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Why a global manufacturing slump is a recurring threat

Wed, 02/27/2019 - 17:39

THE GLOBAL economy had an inauspicious start to 2019. Markets went into a tailspin and America’s government was locked in a seemingly interminable shutdown. But matters have not played out as dismally as they might have. The government in Washington is open again. America and China appear close to a trade deal which, although modest in its achievements, would nonetheless reflect a welcome easing of tension between the world’s two biggest economies. Markets have smiled on these developments: the MSCI index of global shares has risen by 10% so far this year.

Good news notwithstanding, many economic indicators have undergone a remarkable downward shift since early 2018. Back then economists were celebrating the emergence of a broad-based expansion. When it assessed the world economy in January last year, the IMF hailed the “broadest synchronised global growth upsurge since 2010”. Now the progress on trade talks is occurring against a darker economic backdrop.

Global manufacturing activity has slowed (see chart). Economies that are especially reliant on trade, such as Germany and Japan, have suffered. Industrial production in the euro area has fallen over the past year. Both Japan and South Korea reported tumbling exports in January. The World Trade Organisation’s global trade outlook index has been falling for the past...

Why private equity appeals

Thu, 02/21/2019 - 15:49

JOHN MCGAHERN’S novel, “That They May Face the Rising Sun”, is set in a remote corner of Ireland. There is a lake, a church, two bars and not much else. Gossip is prized but in short supply. Much of it is concerns John Quinn, a womaniser who has buried two wives and is looking for a third. His quest takes him to Knock, a shrine to the Virgin Mary, which has become a place to find a partner. Like many pilgrims, John Quinn is outwardly pious. But his mind is fixed on earthly matters.

The masking of intent may also be true of visitors to the temple of private equity. On the surface, investors in such funds might hope to harvest a reward—an “illiquidity premium”—for locking up their money for five to ten years. That allows private-equity funds time to turn sluggish businesses into world-beaters. The pitch is seductive. Capital has flooded in as readily as pilgrims flock to the shrine at Knock.

Perhaps, though, private equity’s pilgrims are really after something else. These institutional investors may face limitations on how much they can borrow. Private equity offers a way round such constraints: it is liberal in its use of debt to juice up returns. And that is not all. The value of privately held assets are not assessed all that often. That is a plus for those who, for ignoble reasons, would like not to be told how...

A surprising number of North Korean refugees send money home

Thu, 02/21/2019 - 15:49

IN FEBRUARY 2018 Jessie Kim found out that she had been sending money to a dead man. Ms Kim, now a 27-year-old student in Seoul, fled North Korea for China in 2011. She had been sending her father in Yanggang province in the North around $1,000 a year since she arrived in South Korea in early 2014. Two years later she doubled the contributions, working several part-time jobs, after her aunt told her that her father had been in an accident and needed money for medical bills. But another call from her aunt last winter, claiming that her father was asking for yet more money, made her suspicious. “He wasn’t the kind of man to ask his daughter for money,” she says. Ms Kim made enquiries through the broker who had facilitated the transactions. She eventually found out that her father had died in the accident in 2016 and that the money had gone to her aunt’s family instead.

Ms Kim’s case illustrates the pitfalls of supporting relatives in a country that is all but cut off from global communications and financial-services networks. Ordinary North Koreans are not allowed to receive money or even phone calls from abroad. Foreign banks are hesitant to handle any transaction associated with the North, for fear of falling foul of sanctions, intended to curtail its nuclear programme, that have been imposed by America and others.

Yet...

The global soyabean market has been upended

Thu, 02/21/2019 - 15:49

“WE’VE BEEN gambling up to this point,” says Tim Bardole, a soyabean farmer from Iowa. After the price of soyabeans crashed last summer (see chart), he held on to most of his harvest and waited for the market to recover. But seven months later, and with large loans to repay, he sold up. “We decided we’d better take what we have,” he says.

