FIG Topics of Interest



“$60 is like the new $100,” said Dallas Fed economist Michael Plante in a mid-April interview.
After a two-year crash, the price of crude CLc1 began to recover in 2016 and pierced $60 a barrel early this year. But oil is still far cheaper than at the peak of the previous eight-year boom that began in 2006 North Dakota’s Bakken oil patch and supercharged the city of Williston.
In the Permian basin, which stretches across West Texas and eastern New Mexico, the latest boom is being helped by advances in technology that allow drillers to extract much more from each acre.
Breakeven costs are now as little as $25 per barrel, according to the Dallas Fed’s most recent survey, so energy companies here no longer need $100 oil to make lots of money.
“It is a full-fledged boom,” says Dale Redman, chief executive of Propetro, a Midland, Texas, firm that supplies heavyduty horsepower to drill sites, where energy companies coax crude from the ground with sand and water.
To Midland Mayor Jerry Morales, “It’s a good story right now.” He says the city is trying to keep up with the drop in housing inventory and rise in rents by approving new apartment complexes and working with developers to put in water and sewer pipes.
“Companies are making enough money to be able to afford to pay higher wages,” he said.

Unemployment was 3.2 percent in Odessa and 2.5 percent in Midland in February. Average weekly earnings in March hit records in both towns, which have a combined population of about 250,000. Sales tax receipts have soared.
“You have people that move in, you train them and then someone else offers them a job: there is constant raiding going on,” says Jeff Sparks, chief operating officer of family-owned Discovery Oil in Midland, who has only recently shifted to the more efficient and capital-intensive drilling techniques that have pushed per-barrel extraction costs down so steeply.

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Commerce Secretary Wilbur Ross said in a statement that he understands the concerns of businesses, and that the department “is making an unprecedented effort to process the requests expeditiously.” 
Companies are asking for relief from 25 percent tariffs on steel imports and 10 percent on aluminum.
Companies that win exclusions will be granted refunds for the tariffs, which they are currently paying. But the delays could mean tying up millions of dollars that a business would rather invest in facilities and employees, said Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association, which represents vehicle suppliers.
“This apparent backlog creates uncertainly for our members, which puts businesses –- and jobs -- at risk,” Wilson said in a statement.
Some 3,500 exclusion requests have yet to be reviewed, while about 550 had been processed as of April 27, according to the Commerce Department. No decision on a request can be made until it’s been reviewed and posted online for 30 days for any objections.

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“The Treasury’s funding needs are massive,” said John Briggs, head of strategy for the Americas at NatWest Markets. “A lot of clients we speak to around the world say they are concerned about how the U.S. is going to fund this deficit. With the supply outlook following the tax changes and new budget, Treasury yields should move upward through the year.”
Treasury officials are set to announce this quarter’s funding plans on May 2, and bond dealers expect another across-the-board boost to auction sizes, including for inflation-linked debt. The nation’s fiscal overseers may have little choice, with deficits projected to surpass $1 trillion by 2020. The deterioration in federal finances, which is putting the U.S. debt profile on track to resemble Italy’s, is becoming more glaring ahead of crucial midterm elections in November.
American taxpayers are already bearing the cost, as swelling issuance has helped drive yields on some maturities to the highest in a decade. Government debt sales will more than double this year, to a net $1.44 trillion by JPMorgan Chase & Co.’s estimate, raising the specter of buyers’ fatigue just as the Federal Reserve is shrinking its $4.4 trillion balance sheet and raising interest rates.

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“We’re late in the credit cycle, and trying to figure out when everything turns,” said Erin Lyons, a senior credit strategist at New York-based research firm CreditSights Inc. “Some of these may eventually be downgraded.”
Bonds with the lowest investment grade have been a market darling over the past decade, ballooning in size as low global interest rates drew fund managers seeking higher returns. But as borrowing costs climb to a four-year high just as investors begin to anticipate a downturn in the global economy, some analysts are starting to sound the alarm.
Notes in the lowest rungs above high-yield junk -- in the BBB group from S&P Global Ratings or the Baa bucket from Moody’s Investors Service -- total about $3 trillion, almost the size of Germany’s gross domestic product. The concern is that as rates rise it will cost companies more to roll over their obligations, and if earnings begin to slump as economic growth slows, that could blow out leverage ratios and lead to credit-rating cuts.

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“Historically, the stock market has done OK with rising inflation, provided economic momentum was also rising,” Jim Paulsen, chief investment strategist at Leuthold Group, wrote in a note to clients Monday. “Stocks also have performed well even when economic momentum has faded, if inflation also moderates. However, periods of stagflation have produced poor results in both the stock and bond markets.”
Here’s how some markets may react to the rise in rates:

Since the financial crisis, stocks have paid out more than fixed income, but the premium is waning: The spread between the S&P 500’s earnings yield and that of the 10-year Treasury is hovering near the lowest levels in eight years.

If yields push past 3 percent, that could alter the value proposition for equities versus fixed income for years to come, according to Chris Verrone, the head of technical analysis at Strategas Research Partners.

“This is a 35-year trend change in bonds, we think it’s just begun,” he said in an interview on Bloomberg Television Monday. “We would encourage investors to consider that 1950 period, the last time bond yields went up. It took a while to go from 2 to 5 percent, but the trend was up and you stopped making money on the long side of the bond trade. That’s where we think we are right now.”

For now, corporate credit is hanging in, with high yield spreads remaining off the tightest level since before the financial crisis.
“The question of course is how long can this last,” said Peter Boockvar, chief investment officer of Bleakley Financial Group, noting that current debt levels for S&P 500 companies outside of banks are at extremely high levels. “Stating the obvious, high debt levels along with higher interest rates is not the best combination.”

