Broken Recycling Markets – Part I


For the past year my kids cluck disapprovingly whenever they see me drinking through a plastic straw and ask, “why do you hate turtles so much?” The connection, for those of you who don’t speak teen girl, is they are signaling to me their concern for unnecessary plastic waste, especially as it shows up dumped in our waterways and oceans, presumably hurting Tommy the Turtle (a fictional character I made up just now.)

Since plastic straws represent just 0.03% of American plastic waste that ends up in the ocean, according to a brief by Rachel Meidl of Rice University’s Baker institute for Public Policy, my kids’ concern is focused on the wrong thing. Because, you know, kids. 

On the other hand, there is a global financial and environment crisis going on in recyclables. In this column and a few to follow, I will describe what – beyond the plastic straw and Tommy the Turtle – we should know about that global crisis and its linkages to the complex financial markets of recycling. 

We tend to think of recycling as interesting to households who want to reduce carbon emissions and protest over-logging of the rainforest.

But another important way – maybe the more sophisticated way – of understanding recycling is to see it fundamentally as a commodities market. Professionals in the recycling industry operate their businesses in a sophisticated financial market for generating four physical commodities, which happen to be second-hand paper, metal, plastic and glass.

The old Chicago Mercantile Exchange

To the extent we think about commodities markets, we might conjure an image of aggressive guys in trading pits in the Chicago Mercantile Exchange shouting and signaling to each other as pork belly futures crash or soybeans soar, or maybe as quantitative traders at their computers bid up the price of West Texas Intermediate Crude following a drone attack on Saudi refineries. 

I’m less interested in a cartoon Tommy the Turtle than I am in the financial linkages between sophisticated commodities markets and the big municipal bin I set out on my curb once a week. 

The metal straw probably isn’t saving the planet. sksksksksksksksk

In speaking with experts in the past few weeks, I wanted to learn about how at the global and national level these commodity markets have evolved in recent years, and also at my household level what I’ve been missing when it comes to my bin. And also about the municipal contracts and programs that link my curbside bin to government revenue and then further link to global markets. In this column and a few to come, I’ll pass on what I’ve learned.

But first, the global market for recyclable commodities got a massive shock at the end of 2017, with the situation still evolving in September 2019.

China announced a new program called “National Sword” in 2017 in which it would not import 24 types of waste, including many mixed paper and plastic products, starting in March 2018. A further list of 16 more items, including many metals, will be banned from import by the end of 2019. This ban meant that a huge proportion of the recyclable commodity producers in the US and Europe suddenly lost their primary buyer. 

Mountains of Plastic

The China bans allow for the importation of “clean” plastics and metals, but ceased the importation of what people in the industry call contaminated commodities, or mixed materials. 

Even after the 2017 policy change, China remained open to highly pure or homogenous paper, plastics and metals, but not the mixed, dirty and hard to handle stuff it had previously bought from the United States and Europe.

Underlying this China ban is a first key lesson of the economics of the recycling industry: Demand, and prices, are highly driven by the purity of the commodity. 

Purity in this market means the homogenous consistency of one type of resource. If a recycler can cleanly separate any second-hand material – whether it be plastic, metal, paper, or even glass – industrial buyers will pay a premium for that commodity’s purity. 

Mixed materials by contrast, whether blended with other materials types or contaminated by non-recyclables or worse, go for the lowest prices, if they will be bought at all. By 2019 the tons of scrap plastic imported to China fell to less than 1% of 2017 levels. 

Imports of plastic waste from the US and Europe to Indonesia, Malaysia, Philippines, Thailand, and Vietnam briefly quadrupled in 2018, as plastic exporters scrambled to find alternatives to the China market. But those alternative Southeast Asian markets have proven unable to handle the volumes coming from the US and Europe. Recyclers in the US are now awash in secondary dirty plastic, with no market-based outlet for their commodity. Much of that is headed for landfills.

