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In America, a political coalition in favour of protectionism may be emerging

Thu, 03/15/2018 - 15:50

THE post-war system of global trade has been close to expiring, seemingly, for most of the post-war period. It tottered in the 1980s, when Ronald Reagan muscled trading partners into curbing their exports to America. It wobbled with the end of the fruitless Doha round of trade talks. The system now faces the antediluvian economics of President Donald Trump, who seems bent on its destruction.

Mr Trump’s mercantilism is gaining steam. Straight after saying he would slap hefty tariffs on aluminium and steel imports, he is setting his sights on China, a favourite stump-speech bogeyman. This week he blocked the takeover of an American chipmaker by a Singaporean rival, because of fears of Chinese technological leadership. He is poised to act against China over its theft of intellectual property and its trade surplus.

And yet global trade has proven itself to be remarkably resilient. An optimist could argue that, historically, it is big political realignments that overturn trade-policy...

Why Japanese houses have such limited lifespans

Thu, 03/15/2018 - 15:50

EVERY 20 years in the eastern coastal Japanese city of Ise, the shrine, one of the country’s most venerated, is knocked down and rebuilt. The ritual is believed to refresh spiritual bonds between the people and the gods. Demolishing houses has no such lofty objective. Yet in Japan they have a similarly short life expectancy.

According to Nomura, a brokerage, the value of the average Japanese house depreciates to zero in 22 years. (It is calculated separately from the land, which is more likely to hold its value.) Most are knocked down and rebuilt. Sales of new homes far outstrip those of used ones, which usually change hands in the expectation that they will be demolished and replaced. In America and Europe second-hand houses accounted for 90% of sales and new-builds for 10% in 2017. In Japan the proportions are the other way around.

The reasons for Japanese houses’ rapid loss of value lie partly in tradition. In many countries people buy when they pair off, when they move to a...

America’s public markets are perking up. Can it last?

Thu, 03/15/2018 - 15:50

FOR years, discussions of America’s public markets have usually featured a lament for their dwindling appeal. According to Jay Ritter of the University of Florida, the number of publicly listed companies peaked in 1997 at 8,491 (see chart). By 2017 it had slumped to 4,496. True, many of the companies that went public in the internet’s early days should never have done so. But the decline worries anyone who sees public markets as the best way for ordinary investors to benefit from the successes of corporate America.

The mood right now is more buoyant. Bankers and lawyers who usually chat with journalists in their offices are on...

A primer on blockchain-based versions of central-bank money

Thu, 03/15/2018 - 15:50

BITCOIN, Ethereum, XRP, Stellar, Cardano: the infant world of cryptocurrencies is already mind-bogglingly crowded. Amid the cacophony of blockchain-based would-be substitutes for official currencies, central banks from Singapore to Sweden have been pondering whether they should issue digital versions of their own money, too. None is about to do so, but a report prepared by central-bank officials from around the world, published by the Bank for International Settlements on March 12th—a week before finance ministers and central-bank heads from G20 countries meet in Buenos Aires—offers a guide to how to approach the task.

The answer? With care. For a start, it matters who will be using these central-bank digital currencies (CBDCs). Existing central-bank money comes in two flavours: notes and coins available to anyone; and reserve and settlement accounts open only to commercial banks, already in electronic form (though not based on blockchain) and used for interbank payments. Similarly, CBDCs could be either widely available or tightly...

A lose-lose trade war looms between America and China

Thu, 03/15/2018 - 15:50

PRESIDENT DONALD TRUMP has not yet started a global trade war. But he has started a frenzy of special pleading and spluttered threats. In the week since he announced tariffs on steel and aluminium imports, countries have scrambled to win reprieves. Australia, the European Union and Japan, among others, have argued that, since they are America’s allies, their products pose no risk to America’s security. If these appeals fail, the EU has been most vocal in vowing to retaliate, in turn prompting Mr Trump to threaten levies on European cars.

In China, ostensibly the focus of Mr Trump’s actions, the public response has been more restrained. Officials have said the two countries should strive for a “win-win outcome”, a favourite bromide in their lexicon. As a rival to America, China knows that an exemption from the tariffs is not on offer. It also knows that it needs to conserve firepower. If this is the first shot in a trade war, it is, for China, small bore. Its steel and aluminium exports to America amount to roughly 0.03% of its GDP, not...

Do credit booms foretell emerging-market crises?

Thu, 03/15/2018 - 15:50

ON THE morning of December 7th 1941, George Elliott Junior noticed “the largest blip” he had ever seen on a radar near America’s naval base at Pearl Harbour. His discovery was dismissed by his superiors, who were thus unprepared for the Japanese bombers that arrived shortly after. The mistake prompted urgent research into “receiver operating characteristics”, the ability of radar operators to distinguish between true and false alarms.

