FIG Topics of Interest



“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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It may be hard to fathom just how cities could be at risk of a water scarcity crisis when approximately 70 percent of the world is made up of the resource. The stark reality, however, is that the percentage of fresh water probably only amounts to about 2.5 percent, according to often-cited assessments.
Even then, a significant supply is locked up in ice and snow, which means just 1 percent of all fresh water is easily accessible to the global population.
Inequality in access to water is also quickly becoming a problem. While the affluent can find ways to get access to water— through deliveries or in-built tanks — poorer populations are left to their own devices.
That situation oftentimes leads to water theft — for profit, for survival, or for both.
"It won't be the same exact scenario that Cape Town is facing," Keller said. "It might be pollution, drought, drier climates or significant population growth."
The troubles faced by Cape Town should serve as a "wake-up call" for other countries about the realities of increasing water stress, Otto said.
In recent years, California faced a drought that lasted years, Australia survived the millennium drought, and Sao Paulo faced a water shortage crisis in 2015 due to both drought and inefficient infrastructures.
Otto summed up the global state of preparedness for water scarcity, saying: "We've either under-invested in measures or allowed existing structures to fall apart."
"The right to water does not mean the right to free water," Felbab-Brown explained, saying many people had misunderstood the UN. "In the same manner that people have to pay for food, they should expect to pay for safe water."
That sentiment hasn't stopped outright water theft on a large scale in countries like Brazil, India and Mexico. Companies and individuals illegally tap into pipelines and reservoirs, or they find other ways to avoid water meters.
As of now, water smuggling mostly operates within countries' borders, but it will eventually occur on an international scale, Felbab-Brown said.

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Fifteen U.S. corporations including online retailer, power company Duke Energy and insurer Prudential Financial avoided U.S. tax on nearly $25 billion in combined profits last year, a tax watchdog group said on Tuesday.
A report by the Institute on Taxation and Economic Policy, or ITEP, said data showed how profitable Fortune 500 companies have routinely lowered their tax bills long before the Republican tax overhaul signed into law by President Donald Trump in December.
The 15 corporations had profits of $24.5 billion in 2017 but managed to obtain nearly $1.4 billion in rebates from the U.S. Treasury for a combined tax rate of minus 5.6 percent, according to the ITEP report, which examined corporate income tax disclosures.
The nonpartisan group said the new U.S. tax regime, which slashed the corporate income tax rate from 35 percent to 21 percent beginning in January, will likely allow corporations avoid even more tax.
Amazon received a $137 million federal rebate on $5.4 billion in U.S. profits, resulting an effective tax rate of negative 2.5 percent, by using a tax break that allows companies to write off the value of executive stock options, according to ITEP.
Charlotte, North Carolina-based Duke Energy obtained a $247 million rebate on $4.2 billion in U.S. profits by using accelerated depreciation on capital investments and renewable energy production tax credits to lower its federal tax rate to a minus 5.9 percent, the report said.


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"The upside could be big because business as usual wasn't getting the job done in opening up the market in China," said Daniel Rosen, founder and China director of research and consulting firm Rhodium Group.
"It is really not so much about trade as about China's rise as a technology power and U.S. efforts to contain this rise and prevent China from dominating key sectors going forward," Paul Triolo, practice head for geotechnology at consulting firm Eurasia Group, said in an email.
"Hence the investment action will be a critical piece of this," he said.
U.S. companies invested $14 billion in China last year, an increase of about $200,000 from 2016, bringing cumulative investment in the country to $256 billion, according to one of two studies released Tuesday by the National Committee on U.S.-China Relations and Rhodium Group.
On the other hand, the value of announcements for new Chinese transactions in the U.S. fell by nearly 90 percent in 2017, and the value of completed deals dropped by more than a third to $29 billion, one of the reports showed. The sharpness of the decline was mostly the result of record-high Chinese investment in the U.S. in 2016 and Beijing's crackdown on capital flight. The Trump administration has also significantly increased its scrutiny on Chinese deals, citing national security issues.

The latest annual survey from the American Chamber of Commerce in China found that its members "continue to feel foreign business are less welcome in China than they once were." More than half of member companies also said they still believe intellectual property leakage and data security threats are higher in China than other parts of the world, the January report said. "American businesses already have hundreds and hundreds of billions of dollars in investment in China on the ground, most of which is producing profits every year. They have a tremendous amount of skin in the game," Rosen said. "They have to take an active stance in this space whether they like it or not."
"What we need China to do at this junction is not to open up whole new sectors but just to allow U.S. companies to own their companies," he said. "Then we could see a rapid uptick of U.S. investment in China" due to companies buying up stakes in financial services, automobiles and other industries.

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A cyberattack that U.S. natural gas pipeline owners weren’t required to report has lawmakers taking a closer look at how the industry is handling such threats, raising the prospect of tighter regulation.
In website notices to customers this week, at least seven pipeline operators from Energy Transfer Partners LP to TransCanada Corp. said their third-party electronic communications systems were shut down, with five confirming the service disruptions were caused by hacking. But the companies didn’t have to alert the U.S. Transportation Security Administration, the agency that oversees the nation’s more than 2.6 million miles of oil and gas conduits in addition to providing security at airports.
Though the cyberattack didn’t disrupt the supply of gas to U.S. homes and businesses, it underscores that energy companies from power providers to pipeline operators and oil drillers are increasingly vulnerable to electronic sabotage. It also showed how even a minor attack can have ripple effects, forcing utilities to warn of billing delays and making it more difficult for analysts and traders to predict a key government report on gas stockpiles.

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