The price of products like cardboard and what the industry calls “mixed paper” has also plummeted. 

Recycling experts draw a straight line between the 2017 China ban and a fundamentally altered US municipal recycling market, compared to just two or three years ago. While not the only cause, the ban provided a major shock to the system. 

Some headline effects: 

US cities that used to earn a profit on their recycling programs a few years ago now lose money every month. Some cities have either cut back part of their programs already, or are considering cutting back on their programs. All cities will be forced to reckon with a greatly altered financial consequence of having a recycling program, since what used to help the bottom line now loses money.

Far more waste in the US is headed for landfills or the incinerator compared to just two years ago. 

In a subsequent column I’ll describe the specific financial effects on Texas cities like Houston and San Antonio and other cities in Texas.

Later, I’ll also describe all the things I’ve been doing wrong with my own recycling bin, and maybe you have been as well. 

When we get it wrong, we contaminate or reduce the value of the natural stream of secondary commodities our households produce. Millions are at stake for our city’s budgets, and billions for the country.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts

Recycling Part II – Commodity Market Price Drops (forthcoming)

Recycling Part III – Municipal Contract (forthcoming)

Recycling Part IV – Household Mistakes (forthcoming)


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100 Year Bonds In The Trump Era

The United States does not currently issue bonds with maturities longer than 30 years, but the idea of super long-dated national debt is back in the air. Long-dated, as in bonds due in 100 years. One reason 100-year bonds are kind of neat is that nobody alive right now ever needs to worry about paying the principal back!

Setting snark to the side (for just a moment), Treasury Secretary Steve Mnuchin, in an interview in December, appeared open to the idea of 50-year or 100-year bonds, floated by financial newspaper Barron’s back in November 2016.

Barron’s followed up in February with the report that Mnuchin asked his staff at the Treasury department to look into the pros and cons of 100-year debt.

100yr_bondsSome of the best reasons for the United States to issue 100-year bonds fit reasonable, prudential, debt-management principles. Other reasons facilitate wackier scenarios. I’ll describe both.

But first, who would buy 100-year bonds from the United States? Buyers are not typically individuals like you and me, but rather institutions that have to make payouts far in the future.

Barbara Mckenna, Managing Principal of Longfellow Investment Management Co, a Boston-based firm managing over $9 billion in assets, noted to me last week that buyers of ultra long-dated bonds tend to be pension funds and life insurance companies, institutions which need assets to match their liabilities, stretching into the future for many decades.

These were the buyers for Austria’s 70-year debt issued in late 2016 at a rate of 1.53 percent. Ireland and Belgium both issued 100-year bonds earlier in 2016 presumably to that type of buyer as well, both reportedly with a 2.3 percent coupon.

“Feed the ducks while they’re quacking,” we’d often say in my old bond salesman days, when we issued new debt. There’s an element of that to justify the US issuing 100-year bonds. Right now, the pension funds and insurance company ducks would happily quack for extremely long-dated US Treasuries, so we might as well satisfy their hunger.

The three most legitimate reasons for the US to issue ultra long-term debt are:

  1. To ease “rollover” risk,
  2. To fund ourselves at historically low rates, saving money, and
  3. To facilitate long-dated corporate bond issuance

First, if your country issues mostly short-term debt, as ours does, the “rollover” problem happens constantly. If you have, on average, more long-term debt including for example 100-year bonds, you’ve gone some way toward relieving your rollover problem.

Next, the cost-savings from long-term low rates could be significant. A few numbers can help put this into context.

The federal government currently owes approximately $19 trillion to all creditors, and paid $433 billion in interest on its debt last year.

The federal government pays 2.26 percent on all of its debts, as of March 31, 2017, an extraordinary low rate.

15 year ago, the average interest rate on long-dated bonds was 8.27 percent.

10 years ago, the average interest rate on long-dated bonds was 7.55 percent.

