IN 14TH-CENTURY Germany a heretical cult grew up around the figure of Frederick II, a dead emperor. Its adherents believed that the apocalypse was close at hand. “In all countries a hard time sets in,” is how a prophecy from the period begins. “Rapine and arson go hand in hand,” it continues. “Everyone is at everyone else’s throat. Everyone harms everyone else in his person and his belongings. There is nobody but has cause to lament.”
This is not the sort of language used in investment-bank research notes and hedge-fund letters, or by pundits on CNBC and Bloomberg News, however troubled the outlook might seem for financial markets. Yet there is a parallel between today’s market chatter and the prophecies of medieval cults. The millenarians believed they were living in the end times or “last days”; and so, in a way, do today’s investors. Much of the talk is of “late-cycle” market conditions—the kind that prevail after a long expansion, when economic slack is largely used up and assets are richly priced.
The late-cycle mindset is a battleground for two impulses. On the one hand, it recognises that these are the good times. The economy is strong, jobs are plentiful, and factories and offices are humming with activity. Animal spirits are higher than they were in the earlier stages of the business cycle. So there is money to...
SUGAR TAXES are on a high. Around 40 countries and seven American cities have started to tax sugary drinks, mostly in the past few years. Supporters say such levies compensate for the costs imposed on health services by higher rates of obesity, diabetes and heart disease. They might also help short-termist buyers avoid the long-term consequences of sugary indulgences. Opponents counter that such levies are a fun-killer, souring people’s pleasure, and regressive, because poorer people spend a bigger share of their incomes on soft drinks.
Two working papers published on May 20th seek to help policymakers find the sweet spot. Hunt Allcott of New York University, Benjamin Lockwood of the University of Pennsylvania and Dmitry Taubinsky of the University of California, Berkeley, compute the “optimal” tax rate that maximises social well-being, taking into account differences in consumers’ income and behavioural biases.
Consumer data show that a soda tax does indeed have regressive effects. American households earning less than $10,000 a year buy twice as much sugary drink as those earning $100,000. Weighed against that, the gap between desired and actual consumption is wider for poorer people than it is for richer ones. The authors surveyed households to gauge their knowledge of sweet drinks’ nutritional content and how much...
THE TEA BUILDING, in London’s hip Shoreditch district, used to hold factories making biscuits and bacon. Now it is home to tech startups and media firms. Yet their ideas require space, too. In the outsized lifts, still operated by push buttons as big as traffic lights, a pair of movers have just finished a job. TransferWise, which rents Floor 6, is taking over another level, barely three years after moving in.
On May 22nd the cross-border payments firm, which was founded in 2011, said it had collected $292m in fresh capital. The fundraising round, led by Lead Edge Capital, Lone Pine Capital and Vitruvian Partners, venture-capital firms known for backing tech stars such as Uber, Snap and Spotify, valued it at $3.5bn—a doubling in 18 months. Now Europe’s most valuable private fintech firm, it plans to add 750 staff in the next 12 months to its existing 1,600.
TransferWise allows users to send money along 1,600 currency routes at 15% or less of the fee banks typically charge. Unburdened by old IT systems and focused on moving money, it has automated many of the steps required. It also aggregates transfers and nets them out against payments going the other way, which means it need borrow less currency offshore to meet customers’ requests. And it seeks to build direct relationships with multiple banks, even as those lenders...
MOST CURRENCIES have snappy names, like yen, won, kip or lek. Some have unfortunate ones: dong or colón. Few have names as cumbersome as Zimbabwe’s Real-Time Gross-Settlement Dollars, also known as RTGS-dollars or “zollars”. Hard to say, the new currency is also hard to price. Last week it lost about 20% of its value against the American dollar, according to Market Watch, which tracks the currency’s movements on the black market. This week it zagged, then zigged again (see chart). “You have to follow Zimbabwe hour by hour,” says an economist in Harare.
Zimbabwe’s previous homegrown currency was destroyed by the hyperinflation of 2007-08, forcing the country to adopt the American dollar (and other foreign currencies) instead. That worked well until 2015. But in the final years under Robert Mugabe, the longstanding dictator ousted in November 2017, the government could not muster enough genuine dollars to meet its spending ambitions. Instead it paid people with money of its own creation, transferred electronically into their dollar bank accounts. These “zollars”, it claimed, were identical to a dollar. But if depositors withdrew them from the bank they received not greenbacks, but “bond notes”: paper currency issued by the Reserve Bank of Zimbabwe, the country’s central bank.
