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America considers retaliating against currency manipulation

Thu, 07/25/2019 - 15:07

THE SOUTHERN SHRIMP ALLIANCE, an industry association based in Florida, is angling for tariffs. It has tried repeatedly to have foreign competitors harpooned with duties. Now some new opportunities have surfaced. The Department of Commerce is proposing a rule enabling tariffs on imports from currency manipulators. Crustacean-catchers are keen.

American businesses disgruntled by what they see as distorted exchange rates may soon have more weapons at hand. After weeks of fulmination by President Donald Trump on Twitter about countries that keep their currencies artificially weak to America’s detriment, financial analysts are speculating that the Treasury might use its Exchange Stabilisation Fund (ESF) to weaken the dollar. Elizabeth Warren, a Democratic presidential hopeful, has also called for the dollar to be managed to promote exports, referring to proposals by Fred Bergsten and Joseph Gagnon of the Peterson Institute for International Economics, a think-tank.

The chatter is odd in one respect: other countries’ currency manipulation does not seem to be the reason for the dollar’s strength. Although an IMF report published on July 17th said that the dollar was overvalued by 6-12%, it also said that foreign-exchange intervention had been playing “a much more muted role in recent years”. America’s loose fiscal policy—and...

Domestic demand has sparkled against the euro-gloom

Thu, 07/25/2019 - 15:07

A STONE’S THROW from the bustling arcade of Atocha railway station in central Madrid are the offices of Spotahome, a startup that matches tenants and long-term rentals. Set up five years ago, it lists 65,000 properties in 11 European cities and employs more than 300 people. An example of Spain’s small but fast-growing startup scene, its success reflects an economic resurgence in Madrid and some other European cities. The supply of rental properties has grown since Spain’s deep housing crisis, notes Alejandro Artacho, its boss. Demand comes from exchange students, as well as an expansion that has lured foreign businesses and workers. Spain’s population fell after recession struck for the second time in three years in 2012, as more people moved abroad than came in, but that trend reversed in 2016.

Since 2018 a slowdown in trade and manufacturing, concentrated in Germany and Italy, has cast a pall over the euro area. But matters would be far worse had other countries and sectors not held up. Spain alone accounts for a tenth of the zone’s GDP, but in recent years has contributed a fifth of growth and an outsize share of new jobs. Across the bloc sectors that rely on domestic demand have expanded, as recovering labour and credit markets have boosted household and business spending.

In the growth league table, the euro area’s...

Why investors favour economically orthodox political strongmen

Thu, 07/25/2019 - 15:07

A GOOD WAY to start an argument that never ends is to try to define populism. Dictionaries say it is politics directed at ordinary people who feel neglected by elites. That leaves a lot out, not least economics. In 1990 Sebastian Edwards and the late Rudiger Dornbusch sketched what is meant by “economic populism”. It is an approach, they wrote, that denies that budget deficits or inflation are constraints on economic growth. The Latin American populists they studied printed money to pay for public-spending binges. It ended in tears.

There is no shortage of leaders in middle-income countries who fit the dictionary definition of a populist. But economic populism in its purest form is now quite rare (though its results are sadly evident in Venezuela). These days a lot of would-be champions of the people prefer their macroeconomic policies on the orthodox side: inflation targets, fiscal restraints, free-floating currencies, that sort of thing. They are happy to let technocrats get on with it.

This poses a mild dilemma for rich-world investors—which is soon resolved. They may be appalled by the social and foreign policies of such strongmen. Yet as professionals they are also unthrilled by inflation, default, devaluation and adverse shifts in politics, which are hazardous to a bond portfolio. They tend to favour autocrats...

