The System is Broken

There Are Now 8.6 Million Missing American Workers

2020-04-09T20:30:00.000-04:00

Everyone knows how unemployment surged through the roof. In a span of two weeks, 10 million people claimed filed for unemployment benefits. The scale is unimaginable. Look at the chart.

But what is less publicized is that the Civilian Labor Force Participation Rate (LFPR) dropped by 0.70% in one month, from 63.4% in February 2020 to just 62.7% in March 2020. So, over 1.6 million people dropped off from the labor force and have gone missing.

There are now 8.6 million people missing from the labor force since the Great Recession began in December 2007 because the LFPR dropped from 66.0% pre-recession to a current 62.7% today.

We are now back to August 2018 levels. This figure reflects only the 3.0 million people that became unemployed in the last week of March 2020. In the first week of April 2020, 6.6 million more people became unemployed, which will lead to further and bigger drops in the Civilian Labor Force Participation Rate for April.

Is Greece Done with Deleveraging?

2020-04-02T20:30:00.000-04:00

Is Greece done with deleveraging? It's been deleveraging for over 10 years now. Credit to GDP is down from a peak of almost 140% of GDP to 110% of GDP.

How Did the US Stock Market Perform During the 1918 Spanish Flu Pandemic?

2020-03-19T20:30:00.000-04:00

During the 1918 Spanish Flu Epidemic, the first wave of deaths hit its peak of 5 deaths per 1,000 persons in July of 1918. It subsided in August and remained that way for the rest of the summer. Come Fall of 2018, a second and much more lethal wave hit, peaking just below 25 deaths per 1,000 persons in November of 2018. This wave subsided to more normal levels during winter. Then a third wave of deaths hit in February of 2019, lasting until May of that year. About 28% of the US population were infected during this period, leading to an estimated 500,000 to 675,000 deaths (0.48 to 0.64% of the population).

Surprisingly, the stock market during this time period remained remarkably stable. It did not crash. The Dow Jones Indusrial Average Index (DJIA), which was the only US stock market index to exist at that time, shows that the market remained relatively flat throughout 1918 and then soared by almost 50% by the end of summer of 1919.

The DJIA is a price-weighted index that measures the stock performance of the 30 large companies listed in the US stock market and is therefore not representative of the broader market.

The S&P 500 Index is broader-based stock market index because it includes at least five hundred of the largest publicly listed companies in the United States. The S&P 500 is a capitalization-weighted index and not price-weighted. It is constructed by combining the market capitalizations of all the component companies. However, the S&P 500 Index only came into existence in 1957. It did not exist in 1918. So how do we gauge the broader market performance of that time.

Enter Finance Professor Robert Shiller of Yale University has a data set which presents the "US Stock Markets 1871 - Present and CAPE Ratio," which reconstructs or estimates what the S&P 500 Index would have been during the Spanish Flu Pandemic using data on the stocks being traded in the US stock market at that time.

The reconstructed S&P 500 Index showed that the broader stock market did soar not just in 1919 but starting in 1918, when the first wave of the pandemic hit.

So, what gives? Why did it soar?

Simple. The economy soared too. Real GDP soared by 9.02% in 1918, then dropped to a measly growth rate of 0.80% in 1919, according to economists Reinhart & Rogoff.

Why did GDP by 1918 in the midst of a global pandemic? Because the US entered World War I in April 1917 and spent billions on military preparations.

The data from the White House website tells it all. Government spending soared by 549% in 1918, from just 3.27% of GDP in 1917 to 16.72% of GDP in 1918.

Year	Total US Government Revenues and Outlays
Year	Receipts	Outlays	Surplus or Deficit (-)	Outlays as % of GDP
1914	725	726	-*	1.99%
1915	683	746	-63	1.93%
1916	761	713	48	1.44%
1917	1,101	1,954	-853	3.27%
1918	3,645	12,677	-9,032	16.72%
1919	5,130	18,493	-13,363	23.62%
1920	6,649	6,358	291	7.19%
1921	5,571	5,062	509	6.88%
1922	4,026	3,289	736	4.48%
1923	3,853	3,140	713	3.68%

Source: Whitehouse.gov and Reinhart & Rogoff

The bulk of the increased outlays were for military spending itself. Expenditures soared from just $546 million in 1917 to $7.05 billion in 1918. It drafted 2.8 million men to fight the war in Europe. By the summer of 1918, it was sending 10,000 fresh soldiers to France every day. World War I lasted until November 1918 at the height of the pandemic. When the war ended, so did expanded military spending and GDP growth dropped off considerably.

The economy was kept humming at a brisk pace, unhampered by the lack of quarantines, allowing the pandemic to grow and spread, leading to many more millions of unnecessary deaths. In other words, public health officials did not flatten the curve so as not to cripple the war effort.

Obviously, not flattening the curve today is not possible. It would be political suicide for any government official to let the pandemic run wild.

One obvious lesson we can take away is that massive government intervention, not necessarily in the form of miltary spending, can keep the economy humming, if not soaring, in the midst of a global pandemic. Even Ken Rogoff, known for his hawkish views on government debt, seems to think so.

I mean, there's never been a concern about our government's defaulting. The concern is being able to borrow massively when you need to. That's the whole point of saving for a rainy day. When it rains, you want to really open up the floodgates.

And, here, I just — there's no limit. We're in a war. You have to win the war. I would have no problem with the government debt magically going up $5 trillion in the blink of an eye, if we could get out of this in two or three months healthily.

