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The Economist - Thu, 05/02/2019 - 14:46

The Economist is looking for a writer to work at its headquarters in London. The ideal candidate will combine the ability to write informatively, succinctly and wittily with a knowledge of finance. Applicants should send a CV and an unpublished article they think would be suitable for publication in either the Business section or the Finance and Economics section to financejob@economist.com. The closing date for applications is May 31st 2019.

The quest to find companies that have a lasting competitive edge

The Economist - Thu, 05/02/2019 - 14:46

IN 1965 WARREN BUFFETT acquired Berkshire Hathaway, a textile company based in New England, for his investment partnership. When he began buying the stock, in 1962, Berkshire had working capital worth $16 a share; the shares sold for $8. So Mr Buffett was getting the rest of the firm’s assets for less than nothing. This was the sort of “value investing” that had made Mr Buffett and his partners a tidy pile over the preceding decade.

Berkshire would become a wildly successful investment vehicle. On May 4th, 40,000 of its shareholders gather for its annual general meeting in Omaha, Nebraska, for a dose of Mr Buffett’s folksy wisdom. It continues to make a wide range of financial investments: witness this week’s offer to buy $10bn of debt-like securities and warrants in Occidental, an oil firm that is negotiating a merger.

Yet he came to regret buying Berkshire stock. The return on investment was paltry, because the firm had no unique edge or products. Textiles are commodities. No one ever asked his tailor for a Hathaway suit lining.

In its way, Berkshire provided a valuable lesson. Mr Buffett’s strategy shifted. Instead of “buying fair companies at wonderful prices”, he would buy “wonderful companies at fair prices”. To make the grade, a firm must have a lucrative position in the marketplace. But it needs more. To...

How a few missing words hurt Turkey’s turnaround

The Economist - Thu, 05/02/2019 - 14:46

A CENTRAL BANK’S words have power. Three of them (“whatever it takes”) calmed the euro area’s debt panic in 2012. Another few (the Federal Reserve mulling a “step down in our pace of purchases”) started the taper tantrum that upset emerging markets in 2013.

What is left unsaid can also be powerful. After its interest-rate meeting on April 25th, Turkey’s central bank failed to repeat eight words that had been included in each of its seven previous statements: “if needed, further monetary tightening will be delivered”. The omission cast doubt on its commitment to fight inflation, which was almost 20% in the year to March. In response, the lira fell by more than 1% against the dollar. It has fallen by 11% this year.

The mishap was an uncomfortable reminder of last summer’s currency turmoil, when the central bank (browbeaten by Recep Tayyip Erdogan, Turkey’s president) failed to raise interest rates swiftly enough to prevent a collapse in the currency. But the parallels should not obscure what has changed in the interim. Turkey’s economy is better balanced now than it was then.

In September the central bank reasserted itself, increasing interest rates to 24%, where they have stayed since. The combination of tighter money and a cheaper currency curbed import spending and encouraged exports. As a result, Turkey’s...

Emi Nakamura wins the John Bates Clark medal

The Economist - Thu, 05/02/2019 - 10:18

THE YEAR 2007, when Emi Nakamura earned her PhD, was a strange one for her chosen discipline of macroeconomics. It marked a turning point between complacent consensus and humiliating division. Pre-crisis macroeconomics had such strong faith in the stabilising power of monetary policy that it neglected the dangers of financial shocks and the merits of fiscal stimulus. Like joining the cavalry in 1914, it was presumably a bad time to be entering the profession.

Not a bit of it. “I think it was a good time,” says Ms Nakamura, who now works at the University of California, Berkeley, and this week won the John Bates Clark medal for the best economist aged under 40 in America. “Macroeconomics”, she points out, “is a countercyclical field.”

Yes, financial shocks of the sort that caused the Great Recession were understudied, but the consequences were Keynesian, she says. And the need for a response turned theoretical curiosities (such as the liquidity trap that can stymie monetary policy) into major policy dilemmas.

For students of economic ups and downs, the crisis also met a crying need: for a new data point, a new down-and-up to examine. The lack of data had made macroeconomics unfashionable. Its practitioners crunched the same quarterly, national numbers, which failed to illuminate ever more refined theories of how...

Advice from a dismal scientist to new parents

The Economist - Tue, 04/30/2019 - 15:40

FOR NEW parents, it is a terrifying moment. The hospital doors close behind them, leaving them with a new and helpless human being. The baby’s survival into adulthood seems impossible. What if it will not eat? What if it is allergic to water? What if an owl carries it off? Probably, few parents wish at that moment for the help of an economist. But “Cribsheet”, a new book by Emily Oster of Brown University, shows that in the hectic haze of parenthood an economist’s perspective can prove surprisingly clarifying.

