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Updated: 51 min 59 sec ago

Price guarantees are common at art auctions

Thu, 12/13/2018 - 15:44

Going, going, not guaranteed

“LADIES AND gentlemen”—the auctioneer scans the room one last time—“the Hockney is sold!” The hammer comes down at $90.3m (including fees). Last month a pool scene by David Hockney, a British painter (pictured), set a new auction record for a work by a living artist. What made it an even bigger splash was that it was sold “naked”: that is, without a minimum price or sale guarantee. It may be one of the last great auction nudes.

Many sellers of fine art are promised a minimum sale price, however the auction turns out. They are unnerved by cautionary flops, like Francis Bacon’s “Study of Red Pope”, which was estimated to fetch £60m-80m ($80m-105m) in 2017, but failed to sell. Guarantees are most useful for post-war and contemporary works, where the value is most speculative. Last month two-thirds of sales at the “evening” auctions—the highest-profile ones—in New York at...

Urjit Patel, the head of the Reserve Bank of India, resigns

Thu, 12/13/2018 - 15:44

LAST MONTH Viral Acharya, a deputy governor of the Reserve Bank of India (RBI), suggested in a speech that the Indian government was risking “economic fire” by meddling with the bank. If he was right, on December 10th the last chance of dousing the flames may have been missed. Urjit Patel, the RBI’s governor, abruptly resigned, citing “personal reasons”. He has been replaced by Shaktikanta Das, a career civil servant who is thought to be an ally of Narendra Modi, the prime minister. The rupee dropped by 1.8% against the dollar on the news.

Mr Patel’s resignation came ahead of a board meeting on December 14th (after The Economist went to press). These gatherings used to be unremarkable, but in recent months board members friendly to the central government, in particular Swaminathan Gurumurthy, a Hindu-nationalist journalist appointed in August, have turned them into battles over RBI policy....

The perils of trying to time the market

Thu, 12/13/2018 - 15:44

JESSE LIVERMORE earned his reputation as a talented speculator by pocketing a tidy sum during the Panic of 1907. Mindful that a scarcity of credit and a giddy stockmarket were a dangerous mix, he began to sell stocks short that autumn. When share prices crashed on October 24th, Livermore was up by $1m ($27m in today’s money). He then changed course. He started to buy stocks, which were now a lot cheaper. The market rallied. By the end of the year Livermore had made $3m.

Anyone who has ever invested in stocks has at one time fancied that they can time the market as exquisitely as Livermore did. Very often, they hope that a benchmark of fair value, such as the cyclically-adjusted price-earnings ratio, or CAPE, will be their guide. History shows that when stock prices rise a lot faster than profits—as they did in the 1920s, 1960s and 1990s—they tend subsequently to fall back (see chart). So the market-timer will sell...

In Africa, agricultural insurance often falls on stony ground

Thu, 12/13/2018 - 15:44

Premium cut

JACKSON LEWANGU looks up at the clouds scudding above the dry plains of northern Kenya. And, somewhere higher still, a satellite looks down on him. Since 2012 Mr Lewangu, who keeps goats and cattle, has bought insurance designed by the International Livestock Research Institute, based in Nairobi. The satellite monitors vegetation; when it is unusually scarce, he gets a payout. He can then buy food for his animals or pay a rancher for access to grazing land, without which his cows would die.

Insurance could bring peace of mind to Africa’s pastoralists. It could also help the continent’s crop farmers, whose fields are almost entirely rain-fed. But Mr Lewangu’s neighbours are unconvinced. The satellite gives false information, says one woman; there is no payout in good years, complains another. Such scepticism is typical. Although schemes have proliferated in the past decade, almost all are...

Trade war has given agricultural merchants a boost

Wed, 12/12/2018 - 12:21

ON DECEMBER 10TH Bunge, an American agribusiness giant, announced plans to replace both its chairman and its CEO. The move may seem ungrateful: the company’s profits surpassed analysts’ expectations in the most recent quarter, marking a turn after a string of bad years. But industry insiders were unsurprised. Despite cost-cutting and divestments, Bunge’s share price is 28% below its February peak, even after a 3% jump when the reshuffle became public. Its travails are a sign of changing times for soft-commodity traders.

For decades ADM, Bunge, Cargill and Louis Dreyfus—the ABCDs of agribusiness—were unavoidable middlemen. From corn and cocoa to soya and sugar, they could best gauge supply and demand, thanks to superior intelligence on stocks and harvests. Their storage facilities placed them well to ride out price swings. State buyers and multinationals relied on their global footprint to source staples...