Many consumers neither read nor understand the contracts they sign

Thu, 07/25/2019 - 15:07

“TERMS AND conditions apply” vies for being the most morale-sapping four-word phrase of modern times, along with “The plane is delayed” and “You’re trending on Twitter”. Consumers read about a juicy offer, but fear a catch is hidden in the small print. The obvious solution—to read that small print—is not always feasible. Facebook’s online terms and conditions run to more than 3,200 words. Not too daunting? One section lists another 11 “other terms and policies that may apply to you”, including “community standards” on the content that users may post. A lot of further reading will be required.

Even when users do read, they may not understand. Last year Which?, a British consumer-advice group, asked 24 volunteers to read the fine print on a selection of 40 insurance documents and answer a series of questions. They gave the wrong answers to between a quarter and a third; only four got top marks. Language analysis showed that the documents were harder to understand than the late Stephen Hawking’s “A Brief History of Time”.

All this matters because “freedom of contract” is fundamental to the economic system. If two parties freely contract to make an exchange or enter a long-term relationship, both must perceive that it is to their advantage. But there is an asymmetry of information between an ordinary consumer and a...

Betterment wants your bank account as well as your investments

Wed, 07/24/2019 - 11:55

THOSE SAVING for retirement face plenty of quandaries. Spending today is more fun than waiting to spend tomorrow. Once savings have been amassed you must decide what to do with them. The possibilities are many and complex. And people are prone to error, buying when asset values are high and panic-selling when they dip. The promise of robo-advisers, which offer computer-generated financial advice, is to assist savers with these problems far more cheaply than human ones.

Rock-bottom fees, usually just 0.25% of assets, have helped them grow fast. Betterment, a robo-adviser based in New York that was founded in 2008, manages $16bn-worth of assets. Wealthfront, a rival from San Francisco, manages $11bn. But skimpy fees mean they need hefty assets to survive. In a report in March HSBC claimed that robo-advisers need to oversee $11bn-21bn of assets to break even. Jon Stein, Betterment’s boss, says that the company is profitable, helped by low costs for running the accounts. But it is probably a close-run thing. Betterment has launched some pricier, fancier products—but its business model would suggest that revenues of just $40m must pay for nearly 300 employees, swanky midtown Manhattan offices and advertising blitzes.

Competition in robo-advice is fierce, as established asset managers have muscled in. Vanguard...

A society’s values and beliefs matter for its economy

Tue, 07/23/2019 - 17:29

MAKE AMERICA GREAT AGAIN is more than text on a red cap. It is an argument about the nature of American success: one which President Donald Trump elaborated on in racist comments last week. On July 21st he questioned whether four Democratic congresswomen, all non-white, were “capable of loving our Country”. The same day Stephen Miller, an adviser to Mr Trump, said the president’s criticisms of America differed from those of his critics because he was defending the “principles of Western civilisation”. The comments seemed to imply that American greatness is built on a cultural inheritance that some people cannot access, whether born in America or not.

Cultural arguments once loomed large in explanations of the ways in which countries differed economically and politically. Economists mostly abandoned such reasoning in the 20th century, not only because it provided cover for racists but also because of its lack of explanatory power. In 1970 Robert Solow, a Nobel prizewinner, quipped that attempts to explain growth with variables such as culture generally ended up “in a blaze of amateur sociology”. This position is changing, however, and not before time. A better grasp of how cultures work may be needed to understand modern political economy.

The responsible intellectual use of cultural arguments begins with clear...

Will America go from hunter to hunted in cross-border tax evasion?

Mon, 07/22/2019 - 13:50


AMERICA HAS launched brutal assaults over the past decade on countries, such as Switzerland and Liechtenstein, where banks have helped American citizens hide money and thereby evade tax. Forced to clean up, these erstwhile havens have seen much tainted capital flow elsewhere—not least to America itself. Now it is the former aggressor's turn to be on the defensive. Other countries are using similar tools to those America once employed to reveal untaxed money stashed by their own citizens in the world’s largest economy.

As well as fining and prosecuting the enablers of tax dodging—Swiss banks alone coughed up at least $5.5bn—America passed a law known as FATCA in 2010 that required foreign financial firms to spill the beans on American clients. Stung into action, more than 100 other countries signed up to the “Common Reporting Standard” (CRS), and now swap tax-relevant financial information with each other.

