More than most other places in the world, this
southern African nation with a long history of monetary
dysfunction has staked its financial system on mobile money, which allows
funds to change hands through the touch of a few buttons on an old-school
cellphone or through a smartphone app.
But now, amid power cuts lasting for up to 17 hours a
day, EcoCash breaks down frequently. The outages are blocking everyday economic
activity and exacerbating a financial crisis that has left Zimbabwe’s
government bankrupt and some five million people, about a third of its
population, in need of food aid.
Eight out of 10 transactions in Zimbabwe—from buying
milk to filling up a car or settling a utility bill—are done via cellphones,
almost exclusively on EcoCash.
“We are more or less a cashless economy,” said Ashok
Chakravarti, an economist based in Harare who believes that the EcoCash outages
will hurt Zimbabwe’s gross domestic product, which the International Monetary
Fund expects to shrink by 5.2% this year.
A government austerity program and limits on issuing
T-bills haven’t stopped the new Zimbabwean dollar from losing value. Inflation
spiked to 176% in June. Last month, the finance minister announced Zimbabwe’s
statistics agency would stop publishing annual inflation data until February,
saying it was distorted by the reintroduction of a local currency.
“One of Europe’s leading energy consultancies has estimated that Tesla’s electric haulage truck will require the same energy as up to 4,000 homes to recharge, calculations that raise questions over the project’s viability.”
“The US electric carmaker unveiled a battery-powered lorry earlier this month, promising haulage drivers they could add 400 miles of charge in as little as 30 minutes using a new ‘megacharger’ to be made by the company.”
“John Feddersen, chief executive of Aurora Energy Research, a consultancy set up in 2013 by a group of Oxford university professors, said the power required for the megacharger to fill a battery in that amount of time would be 1,600 kilowatts.”
“That is the equivalent of providing 3,000-4,000 ‘average’ houses, he told a London conference last week, ten times as powerful as Tesla’s current network of ‘superchargers’ for its electric cars.”
“Pressured by low yields and political issues at home, cash-rich private investors from China and Hong Kong are snapping up trophy buildings in the U.K. capital. Often prepared to spend whatever it takes, these wealthy investors are pricing institutional investors out of the market. And because they don’t need to borrow to buy, U.K. lenders are feeling the pinch.”
“Of the £12.2 billion ($16.1 billion) spent on central London offices in the first three quarters this year, almost half came from private Chinese and Hong Kong buyers, according to real-estate consultant Knight Frank. That is a big jump from last year, when the group accounted for just less than a quarter of overall spending, and from 2015, when the figure was 7%.”
“By borrowing money at home, Chinese and Hong Kong investors have also pushed down property lending in London. According to a report by De Montfort University, the volume of new loans in the U.K. has fallen 18% year-over-year in the first half of 2017 due to a ‘slowdown in purchasing activity of new properties requiring debt during 2017’.”
“U.K. institutional investors such as asset managers are also dialing back. In all, they have bought £880 million of central London real estate so far this year, out of a total £15.68 billion spent by all investors, according to www.propertydata.com. Two years ago, U.K. institutions bought £2.89 billion worth of property.”
“’London is a two-tier market right now—the Asian investors and everybody else,’ said Joe Valente, head of research and strategy of European real estate at J.P. Morgan Asset Management, adding that the firm is waiting for the prices to fall before entering the market again.”
Finance
WSJ – Daily Shot: FRED – Commercial and Industrial Loan Growth 11/27
“Japanese companies are scouring the country for workers and offering more attractive permanent contracts as they struggle to overcome the worst labor shortages in 40 years.”
“Companies across a range of sectors — from construction to aged care — have warned in recent days that a lack of staff is starting to hit their business.”
“The hiring difficulties highlight Japan’s declining population and the strength of its economy after five years of economic stimulus under Prime Minister Shinzo Abe.”
“’Delays to construction projects are becoming chronic,’ said Motohiro Nagashima, president of Toli Corporation, one of Japan’s biggest makers of floor coverings.”
“One way companies are tackling shortages is by offering more generous permanent contracts, which provide job security and pension benefits. That policy has broken a decades-long trend towards more part-time and contract work.”
“The way companies are responding — using every means other than wage increases — suggests that shortages will not yet turn into higher inflation.”
“Irregular work has risen relentlessly from about 19% of total employment when Japan’s bubble burst in 1990, to a peak of 37.9% in 2015.”
“But there are now signs of stabilization, with the percentage of irregular staff falling to 37.4% in the third quarter of this year.”
The bad debt in Italian banks is looking like a BIG problem. The world has become more reliant on Middle Eastern oil. Not looking so rosy for hedge fund reinsurers.