Donald Trump is strong-arming Congress into accepting the new NAFTA

Thu, 12/06/2018 - 15:42

FOR YEARS President Donald Trump has been itching to withdraw from the North American Free Trade Agreement (NAFTA), a trade deal between America, Canada and Mexico. But as long as negotiations about a revamp continued, he held off. The day after signing a new deal on November 30th, rebranded the USMCA, he announced that he would “shortly” indulge himself and terminate the original deal after all. That would force Congress to choose between the USMCA and a NAFTA-less world.

“If Trump’s new NAFTAis so great, why does he need to resort to brinkmanship to ram it through Congress?” asked Ron Wyden, a Democratic senator. The answer is that many do not think the new deal is so great. The AFL-CIO, a union of unions, calls it incomplete. Nancy Pelosi, the minority leader in Congress and probably the next speaker, says it is a “work in progress”. Some Republicans express misgivings. Mr Trump wants to silence such voices.

...

Why investors in emerging-market bonds are so attuned to political risk

Thu, 12/06/2018 - 15:42

PAULO GUEDES might not be your first-choice brother-in-law. He is a close adviser to Jair Bolsonaro, Brazil’s populist president-elect, who is wistful for military rule. But if you invest in emerging-market government bonds, Mr Guedes is the sort of person you might want as economy minister, the post he will take up on January 1st. He was co-founder of BTGPactual, Brazil’s Goldman Sachs. He has a PhD in economics from the University of Chicago. He favours tax reform and privatisation.

Brazil is not the only focus of attention for such investors. This week Andrés Manuel López Obrador, a left-leaning populist, was sworn in as president of Mexico. He has cancelled a $13bn bond-financed airport that is already one-third-built. In November a committee of South Africa’s parliament resolved that the constitution should permit land reform without compensation. Some have begun to worry about what Narendra Modi might do to secure re-...

A trade truce between America and China is over as soon as it began

Thu, 12/06/2018 - 15:42

AFTER A WORKING dinner between Presidents Donald Trump and Xi Jinping on December 1st, it seemed as if a truce had been called in their two countries’ rumbling trade war. “This was an amazing and productive meeting,” said Mr Trump. But the truce is already at risk of unravelling.

On December 5th Canada’s justice department said that, on the same day that the two presidents dined, it had arrested Meng Wanzhou, the chief financial officer of Huawei, a Chinese maker of telecoms equipment, at America’s behest. For China, that looks like a political salvo. Huawei is a pillar of the Chinese economy—and Ms Meng is the founder’s daughter. The fate of the trade talks could hinge on her encounter with the law.

She was due to appear in a Canadian court on December 7th, after The Economist went to press. Her arrest is thought to be related to an American probe into Huawei’s alleged violation of...

Buying nuclear fuel is back in fashion

Thu, 12/06/2018 - 15:42

ON DECEMBER 3RD McIntyre Partnerships, a hedge fund in New York that normally buys equity and debt securities, told investors it was buying a commodity: uranium. This “slight anomaly” was justified by the metal’s impressive recovery, said its founder, Chris McIntyre. Uranium’s spot price has jumped by 41% since April, to near a two-year high (see chart), following an overdue reduction in supply.

Uranium fell out of favour after the Fukushima nuclear disaster in 2011, which led to plant closures in Japan and Germany and a slowdown in plant-building elsewhere. (Uranium, or plutonium, which is made from it, is an essential nuclear fuel.) Despite the recent surge its price, at $29 a pound ($64 per kilo), is still 60% below the 2011 peak, according to UxC, a consultancy. Production costs will be above that for perhaps three-quarters of this year’s output.

Uranium miners were slow to cut supply in response....

Quantitative easing draws to a close, despite a faltering economy

Thu, 12/06/2018 - 15:42

CENTRAL BANKING can be agonising. The effect of monetary policy on the economy is not immediate, so decisions must be based on expectations for two years’ time. That means putting faith in forecasts that could well turn out to be wrong.

Some soul-searching might be expected at the monetary-policy meeting of the European Central Bank (ECB) on December 13th. Since 2015 it has stimulated the euro-zone economy by buying bonds worth €2.6trn ($3trn) under its quantitative-easing programme. In June it said it planned to stop asset purchases by the end of the year (though it will continue to reinvest proceeds from maturing bonds), and to keep interest rates at their current rock-bottom levels “through the summer” of 2019. Since then, though, economic growth has slowed and inflation, stripped of oil-price rises, has stayed resolutely low. The question is how persistent these developments will be.