This is an emergency. You're not worrying about your credit standing right away. I don't think that's going to a problem. And you know what? If we have inflation at the end of this, so what, if that is what we needed to do to win this war. We're trying to protect the American people, protect our interests, protect the future.

This is really — think like World War II, World War I. It's this — tiny little viruses invading us, but you know, make no mistake, this is like a war, an alien invasion.

Maybe we should do the same thing in 2020. Goverment has to step in and pick up the economic slack or we will fall into an economic, financial, and political abyss.

Both China and Hong Kong Have Continued Deleveraging Throughout Most of 2019

2020-03-12T20:30:00.000-04:00

Credit to GDP growth has dipped below the trendline for both countries as of the third quarter 2019.

Source:
https://www.bis.org/statistics/c_gaps.htm

How Crazy is the Philippine Real Estate Market? Prices have Climbed Over 63% Since Duterte Took Office!

2020-03-05T20:30:00.000-05:00

Philippine house prices have gone parabolic. They have climbed 63.33% since President Duterte took office in the second half of 2016. Year-on-year price increase as of the 4th Qtr 2019 is an astounding 26.28%. Prices have outpaced inflation by a wide margin, 169.37 percentage points.

How long can this go on? Not long, considering sales volumes dropped by more than 25% in 2018, indicating that more and more people cannot afford the high price levels.

Is ABS-CBN Preparing for a Shutdown? Why Have Regularized Employees Been Reduced By Over 60%?

2020-02-26T20:30:00.000-05:00

In 2017, ABS-CBN's worker headcount was 11,068 persons as detailed in its 2017 Annual Report. Around 60% of the worker headcount was composed of regularized employees. The rest consisted of Non-Regular Employees, Talents, and Project-Based Employees.

In 2018, ABS-CBN's worker headcount was roughly 2% smaller - only 10,855 person as detailed in its 2018 Annual Report. However, the number of Regularized Employees grew by 2.5% that year. As a result, they comprised a slightly higher percentage of the total workforce - 62%.

ABS-CBN has said time and again that the non-renewal of its broadcast franchise will threaten the livelehoods of its 11 thousand workers. The government claimed otherwise. It said that ABS-CBN only has 4,401 employees.

"In a letter to SolGen Jose Calida dated 21 February 2020, the BIR said ABS-CBN Corp. and ABS-CBN Convergence Inc. have a total of only 4,401 employees, way below the 11,000 the Kapamilya network has been claiming in its efforts to renew its franchise which expires 30 March.

The Internal Revenue based its findings on the Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes submitted by both ABS-CBN Corp. and ABS-CBN Convergence Inc.

The BIR document showed ABS-CBN Corp. has 4,322 employees while ABS-CBN Convergence Inc. has 79 as of 31 December 2018."

To counter this confusion, ABS-CBN released this statement detailing that it had 11,071 workers as of December 31, 2019.

It said that 5,918 people worked directly for ABS-CBN. Of this number, only 2,661 people were regular employees. The rest were Project-Based Seasonal Workers, Independent Contractors and On-Camera Talents, and Project Employees. An additional 5,153 unclassified workers brought the total ABS-CBN workforce to 11,071.

Classification	2019
Regular	2,661
Project Based	2,096
Independent Contractors	1,069
Project Employees	92
Subtotal	5,918

Others	5,153
Grand Total	11,071

This reveals that the number of permanent, regularized employees has declined substantially - by over 60%, in fact. The rest are expendable. Non-regularized employees tend to have less rights, less benefits, and can be let go at the discretion of ABS-CBN's management, especially in a country like the Philippines where the wheels of justice tend to turn very slowly.

The reduced regular employee headcount took place at a time when ABS-CBN's revenues have, in fact, increased by a healthy 4.9% over the previous year.

The reduced number of regular employees gives ABS-CBN maximum flexibility to let go of employees in the event of a broadcast shutdown and it switches completely to an internet streaming service.

The question is: Is ABS-CBN fighting for its workers or fighting for the right to exploit its workers?

The Beginnings of Wage Inflation

2020-02-20T20:30:00.000-05:00

Last year, we estimated that pointed out that there were still 7.4 million workers missing from the labor force. The presence of so many missing workers would dampen wage growth for some time to come. Today, the number of missing workers is down slightly to 6.8 million workers as of January 2020.

And, true enough, wage growth has remained rather subdued given the low official unemployment rate of 3.6% as of January 2020.

But certain sectors of the labor market are starting to tighten. For instance, the prime age (25 to 54 years old) working group is now reflecting a shortage of workers of 191 thousand people.

This indicates that wages for this age group could tighten in the not too distant future.

The tightness of the prime working age group is not shared equally among the sexes. The labor market for Prime Age Women Workers is very tight, with an estimated shortage of almost 1 million women as of January 2020.

For men, it is an altogether a different story. There are still around 800K Prime Age men missing from the labor market..

This gap for Prime Age men is being filled very slowly, only a few thousand a month. But once that gap is filled, wages should start rising up.