FT – US oil reserves surpass those of Saudi Arabia and Russia 7/4. According to Rystad Energy, recoverable oil in the US (264bn barrels) just surpassed Saudi Arabia’s (212bn) and Russia’s (256bn) tally for the first time ever – but it’s still cheaper to pump in the Middle East.
As yields the world over drop “the effective yield on 7-to-10 year investment-grade corporates was 3.19%, according to Bank of America Merrill Lynch.” But relative to everything else, that’s really quite attractive.
“Indeed, in the universe of investment-grade debt, U.S. corporate bonds are close to the only game in town for investors looking for any yield. BofA Merrill Lynch credit strategist Hans Mikkelsen calculates that U.S. corporate bonds account for around 12% of all investment-grade debt outstanding world-wide yet they now represent about 33% of investment-grade yield income. Put otherwise, U.S. corporate bonds generate one out of every three dollars paid out by the entire universe of investment-grade debt.“
“Almost 87% of Japanese government bond yields are now below zero.”
“Unlike other major central banks, the BOJ is a buyer at almost any price and mainly purchases government bonds, which represent almost two-thirds of negative-yielding global sovereign debt globally.”
“Further buying will only push yields lower. Cutting back, while helpful in the short- to medium-term, means that the BOJ has to find other Japanese securities. But, unlike Europe or the U.S., asset-backed securities and corporate bonds are hardly an option because of their relatively small market sizes.”
For reference, “the BOJ now holds almost 30% of its government’s bonds.”
“Seven years into the economic expansion, the U.S. is showing signs it’s running short of job seekers qualified to fill openings. The shortfall, which has been evident for some time for highly skilled workers, is spreading to workers with less education as unemployment falls further.”
“We are now close to eliminating the slack that has weighed on the labor market since the recession.” – Janet Yellen, Federal Reserve Chair on June 6
“At 4.7% in May, the jobless rate is around the level that most Fed policymakers consider to be full employment.”
“A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower.”
“Central banks themselves are having trouble finding all the bonds they need. The ECB, for example, can’t buy bonds with a yield lower than its deposit rate of minus -0.4%. As of July 1, 58% of German bonds eligible for ECB purchases traded below that level, according to Frederik Ducrozet, a senior economist at Pictet Wealth Management.”
“In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”
“Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.”
According to Lorenzo Codogno, former director general at the Italian Treasury, “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”
“The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.”
“…impaired loans at Italian banks now exceed €360 billion – quadruple the 2008 level – and they continue to rise.”
“Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25% – implying an additional €40 billion in write-downs.”
“One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.”
“There is an epidemic, and Italy is the patient that is sickest… if we don’t stop the epidemic, it will become everybody’s problem… The shock of Brexit has created a sense of urgency.” – Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry
However, European officials are loath to let the Italians use the Brexit as an impetus to gain permission to bend the rules of the banking regime that were only just established at great pains. The Italians though are concerned “about the €187 billion of bank bonds in the hands of retail investors that would be wiped out by a bank resolution under the EU banking rules.”
“The world risks becoming ever more reliant on Middle Eastern oil as lower prices derail efforts by governments to curb demand, the west’s leading energy body has warned.”
“Middle Eastern producers, such as Saudi Arabia and Iraq, now have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.”
“Demand for their crude has surged amid a collapse in oil prices over the past two years that has cut output from higher-cost producers such as the US, Canada and Brazil.”
“Middle Eastern producers now make up 34% of global output, pumping 31m barrels a day, according to IEA data. This is the highest proportion since 1975 when it hit 36%. In 1985, when North Sea production accelerated, their share fell to as little as 19%.”
Further, the adoption of more fuel efficient vehicles has slowed since the cost of gas has come down significantly. “In the US, more than two-and-a-half times as many sport utility vehicles were being bought compared with standard cars.” – Fatih Birol, executive director of the International Energy Agency.
“Even more concerning for policymakers is China, where more than four times as many SUVs were bought, suggesting the country’s rapidly growing car culture has adopted America’s taste for larger more fuel-hungry cars.”
“Lower oil prices are proving to be bad news for efficiency improvements.” – Fatih Birol
Bottom line, “‘the Middle East is reminding us that they are the largest source of low-cost oil,’ said Mr. Birol. He said the region was expected to meet three-quarters of demand growth over the next two decades.”
“Mr. Birol said policymakers needed to impose stricter fuel efficiency targets to reduce demand, arguing it was not feasible in a world market to completely sever reliance on Middle Eastern oil.”
“US oil production will increase, but it is still an oil importer and will be for some time.” – Birol
“So-called hedge fund reinsurers (HFRs) have failed to make a profit from providing reinsurance cover for more than four years, according to Standard & Poor’s.”