After an impressive showing...

Hard-up firms in China use cashmere and pork to repay loans

Thu, 12/06/2018 - 15:42

LI XINTONG DID not want one overpriced cashmere sweater, let alone a hundred. But when his loan to Jicai came due, the investment firm offered to repay him not in cash, but in sweaters. The value of 100 cashmere pullovers, it said, equalled his 150,000 yuan ($22,000) loan, and was thus fair compensation. Mr Li (not his real name) disagrees.

Perhaps he should count himself lucky. At least he did not receive dozens of packages of premium ham, as a troubled Chinese pig farm’s bondholders recently did, in lieu of interest. In another case, a financial subsidiary of HNA, a conglomerate that includes an airline, offered flight vouchers instead of cash when its clients’ investments matured.

The spate of unorthodox repayments highlights a squeeze in China’s financial system, which has hurt smaller companies and non-bank lenders most. So far this year companies have defaulted on 135bn yuan ($20bn) of bonds, more...

The first charges for money-laundering are laid against Danske Bank

Thu, 12/06/2018 - 15:42

AS EUPHEMISMS FOR suspected money-laundering go, “insufficiently legitimised” takes some beating. That is how Denmark’s Financial Supervisory Authority (FSA) described some of Danske Bank’s customers in a report in 2012. The country’s largest bank now faces criminal charges at home and investigations elsewhere.

The dirty-money scandal swirling around Danske is the largest ever uncovered. Over €200bn ($227bn) of suspicious transfers originating in ex-Soviet countries may have been rinsed through the bank’s Estonian branch. As the scale of the suspected laundering, dating back a decade, has emerged this year, the bank has lost its boss and seen its share price halved.

In preliminary criminal charges filed on November 28th, Danish prosecutors accuse Danske of failing to report suspicious transactions, not training staff in anti-money-laundering procedures, and having no senior manager responsible for...

The moral assumptions embedded in economic models of climate change

Thu, 12/06/2018 - 15:42

CLIMATE CHANGE is many problems in one. Developing and deploying zero-carbon technologies is a formidable challenge. So is the politics of co-ordinating disparate groups to achieve the necessary collective action. In America, where the Republican Party persists in climate denialism, it is an epistemological pickle. Policymakers met in Katowice, Poland, this week to discuss implementing the climate deal signed three years ago in Paris, from which America withdrew under President Donald Trump.

Behind all this, however, lies an economic problem. Humanity must work out how many resources should be diverted from other, valuable uses—from life-enriching consumer goods to funding for pensions—to the task of limiting global warming. These calculations may look bloodless, but they are built on weighty moral assumptions, namely, how to value other people’s lives. Though it is hard to know what might finally impel humanity to take the...

Why do so many people fall for financial scams?

Thu, 12/06/2018 - 15:42

Unmissable, you say?

IN HINDSIGHT, DAVID CARTER sees the deal differently. The 63-year-old has a Master’s degree in technology. A successful career meant he found a six-figure salary offer perfectly plausible. He knew from reading newspapers that tech stocks were up and the job market was hot. So when an email offered him a job with a Swiss firm at a $100,000 salary, he took it.

Mr Carter never saw a penny. Instead he owes $80,000, which he is paying off from his retirement savings. The job was too good to be true. All he had to do was use his credit card to buy iPhones and iPads. He started in June, buying them at Best Buy and Walmart and sending them from his home in Maryland to an address in California. The company paid his credit-card bill—for a few weeks. In July those payments were voided. His bank said the debts were his. The company’s website vanished. The people he had spoken to...

Europe makes contingency plans for clearing-houses after Brexit

Thu, 11/29/2018 - 15:47

AS THEY PREPARE for Brexit, many of London’s financial firms have begun to move some staff, or operations, to the continent. But financial contracts, notably derivatives, are difficult to uproot. London’s clearing-houses, which ensure that a contract is honoured even if one side goes bust, are globally important. As fears of an acrimonious Brexit have risen, so too have those of havoc. Now European Union regulators have unveiled contingency plans.

Clearing-houses have grown vastly in significance since the financial crisis, after which the G20 group of economies made it mandatory to settle most simple derivatives trades through them. London’s three big clearing-houses handle vast amounts of derivatives, and much of the trading cannot be done elsewhere. LCH, London’s largest clearing-house, clears interest-rate swaps with a notional value of over $340trn, making up 95% of the world’s total. LME Clear (part of the London Metal...