Related Posts: Why There Is Still No Wage Inflation: There are 8.1 Million Missing American Workers

In the Last Twelve Years, Philippine Income Inequality Has Declined Substantially

2020-02-09T20:30:00.000-05:00

In the last twelve years, Income Inequality in the Philippines has declined substantially, primarily because income growth in the lowest classes have outpaced that of the upper classes. From 2006 to 2018, average per capita incomes for the poorest decile grew by a CAGR of 11.1% a year, while the incomes for the richest decile grew by a CAGR of only 2.81% during the same period. The average Filipino's income also grew by a decent CAGR of 5.1% a year. As a result, the richest decile, which once towered over the poorest decile by almost 20 times income in 2006, now has a less intimidating ratio of less than 8 times income of the poorest class. For the average Filipino, that ratio has been cut in half, from 5.4 times the poorest decile in 2006 to just 2.8 times in 2018.

Just How Reasonable are the Rates of Return of the Water Concessionaires: Manila Water Company and Maynilad?

2020-02-02T20:30:00.000-05:00

President Duterte has gone to war with two of the biggest oligarchs in the country, namely the Ayalas and Manny Pangilinan, who operate the water concessionaires Manila Water and Maynilad. He has threatened to arrest them and have them thrown in jail for plunder and syndicated estafa. Specifically, they have been accused of the following:

Renegotiating and extending their 1997 contracts thirteen years prior to their expiration in 2022 without the benefit of public bidding.
Attaching onerous provisions in the revised contracts that include transferring their income tax burden to the consumers and prohibiting government regulators, the MWSS (Metropolitan Waterworks and Sewerage System), from discharging its mandate to regulate the rate of charges that the companies will collect from the consumers.
Collecting environmental fees intended to build water treatment facilities without actually building such facilities, resulting in the pollution of Manila Bay.

As a result, the MWSS has cancelled the extension of the water contracts to 2037 and the government is drafting revised water concession contracts that exclude the terms the President considers onerous.

Plunging Share Prices

Unsurprisingly, with their futures in limbo, the stocks of the water concessionaires have taken deep dives since the President launched his war late last year but have recovered some ground with the prospect of impending contract renegotiations.

Here is the chart for Manila Water:

And here's the chart for Metro Pacific Investments Corporation, Maynilad Water Services' holding company. Maynilad itself was publicly listed in the Philippine Stock Exchange (PSE) until its voluntary delisting in 2017.

Impressive Financials

Both companies have been among the biggest and most profitable companies listed in the PSE, pulling roughly Php 20.0 billion (US$ 392 million) in revenues and Php 6.0 billion (US$ 118 million) in net income each.

Naturally, both companies have stacked up very decent rates of return for their respective shareholders in the last five years. For instance, Manila Water's Return on Equity (ROE) for the last five years (2014 to 2018 plus the last 12 months) have averaged 14.34%. Maynilad's ROE (2015 to 2017) was an even more impressive 21.41%.

Global Comparisons

Now how do these returns stack up, globally?

After scanning Capital IQ for publicly-listed companies comparable to the Water Concessionaires, I arrived at a list of 74 companies that are primarily in the business of Water Supply. Here's the list:

Company Name	Exchange:Ticker	Country of Operations	Revenue (US$ M)	Market Cap (US$ M)
Aguas Andinas S.A. (SNSE:AGUAS-A)	SNSE:AGUAS-A	Chile	703.00	2,622.70
American States Water Company (NYSE:AWR)	NYSE:AWR	California	471.90	3,107.00
American Water Works Company, Inc. (NYSE:AWK)	NYSE:AWK	USA	3,558.00	22,519.30
Aqua Spólka Akcyjna (WSE:AQU)	WSE:AQU	Poland	40.71	54.47
AquaVenture Holdings Limited (NYSE:WAAS)	NYSE:WAAS	Americas	192.70	856.00
Artesian Resources Corporation (NasdaqGS:ARTN.A)	NasdaqGS:ARTN.A	USA	81.90	344.40
AS Tallinna Vesi (TLSE:TVEAT)	TLSE:TVEAT	Estonia	70.90	259.90
Athens Water Supply and Sewerage Company S.A. (ATSE:EYDAP)	ATSE:EYDAP	Greece	357.70	895.80
Beijing Capital Co.,Ltd (SHSE:600008)	SHSE:600008	China	7,873.40
Beijing Enterprises Water Group Limited (SEHK:371)	SEHK:371	Global	3,528.10	5,235.50
Beijing Water Business Doctor Co., Ltd. (SZSE:300055)	SZSE:300055	China	130.30	905.30
Ben Thanh Water Supply Joint Stock Company (HNX:BTW)	HNX:BTW	Vietnam	20.10	9.43
Binh Duong Water - Environment Joint Stock Company (HOSE:BWE)	HOSE:BWE	Vietnam	109.60	142.10
Bohai Water Industry Co.,Ltd (SZSE:000605)	SZSE:000605	China	232.90	368.00
California Water Service Group (NYSE:CWT)	NYSE:CWT	USA	705.10	2,383.20
Chengdu Xingrong Environment Co., Ltd. (SZSE:000598)	SZSE:000598	China	643.90	2,033.50
China Everbright Water Limited (SGX:U9E)	SGX:U9E	China	673.10	690.70
China International Holdings Limited (SGX:BEH)	SGX:BEH	China	10.26	16.90
China Water Affairs Group Limited (SEHK:855)	SEHK:855	China	1,095.70	1,250.80
China Water Industry Group Limited (SEHK:1129)	SEHK:1129	China	124.30	97.60
Chongqing Water Group Co.,Ltd. (SHSE:601158)	SHSE:601158	China	818.70	3,956.80
Compagnie des Eaux de Royan (ENXTPA:MLEDR)	ENXTPA:MLEDR	France	41.93	26.61
Companhia Catarinense de Águas e Saneamento - CASAN (BOVESPA:CASN3)	BOVESPA:CASN3	Brazil	264.90
Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BOVESPA:SBSP3)	BOVESPA:SBSP3	Brazil	4,351.00	10,007.80
Companhia de Saneamento de Minas Gerais (BOVESPA:CSMG3)	BOVESPA:CSMG3	Brazil	1,196.80	2,049.30
Companhia de Saneamento do Paraná - SANEPAR (BOVESPA:SAPR4)	BOVESPA:SAPR4	Brazil	1,071.90	2,406.70
Consolidated Water Co. Ltd. (NasdaqGS:CWCO)	NasdaqGS:CWCO	Global	69.20	251.30
Eastern Water Resources Development and Management Public Company Limited (SET:EASTW)	SET:EASTW	Thailand	150.80	636.80
Essbio S.A. (SNSE:ESSBIO-C)	SNSE:ESSBIO-C	Chile	217.30	409.10
Esval S.A. (SNSE:ESVAL-C)	SNSE:ESVAL-C	Chile	253.70	328.10
Global Water Resources, Inc. (NasdaqGM:GWRS)	NasdaqGM:GWRS	USA	35.04	276.53
Grandblue Environment Co., Ltd. (SHSE:600323)	SHSE:600323	China	802.80	2,219.70
Guangdong Investment Limited (SEHK:270)	SEHK:270	China	1,899.70	14,122.20
Guangxi Nanning Waterworks Co., Ltd. (SHSE:601368)	SHSE:601368	China	210.20	757.30
Heilongjiang Interchina Water Treatment Co.,Ltd. (SHSE:600187)	SHSE:600187	China	66.70	615.70
Hyflux Ltd (OTCPK:HYFX.F)	OTCPK:HYFX.F	Global	111.60	7.90
Iguá Saneamento S.A. (BOVESPA:IGSN3)	BOVESPA:IGSN3	Brazil	214.30
Inversiones Aguas Metropolitanas S.A. (SNSE:IAM)	SNSE:IAM	Chile	703.00	1,071.90
Jiangsu Jiangnan Water Co., Ltd. (SHSE:601199)	SHSE:601199	China	138.30	528.00
Jiangxi Hongcheng Waterworks Co., Ltd. (SHSE:600461)	SHSE:600461	China	689.60	835.40
Kunming Dianchi Water Treatment Co., Ltd. (SEHK:3768)	SEHK:3768	China	230.00	309.70
Luzhou Xinglu Water (Group) Co., Ltd. (SEHK:2281)	SEHK:2281	China	207.80	147.00
Lydec S.A. (CBSE:LYD)	CBSE:LYD	Morocco	786.20	401.30
Manila Water Company, Inc. (PSE:MWC)		Philippines	417.10	462.80
Middlesex Water Company (NasdaqGS:MSEX)	NasdaqGS:MSEX	USA	135.10	1,084.40
Muscat City Desalination Company S.A.O.C. (MSM:MCDE)	MSM:MCDE	Oman	43.67	43.64
New England Service Company, Inc. (OTCPK:NESW)	OTCPK:NESW	USA	7.52	21.49
Nha Be Water Supply Joint Stock Company (HNX:NBW)	HNX:NBW	Vietnam	28.29	20.14
PBA Holdings Bhd (KLSE:PBA)	KLSE:PBA	Malaysia	83.30	88.00
Pennon Group Plc (LSE:PNN)	LSE:PNN	United Kingdom	1,869.20	5,822.40
Puncak Niaga Holdings Berhad (KLSE:PUNCAK)	KLSE:PUNCAK	Malaysia	106.00	33.00
Pure Cycle Corporation (NasdaqCM:PCYO)	NasdaqCM:PCYO	USA	27.75	296.05
Qian Jiang Water Resources Development Co;Ltd (SHSE:600283)	SHSE:600283	China	165.30	522.00
Ranhill Holdings Berhad (KLSE:RANHILL)	KLSE:RANHILL	Global	406.80	280.10
Saigon Water Infrastructure Corporation (HOSE:SII)	HOSE:SII	Vietnam	7.82	49.73
Salcon Berhad (KLSE:SALCON)	KLSE:SALCON	Malaysia	43.26	43.05
Severn Trent Plc (LSE:SVT)	LSE:SVT	United Kingdom	2,344.40	7,997.20
SIIC Environment Holdings Ltd. (SGX:BHK)	SGX:BHK	China	853.60	512.00
SJW Group (NYSE:SJW)	NYSE:SJW	USA	393.40	1,976.00
Société de Distribution d'Eau de la Côte d'Ivoire, S.A. (BRVM:SDCC)	BRVM:SDCC	Ivory Coast	176.60	42.70
Taliworks Corporation Berhad (KLSE:TALIWRK)	KLSE:TALIWRK	Malaysia	90.70	431.50
The Torrington Water Company (OTCPK:TORW)	OTCPK:TORW	USA	7.34	35.42
The York Water Company (NasdaqGS:YORW)	NasdaqGS:YORW		50.60	622.00
Thessaloniki Water Supply & Sewerage Co S.A. (ATSE:EYAPS)	ATSE:EYAPS	Greece	76.80	192.70
Thu Duc Water Supply Joint Stock Company (HOSE:TDW)	HOSE:TDW	Vietnam	21.13	8.80
TTW Public Company Limited (SET:TTW)	SET:TTW	Thailand	201.40	1,830.10
United Utilities Group PLC (LSE:UU.)	LSE:UU.	United Kingdom	2,393.80	8,867.70
Universal Technologies Holdings Limited (SEHK:1026)	SEHK:1026	China	34.54	148.32
Watlington Waterworks Limited (BER:WWW.BH)	BER:WWW.BH	Bermuda	11.99	26.66
WHA Utilities and Power Public Company Limited (SET:WHAUP)	SET:WHAUP	Thailand	59.60	731.60
Wodkan Przedsiebiorstwo Wodociagów i Kanalizacji S.A. (WSE:WOD)	WSE:WOD	Poland	9.82	8.36
Wuhan Sanzhen Industry Holding Co.,Ltd (SHSE:600168)	SHSE:600168	China	225.70	710.50
Yunnan Water Investment Co., Limited (SEHK:6839)	SEHK:6839	China	912.90	255.10
Zhongshan Public Utilities Group Co.,Ltd. (SZSE:000685)	SZSE:000685	China	300.10	1,821.80