Last October the new government, led by...
IF THE BEST way to get rich is by managing other people’s money, it helps if your clients control a lot of it. For private-equity firms and hedge funds, that means courting pension-fund managers, investment bankers and the like. For the top wealth managers, the money in question belongs to the super-rich, whom they advise on asset allocation, tax planning and even which artists should adorn their walls.
Now some are starting to tout for the custom of the merely well-heeled. On May 16th Goldman Sachs paid $750m in cash for United Capital Financial Advisors, a wealth-management firm based in California that manages $25bn-worth of assets for 22,000 clients. It was Goldman’s biggest acquisition in two decades.
It accelerates the firm’s shift of emphasis under David Solomon, who became its boss last year, away from volatile businesses such as trading towards more stable fee-based ones. It also broadens Goldman’s target market for wealth-management services. Until now, the bank’s individual customers were drawn almost entirely from the ranks of those with at least $25m in investable assets. United Capital serves those who have $1m-5m.
The non-filthy rich used to find it surprisingly hard to get customised help with managing their money. The fees they generated were not fat enough to satisfy full-service wealth advisers...
EVERYBODY KNOWS Monty Python’s “cheese shop” sketch—everybody who is over 50 and a comedy nerd, that is. The shopkeeper, played by Michael Palin, asks a customer, played by John Cleese, what cheese he would like. Do you have Red Leicester? Sold out. Caerphilly? On order. Cheddar? Not much call for it. Each increasingly testy request for a different cheese (43 of them) is cheerfully met with a “no”, “sorry” or feeble excuse. Pressed to back up his claim to the best cheese shop around, the shopkeeper replies: “Well, it’s so clean, sir!”
This leads us, as smoothly as a Python segue, to a frequent complaint about the main stock index for investors in emerging markets. The opportunity is as clear as a sign saying “Cheese Shop”. Most of the growth in the world’s GDP over the next five years will be in developing countries, says the IMF. You might like to buy a basket of stocks from a broad range of countries that taps into this growth. But the benchmark MSCI emerging-market index does not really offer that.
It is light on exposure to the fastest-growing bits of the world economy, notably in Africa. Instead it has a heavy tilt towards economies in the Asian supply chain to rich-world consumers. In short, it looks to some investors like a cheese shop that is so clean because it is uncontaminated by cheese. Yet the trouble lies...
TIMES HAVE been tough for Riverdale Mills Corporation, a company based in Northbridge, Massachusetts. In June last year the Trump administration imposed tariffs of 25% on steel imported from Canada, which accounted for half the firm’s supply. As its business involves transforming steel rods to supply 85% of North America’s lobster traps, and 31 miles (50km) of security fencing along America’s border, its costs soared. “We were very, very disappointed,” said James Knott, its chief executive.
Disappointment has given way to delight. On May 19th President Donald Trump declared that steel and aluminium from Mexico and Canada no longer posed a threat to America’s national security, and the next day the tariffs were no more. “This is just pure good news for Canadians,” said Justin Trudeau, Canada’s prime minister.
It was also excellent news for American consumers of steel. Faced with a lack of steel of similar quality from American suppliers nearby, and the expense of shipping from those farther away, Mr Knott had stuck with his Canadian suppliers, which hit profits and forced him to trim his workforce. Although he kept prices steady for his core products, some customers decamped anyway, worried that price rises were coming.
The tariff cuts will relieve strain for metal importers immediately. But the effect on the...
OUTSIDE THE headquarters of the German Taxpayers’ Federation in Berlin, a display tracks the public debt in real time. Now displaying a total of just under €2trn ($2.2trn), it has been ticking down since early 2018. Germany’s public-debt ratio, expected to be 58% of GDP in 2019, is as much the envy of other rich countries as its engineering prowess. Thanks to rising labour-market participation, says Michael Hüther of the German Economic Institute, a think-tank, tax revenues per head reached their highest level ever, in real terms, in 2018.
Even so, Germany’s fiscal policy is becoming a subject of debate. Olaf Scholz, the finance minister, has warned that the “fat years” are over. Economic growth is projected to slow this year, reducing the tax take. If he is to meet Germany’s stringent fiscal rule, he must rein in public spending.
The Schuldenbremse (debt brake) was enshrined in the constitution in 2009, when the financial crisis was expected to swell public debt beyond 80% of GDP. It restricts the federal-government deficit to no more than 0.35% of GDP a year unless a downturn hits; any overshoot beyond that must be made up in better times. (The debt brake also affects states’ finances: from 2020, they will be forbidden to run structural deficits.) Some economists, though...
