Further reading: Survive until 2025, the Chinese economic black hole and RTX in trouble
Plus, most shorted stocks, black hole videos, and a new crisis in Syria
Summer is finally over (though we might get an India late summer this week), which means we’re back to the thrice-weekly letters. Please note, though, that I am away, in lovely Venice, for the week commencing Monday, September 30th, and there will be no letters that week.
Who’s shorting who in the London market: New analysis from GraniteShares, a global issuer of Exchange Traded Products (ETPs) with more than $7 billion under management, reveals that on 1 September 2024, Petrofac was the most shorted UK-listed company. The international energy services company had 8.69% of its stocks held short by five investment firms, with Astaris Capital Management LLP holding the largest position at 2.51%. Diversified Energy Company was the second most shorted company with 7.84% of its stocks held short by eight fund managers. This was followed by Ocado Group and Burberry Group with 6.18% and 6.06% of the retailers’ stock held short by five and four fund managers, respectively. The table shows the largest ten short positions in companies that are listed and trading on the London Stock Exchange. The analysis also revealed GLG Partners LP held the highest number of short positions on UK listed companies of any investment firms, with 40 active shorts. This was followed by Marshall Wace LLP, which held 32 active short positions.
Source: London Stock Exchange, updated on September 1, 2024
Prize for most original new exchange-traded fund - the Employee Happiness ETF. Irrational Capital ETF (HAPI), over in the US has launched an exchange traded fund that “places a unique emphasis on employee happiness as a driver of company performance. HAPI has outperformed the S&P 500 year-to-date, demonstrating that firms with high employee satisfaction often see stronger financial outcomes. By selecting companies that prioritize employee well-being, HAPI offers a distinctive investment strategy that aligns with both social and financial returns.”
Super tight US elections. The conservative US commentator Richard Hanania on general elections. “ Of the 51 presidential elections held in American history between 1796 and 1996, excluding the two where George Washington ran unopposed, 14 of them, or 27%, had a margin of less than 5 points between the candidates finishing first and second in the popular vote. Yet if you look at elections from 2000 to 2020, you see that five out of six, or 83%, were that close. Razor-thin election margins used to be rare, but now they’re the norm”.
Why anger might be useful politically. Social psychologist Rob Henderson reports on a “series of studies published last year led by Heather C. Lench at Texas A&M University found that angry people persisted longer and did better at solving word problems. Angry people also earned higher scores on a challenging video game and were more likely to sign a petition to stop student tuition increases. Furthermore, analyzing survey data from the 2016 and 2020 U.S. general elections, they found that a person’s anger at an opposing candidate’s potential win predicted greater likelihood that a person would vote in the next election. In a 2022 paper titled “How anger works” published in the journal Evolution and Human Behavior, a team of three psychologists explain that anger evolved to help people bargain for better treatment from others. ”
On Naming kids. This is from the excellent, history-oriented conservative columnist Ed West on naming kids. “In Britain there are no more Garys or Nigels, but in 2022 there were 28 newborns called Khaleesi, 26 Theons and 5 Daenerys, among the many Game of Thrones-inspired names. / women named Jill and Lynn earn about $20,000 more than women named Sierra and Breanna, and Jims and Toms have a similar advantage over men called ‘Dillon’ or ‘Johnathan’.”
Net zero needs more metals—but less extraction—from the Earth. The total amount of metals needed for the energy transition is far smaller than the total weight of fossil fuels we burn away each year. The website Fix the News reports that alongside the primary energy fallacy, this is the thing they wish more people understood about clean energy. “Renewables don't just stop climate change, they cut planetary destruction from fossil fuels—500 times over. Bloomberg Welcome to the multi-use, renewable, and recycled energy system of the future, where the world traps solar and wind power with metals that are used again and again. See that black bar? That's the total amount of coal we dig up EACH YEAR. The bar below it shows all the stuff we need to dig up to get to net zero between 2022 and 2050.”
New records for clean energy in the United Kingdom . More than 130 wind, solar, and tidal energy projects representing 9.6 GW secured funding in UK’s latest auction for new renewable capacity, following changes introduced by the new government. This comes off the back of Great Britain’s 'greenest ever summer', after growing numbers of wind and solar farms cut the need for fossil gas power plants to fresh lows
Worth watching
Black Hole TV. “We want to make dynamical, moving, living, breathing, movies of black holes,” ngEHT leader Shep Doeleman tells Inverse. In 2019, the EHT team, which includes hundreds of “black belt engineers” (as Doeleman describes them), published the first-ever image of a black hole — a snapshot of the churning supermassive black hole called M87*. Three years later, in 2022, EHT photographed another supermassive black hole, this one at the heart of our own Milky Way Galaxy.