Some are big, some are small. Many are in China or the ASEAN. But in every case, both Manila Water and Maynilad's Rates of Return tended to gravitate to the upper end of the spectrum, be it globally, Asia-wide, or in Southeast Asia and in every category of return. Manila Water's returns are highlighted in orange while Maynilad's are highlighted in yellow.

Global Returns:

Asian Returns:

Southeast Asian Returns:

Statistical Rankings

Both Manila Water's and Maynilad's Rates of Return are far above average on a global, Asian-wide, and Southeast Asian-wide basis.

Manila Water's Rates of Return are above the 75th percentile (meaning only 25% of the companies have higher returns) globally and in Southeast Asia in terms of ROA and ROC. Asia-wide, its returns are at least in the 83rd percentile in all categories of returns.

Maynilad's Rates of Return rank above the 90th percentile in all geographic categories and in all categories of return except one: global Return on Common Equity (ROCE) - where it ranks in the 65th percentile.

Conclusion:

The impending contract renegotiations and removal of the provisions deemed "onerous" by the Duterte administration will inevitably result in a much slower growth in water tariffs and higher costs for the water concessionaires. They will no longer be able to pass on their income tax burdens to the consumers, they will have to build expensive water treatment plants, and they will no longer enjoy uncontested and automatic rate increases.

All this will serve to lower their rates of return and align them with international averages. The returns of Manila Water and Maynilad will closely resemble that of a regular water utility stock: safe but boring.

Source: Capital IQ, www.edge.pse.com.ph

Why Do Filipinos Love Duterte So Much? Because Income Growth was Fastest Among the Poorer Classes!

2020-01-27T20:30:00.000-05:00

Incomes grew across the board.

But incomes grew fastest among the lower classes. The lowest decile gained the most, while the highest income decile grew the least.

The ratio of the highest income decile to the lowest income decile has narrowed, reducing income inequality further.

Source: FIES Philippines, 2012, 2015, and 2018, Philippine Statistical Authority

In 2018, Even Ayala Land Had a Less Than Stellar Year

2019-11-28T20:30:00.000-05:00

Last time we looked at Ayala Land, its Installment Contract Receivables (ICRs) problem had gotten worse and not better.

In 2018, things are looking better - much better. A lot of its ICRs were sold off to affiliates like BPI Family Bank and the overall level of ICRs have gone down substantially.

But credit quality remains a problem.

As a percentage of the remaining ICRs, total past due and impaired ICRs has not changed much.

Ayala Land's Real Estate Receivables Problem Has Gotten Worse, Not Better

The Philippine Real Estate Bubble Has Also Burst For... Ayala Land!

Hong Kong Real Estate Prices Have Budged - But Only A Little - as of 3rd Qtr. 2019

2019-11-19T20:30:00.000-05:00

On a monthly basis, Hong Kong Real Estate Prices have started showing some declines. But the declines are minimal. They have not reached correction levels of 10% or more.

But on a year-on-year basis, prices have merely flattened.

Even by class, prices have flattened.

And the most expensive class, Class E (>160 sq. m.), has declined the most but have not reached the magnitudes of past declines.

Hong Kong House Prices Haven't Budged - Yet

How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past.

How Crazy is the Philippine Real Estate Market? Prices have Climbed Almost 50% Since Duterte Took Office!

2019-11-13T20:30:00.000-05:00

Philippine house prices have gone parabolic. They have climbed 49.30% since President Duterte took office in the second half of 2016. Year-on-year price increase as of the 3rd Qtr 2019 is an astounding 21.20%. Prices have outpaced inflation by a wide margin, 139.88 percentage points.

How long can this go on? Not long, considering sales volumes dropped by more than 25% in 2018, indicating that more and more people cannot afford the high price levels.

The Not So Obvious Real Estate Bubbles

2019-11-05T20:30:00.000-05:00

We all know about the high price of real estate in San Francisco and Los Angeles. Both metro areas boast one of the highest Median Home Price to Median Income ratios in the country. In 2018, the ratio for Los Angeles was an eye-watering 9.44 times median income. San Francisco was not too far behind with a ratio of 9.24 times median income. The sheer unaffordability of many homes has spawned a crisis of homelessness in those cities. Even tech workers, whose high wages have pushed up real estate prices in Silicon Valley, are forced to sleep in their cars and vans.

