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Finance and economics
Updated: 41 min ago

Who needs America?

Thu, 11/16/2017 - 15:58

REVIVING the original Trans-Pacific Partnership (TPP), a trade deal between 12 countries around the Pacific Rim, is technically impossible. To go into force, members making up at least 85% of their combined GDP had to ratify it. Three days into his presidency, Donald Trump announced that America was out. With 60% of members’ GDP gone, that deal was doomed.

But on November 11th, another began to rise in its place, crowned with a tongue-twisting new name: the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). Ministers from its 11 members issued a joint statement saying that they had agreed on its core elements, and that it demonstrated their “firm commitment to open markets”. The political symbolism was powerful. As America retreats, others will lead instead.

The CPTPP is still far from finished, however. This inconvenient truth is unsurprising. Resuscitating the deal without its biggest member was always going to be hard. Without America, uncomfortable concessions made in the old...

Fuelled by Middle East tension, the oil market has got ahead of itself

Thu, 11/16/2017 - 15:58

ONLY one thing spooks the oil market as much as hot-headed despots in the Middle East, and that is hot-headed hedge-fund managers. For the second time this year, record speculative bets on rising oil prices in American and European futures have made the market vulnerable to a sell-off. “You don’t want to be the last man standing,” says Ole Hansen of Saxo Bank.

On November 15th, the widely traded Brent crude futures benchmark, which had hit a two-year high of $64 a barrel on November 7th, fell below $62. America’s West Texas Intermediate also fell. The declines coincided with a sharp drop across global metals markets, owing to concern about slowing demand in China, which has clobbered prices of nickel and other metals that had hit multi-year highs. (In a sign of investor nervousness after a sharp rally this year in global stock and bond markets, high-yield corporate bonds also weakened significantly this week.)

The reversal in the oil markets put a swift end to talk of crude shooting above $70 a barrel, which had gained strength after the detention in Saudi Arabia of dozens of princes and other members of the elite, and increasing tension between the Gulf states and Iran over Yemen and Lebanon. The International Energy Agency (IEA), which forecasts supply and demand, said on November 14th that it doubted $60 a barrel had become a new floor for oil. It...

Internship

Thu, 11/16/2017 - 15:58

Applications are invited for a Marjorie Deane internship in our New York bureau. The award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three to six months at The Economist writing about economics, business and finance. Applicants are asked to write a covering letter and an article of no more than 500 words, suitable for publication in The Economist. Applications should be sent by December 14th to deaneinternny@economist.com.

The rich get richer, and millennials miss out

Thu, 11/16/2017 - 15:58

Early contender for the 2047 list

BUOYANT financial markets meant that global wealth rose by 6.4% in the 12 months to June, the fastest pace since 2012. And the ranks of the rich expanded again, with 2.3m new millionaires added to the total, according to the Credit Suisse Research Institute’s global wealth report.

The report underlines the sharp divide between the wealthy and the rest. If the world’s wealth were divided equally, each household would have $56,540. Instead, the top 1% own more than half of all global wealth. The median wealth per household is just $3,582; if you own more than that, you are in the richest 50% of the world’s population.

America continues to dominate the ranks of millionaires with 43% of the global total. Both Japan and Britain had fewer dollar millionaires than they did in June 2016, thanks to declines in the yen and sterling. Emerging economies have been catching up in the millionaire stakes; they now have 8.4...

What annual reports say, or do not, about competition

Thu, 11/16/2017 - 15:58

What explains the remarkable strength of corporate profits and the sluggish growth of real wages in recent years? One explanation is that industries are getting less competitive. Work by The Economist found that two-thirds of American industries were more concentrated in the hands of a few firms in 2012 than in 1997.

Research by AXA Investment Managers Rosenberg Equities into the language used in American annual reports points in the same direction. Sherlock Holmes famously talked of the significance of the dog that did not bark in the night. It may be similarly important that companies refer to rivals much less than they did; usage of the word “competition” in annual reports has declined by three-quarters since the turn of the century. Business is less cut-throat than it used to be.

ABP, a Dutch pension giant, is more admired abroad than at home

Thu, 11/16/2017 - 15:58

EUROPE’S largest pension fund, a scheme for Dutch public-sector workers called ABP, is much feted abroad for its efforts in “sustainable” investing. At home, however, where it provides pensions to one in six families and manages nearly one-third of pension wealth, it is suffering a crisis of confidence.

By international standards, Dutch pensions are extremely generous overall, offering 96% of career-averagesalaries (adjusted for inflation), compared with an OECD mean of 63%. And they are solid. Thanks to mandatory, tax-deductible saving, the Dutch have stored up a collective pension pot of nearly €1.4trn ($1.6trn), roughly double GDP. Mercer, a consultancy, marks the country as second only to Denmark in a global ranking of schemes.