Animated background film :
Final film:
Drugs and the Arms technology race
According to Dave Vasquez of the consulting firm StratComms, there’s a new tech-driven arms race going on in Latin America as the big drug gangs up the ‘ante’. The US military is fighting back, though….
“Just a year ago, cocaine production hit record highs, prompting a U.S. official to tell the New York Times in July that we’re now “seeing production at levels that Pablo Escobar dreamed about. You go to coca fields, and it’s like standing in a cornfield in Iowa — you can’t see the end.” As cartels deploy more of their wealth and knowhow to adapt new technology to elude authorities, a technological arms race is taking shape that raises questions about the need for clear policy and capable partnerships. The deployment of new technology such as Unmanned Surface Vessels (USVs) in the Caribbean Sea is the latest chapter in a decades long battle against cartels – and raises bigger questions.
The U.S. 4th Fleet and U.S. 5th Fleet are leading the Navy in pioneering use of drone technology in their respective areas of operation. While 5th Fleet is adapting new technologies for operations in the Red Sea and in the Persian Gulf, 4th fleet is zeroing in on counter-trafficking operations in the waters around Central and South America. The cartels are rapidly moving to set up operations at ports relatively close to the world’s top cocaine production centers - Colombia, Peru and Bolivia - to traffic their product out by sea. Concurrently, the Navy’s Task Force 59, which was developed to operationalize and implement the best of new tech in our military, reached full operational capability in January of last year. Key leaders have signaled a remarkable shift “beyond surveillance” and into more focused operations. Today, the 4th fleet AOR is becoming the operational zone for new concepts and technology.
“It’s no secret today’s cartels are well financed, well manned and well equipped – over 1,000 drones per month near the Mexican border making their way into U.S. airspace, according to testimony by General Gregory M. Guillot. How advanced are they? The U.S. Marine Corps is now modeling new submersible drones inspired by “narco subs.” These days, 80% of drugs smuggled into the U.S. from Mexico traveled through a maritime route - according to recent reports. Some 30% is coming in on the cartels’ own submarines which have been caught carrying as much as 7.5 tons of product onboard.
More HERE
Property “Survive until 25”
The Wall Street Journal, recently ran a cracking article about the great known unknown lurking in the near distance (think tip of iceberg stuff) , which freaks out every banker I talk to: the huge weight of underperforming US (and UK) office and general real estate assets. If you tell the banks to pull the loans, you’ll precipitate an avalanche of distressed selling, pushing valuations even lower. But if you keep waiting, you eventually have to refinance at punishingly high interest rates – and borrowers walk away and hand back the keys. The magic ingredient is to …wait for it … cut interest rates.
Cue the WSJ article, which suggests that many landlords are hanging
“……onto buildings by their fingernails and praying for rate cuts soon. While it is well understood that many offices are a lost cause, apartment loans are in surprisingly bad shape, too. More than $40 billion of office loans were in distress at the end of the second quarter based on data from MSCI, which is around three times the value of distressed apartment loans. But the pool of apartment mortgages that could get into difficulty in the future is larger—$80.95 billion are at risk of distress, compared with $66.87 billion for offices. These loans are flashing amber because occupancy rates are falling or the income generated by the buildings is barely enough to meet interest payments, says Alexis Maltin, a vice president at MSCI Research. “
“One of the rockiest corners of the real-estate lending market is a niche product that apartment flippers gorged on during the pandemic. The distress rate on commercial real-estate collateralized loan obligations, or CRE CLOs, reached 10.8% in July, data released by CRED iQ on Monday show. … There is around $75 billion of CRE CLO debt outstanding, so it is a small part of overall lending. The debt is riskier than commercial mortgage-backed securities or bank mortgages, as they are floating-rate bridge loans for properties that need to be renovated before they can be leased out. As such, there is more uncertainty about where the rental income will ultimately settle and often a dose of wishful thinking in the loan underwriting. Speculative property investors borrowed heavily from this part of the market during the pandemic to buy tired apartment blocks, particularly in the Sunbelt. Their plan was to fix them up, raise the rents and quickly flip the buildings for profit. CRE CLO loan issuance hit a record in 2021 at $45.4 billion when debt costs were exceptionally low and property valuations were at their peak.