Yet those real estate markets are not technically in a bubble, and their ratios are just a shade over one standard deviation of their historical house price to income ratios. For instance, LA's historical ratio for the past 29 years has been at a lofty 7.11 times income, not too far from the current 9.44 times income. The same holds true for San Francisco. Its historical average is 7.57 versus the current 9.24 times income.

Even the global cities of Miami and New York are well within their historical averages. Miami's affordability ratio for 2018 was 6.06 times income - not far from its historical average of 4.71. New York's affordability ratio for 2018 was 5.25 times income - a shade below its historical average of 5.26 times income.

Median House Price to Median Income Ratios


Metropolitan Area	2018	Mean	Std Dev	Z Score
Los Angeles-Long Beach-Anaheim, CA	9.44	7.11	2.14	1.09
San Francisco-Oakland-Hayward, CA	9.24	7.57	1.65	1.01
Miami-Fort Lauderdale-West Palm Beach, FL	6.06	4.71	1.54	0.88
New York-Newark-Jersey City, NY-NJ-PA	5.25	5.26	1.17	-0.01

So where are the bubbilicious markets? Where have home prices strayed very far from their historical affordability ratios? Does Midland, TX come to mind? How about Lubbock, TX? Birmingham, AL? All these places had affordability ratios of less than 4 times income in 2018 - below the US national average of 4.13 times income. But all are solidly in bubble land with affordability ratios more than 2 times their historical averages since 1990.

Midland, TX ratio stood at 3.08 in 2018 - almost three standard deviations away from its historical mean of just 2.33 times income. The probability of the ratio going higher is just 0.17%. Lubbock's ratio of 3.03 times income in 2018 is 2.58 standard deviations away from its historical mean of just 2.59 times income, giving an upside probability of 0.49%. Birmingham, AL's upside is slightly better 0.64% because its 2018 affordability ratio of 3.86 times income is 2.49 standard deviations away from its historical mean of 3.34 times income.

According to data tabulated by Harvard University's Joint Center for Housing Studies, 37 metro areas out of 382 metros are in bubble markets:

None of them, with the exception of San Jose, CA of Silicon Valley, are in obvious real estate bubbles.

Will their affordability ratios normalize or have they reached a permanently higher plateau? Only time will tell. But if they do, the results can be just as catastrophic for the homeowners.

Only three metro areas out of 382 are in a depression. Their affordability ratios in 2018 were way below their historical mean:

Cape Girardeau, MO
Beckley, WV
Decatur, IL

The upside probabilities for these areas? More than 98%.

Source: State of the Nation's Housing, Joint Center for Housing Studies, Harvard University

Who Are the Missing American Workers?

2019-10-15T20:30:00.000-04:00

Last year, we estimated that there were almost 8 million workers missing from the labor force. Because of job growth, that number is down slightly to 7.4 million.

With the exception of DC and MA, most states have not recovered their pre-recession Labor Force Participation Rates (LFPR).

Prime Age Workers (those aged 25 to 54) are within a hair's breadth of their pre-recession LFPRs, indicating that labor markets may start to tighten very soon. However, wage inflation may be muted for the time being. Why? There are huge pools of labor waiting to take up the slack, particularly in the 20-24 and teenage (16 to 19) age groups. Their LFPRs are still significantly below their pre-recession peaks. The oldest age bracket (55+) actually have a higher participation rates post-recession than pre-recession, indicating that many of them are not ready to retire and/or are working part-time jobs. All these factors serve to suppress wage inflation.

In terms of absolute numbers, there are at least 1.5 million young workers missing from the labor force, plus another 1.3 million older workers hanging on to the labor force.

It would take several more years of sustained job growth to reduce this labor slack.

US Home Prices Have Softened Somewhat. How Much Lower Should They Go?

2019-10-08T20:30:00.000-04:00

Prices of new homes sold in the US have softened somewhat.

As of August 2019, the average prices of new homes sold in the US have dropped 2.2%, from $323,125 in 2018 to just $316,075 today. Incomes have also risen. We estimate the median household income to be $65,074 in 2019, up 3.0% from $63,179 in 2018 and up 6.44% from $61,136 in 2019. As a result, the house price to income ratio now stands at an affordable 4.86 times income, down from its recent peak of 5.26 times income in 2017.

But house prices are still a long way from affordable. The current house price to income ratio is more than one standard deviation above the long-term mean of 4.23. The same holds true for existing homes and all homes both new and existing.

Home Type	2019 Median Sales Price	2019 Median Household Income (Estimated)	2019 House Price to Income Ratio (HPI)	Mean House Price to Income Ratio (Mean HPI)
New Homes	$316,075	$65,074	4.86	4.23
Existing Homes	$268,513	$65,074	4.13	3.73
New and Existing Homes (Weighted Average)	$273,859	$65,074	4.21	3.81

So how much further do home prices have to fall to become affordable at current incomes? About 9.4% for all homes, from the current price of $273,859 to $248,160. The drop in new home prices will have to be even steeper: almost 13%.

Conversely, if home prices remain flat, how much further do incomes have to rise to reach their long-term affordability? For all homes, this is around 10.4%. To afford a new home, incomes have to rise 14.9%.

If incomes rise by the current rate of 3.0% a year, it will take 3-5 years before home prices hit their long-term affordability ratios. If prices continue to drop at the current rate of just 2.0% a year, it will take much longer: 5-7 years.

We could be in for a long wait.

