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Updated: 11 min 11 sec ago

A scholar of inequality ponders the future of capitalism

Thu, 10/31/2019 - 16:02

WHEN COMMUNISM fell, that was supposed to be that. History would continue, but arguments about how to organise society seemed to have been settled. Yet even as capitalism has strengthened its hold on the global economy, history’s verdict has come to seem less final. In a new book, “Capitalism, Alone”, Branko Milanovic of the Stone Centre on Socioeconomic Inequality at the City University of New York argues that this unification of humankind under a single social system lends support to the view of history as a march towards progress. But the belief that liberal capitalism will prove to be the destination has been weakened by financial and political dysfunction in the rich world, and by the rise of China. Its triumph cannot be taken for granted.

Mr Milanovic outlines a taxonomy of capitalisms and traces their evolution from classical capitalism before 1914, through the social-democratic capitalism of the mid-20th century, to “liberal meritocratic capitalism” in much of the rich world, in particular America. He contrasts this with the “political capitalism” found in many emerging countries, with China as the exemplar. These two capitalistic forms now dominate the global landscape. Their co-evolution will shape world history for decades to come.

Liberal meritocratic capitalism is generally associated with liberal political...

As profits dwindle, HSBC plans a radical overhaul

Thu, 10/31/2019 - 16:02

WHEN NOEL QUINN took over as interim chief executive of HSBC from John Flint, ousted by the board in August, analysts expected a change in style. Whereas Mr Flint was seen as a cerebral introvert, Mr Quinn is forthcoming, verging on blunt.

On that front, at least, HSBC’s first quarterly-results announcement on his watch did not disappoint. Although its Asian business “held up well in a challenging environment”, performance in other areas was “not acceptable”, Mr Quinn said on October 28th. Third-quarter net profits, down by 24% on the same period last year, to $3bn, undershot pundits’ forecasts by 14%. Revenues fell by 3.2%, to $13.4bn, missing expectations by 3%. Return on tangible equity (ROTE), its chief measure of profitability, reached 6.4%, compared with analysts’ forecast of 9.5%. Investors agreed with Mr Quinn: the bank’s shares dropped by 4.3% on the news in London. They have fallen by about 11% in the past six months.

HSBC’s woes can be blamed in part on broader conditions: low interest rates, a slowing global economy, business uncertainty in Brexit-hit Britain and trade tensions (HSBC is the world’s largest provider of trade finance). Yet that is hardly likely to reassure investors. Tom Rayner of Numis Securities, a broker, points out that although some of these trends may be reversed, others, such as Brexit...

Capital is flooding into Silicon Valley

Thu, 10/31/2019 - 16:02

DEALMAKERS ARE smooth talkers. They need to be. But which branch of finance has the slickest ones? Consider the polished, public-school manner of the City investment banker—or the high-velocity spiel of the Wall Street bank boss. Both have a strong claim. But the venture capitalists, or VCs, of Silicon Valley have a stronger one. They spend their time either being pitched to by, or pitching on behalf of, entrepreneurs who hope to be the next Zuck or Larry-and-Sergey. Peddlers of such extravagant dreams have to have silver tongues.

They certainly have some catchy phrases. They speak of “vanity metrics” (misleading measures of a startup’s progress); of the importance of “product-market fit” (how well a piece of software meets the customer’s needs); and “deal heat”, the fever that causes investors to overpay. After a while even a normally buttoned-up Buttonwood is asking to “double-click” on a topic when he wants more detail from a voluble VC.

A subject guaranteed to get them talking is the flood of capital into Silicon Valley. In the popular metaphor, the VC business used to consist of a flotilla of small boats fishing in a well-stocked lake. It was all very collegial. Now the lake is an ocean. Trawlers are out there—big institutions, such as sovereign-wealth funds and pension-fund managers, that increasingly invest...

Inflation in Turkey has fallen steeply

Thu, 10/31/2019 - 16:02

TURKEY’S PRESIDENT, Recep Tayyip Erdogan, once called high interest rates “the mother of all evil”. Murat Uysal, its new central-bank governor, must then be close to angelic. Since Mr Erdogan sacked Mr Uysal’s predecessor four months ago for refusing to slash interest rates, he has cut three times, by a cumulative ten percentage points (see chart 1). The latest cut, of 2.5 percentage points on October 24th, was more than double market expectations.

