Media Worth Consuming – August 2023

Top Five Articles

Fitch had many good reasons to downgrade the credit rating of the US Government.

The Australian Department of Employment underpaid some of its staff, demonstrating that Australia’s employment terms need to be simplified.

Over the 15 years that Alan Joyce has been CEO of Qantas, the airline has racked up more tax losses than profits.

Companies with high ESG scores pollute almost as much as those with low scores.

A glimpse into the life of a Washington Generals player, the team that ensures the Harlem Globetrotters shine.

Finance

Freight movements have fallen in the US with one casualty being trucking company Yellow Corporation. The company is heading for liquidation three years after receiving a $700 million taxpayer funded bailout. WeWork could become WeBroke, with going concern warnings and a 40 for 1 stock consolidation planned to avoid delisting. Loan losses at American banks are on the rise, with over half of Q2 losses attributed to credit cards. Despite this, there’s limited evidence of widespread distress amongst US consumers as defaults generally remain at low levels. In 1989, 2000 and 2007, many people believed a soft landing was likely months before a recession occurred.

In the US, multi-family real estate debt is twice the size of office debt with a wave of problem loans emerging as interest rates have risen far more than rents. Several large American listed commercial mortgage lenders have ceased new lending to preserve capital after their share prices plummeted. The median house price in San Francisco has fallen by 23.8% in just over a year. After six years and a 73% price reduction, a penthouse in New York City has finally sold. Zillow is trialling 1% deposit home loans in Arizona.

At a busted housing development in Shenyang, China, cows wander among the buildings with farmers planning to plant crops in the spaces between them. Chinese property developer Country Garden has defaulted on interest payments for several bonds, with an ugly bankruptcy expected. Chinese wealth management products are again in the spotlight with missed payments by one of the largest originators, Zhongzhi Enterprises. Police visited the homes of Zhongzhi investors and asked them not to hold protests over their losses.

July was the weakest month for new bank loans in China since 2009. There’s many reasons that point to China’s economic future being darker than its recent past. Growing consumer debt has supported China’s economy over the last 15 years but the trend has turned.

US regulator FINRA issued a ban on a securities firm, who responded by challenging the legality of FINRA undertaking government work despite being a non-government entity. Five banks in France were raided in another round of investigations over cum-ex tax shenanigans. New rules from the SEC on private funds forbid “preferential treatment” including side letters. A US federal appeals court has ruled that loans are not securities, despite loans having similar form and function as bonds which are classified as securities.

Recovery rates have significantly dropped on leveraged loans and high yield bonds, to 40% and 20% respectively partly due to the decline of subordinated debt. Private equity firms are handing over control of overly indebted companies to the debt investing arms of their peers. Institutional investors are pushing back against private equity firms using net asset value loans, as it layers leverage on top of leverage. Despite substantial increases in overnight interest rates, private credit funds have been slow to increase their performance fee benchmarks. UBS’s primer on private credit.

Hindenburg Research is thought to have made little off its three high profile shorts this year, even though each of the targets saw substantial share price falls. Depending on how you classify tech stocks, they can make up over 40% of the S&P 500. American mutual funds fees have more than halved in the last 20 years, with consumers flocking to the lowest fee funds. A study found that alternatives have delivered negative alpha to US pension funds since 2008 with real estate and hedge funds the standout underperformers. Without taxpayer subsidies or massively increased rental yields, the build to rent sector will struggle to gain a meaningful foothold in Australia.

Politics & culture

Americans increasingly see false claims of racism as a bigger problem than actual racism. Chess is banning transgender players from female only tournaments, creating controversy for the game where the top rated female player’s world ranking is 123. Students at the Australian Defence Force Academy were ordered not to wear military uniforms on purple day as it would be “seen as an active protest” against Defence policy. Whilst high school girls lean progressive, high school boys are increasingly becoming conservatives. American Charter schools receive an average of 30% less funding but deliver much better student outcomes.

European taxpayers are coughing up €200 million to pay French farmers to destroy “surplus” wine. Oregon has spent $9 billion over 50 years to increase its salmon population without seeing any discernible improvement. Industrial policy has failed in Japan and China, but Joe Biden is keen to waste American taxpayer’s money on it. Governments are often expanding the list of exploitative rights, which involve taxpayers footing the bill for some people to get “free stuff”.

The prosecutors on the Hunter Biden tax case have treated others far more harshly for lessor offences. A judge presiding over one of Trump’s many legal cases has been accused of “open bias and partisanship”, particularly against January 6^th protestors. Donald Trump has proposed a massive tax increase on consumers through a baseline tariff of 10% on all imports. The NBA players’ union is upset that a team chose to donate to a super PAC that supports Ron DeSantis’s Presidential candidacy.

A small town in New York has been split over whether it should adopt land zoning restrictions when it has proudly never had restrictions before. Minneapolis slashed zoning restrictions leading to a jump in construction and a slower pace of increases in the cost of housing. Portland is trialling tiny homes as a stepping-stone for transitioning homeless people to permanent housing.

Lengthy pre-trial detention is allegedly being used by the Polish government to target political opponents. Following a once in a century downpour, the Chinese government diverted flood waters into the city of Zhuozhou to prevent flooding in Beijing. Illinois has adopted a law that allows illegal migrants to become police officers, provided they have obtained a work permit and pass background checks. Ohio’s legislators ran a ballot to lift the threshold for constitutional changes to 60%, but Ohio’s voters strongly rejected it. A Canadian pastor has been jailed and fined for feeding homeless people and preaching in public.

Economics & work

With US wage growth at around 5%, services inflation won’t ease any time soon. American workers are expecting much higher wage increases but employers are starting to cut salaries for new hires. Higher inflation and a weaker Yen are changing the economic landscape of Japan. Chinese consumer and producer price inflation measures are negative over the last year.

Jerome Powell smacked down talk of raising the US inflation target above 2%. Before the Federal Reserve inflation was minimal, but after its inception inflation took off. Christine Lagarde has been a disaster as head of the IMF and head of the ECB. A strong jobs market and increased working from home arrangements have seen two million disabled Americans gain employment. China’s official youth unemployment rate of 21.3% is so high, the Chinese government has announced it will stop reporting it.

Argentina’s leading presidential candidate wants to abolish its central bank and make the US dollar the country’s currency. Dollarization is an obvious solution for Argentina, where politicians have a long history of printing money to fund budget deficits. In 1951, Argentina and Australia had very similar economies before Argentina chose socialism and MMT resulting in poverty and hyperinflation. Developed economies are showing some of the negative signs that are typically associated with emerging markets.

Miscellaneous

Rising development costs are making offshore wind generation unviable in the UK. Heating of homes creates four times the carbon footprint of cooling them. Tesla lied about the driving range of its cars and then dodged complaints from customers when the vehicles didn’t live up to its marketing. Neeva built a better search engine than Google, but it couldn’t overcome Google’s dominant position.

Scientists have discovered microwaving plastics is much worse than previously believed, with some arguing there’s no such thing as microwave safe plastic. Engineers have long used paper planes to understand flight dynamics and to enhance the design of commercial planes. The US is seeing an increase in cases of leprosy, with 159 cases reported in 2020. Syria is becoming a global hub for the manufacturing and distribution of “poor man’s cocaine”.

A biographical film about Leonard Bernstein has raised the question of whether actors should use prosthetic noses. A sun bear in a Chinese zoo has many asking if it is a person in a bear suit. Olive oil prices have more than doubled over the past year driven by a drought in Spain. A wrecked 1954 Ferrari sold for $1.87 million at auction. American Airlines has filed a lawsuit against a website that used a well-known loophole to sell cheaper tickets to the public.