FIG Topics of Interest

 

09/25/18

"Fed funds increases in September and December are as certain as certain can be," John Donaldson, director of fixed income at Haverford Trust Co., wrote in response to the survey. "Their real challenge starts after the first increase in 2019, which will bring the rate to 2.75 percent, or finally back to even to inflation."
https://www.cnbc.com/2018/09/25/cnbc-fed-survey-fed-to-hike-rates-two-more-times-this-year.html
A full 98 percent of the 46 respondents, who include economists, fund managers and strategists, see the Fed hiking rates a quarter point at its meeting this week to a new range of between 2 and 2 ¼ percent. And 96 percent believe another quarter-point hike is coming in December.
Respondents see the funds rate rising by another two quarter-point hikes (50 basis points) in 2019, which would bring it to a range of 2.75 to 3 percent. After that, divisions set in, with about half the group seeing a third hike in 2019.

About 60 percent of the group sees the Fed raising rates above neutral to slow the economy. The average respondents see the funds rate eventually ending this hiking cycle at 3.3 percent.

"This means that the U.S. bond market will reach a decision point sometime in the next year, when market participants will have to decide whether the Fed will go beyond current market pricing,'' said Tony Crescenzi, executive vice president at PIMCO. "If and when it does, U.S. Treasuries will move higher."

A fifth of the group say a "fed policy mistake" is one of the biggest threats facing the expansion, second only to trade protectionism.

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09/24/18

Investments contributed to 44 percent of China's nominal GDP in December 2017, compared to about 20 to 25 percent for countries like the United States, Japan and Germany, according to figures compiled by economic data provider CEIC.

China's fixed asset investment is slowing, however, with investment growth falling to a record low in August. Economists including Nicholas Lardy from the Peterson Institute for International Economics, however, warn against paying too much attention to the historically low figure as China is currently revising the way it measures fixed asset investment.

Still, as the trade war escalates, it will not be easy for the Chinese government to use public spending to boost investments due to its mounting debt.

The world's second-largest economy had a relatively stable level of debt until the financial crisis in 2008 when it spent a whopping 12.5 percent of its GDP to stimulate the economy.

https://www.cnbc.com/2018/09/24/trumps-trade-war-threatens-chinese-economy-china-already-has-cracks.html
The country had encouraged loans to boost economic growth, with Chinese banks extending a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016. That credit explosion stoked worries about financial risks, so authorities in 2017 pledged to contain the rapid build up in debt.

Since then, Chinese debt-to-GDP has steadily grown to about 250 percent — or about $28 trillion, according to DBS and CEIC.

However, the Institute of International Finance has put China's debt at more than 300 percent of its GDP.

Chinese authorities had been trying to rein in the country's rising debt, with China's state-owned banks told in April to stop lending to local governments. But as the trade war drags on, China appears to be using investments to boost the economy again.

The National Development and Reform Commission, a top Chinese economic regulator, announced earlier this month that it aimed to promote infrastructure investment.

Click here to download a pdf of this article, Missile.pdf
 
 

09/21/18

Earlier this year, Governor Dannel Malloy signed a law that creates a way for owners of so-called pass-through businesses, such as partnerships, to take bigger federal deductions to absorb the hit from the tax law’s new $10,000 SALT deduction limit. Buried in the provision is a way to further reduce the rate applied to carried interest.
https://www.bloomberg.com/news/articles/2018-09-21/connecticut-s-salt-bypass-offers-hidden-perk-for-money-managers?srnd=premium
For managers at some of Connecticut’s big funds such as Viking Global Investors, Lone Pine Capital, Stone Point Capital and Silver Point Capital, the measure could translate to hundreds of thousands, or even millions, of dollars in federal tax savings on carried interest. Representatives for the firms didn’t respond to requests for comment.

The new tax “could create a significant benefit,” said Joseph Pacello, a tax partner in the asset management group at BDO USA. Pacello said the carried interest break is currently being discussed by fund managers in Connecticut and their accountants.