The Case of 8990 Holdings Inc.'s Disappearing Past Due Installment Contract Receivables Gets Curiouser and Curiouser

2019-10-02T20:30:00.000-04:00

In 2014, we first broached the idea that 8990's past due installment contract receivables (ICRs) problem was about to explode. Since then, past due and/or impaired ICRs ballooned from just 0.32% of total ICRs in 2013 to a peak of 18.85% of total ICRs in 2015. Since then, the company has managed to trim its receivables problem to 10.12% in 2016 and to just 2.40% in 2017. In 2018, the receivables problem worsened, almost doubling to 4.67% of total ICRs.

Total ICRs are also down significantly since 2017. In 2018, ICRs were just Php 17.6 billion, down almost 20% from Php 21.2 billion in 2017.

Reduced Disclosure

But the company failed to provide an aging analysis of its past due but not impaired ICRs for 2018.

Level 3 Assets

It also decided to emulate Vista Land by classifying almost all of its ICRs as Level 3 Assets. Beginning in 2017, it classified Php 19.9 billion in 2017 and Php 16.1 billion ICRs in 2018 as Level 3.

What is meant by Level 3?

According to its Fair Value Hierarchy, 8990's Level 3 Assets are assets in which the inputs for those assets are not based on observable market data. The inputs for Level 1 Assets are market prices for those assets. The inputs for Level 2 Assets are more indirect. The exact definitions are as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or financial
liabilities that an entity can access at the measurement date;

Level 2: inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from
prices); and,

Level 3: inputs for the asset or liability that are not based on observable market data
(unobservable inputs).

Now what exactly is an unobservable input to an ICRs of 8990? ICRs are essentially a loan from the developer (8990 Holdings) to the buyer so that the buyer can purchase the residential unit from the developer. The ICR is collateralized by the title to the property itself and is held by the developer until the ICR is paid off by the buyer. All the inputs are observable: the amount of the ICR, the monthly installment, the imputed interest rate, etc. The ICRs have to be simple enough for the buyer to understand what he/she is buying. Otherwise, if the ICRs are structured in a complicated fashion, the buyer will not buy the property. 8990 Holdings customers are simple end-users. They buy the homes they will live in. And most are not financially sophisticated buyers. So valuing the ICRs is not rocket science. The ICRs should be classified as Level 1. All of them.

Dearborn Resources Holdings, Inc.

In early 2018, 8990 Holdings sold a huge chunk of its ICRs to an entity called Dearborn Resources and Holdings, Inc. (Dearborn). The sale was without recourse. But the sale was much more complicated than a simple transaction. From 8990's 2018 Annual Report, we get this tidbit:

"On January 29, 2018, the Group entered into an agreement with Dearborn Resources and Holdings, Inc. (Dearborn) to sell its contracts-to-sell (CTS), with a total face value or principal amount of up to P10.0 billion, without recourse. Subsequent to the sale of the CTS, Dearborn shall be primarily responsible for servicing, administrating, and collecting these receivables. On the same date, the Group was appointed as the sub-servicer and the remarketing agent of Dearborn. Total amount of CTS sold to Dearborn in 2018 is P10.0 billion. The related receivable arising from this transaction amounting to P165.5 million is presented as part of Other receivables as at December 31, 2018.

On December 29, 2017, a loan facility agreement between Dearborn and certain lenders was executed to provide a loan facility in the aggregate principal amount of P1.4 billion for the purpose of partially financing Dearborn’s acquisition of certain CTS of the Group. Under the loan facility agreement, the Parent Company also committed to lend Dearborn the principal amount of up to but not in excess of P300.0 million which bears 16% interest per annum, payable monthly. The loan granted under the facility agreement is unsecured and has a term of five years counting from the date of initial drawdown. However, the principal amount of the loan and any related accrued interest will be due and demandable in the event of default. As of December 31, 2018, the Parent Company has already extended P314.0 million financing to Dearborn. Interest earned and received from this loan receivable amounted to P16.2 million, which is presented as part of Interest income under Other Operating Income in the 2018 consolidated statement of profit or loss (see Note 23.1)."

This disclosure raises a lot of questions:

What is Dearborn Resources Holdings, Inc.? A firm with the ability to buy ICRS with a total face value of Php 10 billion has to be a substantially well capitalized firm. Is it a financial firm, a vulture fund, a subsidiary of a universal bank? It seems to have no website, no listed owners. It's an unknown entity.
Were the receivables sold at a loss? How much cash did 8990 actually receive on the sale? The face value is Php 10.0 billion and the remaining receivable from Dearborn is Php 165.5 million. Maybe I'm not reading this correctly but the step-by-step mechanics of the transaction are not clear.
Is Dearborn related to 8990? Do or did they have common stockholders?
Why is 8990 lending Php 300.0 million to Dearborn on an unsecured basis if this is an arm-length transaction with a completely independent entity? 8990's management would not lend Dearborn Php 300.0 million unless they knew the Dearborn and its management well and they have had an existing relationship with that firm.

The more I look at it, the more Dearborn looks like an off-balance sheet vehicle designed to take problematic ICRs off 8990's books. It's an SPV (Special Purpose Vehicle) used by 8990 to defer or delay the recognition of losses on its ICRs. Such SPVs were used by a lot of Universal Banks to clean their balance sheets in the 2000s. (See BSP's Ampaw Accounting System). And just like those banks, the value of those ICRs could be "ampaw" or puffed up.

Read:

Has the Philippine Real Estate Bubble Already Burst?

