new projects as below-market units, to improve overall affordability in a city that once was among America’s biggest bargains.”
“Soaring housing costs aren’t confined to New York or San Francisco. Cities including Pittsburgh, Detroit, Buffalo and Nashville all have explored or adopted policies that, like Philadelphia’s, seek to create more cheap housing by an approach known as inclusionary zoning.”
“’It really underscores the housing-affordability problem is much more widespread than simply a problem in the 10 most expensive coastal cities,’ said Stockton Williams, executive director of the Terwilliger Center for Housing at the Urban Land Institute in Washington, D.C.”
“Private-equity funds that focus on real estate have been raising less money for the past few years, and chances are dim that there will be much pickup in fundraising in 2018.”
“But the reason for this trend isn’t that pension funds, endowments and other institutions that invest in private equity have lost their appetite for commercial property. A big part of the slowdown is that private-equity funds haven’t been able to spend all of the money they have raised, according to investors, analysts and fund managers.”
“The declining pace of fundraising and spending is partly due to the old age of the current real-estate cycle. Prices started rising in 2009 and remain near record levels in many cities, including San Francisco and New York, making it trickier to make new investments.”
“This is especially true for the most aggressive opportunistic private-equity funds that typically try to produce returns of at least 20%. Fundraising by these funds has fallen particularly sharply, dropping to $33.5 billion as of Dec. 27, compared with $43.8 billion in 2016 and $63.7 billion in 2015, Preqin said.”
“Still, the large amount of unspent cash sitting in the vaults of private-equity funds has been comforting to investors who are concerned the markets are due for a steep correction. As long as demand for property stays strong, prices are likely to remain healthy.”
“Green Street Advisors says that there was $136 billion of buying power sitting with private-equity firms and real-estate investment trusts at the end of 2017. That compares with about $120 billion at the end of 2016 and less than $80 billion at the end of 2011.”
“Another trend that some expect to accelerate in 2018: investors who buy stakes in real-estate fund managers. Dyal Capital Partners, which raises money to buy minority equity stakes in alternative asset managers, in 2016 purchased an interest in Starwood Capital Group.”
“Park Hill is seeing a number of large foreign investors who invest in real estate express an interest in buying into managers, Mr. Stark said. They are saying: ‘Rather than investing through some third-party manager, why don’t we buy into a manager,’ he said. ‘If you have enough capital you can leverage the talent and buy the machine, not just pay to rent one’.”
Under the guise of preventing money laundering and terrorist financing, “China’s authorities have capped overseas withdrawals using Chinese bank cards at Rmb100,000 per year.”
“China has sought to limit foreign exchange purchases by its citizens in an effort to conserve forex reserves. The new measure plugs one of the few remaining ways Chinese citizens get money out of the country by broadening the Rmb100,000 ($15,400) limit from a single account to a single individual.”
“Previously, the annual limit of Rmb100,000 for overseas withdrawals was set for a single bank card.”
“An annual purchase limit of $50,000 worth of foreign currency per person remained unchanged, said the State Administration of Foreign Exchange (SAFE) in a statement on Saturday.”
“A regional currency analyst said that the move appeared to be a tightening of capital controls. ‘I was not expecting this since outflows have been slowing. But by doing this it clearly shows China’s desire to manage the outflows more aggressively, particularly on individual flows’ he said.”
In other words, if you happen to make or to have made a meaningful amount of money in China, don’t plan on taking it home. It’s like a casino, the house always wins if you play long enough – especially, if you’re not allowed to leave the table with your chips.
The follow up question: will U.S. companies with meaningful overseas cash balances be allowed to repatriate funds in 2018 now that the U.S. tax laws have changed?
“With hospital shelves bare and the government stumped on how to settle $5 billion in arrears to pharmaceutical companies, cash-strapped Venezuela recently offered some foreign suppliers alternative compensation: diamonds, gold and coltan, the rare metal used to make cellphones and Playstations.”
“While it isn’t clear if any of the companies accepted it, the proposal underscores how Venezuela’s economic collapse is forcing President Nicolás Maduro’s embattled administration to improvise to pay for goods as severe dollar shortages push the country toward a barter society.”
“Bartering is also creeping into daily street transactions for staples, partly because the government is too broke to print enough currency. The so-called Strong Bolivar, which the government created in 2008 by lopping three zeros off its previous currency, lost 97% of its value in 2017 alone as the oil-rich country plunges further into hyperinflation.“
“Using commodities as payment isn’t uncommon for large global companies trading in mining or oil, but is almost unheard of as a way to settle debts to other sectors like pharmaceuticals, according to Caracas-based economic consultant Orlando Ochoa.”
“Given the country’s opaque finances, it isn’t clear how much Venezuela holds in certified precious metals and stones.”
“As for the Health Ministry’s proposal to pharmaceutical suppliers, ‘It feels like a bluff,’ Mr. Ochoa said. ‘It’s as if they want to show off their assets to give the illusion that there’s still an intention of paying even though they can’t pay’.”
