David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Longtime China Watchers Predict What's Next for Slowing Economy

    This article by Enda Curran and April Ma for Bloomberg may b of interest to subscribers. Here is a section:

    Michael Pettis, a finance professor at Peking University and former Bear Stearns Cos. banker

    My best call was probably to insist, even in 2015-16 when the market strongly expected otherwise, that as quickly as debt was rising, China was unlikely to experience a financial crisis and a sharp depreciation of the currency. I think the market didn’t understand that these are mainly balance sheet events, and as long as China’s financial system was closed and its regulators powerful, Beijing could easily extend and restructure liabilities so as to prevent a crisis.

    My worst call was to propose that Beijing would recognize the extent of investment misallocation and the inexorable rise in debt by 2015-16, and would begin to lower the GDP growth target rapidly after that. I did not recognize how politically difficult this would prove, and that it couldn’t happen until Xi Jinping and the people around him had done a lot more to consolidate political power.

    Every historical precedent -- and the logic of the growth dynamics -- suggests it will be another Japan. GDP growth rates will drop consistently every year until China is growing at below 3%, and the longer it takes to get there, the more debt it will have to work off and the greater the macroeconomic financial distress costs it will have to absorb.

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    Boeing Capsule Misses Space Station Rendezvous as Crisis Deepens

     This article by Justin Bachman may be of interest to subscribers. Here is a section:


    The mishap jeopardizes U.S. plans for human flights as soon as next year by Boeing, which was hired to ferry astronauts to the ISS as part of NASA‘s commercial crew program along with Elon Musk’s Space Exploration Technologies Corp. Boeing’s failure also deepens the sense of crisis around the aerospace giant as it tries to persuade regulators to end a flying ban on its 737 Max after two deadly crashes.

    Boeing fell 1% to $330.04 at 10:40 a.m. in New York. The stock rose 3.4% this year through Thursday while the S&P 500 advanced 28%. NASA and Boeing officials said they were still trying to understand the cause of the timer failure. It’s too soon to assess the impact on subsequent Boeing space flights, they said. About 50 minutes after liftoff, the Starliner was out of position to begin its orbital insertion burn, the last boost into an orbit so the vehicle could dock at the space station. Had astronauts been on board, they might have been able to correct the problem, Bridenstine said.

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    A Major Shipping Change Is Coming, and So Are Higher Fuel Prices

    This article by Firat Kayakiran, Jack Wittels, and Rachel Graham for Bloomberg may be of interest to subscribers. Here is a section:

    It’s important to remember that oil refineries and shipping companies spent billions getting ready.

    Some shipowners installed scrubbers, units that can cost several million dollars each and allow carriers to remove sulfur from fuel as it’s burnt. This enables them to keep using today’s cheaper product. Likewise, refineries have invested in technology to convert sulfur-rich crude into higher-quality fuels.

    For compliant companies, cheating by others is a problem. Yet there could be non-compliance, at least initially. Industry estimates are that something like 10%-15% of the fleet won’t comply with the rules at the start.

    Not every country in the world signed up to the regulations, including some large coastal states with significant refining capacity. Even among those that did, not all look likely to start with strict enforcement. There’s also a disparity between what penalties will be imposed from one nation to the next.

    South Africa, which sits on a shipping lane connecting eastern and western hemispheres, doesn’t yet have the domestic laws in place to punish non-compliant vessels. The United Arab Emirates, a vital refueling hub in the Middle East, has pledged to avoid draconian enforcement.

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    Fertilizer Rebound Depends on Break From Crummy U.S. Weather

    This article by Ashley Robinson for Bloomberg may be of interest to subscribers. Here is a section:

    “We’re going to get demand improvement,” Jonas Oxgaard, an analyst at Sanford C. Bernstein in New York, said in a phone interview. “If the only thing we’re seeing is normalization, so we go back to the trend line, that’s still a pretty good outcome.”

    Fertilizer prices may ease in 2020 as new global sources of supply emerge. EuroChem Group AG and OCP Group are expected to boost potash output, and 4 million metric tons of urea capacity are forecast to come online, Maxwell of Green Markets said.

    Prices dropped in 2019 in tandem with lower costs for natural gas and Chinese coal, benefiting producers including CF Industries Holdings Inc. and Sinochem.

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    Can I Interest You in a 100-Year Boris Bond?

    This article by Marcus Ashworth for Bloomberg may be of interest to subscribers. Here is a section:

    The U.K. has the luxury of a deep investor base that hoovers up long-dated, fixed-income assets to make sure it can meet its future pension and insurance liabilities. So much so that the yield on 50-year Gilts is lower than that of their 30-year counterparts, meaning there’s a so-called inversion at the long end of the U.K. yield curve:

    The average duration of British government debt is much longer than that of its main counterparts; it’s about 14 years, compared to nearly nine years for German bunds and less than seven years for U.S. Treasuries. There is evidently investor demand in the U.K. for longer stuff, but it requires a genuine commitment from the government to stay the course and not leave any ultra-long issue stranded at the end of the yield curve.

    Doing a 100-year deal in concert with more 30- to 50-year issuance would make sure there was plenty of interest at various maturities at the long end of Gilts. A century bond could rapidly build scale into the tens of billions of pounds with quarterly auctions, perhaps with a coupon of about 1.5% (by comparison, Austria’s 100-year issue went for 1.17% back in June). This would be a super-cheap way to really commit to some of the biggest infrastructure projects, such as connecting rail links properly in the north of England.

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