Right now a 100-year bond – depending on a variety of factors such as the size of issuance and the demand from investors – could cost something like the current rate on 30-year bonds, or approximately 3 percent per year. McKenna agreed with me that a 100-year bond “probably would not be dramatically different from a 30year bond in terms of yield.” It might cost the US government a bit more, although it also might cost less.

bond_yieldsWhile a 3 percent 100-year bond would represent a higher rate than the US currently pays on average over all, locking in that rate for a long-time probably offers big interest cost savings over the long run.

We’ve got close to $2 trillion in long-dated bonds outstanding currently, due between 10 and 30 years from now. To point out some simple math (albeit simple math with a lot of zeros involved) a 1 percent drop in the average interest rate on a trillion dollars in long-dated bonds saves $10 billion per year in interest payments.

The third reason for 100 year bonds – and this reason appeals more to bond nerds like me, concerned with smooth-functioning capital markets – is that private corporations can issue more long-dated debt if there are long-dated US Treasury bonds to compare them to. Bond traders really like corporate bonds to match the length of government bonds, as it makes hedging and trading those corporate bonds much easier.

So 100-year US Treasury bonds aren’t crazy, could be issued affordably, and offer some capital market advantages.

Now, you’ve been patient with me and my bond math, so let’s get a little crazy. For readers interested in historical bond trivia – and yes, I’m talking to both of you – ultra long-dated bonds have interesting ties to global catastrophes.

England issued perpetual bonds to finance itself during the Napoleonic Wars, and 100-year debt to finance itself during World War One.

I think of this global catastrophe and 100-year bonds because a time may indeed come in the medium-term future when we have trouble rolling over our debts.

trump_pointingIf we were in a shooting war with China – or even just a nasty trade war – for example, we might have trouble with the fact that Chinese institutions own approximately $1 trillion of US sovereign debt. Heck, if we get into a shooting war with North Korea this week or next week we might face rollover trouble, as a signal from Chinese institutions displeased with our unilateral military actions.

Fortunately, our current President has deep experience with the inability to roll over debts. He ran his casinos into the ground this way. Given his experience, he stated his plans for federal debt issuance while still a candidate, just last summer.

“I’ve borrowed knowing that you can pay back with discounts. I would borrow knowing that if the economy crashed, you could make a deal.”

Oh, sweet mercy, please, no. But then a few days later candidate Trump clarified, default isn’t really necessary. “People said I want to go and buy debt and default on debt. I mean, these people are crazy. This is the United States government.”

I was starting to feel better.

But then he continued,

“First of all, you never have to default because you print the money, I hate to tell you, okay, so there’s never a default.”

Ah, yes. Thank you Mr. President for clarifying your views on sovereign debt.

Dear Treasury Secretary Mnuchin: Can we please issue massive amounts of 100-year bonds quickly before anyone re-reads these quotes and thinks about them too closely?



A version of this post ran in the San Antonio Express News and the Houston Chronicle.

Please see related posts:


Trump and the coming Financial Crisis

Trump: Sovereign Debt Genius

Book Review: The Making of Donald Trump by David Cay Johnston


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China’s Sneeze – Our Cold

ChinaIn real economic terms, and as the second-largest economic power in the world since 2005, China has been a global player for a few decades.

In global financial market terms, however, China became interesting to the rest of the world for the first time this Summer.

I use the word ‘interesting’ the way it’s meant in the disguised curse ‘may you live in interesting times.’’[1]  Interesting financial problems in China became the world’s problems for the first time recently, as we witnessed the first global financial market-swoon attributed to trouble in Chinese financial markets.

Economy v. financial markets

China right now represents a case study in the difference between an ‘economy’ and ‘financial markets.’

We kind of already know that these two things – ‘economy’ and ‘financial markets’ – are distinct, but linked. Also, they interact.

The 2008 Crash in the United States was an example of trouble in the financial markets crashing the real economy, as excessive losses from sub-prime structured mortgages, followed by further excessive losses from illiquid structured products among financial firms, eventually caused construction halts, unemployment, and foreclosures – in other words, real-economy misery.