Yet Dutch people’s faith in their pensions has sunk as low as their trust in banks and insurers. In March a political party for older voters, 50+, won four seats in the Dutch parliament, largely thanks to its promise to “stop the pension raid”. ABP’s own members mark it at just 5.9 out...

Timelier provisions may make banks’ profits and lending choppier

Thu, 11/16/2017 - 15:58

IN THE first quarter of 2018 thousands of banks will look a little less profitable. A new international accounting standard, IFRS 9, will oblige lenders in more than 120 countries, including the European Union’s members, to increase provisions for credit losses. In America, which has its own standard-setter, IFRS 9 will not be applied—but by 2019 banks there will also have to follow a slightly different regime.

The new rule has its roots in the financial crisis of 2007-08, in the wake of which the leaders of the G20 countries declared that accounting standards needed an overhaul. Among their other shortcomings, banks had done too little, too late, to recognise losses on wobbly assets. Under existing standards they make provisions only when losses are incurred, even if they see trouble coming. IFRS 9, which comes into force on January 1st, obliges them to provide for expected losses instead.

Under IFRS 9 bank loans are classified in one of three “stages”. When a loan is made—stage one—banks must make a provision...

What is the purpose of tax reform?

Thu, 11/16/2017 - 15:58

IF MAKING America great again is the aim, you could do worse than bring back the economic growth rates of the late 1990s. President Donald Trump’s team reckons that the Republican tax plan making its way through Congress will do just that. “We are creating a model that creates economic growth in this country,” says Gary Cohn, the director of Mr Trump’s National Economic Council. Kevin Hassett, who runs the Council of Economic Advisers, reckons the bill should push growth above 4% per year.

Such heights are not beyond the realm of possibility, but if America reaches them tax reform will have little to do with it. That is not because of the specifics of the plan. Rather, it reflects an underappreciated reality: tax reform can accomplish many things, but raising long-run growth is not generally among them.

Most assessments of the Republican tax proposals, like most analyses of most tax plans, conclude their effects on growth will be small. The Penn Wharton Budget Model, a non-partisan public-policy initiative, projects that GDP in 2027 will be between 0.4% and 0.9% higher as a result of the bill.

Nonsense, say the adherents of the supply-side school of thinking. Economic growth can be broken down into changes in the supply of labour and in labour productivity. Supply-siders reckon that lower tax rates on labour income should raise its supply; lower...

What five years of Abenomics has and has not achieved

Thu, 11/16/2017 - 15:58

IN TOKYO’S Iidabashi district, north of the Imperial Palace, young salarymen and women gather after work to enjoy grilled chicken and a drink at Torikizoku, a chain of budget restaurants. They tap out their orders on touch-screen terminals, which the company has installed on many tables in an effort to economise on waiters, whose wages are hard to contain. Last month the company was forced to raise its price by over 6%, to ¥298 (about $2.60) plus tax, for two skewers of locally reared chicken yakitori. It was the firm’s first price increase in 28 years.

Chicken skewers are not commonly seen as a macroeconomic indicator. But Torikizoku’s decision exemplifies the underlying logic of “Abenomics”, a campaign to revive Japan’s economy, named after Shinzo Abe, its prime minister. His economic strategy aimed to stimulate spending and investment through vigorous monetary easing. That would create jobs, driving up wages. Higher wages, in turn, would push up prices. Success would be measured by the defeat of deflation, which had...

Criticism of index-tracking funds is ill-directed

Tue, 11/14/2017 - 17:47

INDEX funds were devised in the 1970s as a way of giving investors cheap, diversified portfolios. But they have only become very popular in the past decade. Last year more money flowed into “passive” funds (those tracking a benchmark like the S&P 500) than into “active” funds that try to pick the best stocks.

In any other industry, this would be universally welcomed as a sign that innovation was coming up with cheaper products to the benefit of ordinary citizens. But the rise of index funds has provoked some fierce criticism.

Two stand out. One argues that passive investing is, in the phrase of analysts at Sanford C. Bernstein, “worse than Marxism”. A key role of the financial markets is to allocate capital to the most efficient companies. But index funds do not do this: they simply buy all the stocks that qualify for inclusion in a benchmark. Nor can index funds sell their stocks if they dislike the actions of the management. The long-term result will be bad for capitalism, opponents argue.

A...

Activist shareholders take on the London Stock Exchange

Thu, 11/09/2017 - 15:48

Rolet: who knows?

ACTIVIST hedge funds like Elliott Management, Cevian Capital or The Children’s Investment Fund (TCI) are famed for pushing for change at the companies they buy into. A favoured tactic is to install a new chief executive at a floundering firm. So it is odd to find a fund lobbying for an existing boss to stay on, as TCI has done in a spat with the London Stock Exchange (LSE).