The cause of the crash was a 25% tariff on American soyabeans imposed by China, the world’s biggest importer, as one shot in the trade war between the two countries. Yet peace is supposedly in the offing. The two countries are locked in negotiations over a deal, ahead of a deadline of March 1st that has been imposed by America (though on February 19th President Donald Trump declared the timing to be flexible). That Mr Bardole cut his losses despite those talks is not that surprising. Even if the tariff is lifted—which is far from certain—the past year’s disruption will probably leave a permanent scar.

The trade war caught...

A gamble in France could cost UBS dear

Thu, 02/21/2019 - 15:49

In a fine state

THE MOST intriguing bit of the six-week tax-evasion trial of UBS in France late last year was dairy-themed. Prosecutors accused the Swiss bank of keeping coded notes to track how many “milk cans”—units of money—had been moved to Swiss accounts by tax-dodging French clients. UBS denied having any such parallel accounting system. A former manager insisted the notes related to bankers’ bonuses, not tax-shy funds.

France’s Tribunal de Grande Instance, its high court in Paris, did not buy that explanation. On February 20th it found the Swiss bank guilty of helping thousands of rich French clients set up undeclared accounts, potentially containing over €10bn ($11.3bn), between 2004 and 2012. It fined the bank an eye-watering €3.7bn and added an additional €800m in damages for the French state.

If upheld, it would be more than 12 times larger than France’s previous record...

Countries are seeking help to deal with corporate tax avoidance

Thu, 02/21/2019 - 15:49

PORT ROYAL, at the mouth of Kingston harbour, was once the largest city in the Caribbean, its population swollen by privateers paid by the English and the Dutch to attack Spanish ships. When the practice of issuing such “letters of marque” faded in the 17th century, crews went rogue. As pirates, they continued to use the Jamaican port as their base and to spend their loot there, earning it a reputation for unparalleled debauchery.

Jamaica still has a piracy problem, but today’s buccaneers are in surrounding territories. Unenamoured by Jamaica’s 25% corporate income-tax rate, some international firms with operations there find ways to shelter profits using the British Virgin Islands and other nearby tax havens.

The scale of this plunder is unclear—Jamaica publishes no estimate of its corporate-tax gap. But the problem is serious enough to lead the government to seek outside help. Since 2017, auditors from Tax Administration Jamaica (TAJ), the national tax authority, have received training to help them identify and challenge the tax planning of large firms. The assistance is offered by Tax Inspectors Without Borders (TIWB), a programme backed by the OECD and the UN.

Jamaica is not alone in suffering leakage. Estimates of uncollected revenues vary. The OECD reckons that exchequers worldwide lose $100bn-240bn a year...

Germany’s regulator bans short-selling in Wirecard

Thu, 02/21/2019 - 15:49

THOSE WHO profit from the misery of others are not often popular. Short-sellers, who try to make money by selling borrowed shares and buying them back later at a lower price, have long been viewed with suspicion. They are blamed for exacerbating price falls so that they can reap bigger returns. In times of market stress authorities often ban them. In 1610 regulators in Amsterdam forbade short-selling, blaming it for a fall in the value of the Dutch East India Company. Two centuries later Napoleon prohibited it as an act of treason.

On February 18th BaFin, Germany’s financial regulator, banned investors from taking new net short positions in Wirecard, a German digital-payments firm, after its share price fell by over 40% in under three weeks. The crash marked a swift change in its fortunes. In 2018 Wirecard displaced Commerzbank, a 149-year-old lender, in the DAX 30, an index of Germany’s biggest firms.

Wirecard was worth €20.7bn ($23.6bn) on January 29th, just before the Financial Times reported that Edo Kurniawan, a senior executive in the company’s Singapore office, was suspected of using fraudulent accounting techniques to inflate reported revenues. The share price slid. On February 1st it fell further when the same newspaper reported that Rajah & Tann, a law firm commissioned by Wirecard...