After last year’s aggressive tightening, easing now makes some sense. Inflation is back in single digits, after passing 25% last autumn. The lira has partially recovered from a battering that had pushed domestic prices up. In early October America threatened sanctions in response to Turkey’s offensive in Syria. The lira slumped, but after America brokered a ceasefire deal on October 17th, it steadied again. It strengthened further when Turkey’s and Russia’s presidents signed a similar agreement. That gave the bank room for the most recent cut.


China’s median age will soon overtake America’s

Thu, 10/31/2019 - 16:02

SHORTLY AFTER 9am the neighbourhood care centre for the elderly shuffles to life. One man belts out a folk song. A centenarian sits by his Chinese chessboard, awaiting an opponent. A virtual-reality machine, which lets users experience such exotic adventures as grocery shopping and taking the subway, sits unused in the corner. A bigger attraction is the morning exercise routine—a couple of dozen people limbering up their creaky joints. They are the leading edge of China’s rapid ageing, a trend that is already starting to constrain its economic potential.

Since the care centre opened half a year ago in Changning, in central Shanghai, more than 12,000 elderly people from the area have passed through its doors. The city launched these centres in 2014, combining health clinics, drop-in facilities and old-people’s homes. It plans to have 400 by 2022. “We can’t wait. We’ve got to do everything in our ability to build these now,” says Peng Yanli, a community organiser.


What kind of bank will Wells Fargo be?

Thu, 10/24/2019 - 14:56

WELLS FARGO has reinvented itself before. In a vault beneath the bank’s headquarters in San Francisco is an archive of papers and objects from the 1860s, when the company’s stagecoaches criss-crossed America delivering packages. Advertising posters tout the security of their wagons, thanks to the sharp-shooting skills of the marksmen that accompanied them. As first the railroads, then the telegram and later a government-run delivery service threatened the survival of the firm its bosses adapted, using customers’ trust in their brand to expand their banking business.

Charlie Scharf, who took over as the bank’s chief executive on October 21st, must transform Wells once again. He comes from BNY Mellon, a smaller bank based in New York. It is rare for a giant lender to pick an outsider to run it. The bosses of America’s other largest banks—JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs—are seasoned insiders.

But these are unusual times for Wells. The bank has spent three years trying to cleanse itself of scandal. In 2016 it was revealed that millions of spoof accounts had been opened by more than 5,000 employees. Further infractions involving home and auto loans have since come to light. Regulators have slapped penalties on the bank, the most onerous of which was capping its assets at $1.95trn...

The deep appeal of emerging markets is their lack of surface appeal

Thu, 10/24/2019 - 14:55

BILL HICKS, a much-mourned comedian, would pause in the middle of his act as if a thought had just occurred to him. He would ask that anyone in the audience who worked in advertising or marketing kill themselves. This was the only path to redemption now left open. No one took up his invitation. I know what the marketing people are thinking, he would then say. The anti-marketing dollar, that’s a good market. Look at our research! Bill is smart to tap into it.

Such next-level thinking comes to mind whenever the case for emerging markets is considered. For professional investors, diverting capital from America’s stockmarket to other less-blessed places seems like an invitation to career suicide. The dollar’s continued strength is kryptonite to emerging markets. They feel the damage from the trade war most keenly. Sure, emerging markets look cheap. But there is no law saying they cannot become even cheaper.

Cheapness aside, though, there is another, less appreciated, side to emerging markets. As capital rushes into an ever narrower set of favoured rich-country assets, there is growing anxiety that it might all suddenly unwind. At least emerging markets are an uncrowded trade. This is a paradox that tricksy marketing types should appreciate: the unloved asset class, that’s a good market. You might be wise to tap into it....

Japan’s new investment rules risk scaring off foreign investors

Thu, 10/24/2019 - 14:55

“BUY MY ABENOMICS!”, Shinzo Abe, Japan’s prime minister, pleaded to the New York Stock Exchange in 2013. As he lowered the drawbridge to foreign investors, that pitch seemed to work. Today overseas owners hold 30% of Japan’s TOPIX index of stocks and account for about 70% of the daily turnover on the Tokyo Stock Exchange (TSE). But new rules threaten to reverse these trends. 