Non-bank firms are now big players in America’s mortgage market

Thu, 11/29/2018 - 15:47

Not so bankable

TWICE IN THE past 30 years, housing finance has taken down America’s economy. As interest rates rise and the housing market stutters (see article), regulators are again pondering the risks from the mortgage market—this time from a shift towards non-bank originators.

These firms, which create mortgages and often sell them on to other institutions, exist outside the bank-regulatory framework. They now account for 44% of lending by the top 25 originators, up from 9% in 2009, according to Inside Mortgage Finance, a trade publication. Five of the largest ten are non-banks, as is the largest retail mortgage originator, Quicken Loans. Their market share for servicing mortgages, or collecting monthly payments, has risen from 5% in 2009 to 41% in 2018.

Some of this shift reflects non-...

Paul Volcker’s memoir invites a rethink of the fight against inflation

Thu, 11/29/2018 - 15:47

PAUL VOLCKER’S legend is almost as grand and imposing as his physical personage, all six feet and seven inches of it. In 1979 President Jimmy Carter chose him to run the Federal Reserve and tackle America’s high inflation. Mr Volcker acted with grim determination, tightening monetary policy even as the economy sank into deep recession and beleaguered Americans pleaded for relief. Eventually he not only routed inflation, but also won a hard-earned credibility for the Fed that would help successors keep inflation stable. Mr Volcker himself recounts the story in a new memoir, “Keeping At It”, which calls on central banks to resist the siren song of loose money. But the book also invites readers to reconsider his legacy, and to ask whether central bankers have drawn the right lessons from the legend of Chairman Volcker.

The recessions and disinflation of the early 1980s proved a watershed both for macroeconomics and the practice of...

Financial firms have quietly prepared for Brexit

Thu, 11/29/2018 - 15:47

SINCE BRITONS chose to leave the European Union in June 2016, the clichés have piled up almost as thickly as the votes: “no deal is better than a bad deal”; “Brexit means Brexit”. And you might count yourself rich—even by the City of London’s standards—if you had a fiver for every time you had heard a banker say his firm was “hoping for the best, but preparing for the worst”. Four months before Britain is due to quit the EU, financial firms have long ago given up hoping for the best (for most, that Britain would remain after all) and are still not sure they will avoid the worst—a sudden, no-deal Brexit on March 29th 2019. But they have been quietly bracing themselves for it.

Firms based in any EU member state may serve clients in any other: lending and raising money, trading and clearing derivatives, and insuring lives and property across the union without setting up shop locally, in a system known as “passporting”. London is by...

Corporate bonds in an ageing business cycle

Thu, 11/29/2018 - 15:47

IN THE 1970s the junk-bond market was a dark underworld. It was the home of “fallen angels”, the bonds of investment-grade firms that had gone to seed. Most investors were too genteel to hold them. So they traded at hefty discounts to face value. Then Michael Milken, a junk-bond guru, came along with a new gospel. A portfolio of high-yield junk was a better bet than one of supposedly safer bonds. After all, an A-rated bond can only go in one direction—down.

The corporate-bond class system is still in place. Many types of mutual fund are barred from holding non-investment grade (ie, junk) bonds. But junk is no longer a stunted and shameful offspring. The high-yield market in America is now worth $1.2trn. And investment-grade bonds have also come down in the world. Around half are rated BBB, a notch above junk. Issuers are slumming it for a reason. A low rating is the price they pay for loading up on cheap debt.

A world with less snobbery of any kind is a better...

Why opening pubs on the Emerald Isle is so difficult

Thu, 11/29/2018 - 15:47

Whither ’Spoons?

FOR A COUNTRY whose chief cultural export is its pubs—there are some 7,000 Irish pubs worldwide, and 8,403 on the island itself—Ireland makes it surprisingly difficult to open a drinking establishment. In both Northern Ireland (part of the United Kingdom, but with many of its own laws) and the Republic, the process is slow, pricey and fraught with uncertainty.

Both use a system familiar to anybody who has ever queued to get into a nightclub: one in, one out. Aspiring landlords must buy licences from those willing to “surrender” theirs. Moreover, buyers must prove local “need” by pointing to a growing population or the closure of nearby pubs. Objections, from existing publicans, say, can cause months of delays. Transfers of licences are approved by courts and dates for disputed cases are hard to come by, says Maura McKay, a lawyer in Belfast.

Getting a licence in Ireland...

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