A new book argues weakened communities threaten liberal democracy

Tue, 02/19/2019 - 16:21

UNTIL RECENTLY, economists’ prescription for struggling places was bloodless: let them die. “Some towns cannot be preserved”, this newspaper argued in 2013, attracting a larger-than-usual volume of correspondence from dissenting readers. But the electoral successes of Donald Trump and the campaign to yank Britain out of the European Union (EU) have shaken the dismal science. Prominent economists have begun to consider what an efficient response to geographic inequality might look like. In a paper published in 2018, for example, Benjamin Austin, Edward Glaeser and Lawrence Summers of Harvard University argued for employment subsidies targeted at struggling places.

The reconsideration of place-based policies can often seem grudging—something to be tolerated, in order to keep those on the losing end of regional inequality from embracing populism or killing themselves with drugs. Economists’ reluctance is understandable: efforts to help struggling communities might well deter people from moving when they would otherwise have relocated to more promising places. But it is also short-sighted, argues Raghuram Rajan, an economist at the University of Chicago and the former head of India’s central bank. In a compelling new book, “The Third Pillar: How Markets and the State Leave the Community Behind”, he argues that communities are...

The biggest bank merger since the crisis may herald more

Thu, 02/14/2019 - 15:43

GIANT BANKS are made, not born. Today’s American behemoths were formed by a dizzying series of deals in the decade before the financial crisis. NationsBank and BankAmerica became Bank of America. Wells Fargo joined with Norwest. J.P. Morgan and Chase melded, and then bought Bank One. The crisis brought more mergers, but out of necessity as much as ambition: JPMorgan Chase took on Washington Mutual; Wells, Wachovia. But since the crisis hook-ups have been smaller. The very biggest banks are barred from retail acquisitions on competition grounds. Supervisors have become quicker at approving tie-ups between tiddlers.

On February 7th the big-deal drought ended. BB&T, based in Winston-Salem, North Carolina, and SunTrust, of Atlanta, Georgia, said that they would merge. The new, unnamed entity, valued at $66bn, will be far smaller than America’s biggest but far bigger than anything created since the crisis. It will be...

When trouble strikes, where should you hide? The case for gold

Thu, 02/14/2019 - 15:43

IMAGINE YOU have an assignation in New York. You have not been told where you should meet the other person and she has not been told where to meet you. You have no understanding of where to find her or where she might usually be found. She is as ignorant of you. You cannot communicate. You must somehow guess how to find each other and make those guesses coincide. Where should you go? And at what time of day?

A good answer is Grand Central Station at noon. That was the response of the majority asked by Thomas Schelling, a game theorist and Nobel prizewinner in economics, in experiments reported “The Strategy of Conflict”, published in 1960. People are often able to act tacitly in concert if they know that others are trying to do the same, said Schelling. Most situations throw up a clue, a “focal point”, around which to co-ordinate, even if it takes imagination as much as logic to find it.

Now imagine...

Men still pick “blue” jobs and women “pink” jobs

Thu, 02/14/2019 - 15:43

Fighting fires, they’re all orange

EVERY YEAR a few women become the first of their sex to hold a particular job. The stars of 2018 include Tennessee’s first female senator and the first female head of the New York Stock Exchange. There is the occasional male first, too: in 2018 the first men graduated from Norland College, which trains nannies for rich British families. Each year also sees a few occupations abandon sex-based hiring restrictions: in October Britain’s Special Air Service decided to admit women for the first time.

Fifty years ago this would have been unimaginable. “The hilarity of the notion that all jobs should be open to both sexes spawned a running joke,” writes Gillian Thomas in “Because of Sex”, her book on the impact of Title VII of America’s 1964 Civil Rights Act. Officials liked to quip that the law had created a “Bunny problem”: men would have to be considered for employment as...