A similar concern motivates research at the Bank for International Settlements (BIS) in Basel, Switzerland. Its equivalent to the radar is a set of economic indicators that can potentially detect the approach of financial crises. A prominent example is the “credit gap”, which measures the divergence between the level of credit to households and non-financial firms, expressed as a percentage of GDP, and its long-term trend. A big gap may reflect the kind of unsustainable credit boom that often precedes a crisis. Anything above 9% of GDP is reason to worry, according to Iñaki Aldasoro, Claudio Borio and Mathias Drehmann of the BIS.

The biggest blips on the oscilloscope include Canada (9.6%), Singapore (11.1%) and Switzerland (16.3%), according to the latest readings, released on March 11th. But the one that has kept everyone’s eyes peeled is China, with a gap of 16.7% in the third quarter of 2017 (the latest BIS figure...

A startling amount of land in Japan has no official owner

Thu, 03/15/2018 - 15:50

Property, period

THE tsunami of 2011 left gaping holes reminiscent of war zones in the landscape along the coast of Tohuku, in the north-east of Honshu, Japan’s main island. Car navigation systems gave directions to landmarks that had vanished into the sea. The subsequent reconstruction effort hit an unexpected roadblock: missing landowners. Officials were stunned to find that hundreds of plots were held in the names of people who were dead or unknown.

The deluge threw the problem into particularly sharp relief in Tohuku, but it is widespread elsewhere too. A report last year for the government by a panel of experts estimated that about 41,000 sq km of land, or 11% of Japan’s surface, was unclaimed, most of it in rural regions. By 2040, it warned, the area could more than double. The cumulative cost in lost productivity could be as high as ¥6trn ($56bn).

The countryside is littered with vacant plots and empty houses. Some date from Japan’s great post-...

Mining data on cab rides to show how business information flows

Thu, 03/08/2018 - 15:55

AS COMPUTING power has grown, it has become easier to uncover information hidden inside datasets that seem totally unconnected. Some recent studies have used this approach to reveal business-related information flows. One linked the movements of 18th-century share prices with the arrival of ships bringing news. Another looked at the relationship between business activity and the movements of corporate jets. A third mined White House visitor logs for the names of executives and examined their companies’ subsequent stockmarket returns.

A paper in this vein published on March 5th pores over a dataset released by New York City’s government covering more than 1bn cab rides between 2009 and 2014. David Finer, a graduate student at University of Chicago’s Booth School of Business, analysed trips connecting the headquarters of big banks and the Federal Reserve Bank of New York. He extracted trips starting at commercial banks and at the New York Fed that converged on the same destination around...

Markets fret about America’s turn toward protectionism

Thu, 03/08/2018 - 15:55

IN THE run-up to the presidential election of 2016, investors were nervous about Donald Trump. They liked his tax-cutting, anti-regulation promises, but fretted about his foreign and trade policies. Some dubbed the two agendas “Trump lite” and “Donnie Darko”.

Almost as soon as it became clear that Mr Trump would become president, the markets decided to believe in the optimistic version. His tweeting and decision-making may have been erratic, but investors seemed to forgive the president his peccadilloes as a wife might her errant husband: “He may not be faithful but he’s a good provider.”

Fears about trade conflict almost disappeared. In last month’s survey of global fund managers by Bank of America Merrill Lynch, just 5% regarded a trade war between America and China as the biggest risk facing the markets, compared with 45% who worried about a return of inflation or a crash in the bond markets.

The announcement of tariffs on steel and aluminium on March 1st thus came as a...

Will China’s Belt and Road Initiative outdo the Marshall Plan?

Thu, 03/08/2018 - 15:55

SEVENTY years ago America passed the Economic Co-operation Act, better known as the Marshall Plan. Drawing inspiration from a speech at Harvard University by George Marshall, America’s secretary of state, it aimed to revive Europe’s war-ravaged economies. Almost five years ago, at a more obscure institution of higher learning, Nazarbayev University in Kazakhstan, China’s president, Xi Jinping, outlined his own vision of economic beneficence. The Belt and Road Initiative (BRI), as it has become known, aims to sprinkle infrastructure, trade and fellow-feeling on more than 70 countries, from the Baltic to the Pacific.

Mr Xi’s initiative, which also has geopolitical goals (see Banyan), has invited comparison with America’s mid-century development endeavour. Some even suggest it will be far bigger. But is that credible? The Marshall Plan,...

