Crumbs
Business model tweaks with Chinese characteristics. The Wall Street Journal reports today that China’s central government will ask local authorities to change the procedure for conducting land auctions, holding them in bulk at select times during the year instead of the current piecemeal, ad hoc format. The rationale: Simultaneous auctions will help discourage amply leveraged property developers from bidding aggressively on vacant lots.
Local commentators cheered the move, with ING Bank economist Iris Pang describing the move as an efficient way to freeze out undesirable industry players while Hayden Briscoe, head of Asia-Pacific fixed income at UBS Asset Management, termed the policy “the final piece to the puzzle” in bringing wayward developers to heel. Recall that the Chinese government debuted its three red lines policies, a trio of rules governing developers’ balance sheet metrics (Almost Daily Grant’s, Jan. 12), at the start of the year. Included in that trifecta: A stipulation that short-term borrowings must not exceed cash reserves.
Beijing’s efforts to whip the property sector into shape come too late for some. Bloomberg relayed on Sunday that Singapore-based City Developments Ltd. took a S$1.78 billion ($1.3 billion) writedown on its investment in mainland Chinese operator Sincere Property Group, representing a near-complete wipeout. Sincere, which failed to repay a bond maturing last week, sported some RMB 16 billion ($2.4 billion) in short-term interest-bearing liabilities as of June 2020, more than six times its reported cash holdings on that date.
The Economist ran a story about the challenges of ending the SLR.
NFT
The latest craze is to attach digital objects (like images) to a blockchain managed by the originator, as explained in the FT. I am inclined to think that this is the pets.com of the current bubble. But as Kuppy always says, if you see a bubble forming, hop on it! This is not my advice, and certainly not investment advice.
MMT
This excellent article on MMT makes the important point that MMT only works as long as central bankers and treasury secretaries strongly deny publicly that what they are doing is MMT, because if they did admit they were trying MMT, this would spook the markets. It also makes the point that the “more sovereign” your currency is, the more likely you’ll be able to get away with monetary financing of govt. spending without having to impose taxes to control inflation. The US’s exorbitant privilege makes them candidate number one for this experiment. The article is well worth reading and has some good notes on Japan, which is of course, Patient Zero for all this stuff.
Wrap
J Powell had a press conference today in which he said that the Fed had everything under control and that the Biden administration was doing just the right thing to fix the economy. This is what the markets wanted to hear, so we had a deflationary day:
- DXY down 0.5% to 91.4,
- US equity markets strong, Asian less so (but may catch up tomorrow) and Europe mixed,
- Energy commodities down, precious metals starting to catch a bid, agricultural ones mixed; copper up over 2%,
- US 10Y at 1.65%, barely changed.
Financial conditions are still very unstressed.
Thought for the day
The teleological fallacy is the false conclusion that because something serves a purpose it must have been designed to serve that purpose. The fact of being designed implies the existence of a conscious agent doing the design. It is usually discussed in the context of evolution and religion, but I believe that it can be used about companies. CEOs of successful companies will often attribute that success to their conscious shaping of the company, and their perceptiveness in understanding the market in which the company exists. In fact, I would argue, that more often than not companies achieve their competitive advantage by natural selection, the bosses of that company being fooled by a panoply of biases: confirmation bias, availability bias and egocentric bias and probably even groupthink.
I was reminded of this when I read a review of Jeff Immelt’s new autobiography. I haven’t read the book, but the reviewer (in Private Eye) obviously considers Immelt to be guilty of a colossal lack of self-awareness.
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