America, however, did not join the CRS. Instead it shares information on the foreign clients of American banks under FATCA’s reciprocal provisions. But sharing is patchy; a lot of countries get nothing. Combine that with the high level of anonymity offered by American shell companies, and it is hardly surprising that America has become the destination of choice for many tax evaders. One...

The future of insurance is happening without insurance firms

Thu, 07/18/2019 - 14:52

EVERY MORNING, from a room in Birmingham, some of the world’s largest firms are briefed by phone on the weather in store. As continents, arrows and weather fronts flicker across their screens, meteorologists at The Weather Company (TWC) help British grocers decide whether to stock soups or salads, and Chinese energy firms when to operate wind turbines. Yet such sessions are getting rarer. Computed by 172 models crunching 400 terabytes of data—33 times the amount Twitter stores every 24 hours—most of TWC’S 25bn daily forecasts now feed directly into customers’ computer systems.

Big data has turned weather into a big business. TWC, which was bought by IBM in 2016, serves governments, media channels and 40% of the world’s airlines. But many property insurers, whose fortunes rely on forecasting climate-induced losses, are still learning how to use the information, says Leon Brown of TWC. Their cluelessness is symptomatic of a problem for all insurance lines, including casualty, life and health. Reinsurance firms (which insure the insurers) and Asian insurance champions are almost the only innovators in an industry that is moving at a glacial pace.


Many think the European Central Bank will cut rates soon

Thu, 07/18/2019 - 14:52

THE EUROPEAN CENTRAL BANK’S firepower is sadly depleted. The interest rate on the reserves that banks hold with it is sub-zero; its quantitative-easing (QE) scheme has hoovered up assets worth €2.6trn ($2.9trn)—equivalent to over a fifth of the euro area’s GDP. Even so, in June Mario Draghi, the bank’s boss, promised further stimulus if the economy does not buck up. Statistics published since then suggest little recovery. Cue much speculation about another attempt to revive growth.

Many expect an announcement at the bank’s meeting in September, along with updated economic forecasts. But its next gathering on July 25th could still surprise, or at least lay the groundwork for stimulus. With individual instruments nearing limits, it is expected to deploy a combination.

Of late its weapon of choice has been guidance on the path of interest rates. It has promised to keep rates steady for longer, at least until mid-2020. But markets expect rates not merely to stay on hold, but to fall—by a tenth of a percentage point, from -0.4%, in coming months.

Banks complain that negative interest rates shrink their margins: they have to pay the central bank to hold their deposits, but fear that if they pass negative rates on, their depositors will withdraw their cash. Profits and lending both fall, preventing the rate from...

China’s growth is the slowest in nearly three decades: get used to it

Thu, 07/18/2019 - 14:52

CHINA’S ECONOMY is slowing, again. After a good start to the year annual growth slipped to 6.2% in the second quarter, the weakest in nearly three decades. That is hardly cause for panic: for an economy now worth nearly $14trn, such a growth rate is impressive. As the trade war with America hurts exporters, it also underlines the extent to which China’s economy is now fuelled by domestic demand. The question for the coming months is whether that domestic strength will remain sufficient to offset the trade turmoil.

The export picture has clearly worsened. Last year, even as America’s president, Donald Trump, first levied tariffs on China, the country still managed to increase its exports by 10%. But this year Chinese exports have all but stopped growing.

In May Mr Trump ratcheted up tariffs on Chinese goods, and he has threatened to hit China with yet more duties if trade negotiators fail to resolve an impasse. China, for its part, appears to be in no rush to reach a deal: Zhong Shan, the hard-nosed commerce minister, recently joined the Chinese negotiating team. In published comments this week he blamed America for the trade war, calling it “a classic example of unilateralism and protectionism”.