Ms Oster’s academic work relates to health and health policy. A recent paper, for example, studied how food-purchasing decisions change in response to being diagnosed with diabetes. Five years ago she published a book on pregnancy, drawing on her training as an economist and her own experience (her husband, Jesse Shapiro, with whom she has two children, is also an economist at Brown). “Cribsheet” tackles the next step in the journey from childfree person to parent. Deciding whether to have a child in the first place fairly obviously involves economic calculations, from the impact on the parents’ earning potential to the resources that must be set aside to pay for nappies, child care and university. The decisions that come in a torrent after the birth, in contrast, such as whether to breastfeed or how to manage sleeping...

The past decade has brought a compliance boom in banking

The Economist - Mon, 04/29/2019 - 19:51

COMPLIANCE OFFICERS are the killjoys of finance. To bankers and traders keen to let rip, they are the po-faced types who frown at any transaction that might breach this rule or contravene that regulation. A recent episode of “Billions”, a television drama about Wall Street, captured the rainmakers’ frustration: so fed up is “Dollar” Bill Stern with having his wings clipped by Ari Spyros that the veteran trader rams the side of the compliance chief’s Porsche when he pulls out of the car park of their hedge fund, Axe Capital.

But pity not finance’s in-house policemen, for they have had a golden decade since the crisis. While swathes of banking have laboured under cutbacks and stiff capital requirements, their headcount and clout have grown. Banks fined for aiding corruption, money-laundering and sanctions-busting have beefed up their compliance, risk, legal and internal-audit teams. Compliance officers will never be the rock stars of finance, but they have moved from drums to rhythm guitar. And though some banks hint at having reached “Peak Compliance”, staffing and investment are likely to remain well above pre-crisis levels.

Combating financial crime is central to compliance. Enforcement has tightened since America passed the Patriot Act, which targeted money flowing to terrorists and other bad actors, after the...

Why investors are careful buyers but careless sellers

The Economist - Thu, 04/25/2019 - 10:48

JACK SCHWAGER was once a moderately successful trader who wondered why he was not an immoderately successful trader. Perhaps if he knew the secrets of trading superstars, such as Paul Tudor Jones or Jim Rogers, he might improve. So he asked them for those secrets. “Market Wizards”, his book of interviews with hedge-fund traders, was published in 1989. A second volume soon followed.

Both books have since been pored over by a generation of hedge-fund wannabes. They are full of great stories and tips covering a range of investing styles. Yet there are common elements. It is striking, for instance, how little emphasis the wizards put on getting into a position—finding the right trade at the right entry price—compared with when to get out of it. That makes sense. Deciding what and when to sell surely matters at least as much as, and perhaps more than, deciding what to buy.

The wizardly injunction to cut your losses and let your winners ride has hardened into hedge-fund doctrine. Even so, it is not widely practised in mainstream investing. Fund managers pay lots of attention to buying decisions. But they are remarkably careless in deciding what to sell.

That is the central finding of “Selling Fast and Buying Slow”, published late last year by a trio of academics—Klakow Akepanidtaworn of the University of Chicago’s...

Deutsche Bank and Commerzbank call off merger talks

The Economist - Thu, 04/25/2019 - 10:48

AFTER SIX weeks of rumour, a progress report was due. Deutsche Bank, Germany’s biggest bank, had promised investors an update on merger discussions with its Frankfurt neighbour, Commerzbank, on April 26th, alongside its first-quarter earnings. The update came, unplanned, a day early. On April 25th the two banks said they had called off the talks, the announcement prompted by a Reuters report that negotiations were about to fail.

The pair said that a deal would not justify the “additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration”. Outside the two banks and the German government, Commerzbank’s biggest shareholder with a 15% stake, plenty had reached that conclusion even before the banks said in mid-March that talks were under way and embarked on weeks of negotiation. Two troubled lenders looked unlikely to make one strong one. Deutsche eked out only a tiny profit in 2018, its first for four years, while Commerzbank has made paltry returns. Deutsche’s shares have been trading at about 25% of book value, Commerzbank’s at little more.

Though Commerzbank has done a lot of reconstructive work since taking over Dresdner Bank during the global financial crisis, Deutsche still resembles a building site. It is still attempting to integrate Postbank, a retail...

Mauricio Macri emulates his rival, Cristina Fernández de Kirchner

The Economist - Thu, 04/25/2019 - 10:48

“I JUST WANT an end to the price madness,” says Sonia Valverde, a mother of three, at a supermarket in Buenos Aires. She points to a government sticker advertising new price controls, which have frozen the price of 64 products, including sachets of milk. The only difficulty is that no sachets remain on the shelf.