HISTORY IS NEVER far from China’s mind in its trade dispute with America. A few months ago, when negotiations looked on track, staunch nationalists warned of echoes with the “unequal treaties” that foreign powers had forced upon China in the 19th century. In recent weeks the breakdown in talks has led state propagandists to draw comparisons with the Korean war of the 1950s, a bloody struggle between China and America. But the analogy that haunts Chinese economists does not involve China itself. They fear a replay of the Plaza accord of 1985, when Japan, under American pressure, tried to resolve trade tensions by pushing the yen higher. That calmed the tensions but, most Chinese economists think, at an intolerable price: stagnant Japanese growth for two-plus decades.
The parallels are imperfect. Dependent on America for security, Japan was constrained in its pushback. The Plaza accord also involved Britain, France and West Germany. Jeffrey Frankel of Harvard University has called it “a high-water mark of international policy co-ordination”, which is not President Donald Trump’s trademark. The substance was different, too. The five countries announced that they wanted the dollar to depreciate and intervened in currency markets to make it happen. Within a year the yen soared by nearly 50% against the dollar. By contrast, currencies...
IN SEPTEMBER 2017 executives at Hamilton Lane, an asset manager, received an email. Entitled “Abraaj Fund VI warning”, it accused the Abraaj Group, a buy-out firm based in Dubai, of inflating the value of its investments to lure capital into its latest fund. The email was anonymous and littered with typos and grammatical errors, but its tone was sinister. “The governance is not what it appears but employees are afraid to speak,” it said. Hamilton Lane forwarded it to Abraaj, requesting documents disproving the claims. The evidence provided allayed its concerns, and the firm backed Fund VI with over $100m.
Similar emails went to other Abraaj clients. They had little effect: weeks later Fund VI had already attracted $3bn, half its $6bn target. But the firm’s problems were real. Its collapse last year consumed millions of dollars of investors’ money, the reputation of Dubai’s financial regulator and Abraaj itself. Even as rivals divide up the firm’s former empire, it threatens to cause yet more damage.
It had taken 16 years for Abraaj to become the best-known emerging-markets buy-out firm. With over 30 funds spanning Africa, Asia, Latin America and Turkey, it managed $14bn in assets. Its Pakistani boss, Arif Naqvi, was a Davos regular and arts patron. He presented a kinder, gentler face of private equity: Abraaj’s $1bn...
A WELL-FUNCTIONING market is one that enables buyers and sellers to execute transactions quickly, easily and cheaply. Take the market for oil, or for blue-chip shares. Lots of buyers and sellers, gathered on commodity or stock exchanges, mean lots of bids and offers. Transactions are speedy and fees low.
Company bonds, by contrast, vary in their tenor (the length of time till they fall due) and coupon (interest rate). That makes it much harder to match buyers and sellers. To create liquidity, institutions such as investment banks act as intermediaries, holding an inventory of corporate bonds and guaranteeing to buy from or sell to their clients at any time for a (hefty) fee.
The more varied a product is, the harder it is to create a liquid market. One of the most troublesome—and important—is the market for homes. No two are exactly alike. Compounding the difficulties, most buyers and sellers are links in a chain. Two-thirds of Americans who are selling a home are also looking to buy another. A delay at one point in a chain holds up transactions all along it. So intermediaries in the property market offer a bespoke service, matching individual buyers and sellers and taking a chunky fee.
Enter i-buyers (instant buyers), who aim to play the role in homebuying that investment banks play in the corporate-bond market....
IT WOULD BE hard to tell a story about America’s stockmarket without mention of at least one company that listed this century—Google or Facebook, say. Europe is rather different. Its bourses are heavy with giants from the age of industry but light on the digital champions of tomorrow. It is telling, perhaps, that its character can be captured in the contrasting fortunes of two companies, Nestlé and Daimler, with roots not even in the 20th century, but in the 19th.
Nestlé began in 1867 when Henri Nestlé, a German pharmacist, developed a powdered milk for babies. The firm, based in Switzerland, is now the world’s largest food company. It owns a broad stable of well-known brands, including Nescafé and KitKat. Its coffee, cereals and stock cubes are sold everywhere, from air-conditioned supermarkets in rich countries to sun-scorched stalls in poor ones. Daimler was founded a bit later, in 1890. Its Mercedes-Benz brand of saloon cars and SUVs is favoured by the rich world’s professionals and the developing world’s politicians.