“As most CLO loans are for three years, this vintage is now maturing. Interest-rate cuts alone won’t bail out all these owners, as debt costs would need to fall very sharply to give them meaningful relief: In 2021, the secured overnight financing rate, which is typically used to price these floating-rate loans, was around 0.05% compared with 5.33% today. And the properties aren’t bringing in as much cash as hoped. Strip out the impact of costlier debt and 46% of CRE CLO loans still aren’t generating the net operating income that was baked into the loan underwriting, based on an analysis by CRED iQ’s Chief Executive Officer Michael Haas. Rent growth forecasts were too optimistic, and operating costs such as insurance have shot up. The apartment market has also become oversupplied. In 2024, 440,000 new units will be completed, pushing up vacancy rates and leaving rents flat at best in many markets … Issuers of the CLOs are first on the hook for losses. To encourage sensible lending and avoid a repeat of what happened during the 2008-09 global financial crisis, when securitized subprime mortgages scorched investors, CLO originators keep some loan exposure on their own books, usually the riskiest tranches. Holders of the AAA-rated tranches of these CLOs look insulated though, because of how many others are in line for losses ahead of them. The heaviest issuers of CRE CLOs in recent years include private lenders MF1 and Benefit Street Partners. Listed players Ready Capital and Arbor Realty Trust also lent billions and have attracted short sellers—38% of Arbor’s stock is on loan, a proxy for short interest. … A recession would be the final straw for some landlords. Consumers are showing signs of stress, with credit-card delinquencies at their highest levels in more than a decade. A tapped-out consumer doesn’t bode well for apartment owners that are waiting for the first opportunity to raise rents.
You can read Carol Ryan’s excellent article in the WSJ
There’s a China-Shaped Hole in the Global Economy
Sticking with the Wall Street Journal, I also heartily recommend a fantastic primer by the excellent Greg Ip on why China’s low-consuming, high-investing economy guarantees conflict with other countries.
“China’s economy is unusual. Whereas consumers contribute 50% to 75% of gross domestic product in other major economies, in China they account for 40%. Investment, such as in property, infrastructure and factories, and exports provide most of the rest. Lately, that low consumption has become a headwind to China’s growth because property investment, once a major component of demand, has collapsed. This isn’t just a problem for China; it’s a problem for the whole world. What Chinese companies can’t sell to Chinese consumers, they export. The result: an annual trade surplus in goods now of almost $900 billion, or 0.8% of global gross domestic product. That surplus effectively requires other countries to run trade deficits.
“China’s surplus, long a sore spot in the U.S., increasingly is one elsewhere, too. While China’s 12-month trade balance with the U.S. has risen by $49 billion since 2019, it’s up $72 billion with the European Union, $74 billion with Japan and Asia’s newly industrialized economies, and about $240 billion with the rest of the world, according to data compiled by Brad Setser of the Council on Foreign Relations. Logan Wright, head of China research at Rhodium Group, a U.S. research firm, said China accounts for just 13% of the world’s consumption but 28% of its investment. That investment only makes sense if China takes market share away from other countries, rendering their own manufacturing investment unviable, he said. “China’s growth model is dependent at this point on a more confrontational approach with the rest of the world,” he said.
“Chinese consumption is lower than in other countries at comparable stages of development, orthe U.S. now. …..While many developing countries relied on investment and exports to fuel early growth, China is an outlier for how low its consumption is, and its sheer size. In a report, Rhodium estimates that if China’s consumption share equalled that of the European Union or Japan, its annual household spending would be $9 trillion instead of $6.7 trillion. That $2.3 trillion difference—roughly the GDP of Italy—is equal to a 2% hole in global demand.
The sources of this underconsumption are deeply embedded in both China’s fiscal systems and its policy choices. Chinese incomes are highly unequal, and because the rich spend less of their income than the poor, this automatically depresses consumption. Rhodium cites data that says the top 10% of households had 69% of total savings, while a third had negative saving rates.
“Other countries address such disparities by taxing the rich more heavily and boosting the spending power of lower and middle classes through cash transfers, and public health and education. China does much less of this. Just 8% of its tax revenue comes from personal income taxes, compared with 38% from value-added taxes, similar to sales taxes, which fall much more heavily on lower-income families, Rhodium estimates. China also spends less on health and education than major market economies, forcing poor and middle-income families to spend more of their disposable income on both. Several countries are taking action against China, including the use of tariffs.