A proposed change to the Foreign Exchange and Foreign Trade Act, unveiled on October 8th, will lower the minimum stake foreigners can buy in many listed Japanese companies without prior government approval, from 10% to 1%. Other changes include requiring foreign directors to seek official permission before they sit on the boards of Japanese firms. 

The finance ministry says it wants to protect sensitive sectors such as energy and weapons manufacturing. But analysts warned that the rules could choke off investment. Akira Kiyota, the head of the TSE told the Financial Times they were “absolutely idiotic”. Under fire, the finance ministry clarified on October 18th that foreign “portfolio investors” (such as banks, insurance firms and asset managers) would not need to seek prior approval, as long as they could prove they had no intention “to influence management”. The tweaked legislation was approved by the cabinet and...

The remarkable influence of the World Bank’s business rankings

Thu, 10/24/2019 - 14:55

A CLOTHING WORKSHOP, with just two sewing machines, established long ago on the outskirts of Lima, Peru’s capital city, may be one of the world’s most influential companies, even though it never started operating—and was never intended to do so. The business was conceived as an experiment by Hernando de Soto, a Peruvian economist, who commissioned a team to go through the motions of setting up the firm. Their aim was to find out how long it would take to comply with all the laws and regulations required to start a business. The answer was 289 painstaking days.

The answer now is a mere 26 days, according to the World Bank’s latest report on the ease of doing business around the world. Inspired in part by de Soto’s example, the bank each year asks thousands of lawyers, accountants and other experts how easy it would be for a company to obtain an electricity connection, transfer the title of a warehouse, enforce a debt contract, pay its taxes and so on. Based on the answers, the bank then ranks countries, from New Zealand at the top to Somalia at the bottom.

The report has its critics. Since it ignores infrastructure, price stability, workforce skills and the reliability of suppliers, among other things, it is not really a summary measure of the ease of doing business in a country. It is instead a snapshot of the cost of...

Germans have mixed feelings about Christine Lagarde

Thu, 10/24/2019 - 14:55

AT THE END of September Sabine Lautenschläger, the most senior German official at the European Central Bank (ECB), unexpectedly resigned from the bank’s executive board, years before her term was due to end. She gave no reason for her departure, but is known to have opposed the bank’s decision, announced last month, to resume its bond-buying programme until inflation neared its target of close to, but below, 2%. If that opposition was why she stepped down, it would make her the third German official to quit over bond purchases. In 2011 both Axel Weber, then head of the Bundesbank, and Jürgen Stark, a member of the ECB’s executive board, left over an earlier asset-purchase scheme.

The controversy over the ECB’s latest round of stimulus, which also cut interest rates to -0.5%, has heated up. Current and former central bankers in both Germany and other northern countries have attacked the decision to resume bond-buying. Bild, Germany’s biggest-selling tabloid, has accused Mario Draghi, the ECB’s boss, of sucking people’s savings dry. Mr Draghi’s term ends on October 31st. Christine Lagarde, the former boss of the IMF, replaces him.

Perhaps signalling a desire to cool things down, Germany’s government announced on October 23rd that Isabel Schnabel, a member of its council of economic advisers, would...

Trade finance is nearing a much-needed shakeup

Thu, 10/24/2019 - 14:55

EVERY DAY of the week thousands of visitors flow through Istanbul’s fragrant Spice Bazaar. They are a varied collection, local shoppers mingling with camera-wielding tourists. So are the products on offer. While many delicacies on display are Turkish-grown, one trader gets his berries from Iran, his walnuts from Chile and almonds from California. Another, asked if she went all the way to China to buy her jasmine tea, says wryly: “Of course not. Importers ship it here.”

Most commodities traded round the world still travel on merchant vessels. From Istanbul’s hills you can see them placidly converging on Ambarli, Turkey’s largest port. Less visible is the liquidity that makes those journeys possible. Four-fifths of global trade transactions, worth $15trn a year, rely on specialised loans or guarantees. This hidden world of trade finance is huge but poorly understood. It has long needed a shake-up, and a nascent revolution promises to unlock trillions in fresh capital. But trade wars are putting that Big Bang in peril.

Trade finance is one of the oldest jobs in banking. Millennia ago merchants in present-day Turkey exchanged cloth or copper for engraved tablets promising a later payment in silver. Trade credit today may be more sophisticated, but it still tackles the same problem: that exporters prefer being paid at the...

Is Libra doomed?