“MADE IN CANADA”, not “made in Colorado”: that is how a Canadian senator described the country’s approach to legalising the recreational use of cannabis in a debate last summer. As lawmakers sought to frame rules that would have the best possible chance of squeezing the illicit market and keeping teenagers off the grass, they looked around the world for evidence. Disappointed by how little they found, they decided to blaze a trail.
That meant establishing a baseline for comparison. Before the new law came into force in October 2018, Statistics Canada started to estimate prices and the size of the illicit market, and to carry out quarterly surveys of Canadians’ cannabis usage. Earlier this month it released the fifth of these—the first before-and-after comparison of the same part of a year.
The main finding was a rise in the number of Canadians who had used cannabis in the three months before the survey, of 27% compared with a year earlier. People are probably more willing to admit to getting lit once weed has been legalised. However, half of new cannabis users are aged over 45, which suggests that some of the increase is genuine, says Rosalie Wyonch of the C.D. Howe Institute, a think-tank in Toronto. Middle-aged squares may have decided to try getting high for the first time.
Use by under-25s, by contrast, did...
ON MAY 10TH Uber, the world’s biggest ride-hailing firm, listed on the New York Stock Exchange—and promptly tanked. As The Economist went to press it was trading at $41.29, 8% below its listing price. On the first day of trading investors lost about $650m. Some have called it the worst initial public offering (IPO) ever.
But it could give a boost to fresh thinking on how fast-growing startups should go public. And even as Uber’s first shares were trading, one such innovation got the go-ahead from the Securities and Exchange Commission (SEC), America’s main financial regulator.
The Long-Term Stock Exchange (LTSE) is based in San Francisco and backed by Silicon Valley luminaries including Marc Andreessen, Reid Hoffman and Peter Thiel. They are animated by the weaknesses of conventional exchanges when it comes to startups. Things such as quarterly results, short-sellers and high-frequency trading distract from building businesses for the long term, says Eric Ries, the LTSE’s boss and the author of “The Lean Startup”.
Such distractions are not all unwelcome. Public markets can bring discipline to badly governed startups. Short-sellers help keep companies honest. It would probably not have taken them long to sniff out the fraud at Theranos, for instance, had the blood-testing firm been public...
EVERY SO OFTEN a right-leaning economist raises the alarm about the apparently parlous state of America’s public finances. The subject gripped Washington in the early 2010s but has since been mostly disregarded. At 78% of GDP, America’s net public debt is high, if not yet huge. Thanks to President Donald Trump’s tax cuts, the federal deficit will exceed 4% of GDP this year, a level that is more typical after economic slumps than in the benign conditions seen today, with unemployment at 3.6%. What is more, unless taxes go up or spending on pensions and health care for the elderly is contained, public debt will rise to 92% of GDP in 2029, the highest since 1947, and go on rising for decades more, according to official projections.
Such warnings have fallen on deaf ears not just in Washington, but on Wall Street too. Financial markets, hungry for dollar-denominated safe assets, betray no concern about America’s debts. The risk of a crisis is not the only theoretical downside to public borrowing, but the others are looking unconvincing. For example, the argument that debt is crowding out private investment is hard to sustain when firms are awash with cash and can borrow at extremely low rates.
In January Olivier Blanchard, a former chief economist of the IMF, told the annual meeting of the American Economic Association that...
THOUGH CHINA runs a massive trade surplus with America, over the past year it has run a massive rhetoric deficit. During that period President Donald Trump has tweeted about China at least 130 times; Chinese leaders, by contrast, have mostly kept mum about the trade dispute with America. But in the past few days that has begun to change. A sudden barrage of commentaries about the trade war in state media has struck a note of defiant nationalism. “If you want to talk, our door is wide open,” said an anchor on China’s most-watched news programme on May 13th, in a clip that went viral. “If you want to fight, we’ll fight you to the end.”
The aggressive language comes as the two countries’ trade war heats up. Last week American negotiators alleged that China had reneged on a draft deal that was nearly complete. Chinese officials said it was the Americans who were making unreasonable demands. The breakdown in talks led to America’s decision on May 10th to raise tariffs on $200bn-worth of Chinese imports from 10% to 25%, covering products such as car parts and circuit boards.
On May 13th Mr Trump tweeted, warning China not to retaliate. It will only get worse, he said. Barely an hour later China ratcheted up tariffs on $60bn-worth of imports from America, including natural gas. And it did indeed get worse, with the United...