China’s willingness to take a more unyielding stance partly reflects confidence in its own economy. Activity...

Housing microfinance can help poor people build better homes

Thu, 07/18/2019 - 14:52

WHENEVER MICHAEL JJOGA earns some money from his welding business, he buys a bag of cement. Brick by brick he has built a two-roomed house for his family on land he cleared himself in Wakiso district, in central Uganda. Another house stands half-finished nearby until he collects enough iron sheets to make a roof. Across the glade a chorus of bleats drifts from a crumbling hut, shaped from thatch and earth. He used to live in it; now it shelters his goats.

By 2025 some 1.6bn city dwellers will be living without decent, affordable housing, according to consultants at McKinsey. Many more people lack adequate shelter in the countryside. While governments and private developers fall short, people like Mr Jjoga are building houses themselves. They construct in stages, over years or even decades, preferring to buy a stack of bricks than to put money in a bank. Some move in well before completion. Lenders long overlooked this self-help model, but financed it unwittingly: perhaps a fifth of microloans to businesses are thought to be diverted into housing.

Now some lenders are starting to target this market directly. Conventional mortgages are rare in developing countries: in Uganda, which has 40m people, there are only 5,000. Instead, banks and microlenders offer smaller housing loans, paid back over shorter periods of 1-3 years...

The pound’s slide is about more than Brexit

Thu, 07/18/2019 - 14:52

IN THE WEE hours of June 24th 2016 the pound plunged. The unexpected victory of the Leave campaign in the Brexit referendum meant sterling lost 7% in a single day. Three years later the pound is falling once again. It is now at a two-year low, having fallen by 5% against the dollar since April—and 1% in the past month, the worst performance of any big currency (see chart). Many Britons ascribe any movement in the pound to the twists and turns of the Brexit saga. The cause of its recent slide is, however, more complicated.

Sterling has been weaker since the referendum because the prospect of Brexit has led economists to cut their forecasts for economic growth. It reached a low in October 2016 when Theresa May, the prime minister, promised a “hard” Brexit. Yet it appreciated fairly steadily in 2017 and 2018.

This was in part because the economy was surprisingly strong. GDP grew only slightly more slowly in 2016-18 than before the referendum. Unemployment fell to...

Lots of investors bet on “factors”, such as size, value and momentum

Thu, 07/18/2019 - 14:52

THE FINAL of the European Football Championship in 1976 was settled by a penalty shoot-out. The winning kick, scored by Antonin Panenka of Czechoslovakia, was a thing of beauty. From Panenka’s long run-up and body shape, the West German goalkeeper, Sepp Maier, guessed that the kick would go hard to his left. He dived in anticipation. But Panenka did something novel. He calmly chipped the ball down the centre of the goal, which Maier had just vacated.

Armed with this story, we come scrambling back to the present to contemplate another game of fine margins: investment. Here too success often depends on the ability to outwit others. Indeed proponents of factor investing—buying baskets of stocks with characteristics that have been shown to beat the market averages—say it works by exploiting the enduring weaknesses of investors. If the dumb money keeps shooting for the corners, you profit by going down the middle. Just hold your nerve.

This requires a faith that the future will be like the past. And where there is faith, there is always doubt. The world of investing evolves, just as football has. As more players adopted the Panenka, goalkeepers cottoned on. A new category emerged: the failed Panenka. A consideration of this begs a scary thought for factor investors: what if returns will be hurt by the ubiquity of the...

A debate is under way about the cost of higher education

Tue, 07/16/2019 - 17:11

IN MANY WAYS the flood of bold, progressive policy proposals coursing across America’s political landscape began in 2015, when Bernie Sanders, an independent senator from Vermont, put a plan to make higher education at public universities free at the centre of his upstart campaign for the presidency. Then the idea seemed radical, even gimmicky. Now it is noteworthy when leading Democrats oppose the notion. Yet some do, for example Pete Buttigieg, the mayor of South Bend, and their arguments still pack a punch. Why indeed should taxpayers’ money be spent on the children of the rich rather than more generous financial aid for the poor? The Democratic debate over free college is in fact part of a deeper disagreement about how best to structure a welfare state.