Matt Maley, an equity strategist at Miller Tabak & Co., also says staggering levels of investor leverage pose a risk. As rate rise, lenders increase costs on margin accounts which in turn prompt a gradual unwind of leverage that’s become too expensive, he said.

“When everyone has been talking about whether higher rates impact the economy, the more important thing is how it will impact leverage,” Maley said by phone. “It creates a headwind for the market.

Debt in New York Stock Exchange margin accounts is the highest on record, yet the measure necessarily rises when the value of stocks -- which are used as underlying collateral -- rises. And it looks relatively small: Margin debt is less than 3 percent of the total NYSE market capitalization. For that reason, leverage levels can’t be used as a timing tool for downturns, but rather pressures markets during periods where investors need to unwind, Maley said.

Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC, attributes the pick-up in the dollar and real yields to the U.S. economy’s brighter outlook compared to the rest of the world. The continuation of this dynamic would paint a mixed, but positive, picture for risk assets.

“Our sense is that in coming quarters we see the dollar strengthen against most of the majors and for U.S. real rates to continue rising," he writes. "Stocks should like the stronger growth environment, but dollar strength and higher real yields imply tighter financial conditions, providing some offset.”

“Yields on U.S. corporate and mortgage debt, without currency hedging, have reached attractive levels for Japanese life insurance companies,” said Yunosuke Ikeda, head of Japan FX research at Nomura Securities. “As long as U.S. 10-year yields are expected to pivot around 3 percent, it’s natural for life insurers to consider non-hedged investments in dollar assets.”

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Bloomberg has crunched the numbers to compile the most comprehensive audit to date of China’s presence in Europe. It shows that China has bought or invested in assets amounting to at least $318 billion over the past 10 years. The continent saw roughly 45 percent more China-related activity than the U.S. during this period, in dollar terms, according to available data.
The volume and nature of some of these investments, from critical infrastructure in eastern and southern Europe to high-tech companies in the west, have raised a red flag at the European Union level. Leaders that include German Chancellor Angela Merkel and French President Emmanuel Macron are pressing for a common strategy to handle China’s relentless advance into Europe, with some opposition from the EU’s periphery.
We analyzed data for 678 completed or pending deals in 30 countries since 2008 for which financial terms were released, and found that Chinese state-backed and private companies have been involved in deals worth at least $255 billion across the European continent. Approximately 360 companies have been taken over, from Italian tire maker Pirelli & C. SpA to Irish aircraft leasing company Avolon Holdings Ltd., while Chinese entities also partially or wholly own at least four airports, six seaports, wind farms in at least nine countries and 13 professional soccer teams.

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The latest example of how one of the dirtiest fossil fuels is being squeezed out of the market came this week in Britain, which went for a record 55 hours without its any of its power plants producing electricity by burning coal.
No coal was used for power generation by stations in the U.K. between 10:25 p.m. in London on Monday until 5:10 a.m. on Thursday, according to grid data compiled by Bloomberg. At the same time wind turbines produced more power.
The U.K. was an early adopter of renewable energy and has more offshore wind turbines installed than any other country. It also has fields of solar panels that are meeting more and more demand as old traditional power plants close permanently. The government aims to switch off all coal plants by 2025 and has given renewables priority access to the grid.

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Global debt hit its highest levels ever and governments should take actions to reduce their indebtedness while the going is still good, the International Monetary Fund said.
Total debt levels globally came in at a record $164 trillion in 2016, amounting to 225 percent of the world economy's gross domestic product, according to the IMF's April Fiscal Monitor. That level of debt was 12 percentage points steeper than the last historic high seen in 2009 immediately after the global financial crisis.

Those findings, taken together with the business cycle upswing, meant that governments should build buffers and cut public debt levels to face "challenges that will unavoidably come in the future," Vitor Gaspar, director of the fiscal affairs department at the IMF, told CNBC's Joumanna Bercetche.

"Because times are good. It's exactly in good times that you can build buffers and resilience," Gaspar said.

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Warnings about looming public pension disasters have regularly cropped up since the 1950s, pointing to problems 25 years or more down the line. To politicians and union leaders, 1  the troubles were someone else's predicament. Then crisis fatigue set in as the big problem remained down the road.
Today, the hard stop is five to 10 years away, 2  within the career plans of current officials.3  In the next decade, and probably within five years, some large states are going to face insolvency 4 due to pensions, absent major changes. 5
There are some reassuring facts. 6  Many states are in pretty good shape, and many others still have time and resources to fix things. 7  There is no serious chance of retirees being impoverished. What's in doubt is whether states will pay promised benefits to retirees with large pensions or significant outside income or assets. 8  Also, although most of the problem is created by politicians and union leaders cutting deals to promise future unfunded benefits to keep voters 9  happy, there are also plenty of stories of politicians and union leaders risking their careers to stand up for honest pensions. 10

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"We believe there is actually a market today in the secondary market for people who want to buy nonprime loans that have been properly underwritten," said Rick Sharga, executive vice president of Carrington Mortgage Holdings. "We're not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans."
California-based Carrington Mortgage Services, a midsized lender, just announced an expansion into the space, offering loans to borrowers, "with less-than-perfect credit." Carrington will originate and service the loans, but it will also securitize them for sale to investors.
Sharga said Carrington will manually underwrite each loan, assessing the individual risks. But it will allow its borrowers to have FICO credit scores as low as 500. The current average for agency-backed mortgages is in the mid-700s. Borrowers can take out loans of up to $1.5 million on single-family homes, townhomes and condominiums. They can also do cash-out refinances, where borrowers tap extra equity in their homes, up to $500,000. Recent credit events, like a foreclosure, bankruptcy or a history of late payments are acceptable.

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