Thinking more about Ant and its clash with Chinese financial regulators. A couple months ago the BIS published a paper explicitly comparing Ant Group's lending vs. that of traditional Chinese banks.
Ant's use of more sophisticated underwriting tech (massive amounts of big data) reduces the importance of collateral in the financial system, since Ant is looking at things other than just 'how much your house/assets are worth.'
But it also reduces the role of collateral just by increasing Ant's certainty about lending (you only need collateral if you're uncertain about the outcome of the loan).
The conclusion in the paper is interesting. If collateral loses its importance in the financial system, then the central bank effectively loses a key component in how it influences the economy.
From the paper:
Obviously there are a lot of sources of potential tension between Ant and Beijing (payments, power struggles, even allocation issues!) but this strikes me as an interesting thought in light of the additional capital requirements reportedly being demanded by regulators.
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The U.S. ban on Tencent (WeChat) and Bytedance (TikTok) is a huge deal not because it changes things in the U.S., but because it potentially changes things *within* China.
It seems plausible that once the order comes into effect US companies operating within China won't be able to use WeChat, increasing the complexity of doing business by taking away access to the most common messaging platform. WeChat's pretty central to daily & business life.
A big question will be whether app sales within China also get affected. iOS and Android are the dominant platforms, which means Apple and Google could stop offering the WeChat app and its updates within China (this is more of a problem for iPhones given the App store model).
In today's newsletter, I wrote about how China's encouraging people to become street vendors to replace lost or reduced income during the economic crisis.
It's "gig economy" with Chinese characteristics.
The social campaign going along with this is pretty amazing. Here's an infographic teaching people to become vendors that's been running in a few provincial news sources:
And Tencent's QQ.com collecting all the famous business people who used to be street vendors.
Banking regulators trying to calibrate leverage ratios in real-time to allow banks to extend credit and refuel the economy without burning the whole place down:
Here's a thread of some older Odd Lots episodes @TheStalwart and I have made that are worth listening to right now.
Clearly we're in unprecedented times for markets, finance, the economy and society, but there are some consistent themes that start to emerge --->
First, the world is terrible right now. So listen to Arthur Demarest, an anthropologist who’s often been compared to India Jones, talk about why civilizations collapse (Yes, I think about this one a lot):
The recent market crash is certain to wind up in history books. Here’s @ScottNations walking us through what all the great market crashes in history have in common (he'll have to add a new chapter to his book!)
JPMorgan estimates there were around 300 investment-grade portfolio trades in the first half of 2019, about 40% higher than the number of such trades in the *whole* of 2018. (Portfolio trades in high-yield were roughly stable at 160).
As a reminder, portfolio trades are when investors/dealers agree to exchange a basket of bonds in one transaction. Unsurprisingly, this is growing in tandem with corporate bond ETFs.
MarketAxess talked about this in earnings call last week: "We will also be launching a portfolio trading solution to respond to both the recent growth in portfolio trading across the fixed income market and the growth of fixed income ETFs."
Let's talk about earnings quality and credit. 43% of syndicated loan deals featured Ebitda addbacks in the first half of this year. That's a record proportion, according to BAML. If you strip those addbacks out, Ebitda/Interest coverage levels on loans are the lowest since 2005.
(Let me tell you about my pet theory that Valeant's aggressive use of addbacks and debt financing to engineer artificial growth in a sluggish economic environment is actually representative of the entire market.)
(Ok here goes). First a recap. I think most people remember Valeant as the Canadian pharma company that expanded really rapidly by borrowing billions to fund mergers and acquisitions. Share prices soared and then began tanking in late 2015 as a number of issues came to light.