In The Headlines

Could China’s Bad Debt Trigger a Worldwide Slowdown?

Many economists are wondering just how high China’s bad loan levels have gotten. Amid a massive, five-year expansion in credit, and with the recent economic slowdown, the answer is becoming more important. One reason analysts are wondering is that official figures look too low to be credible. Even as China’s debt level has soared, with the ratio of private-sector credit to GDP rising from 104% in 2008 to 134% in 2012, China’s reported nonperforming-loan (NPL) ratio is only 1%—and that figure has changed little over the past few years.

The real situation is probably far scarier, according to a new report entitled China: How bad could bad loans get? that was recently released by consultancy Oxford Economics. More likely, China’s bad-debt ratio is somewhere between 10% and 20%, amounting to $1 trillion to $1.9 trillion, says the report’s author, senior economist Adam Slater.

“The estimated range is wide, reflecting considerable uncertainties,” writes Slater. “But even at the lower end of the range, the absolute size of NPLs would be very large—while the upper end of this range would suggest a bad asset problem comparable in scale to that seen in the wake of the U.S. subprime crisis.”

Slater calculated his somewhat alarming estimate by looking at China’s own experience with a rapid run-up in bad debt in the late 1990s, as well as by comparing it with ratios in other countries. For example, while China saw its credit-to-GDP ratio rise 27 percentage points from 1995 to 1999, its NPL ratio went up 13 percentage points over the same period. And by the early 2000s, the bad-debt ratio reached a high of almost 30%.

Meanwhile, China has experienced an even higher expansion of borrowing as a proportion of its total economy in recent years. “The fact that the reported NPL ratio has failed to increase in the wake of the credit expansion of 2009-13 is hard to understand given the experience of the 1990s,” he writes.

Slater also looked at a group of 33 countries that went through periods of credit booms followed by financial crises in the period from 1980 to 2008. Most of them saw nonperforming loans peak at levels far higher than China’s official levels now. Finland in the early 1990s and Greece in 2008, for example, had debt ratios around 15%, while Thailand and Malaysia reached levels twice that in the late 1990s. “Once again, this analysis suggests that China’s currently reported NPL ratio is abnormally low,” writes Slater.

If indeed China’s bad-debt ratio is now in the 10% to 20$ range, that has alarming ramifications. “NPLs on such a scale could be the trigger for a serious banking crisis in China, with major regional and global economic implications.” That, in turn, could produce a “Chinese GDP growth slump below 2% and world growth … as low as 1%,” he warns.

Patagonia Accessorizes with Food

Along with fleece coats and fishing vests, you can now buy your dinner at Patagonia. The eco-friendly, socially-conscious maker of active wear now sells $12 pouches of “responsibly-sourced” Wild Sockeye Salmon. Marketed as both delicious enough to serve at dinner parties and portable enough to eat while climbing Everest, the product is just the first course from a retailer that hopes to change the way people eat and ultimately the way food is produced.

Patagonia, which had $600 million in revenues in 2013, made its first foray into the food business in 2012 when it introduced wild salmon jerky. After early lessons learned, the company is entering the category in a more serious way this year. In June, the company will begin selling buffalo jerky, the dried meat of grass-fed, free-roaming bison from the Great Plains. And by the end of the year, Patagonia expects to have introduced a number of other, sustainably-sourced food products that will be sold beyond Patagonia, eventually in grocery stores.

The move into food may strike many as an unusual strategy for a retailer best known for durable outerwear, but Birgit Cameron, director of Patagonia Provisions, says it is a natural extension for the 42-year old company, which is known for transparency. “Our brand is about examining the supply chain of everything we do,” says Cameron. “Because that’s such a core part of everything we make, we felt we could apply this to other areas and take risk of going into a completely different world because that transparency is something that consumers are definitely wanting.”

Patagonia’s salmon, for example, is fished only from carefully-vetted fish runs with pure and sustainable wild salmon populations. Working with conservationists and biologists to identify such sources, Patagonia hopes to help reverse the damage that’s been done to the continent’s wild salmon stock through years of industrialization, commercial fishing, dam building and more. It also hopes to call attention to the issue in a way that will change industry and broader consumer habits. Patagonia also produced DamNation, a documentary that premiered at South by Southwest earlier this year to spread the message.

“We really want to have people start thinking about the supply chain—how things are made and how it effects our environment—so they really start making decisions based on that,” says Cameron. Patagonia has always been well ahead of America’s corporate social responsibility (CSR) curve. While many businesses have adopted CSR policies, Patagonia which was founded in 1972 by Yvon Chouinard, an environmentally-minded blacksmith and rock-climbing enthusiast, has operated by them for decades. On its website, Patagonia currently offers detailed information about its suppliers around the world, with the stated goal of reducing social and environmental impacts. In 2011, the company partnered with Wal-Mart to found the Sustainable Apparel Coalition.

Chouinard, whose unconventional business philosophy has been captured in his books Let My People Go Surfing and The Responsible Company, is very much the driver of these efforts and Patagonia’s recent expansion into food. His interest in food pre-dates his interest in outdoor apparel, and in 2013 he opened Patagonia Provisions headquarters in Sausalito, CA because of the area’s reputation as an innovative and socially-conscious food center.

Yet, the brand’s food venture is no hobby project. Cameron says the company is building the business carefully and thoughtfully, both to inspire needed changes in the food industry and to make Patagonia Provisions profitable. She adds that the company has spent much time investigating like-minded partners and how to make the right product.