How digitisation is paying for DBS

Thu, 03/08/2018 - 15:55

MOST banks gush about digital technology, fearing all the while that some born-digital usurper, large or small, will do to them what Amazon has done to retailers, Uber to taxi-drivers and Airbnb to hoteliers. Some have reorganised themselves to become nimbler, copying startups by forming small teams to generate, test, reject and improve ideas at speed. Apps are improving, new products are appearing and online marketplaces are being built. Only a few are turning enthusiasm into money. One of those is DBS.

Singapore’s (and South-East Asia’s) biggest bank is a stockmarket darling. Its share price has roughly doubled in the past two years, outstripping the gains of Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB), its main local rivals (see chart). The price exceeds DBS’s net book value per share by 50%. That owes something to the city-state’s buoyant economy—GDP rose by 3.6% last year, the most since 2014—and recovering housing market, and to the doubling of the dividend when DBS reported fourth-quarter results on...

Active fund managers hold fewer and fewer stocks

Thu, 03/08/2018 - 15:55

THE past decade has been tough for conventional “active” fund managers, who try to pick stocks that beat the market. They have been losing business to “passive” funds—those that try to replicate a benchmark, like the S&P500 index. Passive funds have much lower fees.

Figures from Inalytics, a company that analyses fund managers’ portfolios, suggest that active managers are changing strategy in response. The average number of stocks in global equity portfolios has halved, from 121 to 61 (see chart). In a sense, active managers have become more active, making bigger bets on individual stocks. This makes their portfolios less like the index, meaning they can beat the market by a larger margin. But they can also do a lot worse. The portfolios examined by Inalytics have outperformed, but in the long term the average manager is unlikely to do so, since the index reflects average performance.

Moreover, managers incur costs and the index does not. The result of more active management...

Investment by women, and in them, is growing

Thu, 03/08/2018 - 10:33

MARCH 8th, International Women’s Day, always brings a flood of reports about gender inequalities in everything from health outcomes to pay and promotion. But one gap is gradually narrowing: that in wealth. As money managers seek to attract and serve rich women, and as those women express their values through their portfolios, the impact will be felt within the investment industry and beyond.

According to the Boston Consulting Group, between 2010 and 2015 private wealth held by women grew from $34trn to $51trn. Women’s wealth also rose as a share of all private wealth, though less spectacularly, from 28% to 30%. By 2020 they are expected to hold $72trn, 32% of the total. And most of the private wealth that changes hands in the coming decades is likely to go to women.

One reason for women’s growing wealth is that far more of them are in well-paid work than before. In America, women’s rate of participation in the labour market rose from 34% in 1950 to 57% in 2016. Another is that women are...

An attempt to revise the Dodd-Frank Act reaches a milestone

Thu, 03/08/2018 - 10:33

AFTER 25 hearings, thousands of pages of comments and many unworkable bipartisan working groups, America’s Senate has finally produced a possible consensus bill to tweak the Dodd-Frank Act, the vast swathe of banking regulation passed soon after the 2008-09 financial crisis. On March 6th, in a technical move that counts as significant progress in Washington’s creaky bureaucracy, 16 Democrats and one independent joined Republicans in voting to allow several hours of debate before passing the bill on to the Senate leadership.

Amendments may yet be added and the entire edifice could fracture, but the vote, after years of effort, suggests a bill might now pass. If it does, it would then have to be reconciled with a different bill passed by the House of Representatives. But this now seems possible as well, if only because the alternative would be no amendment to Dodd-Frank at all.

One certainty is that, whatever the bill’s fate, there will be disappointment. Bernie Sanders, a socialist who ran for the Democratic Party’s presidential nomination, said passage would create massive economic disruption. Elizabeth Warren, a Democratic senator since 2012 who helped ensure the current law’s expansive scope, said the proposal was a “punch in the gut to American consumers”, and “bank lobbyists …dragging us back to the bad old days”.

Dodd-Frank was passed in...

New research suggests the dollar’s level drives world trade

Thu, 03/01/2018 - 15:44

AGUS SACCHAL sells sheets and blankets from a warehouse in Buenos Aires, for which he is paid in Argentine pesos. While the pesos go into his wallet, two other banknotes are stuck to his office window. One is a ten-yuan note from a visit to China, where he went in search of cheap textiles. The other is a $5 bill, pinned next to an invoice, also in dollars. Though he does not trade with America directly, when importing he uses the greenback.

Argentina’s rocky financial history makes the dollar’s dominance there unsurprising. Still, it is an extreme case of a wider phenomenon. After gathering data on 91% of the world’s imports, by value, Gita Gopinath of Harvard University found that America accounts for nearly 10%. But its currency is used in over 40% of invoicing.

Recent research suggests that this creates a link between a weak dollar and buoyant trade flows—and vice versa. Trends since 1999 are suggestive (see chart). During 2017 the dollar depreciated by 7% against a basket of other currencies, as global trade flows surged...

