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...
IMAGINE THAT, by some twist of fate, you become the ruler of an oil-rich state. A crash in the oil price has left a hole in its budget. You are forced to consider selling the kingdom’s assets. Among them is a mothballed oilfield in a remote part of the country—so remote that it costs $90 to retrieve each barrel of oil. That is above the prevailing price of $70 a barrel. Even so, you are advised to try to sell a licence to operate the field.
Who would buy such a licence? It is valuable only if a barrel of oil sells for at least $90. Yet there is always value in a right—if it carries no obligation. The greater the chance that prices will rise above $90, the more the licence can be sold for. The price will be higher if the licence is for a long period. Crucially, the price also depends on how changeable the oil price is. The more volatile, the likelier it is that it will hit a level where it is profitable to restart production.
Volatility is normally something to fear. People prefer a stable income to an erratic one, for instance, and they feel the same way about their wealth. In this regard, the jumpiness of stock prices is a source of discomfort. But where you have rights without obligations—options, in other words—things are different. Here, volatility is welcome.
Look closely, and the hypothetical oil licence...
IN OCTOBER, SENTIMENT on India’s financial markets was bleak. The previous month Infrastructure Leasing and Financial Services (IL&FS), a Mumbai-based lender with scores of subsidiaries, had defaulted on a series of loans. Stockmarket indices fell sharply (see chart). Investors worried not only that the firm’s losses would directly harm other institutions, but also that similar problems might be lurking in other lenders.
Then the government stepped in. The management was replaced, and state-controlled entities ensured that other non-bank lenders had enough liquidity to enable credit markets to function. From a low point on October 26th, financial markets resumed a rise that, notwithstanding several reversals and a lull in recent days, has seen dramatic gains in the past decade. Late last month the major indices, including the Bombay Stock Exchange’s Sensex, which includes 30 companies, and a broader index of 500 companies, flirted with the heights they reached before the IL&FS scare—even though American sanctions on Iran pushed up the price of oil, India’s biggest import.
Crucial to the rally have been foreign buyers, whose activities are tracked and reported by local exchanges. Their importance is a consequence of the odd ownership structure of Indian companies. More than...
THE CLASS of the guests reflects the clout of the hosts. In a posh Washington hotel, two powerful visitors—first Maxine Waters, the Democrat who chairs the House of Representatives’ financial-services committee, and then Mike Crapo, the Republican head of the Senate banking committee—address a roomful of well-breakfasted bankers. After the speeches and a few polite but pointed questions, the bankers head to lobby Capitol Hill.
They are not from Wall Street, but are community bankers, from towns large and small all over America. Some belong to the third or fourth generation running the family business. They each oversee only up to about $10bn in assets, and most of them much less. But the Independent Community Bankers of America (ICBA) are both deeply rooted in their home soil and well organised. Almost every congressional district is home to at least one such bank.
Though their numbers have been falling for years (see chart), America’s small banks are, by and large, in fair shape. According to the Federal Deposit Insurance Corporation (FDIC), a regulator, the 4,979 community banks reported an average return on equity of 10.6% last year—less than bigger banks, but nearly two percentage points more than in 2017 and the most since the financial crisis. Only 3.4% lost money, the lowest share on record.
A YEAR AFTER the start of trade skirmishes between America and China, America’s economy—and the world’s—seem to be holding up. Are trade wars, as President Donald Trump believes, not so costly after all?
The immediate impact was always going to be hard to spot. Though special tariffs now cover more than half of China’s exports to America, those exports account for less than 2% of American personal consumption and only around 5% of American business investment. Surveys suggest that tariffs are suppressing investment in America, but how much is unclear.
As with all taxes, much of the effect is to shuffle costs and resources around. Taxing imports hurts companies and consumers by making their foreign purchases more expensive, and as domestic producers respond to weaker foreign competition by raising prices. Exporters may lose out from retaliatory tariffs. But there are also winners, including domestic companies shielded from foreign competition and thus able to enjoy fatter profits—and the US Treasury, which gains new revenues.
A recent study by Pablo Fajgelbaum of the University of California, Los Angeles, Pinelopi Goldberg of the World Bank, Patrick Kennedy of the University of California, Berkeley and Amit Khandelwal of Columbia University totted up all such effects for the tariffs imposed by the Trump...
THE SHARED cars that shuttle between Abuja and Kaduna, two Nigerian cities, carry more than passengers. For a fee they will also carry cash, says Odedele Olusanmi, a driver. On a typical journey he takes five packages, each holding around 20,000 naira ($55). Only two-fifths of Nigerians have bank accounts, which is why some send money this way. Yet an alternative could already be in their pockets.
In the past decade a mobile-money revolution has swept through much of Africa, enabling the unbanked to make transfers, pay bills and save. Half of the world’s 866m mobile-money accounts are in Africa, not counting services which need users to belong to a bank. But not many are in Nigeria, its largest economy and most populous country, with 200m people, where mobile money was used for transactions worth just 1.4% of GDP last year (compared with 44% in Kenya). Four-fifths of Nigerians have never heard of it.
Until recently, the Nigerian central bank did not allow telecoms firms to offer financial services, except as the junior partners of conventional banks. Elsewhere mobile operators had been in the vanguard. A mobile-money system needs agents to take in and give out cash—boots on the ground, not just bytes in the pocket. In the early stages telecoms firms, which sell phone credit in the remotest villages, can run these...