Sources:
1.http://www.businessweek.com/articles/2014-05-09/china-bad-debt-could-spark-global-growth-slump#r=nav-r-story – BusinessWeek
2.http://features.blogs.fortune.cnn.com/2014/04/09/more-than-jerky-patagonia-expands-in-food/?iid=EL – Fortune

The Good News Is . . .

• U.S. wholesale inventories rose more than expected in March, suggesting the restocking of goods by companies was probably less of a drag on first-quarter growth than initially thought. The Commerce Department said wholesale inventories increased 1.1% after rising by an upwardly revised 0.7% in February. Economists had expected wholesale stocks to rise 0.5% in March after a previously reported 0.5% gain in February. The government also reported that sales at wholesalers rose 1.4% in March after increasing 0.9% the prior month.

• Walt Disney Co., a leading diversified international family entertainment and media enterprise, reported earnings of $1.11 per share, an increase of 40.5% over year-ago earnings of $0.79. The firm’s earnings topped the consensus estimate of analysts by $0.15 The company reported that revenues rose to $11.6 billion, a 10.4% increase. Management attributed the company’s performance to strong performance to double digit growth in all of its segments including media networks, parks and resorts, studio entertainment, and consumer products.

• After an extended period of weakness, mortgage loan applications finally rose last week, led by a surge in applications to purchase a home. Total mortgage application volume rose 5.3% week-to-week on a seasonally-adjusted basis, according to the Mortgage Bankers Association (MBA). Refinance applications were up just 2%, but purchase applications jumped 9% to their highest level since January. Officials at the MBA indicated that the increase in purchase applications likely reflected the impact of somewhat lower mortgage rates as well as continued growth in the job market.

Sources:
1.http://www.cnbc.com/id/101658512 – CNBC
2.http://www.cnbc.com/id/18080780/ – CNBC
3.http://thewaltdisneycompany.com/sites/default/files/reports/q2-fy14-earnings.pdf – Walt Disney
4.http://blogs.marketwatch.com/capitolreport/2014/05/07/its-official-mortgage-applications-to-buy-have-outpaced-refis/ – MarketWatch
5.http://www.cnbc.com/id/101648399 – CNBC

Planning Tips

Tips for Paying Your Mortgage Off Faster

For most Americans, a home mortgage represents the biggest debt they have to manage. Paying off a mortgage early can generate substantial savings on the interest paid. Below are some tips to help you pay off your mortgage sooner.

Use your tax refund to pay down your mortgage – If you are a borrower with a house note, using a tax refund might be a good practice to help pay down your mortgage. Instead of splurging on new wheels or living room sets, homeowners might do well to earmark tax refunds for an additional principal payment on their mortgages. For the average taxpayer/homeowner who gets a refund, the amount might equal a couple of extra house payments a year.

Use your credit card rewards for mortgage payments – From vacations, to cash back, to prizes, it seems you can get almost anything nowadays as a reward for using your credit card. But you could also use those rewards to pay your mortgage off faster. Some banks offer this type of reward program. For example with the Home Rebate Card through Wells Fargo, you can earn 1% cash back on all of your purchases, and that money is automatically transferred to your mortgage principal each month. Of course you could have the same end result by simply adding the cash back amount from your existing rewards program to your mortgage principal each month.

Make large mortgage payments early on – To pay down a mortgage faster, it might be a good to get a speedy start right out of the gate. With a 30-year mortgage, it takes a good number of years before the emphasis of the mortgage payments shifts from paying the interest to paying the principal balance. Thus, one of the best strategies for paying down the loan involves making larger payments from the beginning. This can be an especially good strategy for those who have extra income, and have low expenses. If you do have the capability, try applying funds toward the principal as early as possible. In this regard, new homebuyers or people transitioning into a new home loan should consider front-loading principal payments to get ahead.

Split up your monthly payments – Breaking up your monthly loan payments is a little-known strategy that can help you pay off your loan faster. Making multiple payments each month does save a little bit of interest and time on your payments because you are technically borrowing less money on a daily basis and your interest is lower. For example, let’s say your monthly mortgage payment is $2,000. Instead of paying $2,000 each month though, you could pay $1,000 every 14 days. If you pay every 14 days, you are making 26 (and a half) payments or giving the bank two extra payments a year. That equals one extra monthly payment per year, and that will help you pay your mortgage down faster.

Increase your monthly mortgage payments – Refinancing is one way to shorten the term of your mortgage. However, that can involve substantial costs. Rather than refinancing into a shorter-term mortgage, simply write a bigger mortgage check each month on your own. This strategy offers a couple of key advantages over refinancing. First, it gives you the flexibility to pay extra toward your mortgage during months when you can afford it without forcing you into a higher mortgage payment every month. Second, you save the cost of refinancing, which can be significant, since your mortgage isn’t changing. Keep in mind, however, that you will not benefit from a lower interest rate like you probably would by refinancing from a 30-year to a 15-year mortgage.

Sources:
1.http://www.bankrate.com/finance/mortgages/4-ways-to-pay-off-your-mortgage-earlier-1.aspx – Bankrate
2.http://www.freecreditscore.com/blog/what-is-the-quickest-way-to-pay-off-a-mortgage/ – FreeCreditScor.com
3.https://homes.yahoo.com/news/ways-to-pay-mortgage-fast-184808566.html – Yahoo! Finance
4.http://www.smithcraine.com/manageyourmortgage – Smith-Chaine Real Estate Financing
5.http://www.allbusiness.com/pay-off-mortgage-loan-faster/16672667-1.html – AllBusiness.com
6.http://money.msn.com/home-loans/4-ways-to-pay-off-your-mortgage-early – MSN Money

Please don’t hesitate to give us a call if you need help with any component of your financial planning.