“S&P found that HFRs had performed considerably worse than traditional reinsurers, which have complained that the entry of new money into their sector has driven profitability down for all.”
“Conventional reinsurers tend to invest their income in conservative assets such as corporate bonds, since they do not know in advance how much they will need to pay out in claims.”
“In contrast, HFRs pursue what S&P described as ‘meaningfully risker’ investment strategies. Their assets are managed by their affiliated hedge funds. Allocations vary but include exposure to speculative-grade leveraged loans, private equity and short positions.”
“So-called combined ratio for the HFRs – claims paid and expenses incurred as a proportion of premium income 0 has been above 100 in every year since 2012, meaning a loss from underwriting.”
“Last year the ratio came in at 110.2%, compared with a profitmaking 88.6% for their conventional reinsurance peers.”
“S&P said the HFRs’ investment performance had also been ‘rough’. Overall net investment income dropped 63% from 2014 to $247m last year.”
“The flattening in the yield curve suggests longer-term borrowing costs are moving closer to shorter-term costs, and signals investor concerns about the longer-term outlook for the economy.”
“And then of course there is the matter of historic precedence: The 83-month economic expansion (assuming the economy expanded in April and May) is the fourth longest on record going back to 1857, data from the US National Bureau of Economic Research show. It is also far longer than the median 30 month expansion over the same period.”
Moody’s downgraded its rating for Saudi Arabia one notch from Aa3 to A1. It’s the first rating downgrade by the company since it began rating the kingdom two decades ago. The new rating puts Saudi Arabia’s credit on par with Japan.
Standard & Poor’s and Fitch have already made similar moves.
“Bankers believe the kingdom is likely to start issuing international bonds this year, after agreeing to a $10bn loan with lenders, as it seeks to slow a sharp fall in its foreign reserves to $576bn. Moody’s forecasts reserves declining to $460bn by 2019.”
“Total external debt is expected to rise to 30% of GDP by 2018 and to about 40% by the end of the decade, Moody’s estimated.”
“In recent years a tide of Chinese money has hit global property markets, with buyers from the country now the largest single group of foreign investors in residential property in the US, UK and Australia.”
“But after inflows of $110bn into US real estate between 2010 and 2015, investment in residential American property is expected to drop in the next two years, according to the report by the US-based Asia Society and the Rosen Consulting Group.”
Bottom line, “…China is still in foreign exchange preservation mode, and is going with a tooth comb through capital outflows.” – Frederic Neumann, co-head of Asian Economic Research at HSBC
“Two Chinese policy banks – the China Development Bank (CDB) and the Export-Import Bank of China – had outstanding loans to overseas borrowers amounting to an estimated $684bn at the end of 2014, just short of the $700bn owed to the six western-backed multilateral development institutions.”
“In terms of individual lending institutions, the CDB has overtaken the World Bank as the world’s biggest provider of international development finance with estimated outstanding overseas assets of $375bn at the end of 2014.”
“Zimbabwe finally tamed inflation in 2009, when it abandoned the Zim dollar and started using American dollars and other foreign currencies instead. (It converted bank balances to US dollars at a rate of $1 for every 35 quadrillion Zim dollars.)”
Well, “this time it insists it is not bringing back the reviled ‘new’ Zim dollar, but is printing notes that are ‘backed’ by some $200m that Zimbabwe has borrowed from the African Export-Import Bank.”
Clearly to the government doesn’t want a run on the banks, so “banks have had to restrict dollar withdrawals, in some cases to as little as $20 a day. The last bout of hyperinflation wiped out savers and pensioners. Savers are braced to be robbed again.”
Take caution when adjusting your narratives to fit the facts. Just because oil is low today, that doesn’t mean that they will remain so forever. Of the interesting narratives in the zeitgeist about the future of oil is the one posited by geopolitical strategist and former diplomat Peter Zeihan.
“He suggests that oil will cease to be a global market. The US has achieved self-sufficiency in oil, which means that it does not have to be dragged into the next conflict in the oil producing regions. The availability of shale will put a ceiling on oil prices, not far above their current level.”
“Elsewhere, this will drive the incentive for conflict, as oil producers are hurting and fighting for market share. As conflicts resume – whether between Iran and Saudi Arabia, or between Russia and its neighbors – supply will grow erratic, leading to price spikes. Without US intervention to stop prices rising, the rest of the world could see more expensive oil.”
“The ripples would be global. Mr. Zeihan pointed out that China, Japan, Taiwan and South Korea, all dependent on oil imports, are geographically far removed from any oilfields. They risk being drawn into conflict with each other, as they compete to send navies to escort tankers all the way home.”