CHINA’S PROPAGANDA machine grinds slowly. But its output is nothing if not consistent. It took more than 24 hours for state media to report President Donald Trump’s threats, tweeted on May 5th, to ratchet up tariffs on China. By that time Chinese stocks had already plunged, a foretaste of global market ructions. When the response finally came in official editorials, it was a familiar refrain from China’s canon of trade-war statements: “We do not want to fight, but we are not afraid to fight and, given no choice, we will fight.”
That sounds bellicose. Yet one lesson from the past year’s dispute with America is that China places more weight on the sentence’s first part, its desire to avoid a full-on fight. At multiple points when the Chinese government could have retaliated against America by targeting its businesses, it has instead tried to win them over.
Dodging a fight, though, does not mean giving in. As The Economist went to press, officials from both countries were preparing for talks in Washington to see if they could revive a deal which, until Mr Trump’s tweets, had seemed nearly done. The previous evening, America announced its intention to raise tariffs on $200bn of Chinese goods from 10% to 25% from midnight on May 9th. According to Reuters, citing American government...
UBER’S INITIAL public offering, due after The Economist went to press, will be one of the largest in tech history. The hoopla cannot drown out uncertainty about the firm’s future. Ride-hailing platforms have grown hugely in recent years, changing the face of urban transport. They have also been virtuosic losers of money (see article). Lyft made an operating loss of nearly $1bn in 2018; Uber, about $3bn. The flow of red ink mainly represents subsidies from investors to riders: cash that allows average Joes to feel as though they have a personal car at their beck and call. It will not last. But Uber passengers are not the only road-farers facing straitened circumstances. Car-related subsidies of all sorts are becoming harder to sustain. Their loss could reveal mass travel in single-occupancy cars to be a no-longer-affordable luxury.
The mania for tech platforms that match cars with riders rests on the idea that they can turn car-hire into critical urban-transport infrastructure. Perhaps ride-hailing could spare millions of people the cost of owning cars that mostly sit idle, and allow vehicles and roads to be used more efficiently. But increased scale has yet to...
INVESTORS STARTED the year brooding about the risk of an American recession. Torsten Slok of Deutsche Bank, Germany’s biggest lender, says clients around the globe were worried. Financial indicators were flashing red, the stockmarket was weak and yields on low-grade corporate debt had jumped. The Federal Reserve’s decision to raise interest rates in December had been unsurprising, but unwelcome.
At the end of the year a model from economists at JPMorgan Chase had put the chances of a recession within 12 months, based on the S&P 500 index and corporate-credit spreads, at 65%. But the mood has now improved. By April 29th JPMorgan’s model was putting the chances of a recession at just 15%.
“It’s eye-popping how quickly the narrative has changed,” says Mr Slok. One reason for the improvement in sentiment is the Fed’s evolving monetary-policy stance. In January it turned more doveish, abandoning its plans to raise rates in 2019. “We don’t see any evidence at all of overheating,” said Jerome Powell, the chairman of the Federal Reserve, on May 1st after announcing that the Fed would maintain its patient stance. He also repeated his view that the data do not warrant higher rates.
Investors have been delighted by the Fed’s pause. But the timing and extent of their change of mood suggests that is not the full story....
DAYS AFTER allegations of misuse of customer money against Tether rocked the cryptocurrency world, the shock wave has temporarily subsided. The four-year-old currency, which fell to 97 cents last week, has returned to parity with the American dollar. And after a 10% fall, to $4,953, the price of a single Bitcoin, its best-known peer, has steadied at around $5,400. But cryptocurrency-watchers remain wary. Beneath the surface, trouble may be brewing.
Doubts had long swirled about the bona fides of Tether, which has more than $2.8bn-worth in circulation, and Bitfinex, the exchange it is traded on. On April 25th New York’s attorney-general, Letitia James, accused both of a cover-up intended to hide a loss of $850m in client and corporate funds. That hit the value of other cryptocurrencies because of Tether’s unique status. Cryptocurrencies stem from libertarian attempts to create a currency resistant to central control. Many exchanges thus struggle to get hold of dollars, because banks, which must comply with fraud and money-laundering rules, do not want their custom. For them Tether, which is pegged one-to-one to the greenback, acts as a dollar substitute. Traders use it for transfers between one cryptocurrency and another.
For years Tether said that every coin it issues is backed by a real dollar in a real bank account....
THE FOREIGN-EXCHANGE (FX) market is as opaque and old-fashioned as it is enormous. Most of its $5trn of daily trading happens “over-the-counter” (OTC), in deals negotiated between banks and private customers, rather than on exchanges. Many orders are still placed by phone. Gauging the market’s size and structure usually means relying on outdated surveys. The most comprehensive review, by the Bank for International Settlements, is conducted only once every three years.
Yet modernity is arriving—in fits and starts. Last month it emerged that Deutsche Börse, Europe’s third-largest stock exchange, was close to buying FX all, an electronic FX-trading platform, for a reported $3.5bn. If it happens the deal could end up being one of the largest in Deutsche Börse’s history. It hints at a shake-up in a sector that has long been deemed antediluvian.
The FX market serves not only investors, but corporations and governments seeking to protect trade or bonds against currency swings. FX contracts can be “spot” (for immediate delivery), “forward” (for delivery at a later date) or “swap” (when currency is exchanged back at maturity). Buyers go through dealers (mostly banks), which source liquidity. Specific needs, such as matching cash-flow dates, are more easily met using OTC trades, which can be tailored, than over...