In over eight years at the LSE, Xavier Rolet has transformed it from a share-trading venue to a clearing and data-services powerhouse, through acquisitions such as Russell, an index-maker, and a majority stake in LCH, a clearing-house. His hope of merging with the LSE’s big German rival, Deutsche Börse, fell through, largely because of Britain’s vote to leave the EU. But Mr Rolet remains widely respected. So eyebrows were raised when the LSE’s announcement on October 19th that Mr Rolet would leave in 2018 gave no reason.

In a fiery letter penned on...

Regulators begin to tackle the craze for initial coin offerings

Thu, 11/09/2017 - 15:48

“I’M GONNA make a $hit t$n of money on August 2nd on the Stox.com ICO.” Written in July on Instagram, these words made Floyd Mayweather, a boxer, the first big celebrity to endorse an “initial coin offering”, a form of crowdfunding that issues cryptographic coins, or “tokens”. Stox, an online prediction market, went on to raise more than $30m, some of which seems to have gone directly into Mr Mayweather’s pocket. Other VIPs, including Paris Hilton, a socialite, followed suit and endorsed ICOs. But this source of easy cash may now be drying up: on November 1st America’s Securities and Exchange Commission (SEC) warned that such promotions may be unlawful, if celebrities fail to disclose what they receive in return.

The endorsements and the SEC’s attempt to rein them in are the latest episodes of token mania. Virtually unknown a year ago, ICOs are now more celebrated than initial public offerings (IPOs), the conventional way of floating a firm. Over the past 12 months $3.3bn has been...

ING, a Dutch bank, finds a winning digital strategy

Thu, 11/09/2017 - 15:48

GERMANY’S third-biggest retail bank has no branches. It is also Dutch. And it is highly profitable. ING-DiBa, an online bank owned by ING, the Netherlands’ biggest lender, looks after €133bn ($154bn) of deposits for over 8m customers. In a fragmented market—most Germans entrust their savings to small, local banks—that means a share of around 6%. ING-DiBa’s lack of branches keeps costs down, allowing it to resist charging for current accounts and offer savers a tad more than rivals, despite a recent cut; and it has won a name for good service in a country not renowned for it. While other banks struggle after years of ultra-low interest rates, ING-DiBa thrives. Its return on equity exceeds 20%.

ING as a whole is in fair shape, too. On November 2nd it reported net third-quarter earnings of €1.4bn, slightly more than a year earlier. The group’s return on equity was a healthy 11%, nearly two percentage points up. Since 2014 the number of “primary” customers (with an active current account and another product) has climbed by 25%, to...

America’s Republicans take aim at mortgage subsidies

Thu, 11/09/2017 - 15:48

IN THE 1980s Margaret Thatcher and Ronald Reagan were both proud of their efforts to expand home ownership. In Britain, Thatcher presided over a fire sale of state-owned homes to tenants. In America, Reagan deregulated financial markets and expanded mortgage lending. At the time both countries provided generous mortgage-related tax breaks, making it easier to flog homes to the masses.

Britain’s 1980s housing boom turned to bust; the mortgage subsidies that helped to fuel it were abolished. America still subsidises mortgages to the tune of $64bn a year, by allowing homeowners to deduct interest costs from their tax liabilities. But a tax plan unveiled by Republicans on November 2nd proposes to limit the subsidy.

Twelve European Union countries also include some form of mortgage-interest deduction (MID) in their tax code. The average European subsidy, however, is around a tenth of America’s—about 0.05% of GDP. The Netherlands is much the most generous, at 2% of GDP.

...

The Paradise Papers shed new light on offshore finance

Thu, 11/09/2017 - 15:48

THIS week was uncomfortable for a host of well-heeled figures. In the frame were U2’s Bono, America’s commerce secretary, Wilbur Ross, and Britain’s Queen Elizabeth, as well as some of the world’s most valuable companies, including Apple and Nike. All these, and many more, feature in the “Paradise Papers”, a trove of more than 13m documents, many of them stolen from Appleby, a leading offshore law firm. The International Consortium of Investigative Journalists (ICIJ) and its 95 press partners, including the BBC and the New York Times, began publishing stories based on the papers on November 5th. Dozens appeared this week, with more to follow after The Economist went to press.

The ICIJ’s last big splash, the Panama Papers in April 2016, shed light on some of the darkest corners of offshore finance. In contrast, many of the activities highlighted by this leak are legal. But they would be widely seen as flouting the spirit of national tax laws by exploiting the gaps that open up...