Ending Argentina’s price madness was Mauricio Macri’s guiding mission when he won the presidency in 2015. He lifted currency controls imposed by his populist predecessor, Cristina Fernández de Kirchner, and began to cut energy subsidies. He gave the central bank a target for inflation and let the statisticians measure it honestly. And he loosened price controls Ms Fernández had imposed on hundreds of items, including soap and chicken.

But Argentina’s maddening prices refuse to be tamed. When inflation fell less quickly than hoped, the government relaxed the central bank’s inflation target in late 2017, undermining its credibility. As American Treasury yields rose months later, the peso dropped and inflation soared. Argentina embraced the IMF and abandoned its inflation target in favour of the more direct goal of constraining the money supply. But even after the central bank promised to freeze the quantity of money until the end of this year, the peso wobbled and annual inflation soared, to almost 55% in March (...

Large Nigerian banks have weathered a storm

The Economist - Thu, 04/25/2019 - 10:48

THE COLLAPSE of the oil price that began in 2014 was bad news for Nigerian banks. A quarter of their lending was to oil and gas firms. Many businesses were left reeling after a currency crisis. The economy stuttered, then plunged into recession. Before the oil slump just 3% of loans were not being paid back. By 2017 some 15% had gone sour.

The oil shock underscored an old truth: in choppy waters, it helps to be a big ship. The country’s large banks made tidy profits and now sit on sufficient capital. But smaller ones look shaky, even as currency problems have eased and the economy has recovered. Last year the central bank revoked the licence of Skye Bank, a struggling midsized lender.

Diamond, another middling bank, was on the rocks before being taken over by Access, a bigger rival. The combined bank began operations this month, becoming Nigeria’s largest bank by assets (see chart). It now boasts more customers than any other in Africa.

Large banks were able to find ways to make money...

Should judges assume that markets are efficient?

The Economist - Thu, 04/25/2019 - 09:33

ECONOMISTS HAVE long argued about the workings of financial markets. Some, like Eugene Fama, argue that markets adjust swiftly to include all available information, an idea supported by the difficulty of predicting short-term stockmarket moves. Others, like Robert Shiller, posit that psychology has a big effect on market prices, pointing out that share prices fluctuate far more than fundamental variables such as dividends. The pair were jointly awarded the Nobel prize in economics in 2013 (along with Lars Peter Hansen).

The question is puzzling judges (or “chancellors”) in Delaware, where more than half of America’s public companies are listed. Last year the chancery court of Delaware decided that some shareholders of Aruba Networks, a company that Hewlett Packard (HP) acquired in 2015, should be awarded just $17.13 per share—the price before the deal was announced. HP paid $24.67. The judgment deferred entirely to the market, above all other evidence of what Aruba might be worth—including what HP was willing to pay. It was overturned by Delaware’s supreme court on April 16th.

Usually, if investors differ from the market in their opinion of a company’s value, they can buy or sell its shares. The exception is during a takeover. If most shareholders vote to sell at a given price, the rest must sell at that price, too. A...

Political economy suggests that geoengineering is likely to be used

The Economist - Thu, 04/25/2019 - 09:33

A QUARTER-CENTURY has passed since the first global climate-change treaty, the UN Framework Convention on Climate Change. Humanity’s record of following through on its climate promises is dismal. The concentration of carbon dioxide in the atmosphere has risen by 15% since 1994. The average global temperature, relative to the norm for 1951-80, has gone up by about 0.5°C over that period. And in 2018 annual emissions reached their highest level ever. To have a good chance of stopping global temperatures rising more than 1.5°C relative to the pre-industrial norm, by 2030 annual greenhouse-gas emissions must fall by almost half, relative to levels in 2010, according to the Intergovernmental Panel on Climate Change. They almost certainly will not.

A much warmer and more hostile climate might yet be avoided, however, through geoengineering: tinkering with climate processes to reduce the global temperature. (The possibilities are described at length in “The Planet Remade” by Oliver Morton, a journalist on this newspaper.) The longer climate targets are missed, the more likely geoengineering is to be used—and the more urgent it is that governments understand its tricky political economy.

Earth is warming because carbon dioxide and other greenhouse gases are accumulating in the atmosphere, shifting the balance of energy arriving...

The official impact assessment of NAFTA’s replacement is out

The Economist - Thu, 04/25/2019 - 09:33

“USMCA WILL boost economic growth and create jobs.” This was the triumphant headline from the White House’s media machine summarising an official assessment of the impact of America’s new trade deal with Mexico and Canada. According to the United States International Trade Commission (USITC), an independent government agency, the deal will increase American GDP by 0.35% and employment by 0.12%.