“Lower crude prices and nearly two decades of profligate public spending have left Venezuela’s economy—once Latin America’s most prosperous—in tatters. Gross domestic product shrunk by more than 16.5% in 2016, according to the government, and there is scant evidence of improvement in 2017. The International Monetary Fund estimates inflation will top 2,000% in 2018. The government has defaulted on more than $700 million in bonds in recent months, spurring drastic cuts in imports that have resulted in chronic shortages of food and medicine.”
“Tito López, head of Venezuela’s Pharmaceutical Industry Chamber, says because companies in his sector haven’t received payments from the government in more than a year, 95% of medications that were available three years ago aren’t now. Antibiotics and treatments for chronic illnesses like hypertension and diabetes are among those hardest to find.”
“In the past pharmaceutical companies operating in Venezuela have considered accepting bonds or even oil as payment, but the government has never followed through, Mr. López said. ‘What we’re missing is a serious system that actually guarantees payments,’ he added.”
“Standard & Poor’s has declared that Venezuela is in default after it missed two interest payments and following a meeting in Caracas that left investors with little notion of how a default on its $60bn debt pile can be avoided.”
“S&P, which is the first rating agency to say the country is in default, said on Tuesday that Caracas had failed to make $200m in coupon payments for global bonds due in 2019 and 2024 within the 30-calendar-day grace period.”
“The agency said it had downgraded the issue ratings on those bonds to D from CC and cut the country’s long-term foreign currency sovereign credit rating to selective default, or SD, from CC.”
“’Our CreditWatch negative reflects our opinion that there is a one-in-two chance that Venezuela could default again within the next three months,’ said S&P.”
“Sweden’s decades-long housing market boom is over, two of the country’s bank bosses admit, while trying to reassure investors that their institutions will not suffer a painful hangover of defaults even if the cheap mortgage-fueled party is finished.”
“Swedish house prices have been red hot, rising almost 6% a year on average since 2007, while a surge in household indebtedness from 1.2 to 1.6 times disposable income has attracted intense scrutiny from regulators.”
“Swedish house prices fell 1.5% in September, the first decline for several years, reflecting the impact of measures introduced by regulators to constrain riskier mortgage lending as well as a recent increase in the supply of new homes.”
Japan
WSJ – Daily Shot: Bank of Japan Balance Sheet as % of GDP 11/14
More than “…two million…Venezuelans…have left the country since 1999, the year Mr. Chavez gained power, according to Tomas Paez, a Venezuelan immigration expert. That exodus is roughly twice the number who fled Cuba in the two decades after the revolution there, and is set to worsen.”
“Venezuela has been falling behind on debt payments in its prolonged economic crisis. Some payments have come late. Others haven’t arrived at all. The South American country has said it wants to restructure its remaining debt, which analysts put as high as $150 billion. But observers say Venezuela’s debt crisis could be one of the most complicated in history.”
“Cash-strapped Venezuela and its state oil company, Petróleos de Venezuela SA, have been putting off making interest payments on their debt, taking advantage of 30-day grace periods to save money.”
“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.”
“China’s capital flow turned positive in the first half of 2017, a reversal from unprecedented outflows during the previous two years that sparked worries over financial stability.”
“Data released on Monday indicate that Beijing’s support for the renminbi and a crackdown on foreign deal making and other outflow channels have largely succeeded in curtailing capital flight.”
“China ran a $16bn surplus over the first half of this year, excluding central bank intervention, compared with a $417bn deficit in 2016, balance of payments data showed. The figures also showed that China added to its foreign exchange reserves on a valuation-adjusted basis in the second quarter for the first time since early 2014.”
“‘Hot money’ — short-term money movements viewed as a gauge of investor sentiment toward Chinese assets — continues to flow out of the country, albeit more slowly, according to FT estimates based on official data.”
“Hot money outflow was $126bn in the first half on a net basis, well behind the $891bn full-year pace for 2016. The FT uses a broad definition of the term, treating all money flows not related to goods trade or foreign direct investment as hot money.”
“That suggests investors are eager to take money out of China if they can skirt capital controls, despite recent tightening. Indeed, a Reuters poll of 60 forex analysts in late July showed that they expect the renminbi to erase most of this year’s gains over the next 12 months.”
“In a sign that the government remains vigilant despite the improvements, regulators have imposed new measures in recent weeks to prevent capital flight.”
“Last week, the foreign exchange regulator named and shamed nine banks for violating forex rules. The agency is also requiring lenders to issue daily reports on all foreign bank card purchases by customers worth more than Rmb1,000 ($149) beginning later this month.”
“The yuan, which as recently as 2015 had overtaken the Japanese yen as the fourth most popular currency for global payments, now clocks in at No. 6, according to international-transaction service provider Swift, below the Canadian dollar and barely above the Swiss franc. Only 1.98% of international payments tracked by Swift were yuan-denominated in June 2017, down from 2.09% two years ago.”
“Given the scale of the bleeding in 2015 and 2016, China’s leaders likely had little choice but to close the drawbridge.”