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)

While Philippine House Prices Rose Sharply in 2018, Sales Volumes Fell. Is this the Start of the Real Estate Crash?

2019-10-01T20:30:00.000-04:00

In a classic technical analysis indicator, Philippine Home Prices rose by 15.40% in 2018 while sales volumes fell by a startling 25.55% over the previous year, indicating that fewer and fewer people could afford the higher prices.

Despite this, House Prices, at least in the Makati CBD, continued to rise even further, by 10.07% as of the second quarter of 2019.

Today, the BSP reported that its Residential Real Estate Price Index (RREPI) fell by 2.08% on a Philippine-wide basis and across all types. Prices in areas outside the National Capital Region (Ex-NCR) fell while real estate prices in the National Capital Region (NCR) stayed about flat.

Although this is only a slowdown and a very marginal one at that, it could lead to a crash as the market clears.

This is Even Nuttier! When's the Crash? Philippine Home Prices Have Gone Even More Parabolic!

Australia Has Been Deleveraging Since Year-End 2016

2019-09-24T20:30:00.000-04:00

Australia has been deleveraging since year-end 2016. The gap between Credit -to-GDP Growth and its long-term trend has been growing wider ever since. Last time this happened was in March 2010 and it remained that way for over five years - June 2015.

Source: https://www.bis.org/statistics/c_gaps.htmg

Unemployment is Low But Wage Inflation is Low Too. Which States Have the Tightest Labor Markets?

2019-09-21T20:30:00.000-04:00

Last month, the unemployment rate was an astounding 3.7% - a rate not seen since September 1969.

But for most of the last decade, wage inflation has been low to almost non-existent. Only recently have wages started to creep up.

One reason? Both the Civilian Labor Force Participation Rates (LFPR) and Civilian Employment to Population Ratios (EPR) have yet to reach their pre-recession peak in 2007 and their absolute peak in 2000, during the height of the dotcom bubble.

The gaps are substantial, involving millions of missing workers. For instance, if last month's LFPR were 65.70% (2007 pre-recession peak) instead of an actual 63.20%, there would be 6.5 million more workers counted in the labor force today.

If we had posted an EPR of 63.00% (2007 peak) instead of the current 60.90%, there would be 5.6 million more workers employed today.

Instead, all those workers have gone missing from the labor force. One reason why wage inflation has not been stronger is that all these missing workers are slowly starting to come back to the labor force and kept a lid on wage inflation.

But that is starting to change. Some states have reached, if not surpassed, their pre-recession LFPRs and EPRs and are starting to experience a shortage of workers.Where are those shortages? DC and Massachussets come to mind (in green). Thirteen other states (in yellow) are getting close, with less than 2% of their civilian non-institutional populations (CINP) labeled as missing. Sadly, five states (in red) have more than 5% of their workers categorized as missing from the labor force.

In terms of EPR, DC and MA have actual shortages (in green) while six other states have less than 2% of their CINPs categorized as missing (in yellow). Seven states have more than 5% of their CINPs categorized as missing.

If you add the percentage of missing workers to the state's unemployment rate, we get a closer picture of where the true unemployment rates lie. Again, DC and MA (in green) have very low true unemployment rates, while four other states (in yellow) have true unemployment rates of less than 5%. Seven states (in red) have true unemployment rates of 12% or more of their CINPs.

Both China and Hong Kong Just Started Deleveraging - Last Year

2019-09-16T20:30:00.000-04:00

Credit to GDP growth has dipped below the trendline for both countries.

Source:
https://www.bis.org/statistics/c_gaps.htm

This is Even Nuttier! When's the Crash? Philippine Home Prices Have Gone Even More Parabolic!

2019-09-12T20:30:00.000-04:00

Philippine Home Prices have gone parabolic. Home prices are now 125.63% above their inflation-adjusted basis.

On a year-over-year basis, home prices have increased almost 20% year-on-year since the second quarter of 2018. Since the third quarter of 2016, home prices have climbed 43.39%. This pace is unsustainable and will not last.

Hong Kong House Prices Haven't Budged - Yet

2019-09-05T20:30:00.000-04:00

But the data is only up to the second quarter of 2019. And the protests only started on a massive scale in the middle of June 2019.

Source: Hong Kong Rating and Valuation Department

This is Nuts. When's the Crash? Philippine Home Prices Have Gone Parabolic!

2019-08-20T20:30:00.000-04:00

Philippine Home Prices have gone parabolic. Home prices are now 116.03% above their inflation-adjusted basis.

On a year-over-year basis, home prices have increased almost 19% since the first quarter of 2018. Since the third quarter of 2016, home prices have climbed 38%. This pace is unsustainable and will not last.

New Zealand Real Estate Market: Is it a Unicorn? Prices Keep Rising While Other Markets Fall

2019-08-13T20:30:00.000-04:00

House Prices in New Zealand continue to rise. In the first quarter of 2019, it rose 3.5% year-over-year.

This is in sharp contrast to its next door neighbor, Australia, where house prices in the first quarter of 2019 have dropped 7.7% year-over-year and are down 8.27% from their peak in the fourth quarter of 2017.

In real terms, New Zealand's uptrend in home prices seems to have accelerated and verges on the parabolic, vastly outpacing real disposable income.

The ratio of real house prices to real disposable income seems to have reached a permanently high plateau. The ratio is now 2.29 standard deviations from the mean of 76.82%, implying a probability of only 1.10% that the ratio will go even higher. In other words, it's firmly in bubble territory and seems to be staying there.