The pass-through tax, signed into law by Malloy in May, set a mandatory 6.99 percent levy -- the state’s top marginal individual income tax rate -- on pass-through entities, whose income is reported on owners’ personal returns and taxed at individual rates. Pass-through owners then get a state credit equal to about 93 percent of the owner’s share of tax paid by the business. They also get a full deduction for the levy as a business expense on their individual federal returns, since those are still unlimited.

The workaround, retroactive to Jan. 1, 2018, effectively assesses a state tax on the business that the owner can turn into a federal deduction.

For fund managers who earn carried interest -- typically 20 percent of a fund’s profits -- the pass-through entity tax has benefits that go beyond SALT.

Carried interest is eligible for the long-term capital gains rate of 20 percent, instead of facing ordinary income tax rates that now top out at 37 percent. (Federal law adds an additional 3.8 percent surcharge tied to Obamacare to the capital gains rate.) Under the old tax regime, assets had to be held for one year to qualify for the lower rate -- the new law sets a three-year holding period.

To compute the Connecticut levy, fund managers can use two methods. The standard way involves tallying up an entity’s income from sales and services within the state, or in the case of fund managers, annual management fees paid by investors who are Connecticut residents.

An alternative method includes any capital gains, dividends and interest earned by Connecticut residents. Managers who choose that method can include carried interest and reduce the long-term capital gains rate of 20 percent by about 1.4 percentage points, according to Bloomberg calculations supported by Michael Spiro, chair of the tax group at Finn Dixon & Herling in Stamford, and Ivan Mitev, a tax lawyer at Pillsbury Winthrop Shaw Pittman.

Tax Examples

Before the pass-through entity tax, a fund manager with $1 million in management fees would have owed Connecticut state taxes of $69,900 and federal income taxes of $370,000 assuming top individual rates, according to an example by law firm Kleinberg, Kaplan Wolff & Cohen.

With the new workaround, the manager could reduce her federal tax bill by almost $26,000. She would be able to reduce her adjusted gross income by $69,900, bringing it down to about $930,000 -- taxed at 37 percent, that’s a federal tax bill of about $344,000. And she would receive a 93 percent credit on her state tax bill for the $69,900.

In an alternate example provided by Kleinberg Kaplan, if a manager earned $1 million -- but only in carried interest -- she would save almost $14,000. That’s because a 20 percent rate applied to the $930,000 would create a tax bill of $186,000, compared to $200,000 that would have been owed on the full $1 million.

Managers who are able to combine their management fees and their carried interest would be able to maximize their savings. “It behooves funds to explore this,” Spiro said.

Click here to download a pdf of this article, Missile.pdf
 
 

09/20/18

Canadian Foreign Minister Chrystia Freeland, after her first in-person meeting in more than a week with U.S. Trade Representative Robert Lighthizer in Washington on Wednesday, said talks are still productive. Negotiators need to do more work, Freeland told reporters, adding she’ll meet Lighthizer again in the afternoon.

The two countries remain at odds on core issues, including dairy and dispute panels. A deal is unlikely this week without major movement, the people said, speaking on condition of anonymity as negotiations continue. The talks could extend into next week, and several deadlines have been missed so far. A Canadian official had said Thursday was the likely deadline to reach a deal in order to convert it to legal text by the end of the month.

https://www.bloomberg.com/news/articles/2018-09-19/u-s-canada-trade-sharper-barbs-before-resuming-nafta-talks?srnd=premium
“We’ve been very clear that we’re interested in what could be a good deal for Canada, but we’re going to need to see a certain amount of movement in order to get there and that’s certainly what we’re hoping for,” Trudeau told reporters Wednesday in Ottawa.
“It is growing increasingly unlikely that you can get text to the Congress by Sept. 30,” said Jennifer Hillman, a professor of law at Georgetown University and former general counsel to the Office of the U.S. Trade Representative. It’s even more unlikely to proceed quickly with only Mexico, she said. “Canada does still have some leverage.”
Scalise, the House majority whip, said if Canada does not “cooperate” then Congress would “consider options about how best to move forward,” though he didn’t specify how.