Since the North American Free Trade Agreement (NAFTA), which the USMCA replaced, had already slashed most tariffs between the three countries, it would be unfair to expect the impact to be large. But two aspects of the analysis offer fairer grounds for scepticism. One concerns trade in cars; the other the way the assessment accounts for policy stability in the future.

New rules of origin for cars were intended to push up wages and bring more production to North America. For a car to move from Mexico to America tariff-free, a much higher share of its parts must now be sourced in the region than had been required under NAFTA. Car manufacturers could have opted to ignore the deal, pay the 2.5% tariff for non-USMCA imports and source parts wherever made business sense. Instead, most seem to be reworking supply chains to meet the new requirements. The USITC predicted that employment in America in car parts would increase by nearly 30,...

America wants to challenge rogue petrostates

The Economist - Wed, 04/24/2019 - 17:53

AMERICA HAS been a superpower for decades. As a superpower in global energy markets, however, it is barely an adolescent. As recently as 2015 it was illegal to export oil. Within ten years the shale boom has transformed it into the world’s biggest producer of crude. No longer must it tiptoe around regimes whose policies it detests but whose oil it craves. President Donald Trump touts an age of “energy dominance”. He has put its burgeoning energy prowess to the test with sanctions on Iran and Venezuela. But dreams of dominance are running into the realities of energy markets.

On April 22nd the American administration announced that no further waivers would be granted to countries importing oil from Iran. “We are going to zero,” declared Mike Pompeo, the secretary of state. Waivers to eight countries, granted in November, were due to expire on May 2nd. Even so, investors were shocked that no exceptions were allowed. According to the state department, Saudi Arabia, the United Arab Emirates and America will help meet demand. But Brent crude, the international benchmark, quickly topped $74, the highest level in nearly six months.

The Trump administration is right to make to make a fuss about America’s oil boom. According to the International Energy Agency, by 2021 the country may be a net exporter of oil. This would be a...

Shinzo Abe, Japan’s prime minister, is determined to raise sales taxes

The Economist - Wed, 04/17/2019 - 14:54

AMONG THE pledges Shinzo Abe made in 2012, as he started his second stint as Japan’s prime minister, was to double the sales-tax rate. At 5% it was low by rich-country standards, and Japan’s public finances, battered by years of deficits, needed shoring up. But having gone part-way, to 8%, in 2014, he has twice put off finishing the job for fear of choking off a tentative economic recovery. That increase is now scheduled for October, and he is loth to delay a third time—so much so that he has said that only “an event with the magnitude of the Lehman Brothers shock” would deter him.

Everyone agrees that a higher sales tax is needed, but they differ on the wisdom of a speedy move. The previous hike provoked a sharp downturn. Now fresh signs of economic weakness are leading to fears of a repetition.

Just a few months ago the government was congratulating itself on having overseen Japan’s longest economic expansion since the second world war (as judged by a panel of experts appointed by the cabinet office). But last month the cabinet office downgraded its headline economic assessment for the first time in three years, blaming foreign factors, including China’s slowing economy. Their gloominess is widely shared. Freya Beamish of Pantheon Macroeconomics, a consultancy, points to the purchasing managers’ index and machine...

Bond maturities are the result of a tug-of-war

The Economist - Wed, 04/17/2019 - 14:54

IMAGINE TWO countries that differ only in the scale of public debt. In Vulgaria it is 50% of GDP; in Freedonia it is 5%. Vulgaria used the proceeds of its extra debt-raising to buy land for public parks. Because of these assets, it is regarded as being as good a credit risk as Freedonia. Taxes do not affect incentives to work or save in either place (they are a bit higher in Vulgaria). Inflation is low and stable.

How should each country manage its debts? Specifically, how much should it raise by selling short-term bills, and how much by selling long-term bonds? A strain of public-finance theory, developed by Robert Barro of Harvard University, says it does not matter. Debt is deferred taxation. A dollar of debt will cut today’s tax bill by a dollar, but at the cost of raising it by a dollar tomorrow. If the debt is a one-year bond, the tax bill will come sooner. If it is a ten-year bond, it will come later. In this frictionless world the maturity of public debt is irrelevant.

The real world is messier. The economy fluctuates, and so do interest rates. Taxes affect how willing people are to work. In such conditions, the maturity of debt is a tug-of-war between two influences. The government wants to keep today’s taxes low: that pulls it towards short-term bonds, the cheapest to issue. But it is wary of sudden increases...

Is the world economy still slowbalising?