Bill and Melinda Gates publish their annual letter

Thu, 02/14/2019 - 15:43

Always something to be mad about

GETTING KILLED in a video game, receiving unfair treatment from a teacher, seeing a relative go to jail: the teenagers taking part in Chicago’s Becoming a Man (BAM) initiative admit to a variety of frustrations, some trivial, some tragic, that can stir their anger. The initiative, which teaches young men how to regulate their emotions, aims to lower crime rates and improve graduation rates. Recently one BAM group invited an unusual guest into their counselling circle: Bill Gates, the second-richest man in the world. So what pushes his buttons?

Mr Gates answers that question in his latest annual letter, written with his wife Melinda, describing the work of the $50bn charitable foundation they oversee. He admits to being “pretty harsh” with his parents as a child and “tough” on people at Microsoft. (“Over the decades I’ve mellowed out on that,” he says.) He also remembers...

Finland’s basic-income trial did not much affect work incentives

Thu, 02/14/2019 - 15:43

AMONG THE adherents of universal basic income (UBI) are the Italian government, India’s opposition party and Alexandria Ocasio-Cortez, a Democratic congresswoman in America. Boosters argue that a minimum income would be a safety-net for people in precarious jobs—eg, those at risk of being displaced by automation. Others see a way of eliminating complex, even corrupt, social-security bureaucracies.

Naysayers, horrified by the potential cost of UBI, fret that state handouts will put recipients off work. Early results from Finland’s basic-income experiment, released on February 8th, suggest that such fears are overdone, but don’t resolve much else.

Researchers randomly chose 2,000 people on the dole to receive for two years a monthly payment of €560 ($634) instead, whether or not they sought or started work. After a year, recipients were no less likely to be working than those on the dole. On average, both...

Signs of progress in China-US trade talks, but gaps remain big

Wed, 02/13/2019 - 18:35

LAST YEAR, when American officials visited Beijing for trade negotiations, they spent more time fighting among themselves than against China. They could not agree on who should lead the talks or what their goal should be. Seeing such amateurism, their Chinese interlocutors reckoned that they had little to worry about.

Many of the same Americans have been back in Beijing for more talks in recent days. But this time they had an undisputed leader—Robert Lighthizer, the hard-nosed United States Trade Representative—and a clear set of demands. Their Chinese counterparts, having seen President Donald Trump’s zeal for tariffs, knew that they had something to worry about after all.

America has set a deadline of March 1st for an agreement. If it is missed, tariffs on $200bn-worth of imports from China are due to rise from 10% to 25%, inflicting more pain on a slowing Chinese economy. That would invite a sharper backlash from China. Its ability...

What would happen if Facebook was turned off?

Tue, 02/12/2019 - 16:28

THERE HAS never been such an agglomeration of humanity as Facebook. Some 2.3bn people, 30% of the world’s population, engage with the network each month. Economists reckon it may yield trillions of dollars’ worth of value for its users. But Facebook is also blamed for all sorts of social horrors: from addiction and bullying to the erosion of fact-based political discourse and the enabling of genocide. New research—and there is more all the time—suggests such accusations are not entirely without merit. It may be time to consider what life without Facebook would be like.

To begin to imagine such a world, suppose that researchers could kick a sample of people off Facebook and observe the results. In fact, several teams of scholars have done just that. In January Hunt Allcott, of New York University, and Luca Braghieri, Sarah Eichmeyer and Matthew Gentzkow, of Stanford University, published results of the largest such experiment yet. They recruited...

America’s public pension plans make over-optimistic return assumptions

Thu, 02/07/2019 - 15:53

PROMISING A PENSION is a long-term and expensive business, especially if the payout is linked to earnings. But whether the employer is private or public, the cost ought to be the same in the long run and so, you might assume, would be the investment approach. Until 2008 that was true for American pension plans: private and public-sector schemes had roughly the same asset allocation.