Across much of the rich world, a public-university education is free or nearly free, apart from the cost of books and living expenses. (Danish students even receive a stipend to help pay for such things.) But those in America and Britain pay tuition fees which are high and growing higher. In Britain, a change in the law in 1998 allowed public universities to begin charging. The average tuition fee at four-year public universities in America has roughly tripled over the past three decades after adjusting for inflation. Rising fees represent an evolution towards a means-tested...

Why everybody is concerned about corporate-bond liquidity

Thu, 07/11/2019 - 14:51

IN SEPTEMBER 2007 Britain suffered its first bank run in a century. Television pictures showed a long queue of depositors outside a branch of Northern Rock. Alistair Darling watched in dismay from Portugal, where he and his fellow European Union finance ministers were gathered. “They’re behaving perfectly rationally, you know,” Mervyn King, the governor of the Bank of England, said in the smarty-pants manner that economists are cherished for. Mr Darling was uncharmed. “It was not what I wanted to hear,” he recalled.

What Lord King probably had in mind was a well-thumbed textbook model. Banks have a liquidity mismatch. One side of the balance-sheet is hard-to-sell loans; the other side is deposits that can be withdrawn in a trice. If depositors believe that a bank is sound, there will be no runs on it. But if enough start to demand their deposits back, it makes sense for everybody to join the rush.

This model can also be applied in other areas. Take the corporate-bond market. Every policy body of stature, from the IMF to the European Central Bank (ECB), has worried about a growing mismatch between investors’ expectations that they can sell out at any moment and an underlying shortage of liquidity in the market. More investors are using corporate-bond funds as an alternative to cash. But fewer dealers are willing to trade...

The choice of the IMF’s next boss could be a coronation

Thu, 07/11/2019 - 14:51

FOR THE purposes of decision-making, the IMF’s 189 member countries are divided into 24 constituencies of peculiar shapes and sizes. Ghana, for example, belongs to the same group as Afghanistan. Ecuador sits with East Timor. But in choosing the next boss after Christine Lagarde moves to the European Central Bank in October, the most decisive constituency may be a different group entirely: the “New Hanseatic League”. This includes eight small, northern members of the European Union (EU) with bad weather and good credit ratings. They lost out in the fight for big EU jobs earlier this month. In compensation they may have a large say in Europe’s pick to lead the fund.

That could be good news for Mark Carney, the charismatic and credentialled boss of the Bank of England. As well as Canadian and British citizenship, he holds a passport from Ireland, one of the new Hanseatics. If Ireland champions his cause in the league, and the league backs him within the union, he would be hard to resist within the fund. By convention the IMF is led by whichever European candidate the Americans can live with. And the Americans are unlikely to object to him, especially after the Europeans dutifully supported Washington’s choice to run the World Bank earlier this year.

What about an Asian rival? One obvious candidate is Tharman Shanmugaratnam...

A new study tracks the surge in Chinese loans to poor countries

Thu, 07/11/2019 - 14:51

LOAN TALKS with Belarus; funding for bridges in Liberia; a possible gas project in Timor-Leste; accusations of exploitation in Tanzania; a corporate dispute in India; pledges to support the Rwandan private sector. And that was just the past few weeks. Such is the frenetic pace of China’s overseas lending that its outstanding loans have risen from almost nothing in 2000 to more than $700bn today. It is the world’s largest official creditor, more than twice as big as the World Bank and IMF combined. Yet tracking the money is hard because of limited transparency in its disclosures.

A new study by Sebastian Horn and Christoph Trebesch of the Kiel Institute for the World Economy and Carmen Reinhart of Harvard University offers the most comprehensive picture yet of China’s official credit flows (including state-owned banks). It adds to concern about whether China has sowed the seeds for debt problems abroad. They find that nearly half of China’s lending to developing...