“There is a growing frustration with many in Congress regarding Canada’s negotiating tactics,” Scalise said in the statement.

“I think that if all three countries are in and all signed up, there’s a much higher likelihood this gets passed,” Bruce Heyman, a former U.S. ambassador to Canada under Barack Obama, said Tuesday on BNN Bloomberg television. There’s no sign a Mexico-only deal can be passed by Congress, he said, while shrugging off the significance of Scalise’s statement. “I think Steve Scalise is carrying water for USTR,” he said.

Click here to download a pdf of this article, Missile.pdf
 
 

09/19/18

Credit traders at some of the world’s largest banks are convinced hedge funds and brokers have penetrated their members-only club. The claim -- based on interviews with more than 16 bankers, including seven who head trading desks -- is that rivals and even clients are now accessing information from trading platforms that have long been the exclusive domain of the banks.
https://www.bloomberg.com/news/articles/2018-09-19/bond-dealers-say-hedge-funds-gatecrashed-their-exclusive-club?srnd=premium
These wholesale trading venues are operated by firms known as interdealer brokers. And according to practices developed over decades, they were used solely by big banks that have served as the primary market makers for institutional investors looking to trade corporate bonds and other debt.
The platforms allow the banks to anonymously unload unwanted positions or source bonds from each other, as well as gain pricing intelligence. Effectively, this has helped the banks maintain a significant amount of control over who gets what and how much is paid in a marketplace that now trades more than $30 billion a day.
But post-crisis regulations that curbed the banks’ ability to take risks -- while ushering in a wave of new trading venues -- diminished the banks’ role. What has followed is a brutish world where bankers, investors and smaller brokers jostle for influence and profits.

“The banks are trying to defend their turf and maintain the advantages they used to enjoy,” said Suki Mann, a debt-market analyst who previously ran credit strategy in Europe for Societe Generale SA and UBS Group AG. “But they’re fighting a losing battle.”

Caught in the middle of all of this are the interdealer firms, such as TP ICAP Plc, BGC Partners Inc. and Cie. Financiere Tradition SA. They’re fighting for a share of a shrinking pie while trying not to alienate their primary clients -- the banks.

Credit traders at 11 of the world’s largest banks -- including some that head trading desks -- said that they’re convinced that pressures faced by the interdealer brokers to boost commissions is prompting them to let investors and brokers onto platforms where dealers trade -- giving them access to a bigger universe of product and prices.

The traders aren’t claiming any laws are being broken. But they say that -- in addition to their own profits -- it’s threatening long-standing conventions that have helped maintain market integrity and liquidity. One senior trader at a French lender said banks often try to buy or sell bonds for clients in the interdealer market, and if those investors are also present on the platforms then their ability to trade will decrease.

The tensions emerged after new rules intended to prevent another financial crisis forced banks to pull back from some risky trading activities. The regulations also made it costlier for them to facilitate trades by holding debt on their own balance sheets or maintaining large warehouses of securities.

As the banks’ roles were reduced, that allowed others to step in -- namely smaller brokerage firms that simply match buyers and sellers without taking assets on to their balance sheets. Investment firms, like asset managers and hedge funds, have also increased trading among themselves since they can no longer rely on deposit-taking giants to always help them enter or exit a trade.

“It’s not a very pleasant time, whether you’re in a bank or a hedge fund,” said Derrick Herndon, who has run credit businesses in New York and London for Credit Suisse, Toronto-Dominion Bank and UBS Group AG. “Both sides are pointing at each other, but it’s a deeper issue than banks just don’t have market clout the way they used to.”

Click here to download a pdf of this article, Missile.pdf
 
 

09/18/18

NAHB Housing Market Index (exp 66 v. 67 prior) 0900 hrs cst
4-week bill auction ($45b)
 

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09/18/18

"The U.S. side insisted on imposing tariffs, which has brought new uncertainty to the bilateral negotiations," the commerce ministry statement said. "We hope that the U.S. side will recognize the negative consequences of such acts and take convincing measures to correct them in a timely manner."

https://www.bloomberg.com/news/articles/2018-09-17/trump-ratchets-up-tariff-pressure-on-china-with-200-billion-hit?srnd=premium
The foreign ministry said in a separate briefing that it would announce counter-measures at an appropriate time without elaborating.