But a new report by Jean-Pierre Aubry and Caroline Crawford of the Centre for Retirement Research (CRR) at Boston College shows that things have changed. Public plans have 72% of their portfolios in risky assets (equities and alternatives such as hedge funds), and private plans just 62%. Since private plans have more scheme members who are retired, they should have a less risky approach, because they must focus on paying benefits immediately rather than on long-term growth. However, even allowing for this and other factors such as plan...

Malaysia’s former prime minister faces trial in the 1MDB scandal

Thu, 02/07/2019 - 15:53

Mr Najib awaits his day in court

ACCORDING TO America’s Department of Justice, between 2009 and 2015 $4.5bn disappeared from 1 Malaysia Development Berhad (1MDB), a Malaysian state development fund set up a decade ago by Najib Razak, then the prime minister. The money passed through a maze of institutions and accounts in the Middle East, the Caribbean and the Seychelles. It was frittered away on property, parties, gems, art, private jets and a superyacht. It helped fund a film on scamming, “The Wolf of Wall Street”. The mastermind behind the fraud is allegedly Jho Low, a Malaysian financier. But more than $600m ended up in Mr Najib’s personal bank accounts.

Mr Najib denies wrongdoing and says the money was a gift, since returned, from an unnamed Saudi royal. His claims of innocence in one of the biggest financial scandals ever are about to be put to the test. On February 12th he is due to...

What happens when your bitcoin banker dies?

Thu, 02/07/2019 - 15:53

BITCOIN WAS introduced to the world in August 2008, in the aftermath of the financial crisis. According to its techno-libertarian fan-base, one of its main attractions was the promise that users could avoid dealing with the hated banks. But after a decade of amateurism, scams and billions of dollars of lost or stolen money, it is clear that many of the ramshackle institutions that play the role of banks in the cryptocurrency world make even their most reckless conventional counterparts look like paragons of good management.

The latest example is QuadrigaCX, a Canadian cryptocurrency exchange that was granted protection from its creditors on February 5th. The problem, according to the firm, is not that it has lost its customers’ money, but that it cannot get to it. It says that Gerald Cotten, its boss, died unexpectedly in India in December.

Few banks would be brought to ruin by the death of a single member of staff...

Some fights about the Tax Cuts and Jobs Act seem over

Thu, 02/07/2019 - 15:53

HURRIED THROUGH Congress in late 2017, the Tax Cuts and Jobs Act (TCJA) was the biggest overhaul to America’s tax system in more than 30 years. Boosters claimed it would turbocharge investment and growth, generating so much extra taxable income that it would pay for itself. Critics claimed it would shower the rich with tax breaks, and that balancing the books would mean the costs were ultimately born by the poor. Over a year later, beliefs on neither side have been shaken.

The law’s complexity makes its impact hard to assess. It sprawls across individual and corporate taxation, and affects individuals’ health insurance, too. Some changes are temporary, others permanent. It redraws the basis for taxing multinationals, which are expert at finding loopholes.

Though it has been clear all along that the tax cuts go mainly to richer Americans, there is disagreement over just how regressive they are. Alan...

The benefits of better credit-risk models will be spread unevenly

Thu, 02/07/2019 - 15:53

IN “PLAYER PIANO”, a novel by Kurt Vonnegut, society is divided into a workless majority and an elite who tend all-powerful machines. A character tells how her husband lost his status as a writer when his novel fails to hit the “readability quotient”. She turns to sex work after he refuses the public-relations job he is assigned. “I’m proud to say that he’s one of the few men on earth with a little self-respect left,” she says.

The novel, published in 1952, anticipates present-day fears about the social impact of automation. Clever algorithms already make finely graded distinctions about the price each consumer pays for an air ticket, or which advertisements or news he sees. They will soon decide who gets credit, and on what terms. Vonnegut touches on a deeper worry. The husband fails to reach the mark because his book is anti-machine. It is easy to imagine credit being similarly denied for reasons other than credit risk—such as...

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