To get a ticket to Wimbledon you must be rich, patient or lucky

Thu, 07/11/2019 - 14:51

ECONOMICS IS ALL about allocating scarce resources. Usually that is done by pricing. If demand for strawberries exceeds supply, prices will rise. Customers may switch to raspberries, or farmers may plant more strawberries. But some markets are more complex. 

Take those for tickets to popular events—like Wimbledon. The tournament is played over a fortnight each July at the All England Lawn Tennis & Croquet Club, which has a fixed capacity. Raising prices until demand met supply would exclude most tennis fans, tarnishing the tournament’s image. A price overshoot would leave some seats empty, ruining the atmosphere.

Around a sixth of seats on Centre Court, where the big-draw matches are played, are reserved for debenture-holders, who pay through the nose for a specific seat for five years. These can be freely resold. Debentures for 2021-25 went for £80,000 ($100,000); a single resale ticket costs thousands.

Other seats are rationed in different ways. The first is chance: the All England Club runs a ballot six months before the tournament each year. Winners get the option to buy a randomly allocated pair of tickets at a price that varies according to the day and court—this year, between £33 and £190. These cannot be resold.

The second is queuing. Except on the final four days, 500 tickets for the top...

Recep Tayyip Erdogan sacks the head of Turkey’s central bank

Thu, 07/11/2019 - 14:51

TURKEY’S ECONOMY had just begun to show signs of recovery. High interest rates, a measure of calm following local elections earlier this year and attempts to rebuild a strained relationship with America had allowed the lira, which fell by 12% against the dollar in the first four months of the year, to strengthen. Inflation had fallen to 16%, from 25% last autumn.

But in the small hours of July 6th Recep Tayyip Erdogan, Turkey’s president, put the progress in jeopardy by sacking Murat Cetinkaya, the boss of the central bank. Though Mr Cetinkaya was not widely admired by investors, his peremptory removal unsettled markets. Mr Erdogan compounded the damage by proclaiming that high lending rates were to blame for inflation (a view roundly mocked by economists) and making clear that it was he who was in charge of monetary policymaking. “We told him several times to cut interest rates at meetings on the economy,” said the president of Mr Cetinkaya. “We said that if rates fall, inflation will fall. He didn’t do what was necessary.”

Mr Erdogan scored an own goal, says Paul McNamara, an investment director at GAM, an asset manager. “The best case is that they get a lira sell-off that keeps rates higher than they otherwise would have been. The worst case is that they set off a currency avalanche.” Mr Cetinkaya’s sacking showed...

Recognising reality at Deutsche Bank

Thu, 07/11/2019 - 14:51

“THE MOST fundamental transformation of Deutsche Bank in decades.” So Christian Sewing described his refashioning of the chronically unprofitable firm, announced on July 7th. Germany’s biggest lender is trimming its investment bank—and excising the trading of shares altogether. Mr Sewing, chief executive since April 2018, intends to cut costs by €5.8bn ($6.7bn) a year, a quarter of the total, by 2022. Eighteen thousand jobs, a fifth of the payroll, will go. Some equity traders were shown the door on July 8th.

The restyling has taken five months to plan (during which time Deutsche also pondered and dismissed a merger with its Frankfurt neighbour, Commerzbank). It looks bold. Yet it is also a belated recognition of reality. For years after the financial crisis, Deutsche clung to the hope that it would again strut alongside Wall Street’s most glamorous names, as it had for a heady 20 years. Mr Sewing has binned the last threads of that ambition. The remodelled Deutsche—150 years old next year—will look a lot more like the sober servant of international companies it originally was.

Mr Sewing is reshaping the bank around four lines. At the centre will be a corporate bank, chiefly providing European businesses with cash management, trade finance, foreign exchange and so forth: dull-sounding work but steady. A substantial...