“Meanwhile, suppressed wages and interest rates depress household income and spending while boosting the profits of state-owned enterprises. The limited taxing authority of local governments forces them to raise revenue by selling property for manufacturing and infrastructure, which further inflates investment. A decade ago top Chinese policymakers shared Western economists’ perspective that, at the macro level, China needed to rebalance away from investment to consumption. In 2013, the ruling Communist Party said growth would henceforth rely on market forces and consumers. President Xi Jinping ended up going in the opposite direction; consumption stayed weak while state control over the economy grew. He has replaced reformers with loyalists more preoccupied with sector-specific targets than overall growth.”
“Mexico, Chile, Indonesia and Turkey have all announced or said they are considering tariffs on China this year. This week, Canada announced steep new tariffs on Chinese electric vehicles, steel and aluminium, aligning with those already announced by the U.S. Yet the world thus far lacks a unified solution to Chinese underconsumption because China refuses to accept that it’s a problem. Xi has rejected fiscal support for households as “welfarism” that breeds laziness. In April, Treasury Secretary Janet Yellen complained that China’s “weak household consumption and business overinvestment” were threatening jobs in the U.S. The state news agency Xinhua called it a pretext for protectionism. Earlier this month the International Monetary Fund advised Beijing to spend 5.5% of GDP over four years buying up uncompleted homes. Beijing politely declined. With China dug in, more friction is sure to follow, and an already fragile world trading system will be stressed to its breaking point.
More HERE
What was RTX thinking !!
The RTX chalet at the 2023 Paris Air Show shows off both the rebranded company name and its older Raytheon Technologies title. (Aaron Mehta/Breaking Defense)
The contrarian military and security observer Stephen Bryen reports that the US State Department has fined the defence giant RTX for really rather big security lapses….
“The State Department has let RTX corporation off the hook on serious violations of US export control laws that resulted in the compromise of major US military systems. The transactions involved China, Iran and Russia among others and procurement of important parts for defense systems from China. Despite reporting more than 750 violations, RTX was fined $200 million, although the real fine is only half that amount. No other action was taken. Apparently no referrals were made to the Department of Justice. No estimate was made of damages to US security. The fine is just a number pulled out of a hat and is, in fact, a meaningless action given the severity of the violations. RTX revenues are around $69 billion annually.”
More HERE
A new uprising starts in Syria
When you thought it couldn’t get any worse in Syria, it has, according to Charles Lister in Foreign Policy magazine (via Adam Tooze). That means we now have an ever longer list of failed states in the region: Syria, Lebanon, Sudan, Libya, Yemen and Somalia.
“Six years ago, the Syrian regime conquered the southern province of Daraa, popularly known by millions of Syrians as the “cradle of the revolution.” That military victory represented a pivotal moment for Syrian President Bashar al-Assad. After all, it was the last time the regime captured a sizable swath of opposition territory, and in doing so in July 2018, its impunity was laid bare for all the world to see. On paper, Daraa had been designated a “de-escalation zone” after months of intensive international diplomacy in which the United States had played a central role. Despite that protected status, regime forces with heavy Russian military assistance proceeded to besiege Daraa; shell it to rubble; and after weeks of brutal violence, coerce it into surrendering.
“Washington’s most reliable umbrella of opposition allies, the Southern Front, was abandoned—advised to surrender by U.S. officials. Since then, the regime’s status has never been in question, as international actors have methodically backed away, fatigued and disinterested. Since that decisive moment, as far as many were concerned, Assad had won and Syria’s crisis was over, its effects contained. In truth, Assad never “won,” —he merely survived, thanks to the consistently strong support of Russia and Iran, but also to that international disengagement. In the years since, the world’s interest in working to resolve Syria’s debilitating crisis has completely evaporated. In Washington today, the mere suggestion of doing anything more on Syria in policymaking circles draws exasperated gasps and sarcastic laughs, not attention.
“And yet, in many ways, the situation in Syria is worse than it’s ever been. There are clear and sustained signs of an Islamic State recovery; a multibillion-dollar regime-linked international drugs trade; and ongoing geopolitical hostilities involving Israel, Iran, Turkey, Russia, and the United States. The regime’s grip over areas under its control has never looked more frail and unconvincing. Southern Syria offers a notable example. Six years after bombing the cradle of the revolution into submission, Assad’s rule in the south is fraying at the seams.”
Source: Foreign Policy