Causation just as typically runs the other way, in which a decline in real-economy profits leads to a slow-down in financial volumes and asset prices.

A real economy and its financial markets each influence the other, but can – for a time at least – differ drastically.

The distinction between the real economy and financial markets matters when viewing China’s struggle this year, especially in light of financial market fragility.

The real Chinese economy

I think we in the US forget to acknowledge – or in our narrow-minded patriotic competitiveness we prefer to overlook – the economic miracle of China.

For my part, I think the wealth gains for hundreds of millions of Chinese represents the greatest miracle for humanity over the last 50 years.

Among urban Chinese, only 10 percent could be considered middle class or above as recently as 2002. Just ten years later, 70 percent of urban Chinese achieved middle class or higher economic prosperity.

No society has ever developed that fast, on such a vast scale.

I can’t think of any social change as profound as the lifting of 500 million Chinese from poverty into relative middle-class prosperity in a single generation.

Whatever you think of the Chinese system (Is it Communist? Is it Capitalist? Is it a Socialist Market Economy with Chinese Characteristics? Who cares?) The economic miracle is real and amazing and to be celebrated.

Let’s not forget that gains in the real economy of China are real, impressive, and irreversible.

The Chinese financial system

And then there’s the Chinese financial system. Between lending, stock-investing and the currency, I mistrust all of it.

On the banking and lending side, to a degree we would find ludicrous in the US, Chinese lending institutions act with governmental direction. Back in my emerging market Wall Street bond days, a pattern developed with Chinese government-sponsored lending. State-supported investment banks in many provinces, known as ITICs, would periodically go bankrupt as a result of politically-directed lending.

A history of lending for non-economic reasons
A history of lending for non-economic reasons

Meanwhile private business and consumers – borrowers not connected to the government – traditionally find it difficult to access any bank credit at all

On the stock-investing side in China, this year has been a roller-coaster ride for the ages. Throughout the Spring, stocks blasted ever-upward, with numerous stocks and especially new issues hitting their daily ‘limit up,’ meaning trading halted once the price rose too much in one day. Come Summer, however, that process reversed, with numerous stocks and exchanges hitting their daily ‘limit down’ as stocks went into freefall.

Now, there’s nothing inherently wrong with volatile stock markets, except maybe various group’s reactions to the volatility.

The Chinese government, apparently seeing stock market instability as an existential threat, intervened numerous times since the market’s June 12 peak.

Some of these interventions include:

The 'National Team' is expected to support household investors
The ‘National Team’ is expected to support household investors

You can’t accuse the Chinese government of being inactive in the face of the stock-market crash. Probably that’s wise, because…

Chinese household investors, to the extent the financial press is accurate, appear to be counting on the power of the central government to prevent a market collapse.

This idea of the central government’s capacity to bail everyone out gets referred to in China as the ‘National Team,’ as in an investor saying: “I don’t worry about the Chinese stock market going down too much because we have the “National Team” on our side.

You can probably see how that line of thinking – if enough people follow it – will end in tears someday for the individual investor, or the central government, or both.

The roughly 40 percent – or estimated $5 Trillion in market value – drop in the Shanghai Composite Index since June 2015 naturally has all sides extremely anxious.

As I mentioned in the beginning, the most interesting thing for a US-based person, is the extent to which this all matters, for the first time, to global markets.

Before this past Summer, China’s financial sneezes had never caused the world financial markets to catch a cold. Now that’s happened for the first time and there’s no going back.

[1] Interestingly, I just learned from a simple search this curse isn’t Chinese at all, but probably dates to a letter by an American named Frederic R. Coudert written around 1936. Coudert attributed the phrase to British politician Austen Chamberlain (brother of the infamous Prime Minister Neville “Peace in our time” Chamberlain.) Robert Kennedy popularized it during a speech in 1966.

A version of this post ran in the San Antonio Express News


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