JEFF BEZOS wants humans to live in space. On May 9th the founder and boss of Amazon, who also runs Blue Origin, a private rocketry firm, unveiled plans for a lunar lander. “Blue Moon”, as it is called, is just one phase of a bold plan to establish large off-world settlements. It is a vision ripped directly from 20th-century science fiction. Having persuaded people to take other leaps of faith, from shopping online to placing his firm’s always-on listening posts in their homes, he could be just the person to convince millions to leave Earth. But it will take a unique economic pitch.
Unless Mr Bezos obtains the state-like power to order masses of people around, his plans will require émigré Earthlings to leave voluntarily. Their motives need not be entirely economic. The Puritans left Britain for America in search of freedom from religious persecution. Mr Bezos might well find recruits among unhappy minorities—or among deeply devoted believers in his vision for humanity. He is not an entirely implausible cult figure.
Per his presentation, however, Mr Bezos’s cities will be home to millions: numbers demanding a cost-benefit proposition with mass appeal. People might line up if the costs or risks of staying on Earth were to rise—because of a deteriorating environment, say, or imminent collision with a massive asteroid...
FAMILIARITY, THEY say, breeds contempt. Few countries are as familiar with the IMF as Pakistan, which has previously obtained 21 loans from the fund, as many as Argentina. On May 12th this familiarity deepened further. The government, led by Imran Khan, a former cricketer who heads the Pakistan Tehreek-e-Insaf party, said it had reached a deal to borrow $6bn more over three years. The agreement now awaits formal approval from the fund’s bosses in Washington and the support of other international lenders, including the World Bank and Asian Development Bank.
The loan will relieve Pakistan’s dollar shortage but do little to improve the IMF’s standing in the country. In return for its money, the fund expects the government to raise tax revenues and utility prices, impose discipline on provincial spending—and let the currency fall, if need be. That will help narrow Pakistan’s wide trade and budget deficits. But it will also curb growth and increase inflation in the short term.
Targets include cutting the budget deficit (before interest payments) to 0.6% of GDP next fiscal year (which starts in July) from the 1.9% that the IMF reportedly expects for this year. The government has talked about removing tax breaks worth about 350bn rupees ($2.5bn or 1% of GDP) and raising the price of...
INCENTIVES ARE central to welfare systems. In developing countries some “conditional cash-transfer” programmes offer families on low incomes benefits only if the children are sent to school and vaccinated. Payments may be suspended if they do not meet the conditions, but relatively little is known about how recipients respond. A trio of papers written by Fernanda Brollo of the University of Warwick, Katja Kaufmann of Mannheim University and Eliana La Ferrara of Bocconi University, and presented at the annual conference of the Royal Economic Society last month, examine the far-reaching spillovers of enforcing conditionality.
The authors analyse the behaviour of recipients of the world’s largest conditional cash-transfer scheme, Bolsa Família (Family Grant), which covers 14m poor households in Brazil, or roughly a third of the country’s population. Its budget amounts to 30bn reais ($7.5bn)—0.4% of GDP. In order for a family to receive the benefit, the children must attend school for at least 85% of days in a month. Parents whose children play truant first receive a warning; further absences eventually lead to payments being suspended.
The papers find that such penalties have wide-ranging effects. They encourage compliance not only by the family that is directly affected, but also by their neighbours, and by the families...
SWITZERLAND’S HALF-IN, half-out relationship with the European Union has suited its traders and firms well. Shares of almost all the large Swiss companies that are traded on SIX, Switzerland’s main exchange, are also available within the EU through alternative exchange platforms known as multilateral trading facilities (MTFs). Traders based in the EU account for 60-80% of trading in Swiss shares by volume. Big Swiss firms like Nestlé, Novartis and Roche make up 20% of the market capitalisation of the Stoxx Europe 50 index. It is, to coin a phrase, a single market.
Now that system is at risk. It relies on “stockmarket equivalence”, a status granted by the EU that allows swift and seamless trading across borders. But if Switzerland refuses to sign a new, EU-drafted trade deal, its equivalence may be revoked. The EU has given Switzerland until the end of June to sign, or at least make progress. If the deadline is met, equivalence is likely to be renewed indefinitely.
If it is not, however, traders within the EU, who are supposed whenever possible to trade within it or on exchanges granted equivalence, would be pushed to trade Swiss stocks on European MTFs, rather than on Swiss exchanges. That would make Swiss stocks harder and dearer to trade, because it would segregate interested buyers and sellers. “You want to buy a...