In a sign of how Chinese business are girding for a protracted dispute, Jack Ma, executive chairman of Internet giant Alibaba Group Holding Ltd., said the trade war could last for 20 years. It is "easy to launch a war but difficult to stop a war," he said at the company’s annual investor day in Hangzhou.
On a panel at meetings of the World Economic Forum in Tianjin, Fang Xinghai, vice chairman of China’s Securities Regulatory Commission, said China won’t be pressured by Trump’s trade tactics and talked up the economy’s strength. While he estimated a negative hit to China’s GDP growth of about 0.7 percentage points if the U.S. goes ahead with tariffs on all China exports to the U.S., Fang also said he’s confident that relations between both countries can normalize and said he hopes both sides can negotiate on an equal basis.

“It is good for the U.S. economy to have good relations with China and good for the rest of the world,” he said. “President Trump, as shown in the North Korean affair, is able to revert himself very quickly. I think we have to take that into account.”
 

Click here to download a pdf of this article, Missile.pdf
 
 

09/17/18

High-level negotiations are expected to resume this week in a bid to reach a deal for Canada to remain in the three-nation North American Free Trade Agreement, a Canadian government official said, speaking on condition of anonymity. Congress is pressing for Canada to be kept in Nafta, after the U.S. and Mexico struck their own deal last month.

“What has surprised me is looking at the conciliatory position of the U.S. on a lot of issues,” said Laura Dawson, Director of the Wilson Center’s Canada Institute in Washington. The U.S. has dropped some of its most high-profile demands, but she stopped short of making any bets. “They’re closer now than they have been; that’s all I’ve got.”

Canada is offering certain concessions, such as on dairy, in exchange for keeping parts of the current deal it deems essential. Here are the core remaining issues:

Dispute panels: Anti-dumping panels contained in Nafta’s Chapter 19. U.S. Trade Representative Robert Lighthizer has long despised them and sees them as an assault on sovereignty and wants to kill them; Canada calls this a red line issue, and sees them as an essential arbiter in a trade pact with a country 10 times its size.

Cultural exemptions: Canadian Prime Minister Justin Trudeau doesn’t want to open the door to U.S. takeovers of Canadian TV networks, or a flood of U.S. content.

Dairy: This is probably Canada’s big bargaining chip. It’s not in Nafta now but the U.S. is seeking more access to Canada’s protected market. Trudeau has said he’ll bargain here.

Cross-border shipping: The U.S. wants Canada to raise its so-called de minimis level, under which cross-border shipments are shipped duty-free.

Pharmaceuticals: The U.S. and Mexico agreed to 10-year patent protection for biologic drugs, but Canada wants a shorter period. Longer patent protection raises drug costs, and Canada is eyeing expanded public funding for pharmaceuticals.

Intellectual Property: Mexico and the U.S. agreed to tougher protections here. It’s a sticking point, but there have been scant signs that Canada sees this as a core issue.

The U.S.-Canada deal won’t substantially change any of the autos agreement already struck by the U.S. and Mexico, officials familiar with talks have said. Autos had been the biggest sticking point in earlier talks. In other words, two of the subjects Trump talks about most -- cars and dairy -- are resolved or within grasp.

The countries have been close to a deal for weeks, but remain at loggerheads. This week, Canada’s parliament returns from its summer break, squeezing Canadian bandwidth. Foreign Minister Chrystia Freeland, who is Trudeau’s Nafta minister, is scheduled to be in parliament Monday and will host a summit in Montreal beginning Friday. A Canadian cabinet meeting is also scheduled for Tuesday, one Canadian government official said.

The official confirmed that Thursday is a target for any agreement this week -- but also stressed Canada doesn’t think it’s a hard deadline. Trudeau has said as much publicly, saying so-called deadlines have come and gone in talks.