Capital is on its way to America, but for bad reasons

Thu, 03/01/2018 - 15:44

ACCORDING to President Donald Trump, money is pouring into America from abroad. The tax reform he signed into law in December means American firms can no longer defer paying taxes on profits left sitting in foreign subsidiaries. The change has led to some uplifting headlines. Apple said that it would make a one-off tax payment of $38bn relating to its past accumulation of $252bn in foreign earnings. Presumably, it will now start to bring this cash home. “Huge win for American workers and the USA!” tweeted Mr Trump. Yet despite the prospect of large-scale profit repatriations, the dollar has been strangely weak of late. Since the start of November, when tax reform began looking likely to pass, the greenback has fallen by about 3%. What is going on?

Start with the fact that repatriations are mostly not true capital inflows. An analysis by Zoltan Pozsar of Credit Suisse finds that, as of March 2017, American corporations had amassed around $2.2trn of earnings in overseas subsidiaries. About half...

Automation will drive interest rates higher, a new report concludes

Thu, 03/01/2018 - 15:44

REAL interest rates in the developed world have been low ever since the financial crisis of 2008-09 (see chart). The global economy might have struggled to recover had that not been the case; higher rates would have caused many more companies and homeowners to default.

Central banks are now starting to push rates slightly higher. And according to a new paper* from Bain, a management consultancy, the trend towards robotics will push them higher still—at least for a decade. That could be a shock for the financial markets.

Bain estimates that by 2030 American companies will have invested as much as $8trn in automation. As companies scramble to borrow money in order to buy machinery and robots, the resulting investment boom will drive up rates.

Automation will boost productivity, which has grown sluggishly in recent years. This slowdown may have been caused by the shift from manufacturing to services, where productivity gains are harder to achieve. Between 1993 and 2014, the...

Labour-monitoring technologies raise efficiency—and hard questions

Thu, 03/01/2018 - 15:44

BOSSES have always sought control over how workers do their jobs. Whatever subtlety there once was to this art, technology is now obliterating. In February Amazon received patents for a wristband apparently intended to shepherd labourers in its warehouses through their jobs with maximum efficiency. The device, were Amazon to produce and use it, could collect detailed information about each worker’s whereabouts and movements, and strategically vibrate in order to guide their actions. Using such technology seems an obvious step for firms seeking to maximise productivity. Whether workers should welcome the trend, or fear it, is harder to say.

Workplace discipline came into its own during the Industrial Revolution. As production came to depend ever more on expensive capital equipment, bosses, not keen to see that equipment sitting idle, curtailed their workers’ freedom, demanding they work during set hours, in co-ordination with other employees, at a pace dictated by the firm. Technology creates...

Narendra Modi wants to boost formalisation. How is he faring?

Thu, 03/01/2018 - 15:44

WATCHING money drain from your bank account has never been so much fun. On WhatsApp, a messaging service ubiquitous in India, sending rupees is now as easy as posting a selfie. Set-up is a breeze, because all Indian banks have been corralled onto a common payment platform on which anyone, from Google and Samsung to local payment firms and banks themselves, can build their own user interface. Money zips instantly from one bank account to the other, without any need to set up a pesky digital wallet or download some new app. At least outside China, there is no simpler way to shift money today.

WhatsApp’s offering is being rolled out gradually. The number of transactions routed through the United Payments Interface (UPI), the system on which WhatsApp and the rest are riding, has soared from almost nothing in early 2017 to over 150m a month in January. On current trends, UPI transfers will overtake cash withdrawals from banks within weeks. Some 665bn rupees ($10.2bn) will have shifted hands—or...

Hong Kong and Singapore succumb to the lure of dual-class shares

Thu, 03/01/2018 - 15:44

FOR Charles Li, Alibaba was the one that got away. The head of the Hong Kong stock exchange (HKEX) courted the Chinese e-commerce giant when it sought a venue for its listing five years ago, but he could not push through rule changes wanted by Alibaba to keep control of the company in its leaders’ hands. It opted instead for an initial public offering (IPO) in New York. “Losing one or two listing candidates is not a big deal for Hong Kong,” he wrote at the time. “But losing a generation of companies from China’s new economy is.” Since then he has been determined to make the next big catch.

It is finally within his grasp. After a debate that has trundled on for several years HKEX is, in the coming weeks, poised to allow companies to issue shares with different voting rights. Known as dual-class shares, these give founders the ability to control their firms, even as minority owners. This should make Hong Kong the favoured destination for the next wave of Chinese tech firms to go public, from Xiaomi, a smartphone maker, to Ant Financial,...