Equity valuations are high. But other options look even worse

Thu, 11/09/2017 - 15:48

EVERY investor would like to find the perfect measurement tool to tell them when to get into, and out of, the stockmarket. The cyclically adjusted price-earnings ratio (CAPE), as calculated by Robert Shiller of Yale University, averages profits over ten years and is used by many as an important valuation indicator. Currently it shows that American shares have hitherto been more highly valued only in 1929 and the late 1990s, periods that were followed by big crashes.

That seems ominous. But as a paper by Dylan Grice and Gregor Obrecht of Calibrium, a Zurich-based private-investment office, makes clear, it is far from conclusive. The CAPE is not much use as a short-term indicator; it has been well above its long-term average for several years now, as it was in the late 1990s.

The main argument for the CAPE is a long-term one. If you divide all past CAPE values into quintiles, the annual returns earned over the subsequent decade by investing in equities when the CAPE was in...

Venezuela seeks the restructuring of its massive foreign debts

Thu, 11/09/2017 - 15:48

Maduro has a cunning plan. Maybe

INVESTORS have long seen a default on Venezuelan sovereign debt as a question of when, not if. Its bonds have been priced at levels implying imminent bankruptcy, but somehow the cash-strapped oil exporter has stayed afloat. Until now. On November 2nd Nicolás Maduro, the country’s authoritarian president, announced that he would order a “refinancing and restructuring” of foreign debt worth about $105bn. The prices of government bonds fell by up to half. Markets braced themselves for one of history’s most complex sovereign-debt renegotiations.

Mr Maduro’s brief statement was cryptic as to the concrete steps he will take. He invited “everyone involved in foreign debt” to talks in Caracas, the capital, on November 13th. Many creditors want a neutral venue. Moreover, Mr Maduro appears to have pre-emptively dashed any hope of a voluntary agreement by naming his vice-president, Tareck El Aissami, as head of his debt-restructuring committee. America’s Treasury department...

What there is to learn from the Soviet economic model

Thu, 11/09/2017 - 15:47

IN 1955 Jawaharlal Nehru, the prime minister of India, embarked on a 16-day tour of the Soviet Union. He was like a “kid in a candy store”, according to one editor of his letters. Besides the Bolshoi ballet and the embalmed corpse of Stalin, he visited a Stalingrad tractor works, a machinery-maker in Yekaterinburg and an iron-and-steel plant in Magnitogorsk. In a letter, he wondered if the Soviet Union’s economic approach, “shorn of violence and coercion”, could help the world achieve peace and prosperity.

The answer, of course, was “no”. But Nehru concluded otherwise, incorporating Soviet ideas into India’s five-year plans and welcoming Soviet aid, equipment and expertise. In the year of his visit, the Russians set up a steel factory in what is now the Indian state of Chhattisgarh. It became India’s main supplier of rails.

Nehru was not alone. The Soviet model impressed many leaders in the poorer parts of the world. Even today, according to Charles Robertson of...

The New York Fed’s president announces his retirement

Wed, 11/08/2017 - 17:33

He never really took the bull by the horns

APPLICATIONS sought for leading Wall Street post. Duties: important role in setting interest rates (some vaguely defined other responsibilities). Perks: lovely office in Italianate palace; large staff. Requirements: eligibility for highest-level security clearance; tacit support in Washington, DC. Desirable but optional: broad knowledge of banking.

This week the New York Federal Reserve Bank announced that its president, Bill Dudley, will retire next year. He will leave a mixed legacy. He is thought to have given important help to Janet Yellen, the outgoing chair of the Federal Reserve. But he also presided over a steep decline in his institution’s influence over the banks that used to revere and fear it.

Located in America’s financial centre, the New York Fed has powers not vested in the country’s 11 other reserve banks. Its president has a permanent seat on the Fed committee that sets interest rates. Its trading desk puts board policies into...

In Japan, the move from cash to plastic goes slowly

Thu, 11/02/2017 - 15:51

BIC CAMERA, a Japanese electronics retailer, accepts payments in so many ways that the list nearly obscures the till: credit, debit and pre-paid cards; mobile wallets; ApplePay and Alipay; and, in some stores since April, bitcoin too.

Efforts are under way to wean Japan off genkin, or cash. Handling notes and coins is expensive for businesses; many operate on tight margins because a persistent lack of inflation has inhibited price rises. The government reckons more cashless payments could help the economy, too, encouraging people, including a growing number of tourists, to spend more. (And help it collect more tax.) Entrepreneurs think the data that come with cashless methods could promote new business.

Yet cash still dominates. Thank a preponderance of ATMs in ubiquitous konbini (convenience stores), safe cities where people are happy to carry wads of cash, and wariness about handing over personal data. Last year cash accounted for 62% of consumer transactions by...

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