“We will do the work needed and try and get there as quick as we can, but we are going to make sure that we are doing what is necessary to get the right deal for Canadians,” Trudeau said Sept. 13.

A spokesman for Lighthizer didn’t respond to a request for comment. Without a deal this week, there’s likely little hope that text of a trilateral pact can be published by Sept. 30 -- though Nafta talks have already blown through several deadlines, and wouldn’t necessarily collapse if they miss that one. If text isn’t published by then, a deal probably can’t be signed before Andres Manuel Lopez Obrador takes office as Mexico’s president Dec. 1.

Then the next step would be up the U.S. -- it could extend the clock a bit for further talks, or ramp up fights with Canada and Congress by trying to go ahead with Mexico only, possibly begin an exit of the existing accord and proceed with auto tariffs on Canada. All that would be a dramatic escalation of trade tensions with Canada, the U.S.’s second-biggest trading partner and top export market.

https://www.bloomberg.com/news/articles/2018-09-17/it-s-crunch-week-again-for-nafta-with-u-s-and-canada-at-odds

Click here to download a pdf of this article, Missile.pdf
 
 

09/14/18

The most recent Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics (BLS) reports that from June to July, the number of unfilled jobs rose by 117,000, to 6.94 million, confirming the tightness of the current labor market.
https://www.cnbc.com/2018/09/13/workers-are-quitting-their-jobs-in-order-to-get-raises.html

At the same time, however, the number of workers voluntarily leaving their jobs rose to 3.58 million — that's 2.4 percent of the entire U.S. workforce. Bloomberg reports that the last time this many workers quit their jobs was 2001.

These 3.58 million workers are likely making a smart move, says Andrew Chamberlain, chief economist at job site Glassdoor. "We're seeing high worker confidence in their ability to strike out and find a better job opportunity elsewhere," says Chamberlain. "For many, it's a smart move, as there's a clear advantage to increasing your earning potential by switching jobs."
According to Brian Kropp, vice president at research firm Gartner, the average increase in compensation for a worker who quits their old job for a new one is about 15 percent. "You're never going to get that 15 percent [increase] by staying at your current job," he tells CNBC Make It. "That's just not going to happen."
"One of the big things that happened during the global financial crisis is that organizations pulled out all sorts of layers middle management, which actually makes it harder to get promoted," says Kropp. "Simply put, there are fewer opportunities to get promoted."

And it's not just antsy Millennials who are packing up their cubicles. Some of the biggest increases in quit rates are among older, more experienced, workers.

"Younger employees have always quit at a higher rate. That was true when Gen Xers were in their 20s. That was true when Boomers were in their 20s. That's just a fact," explains Kropp. "What's interesting, is that we are now seeing employees who are more established in their careers also quitting at higher rates."

Click here to download a pdf of this article, Missile.pdf
 
 

09/12/18

“The first place you’ll likely see it is in initial jobless claims,” Ryan Sweet, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in reference to Florence. At the same time, major storms’ effects on the broader economy tend to be “pretty small, on aggregate.”
https://www.bloomberg.com/news/articles/2018-09-12/florence-to-batter-u-s-data-but-harm-to-economy-likely-small?srnd=premium
That will be a challenge again with Florence, forecast to be the worst storm to hit North Carolina in 64 years, and the storm season is far from over. Data on employment, consumer spending and manufacturing may also become trickier to analyze as economists gauge impacts of tax cuts and a trade war.
Based on consumer purchases that won’t be made as a result of the storm -- such as canceled events and missed dinners out -- Florence may have a $700 million net negative impact on the U.S. economy, not counting insurance losses, according to weather-analytics company Planalytics’ initial estimate.

“If you’re a mom-and-pop and you happen to be in harm’s way, this could be devastating,” said Evan Gold, executive vice president at Planalytics. Florence is “going to be big, and it’s going to be notable, but I’m not sure it’s going to be as big as others” such as Sandy.

Click here to download a pdf of this article, Missile.pdf