The Economist - Wed, 04/17/2019 - 14:54

PROTONS POP up in every atom. Proton cars are not quite so ubiquitous. Founded in 1983 by Malaysia’s government, the Proton company strove to build a truly “national car”, but its parent lost over 1bn ringgit ($280m) in the two financial years before it sold a stake to Geely, a Chinese carmaker, in 2017. Neighbouring Thailand, in contrast, lacks a national car, but boasts a thriving car industry. Carmaking took off in the late 1980s after Japanese multinationals flocked to the country, importing whatever they could not make or buy within its borders. Foreign parts still account for 56% of the value of Thailand’s car exports, according to the most recent data from the World Trade Organisation (WTO). But the remaining home-grown value exceeds the total worth of Malaysia’s car exports several times over.

Thailand’s cosmopolitan car industry illustrates the potential of “global value chains”, which link several countries in the production of a good or service. Unfortunately, these chains declined relative to world GDP between 2011 and 2016, contributing to what has been dubbed “slowbalisation”. But a new report by the WTO (and a long chain of partners, including the University of International Business and Economics in Beijing and the China Development Research Foundation, a Chinese government think-tank) finds that value chains recovered...

A new era at Goldman Sachs starts in the shadow of a scandal

The Economist - Wed, 04/17/2019 - 14:54

NO ONE IS more aware of the value of a brand than Goldman Sachs. The investment bank, founded in 1869, has advised the biggest and best American companies on the value of theirs for the past 150 years. It helped F.W. Woolworth, a pioneering department store, with its initial public offering in 1912. It took Ford and Disney public in the 1950s, helped Amazon buy Whole Foods in 2017 and will take Uber public later this year. Yet these are troubled times for its own brand, tarnished by association with a fraud-ridden Malaysian state-run fund, 1MDB, and hurt by the bank’s failure to adapt after the global financial crisis.

These issues were echoed in its first-quarter results, released on April 15th. Revenues came in below expectations—13% lower than for the first quarter of 2018—largely as a result of lower trading revenues. The share price fell by more than 3% and the earnings call was peppered with analysts asking questions about1MDB.

The first task for David Solomon, who took over as chief executive last October, is to clean up Goldman’s reputation. In 2012 and 2013 it helped 1MDB raise $6.5bn across three bond offerings, earning $600m in fees—far above the norm for such work. American and Malaysian authorities have alleged that much of the money raised was stolen in a scheme masterminded by Jho Low, a Malaysian...

American banks’ earnings are boosted by retail business

The Economist - Wed, 04/17/2019 - 14:54

AMERICA’S FINANCIAL markets made a stunning start to 2019. The S&P 500 stockmarket index climbed by 13.1% in the first quarter, its best beginning since 1998. But that was little use to Wall Street banks. Trading revenues depend on volumes, not prices. Quarterly earnings, reported in recent days, have confirmed that they were markedly lower than a year earlier. Never mind. The retail divisions of America’s mightiest banks did well enough to boost profits overall. The giants’ retail heft is likely to keep serving them well.

Start, though, with the grim stuff. Share-trading revenues fell by 24%, year on year, at Citigroup and Goldman Sachs; by 22% at Bank of America (BofA); and by 13% at JPMorgan Chase. (Morgan Stanley, the remaining bulge-bracket Wall Street firm, was due to report earnings after The Economist went to press on April 17th.) New share issues were delayed by a 35-day government shutdown that lasted until late January, holding up approvals at the Securities and Exchange Commission; equity-underwriting revenues tumbled by 20% at Citi, 23% at JPMorgan Chase, 29% at BofA and 34% at Goldman. But debt underwriting was perkier at Citi and JPMorgan Chase, and advisory fees rose across the board.

Yet JPMorgan Chase, America’s biggest bank by assets, still reported a 5.4% rise in net...

China’s growth is set to perk up after a decade low

The Economist - Wed, 04/17/2019 - 08:46

JUST OVER 25 years ago Shanghai launched its metro with a single, stubby line. Since then it has added 15 lines and some 700km, making it the world’s longest metro system. It is far from done. The city recently unveiled plans for another 300km, including overland rail, within five years. Much of the work proceeds unseen as machines bore tunnels beneath the surface. But excavation holes around the city offer clues about the activity deep underground.

They are part of a nationwide push. The Chinese government has, in the words of state media, hit the “fast-forward button” on infrastructure spending, a tried and tested way to pep up the economy. In the first quarter China’s GDP grew by 6.4% compared with a year earlier, level with the final quarter of 2018—its slowest in a decade. That would still be enviably fast for most countries. But Chinese officials have been unnerved by the possibility that it could herald the start of a steeper slide.

Last year such fears were widely heard. The trade war with America seemed destined to...