Wed, 10/23/2019 - 19:40

ON JUNE 18TH Facebook announced Libra, a new global payments system and currency, to be launched in 2020. Dubbed the “Zuck Buck” by Brad Sherman, an American congressman, the plan was to employ a mix of entrepreneurial daring and the technology underlying cryptocurrencies to shake up the world’s financial systems. Money would move at the speed of a smartphone-swipe, even across borders. Libra would lubricate life in the rich world and revolutionise it in poor countries, where basic financial services are dear and often scarce. After all, as the firm points out, 1.7bn people have no access to a bank account. Besides further expanding Facebook’s empire, Libra would bring them into the financial fold.

In the subsequent four months, Libra has had a bruising time. Many of its partner firms have got cold feet. Politicians and regulators around the world have made disapproving noises. On October 23rd Mark Zuckerberg, Facebook’s boss, spent a lonely few hours in Washington, DC, fielding mostly hostile questions from American politicians on the House of Representatives Financial Services Committee.

One problem, as Mr Zuckerberg admitted, is Facebook itself. Maxine Waters, the Californian Democrat who chairs the committee, began proceedings with a litany of its misdeeds, pointing out that it is subject to antitrust investigations...

Can central bankers talk too much?

Wed, 10/23/2019 - 19:02

IMAGINE YOU are a journalist trying to reassure your bosses that you will hit a tight deadline. What would be more effective: a forceful but brief commitment that you will do whatever is needed to get the job done, which leaves them in the dark on all the things that might go wrong along the way? Or a plan detailing every step you will take—but in which they can spot unnerving risks?

That resembles the choice central banks face as they try to convince financial markets and the public that they will meet their goals. Over the past decade their preference has been clear: the more transparency and detail, the better. In 2011 America’s Federal Reserve began holding press conferences after its monetary-policy meetings. It started publishing the range of rate-setters’ economic forecasts the following year. Across the rich world, forward guidance on the path of interest rates has become part of the toolkit. Central bankers make ever more speeches, bringing once-hidden debates out into the open. Some tweet their views.

The theoretical justification for all the talk is strong. The more markets understand how the central bank will react to events, the better they anticipate future policy. Conditions in financial markets should immediately tighten or loosen in response to economic news, making central bankers’ jobs easier. It is...

A massive money-laundering scandal stains the image of Nordic banks

Thu, 10/17/2019 - 15:03

DANSKE BANK’S headquarters in Copenhagen, reminiscent of a Greek temple, speaks of an illustrious past. But Denmark’s biggest bank has “no vanity left”, says a spokesman. Since 2008 it has been embroiled in a disaster every five years. After one during the financial crisis, it was again in crisis mode in 2013 when the board sacked Eivind Kolding after 18 catastrophic months at its helm. Last year Thomas Borgen, Mr Kolding’s successor, resigned amid revelations about Danske’s role in a vast money-laundering scandal. In May Mr Borgen was charged by Denmark’s prosecutor.

The money-laundering crisis is the most damaging yet for Danske, and for other Nordic banks allegedly involved. Last year the Organised Crime and Corruption Reporting Project, a group of investigative journalists, gave Danske its “Corrupt Actor of the Year” award. How did the bank squander its good name—and can it regain clients’ and regulators’ trust?

The saga started in 2007, when it bought Finland’s Sampo Bank, which came with a branch in Tallinn, Estonia’s capital. In the same year Estonia’s authorities found flaws in Sampo’s procedures, and the Russian central bank told Danish supervisors that non-resident customers were participating in transactions intended to dodge taxes and customs payments, or to launder “billions of roubles monthly”. The...

Is the board overseeing the territory’s bankruptcy unconstitutional?

Thu, 10/17/2019 - 15:03

“ARE YOU and your client here just to defend the integrity of the Constitution?” asked Samuel Alito, an associate justice of the America’s Supreme Court, on October 15th. “Or would one be excessively cynical to think that something else is involved here, involving money?” The court had heard arguments from Donald Verrilli, for the board overseeing Puerto Rico’s bankruptcy; Jeffrey Wall, for the federal government; and Theodore Olson, to whom the judge’s remarks were addressed. His client is Aurelius Capital Management, a hedge fund that invests in distressed debt. At stake are $125bn of creditor claims.

Aurelius was founded in 2006 by Mark Brodsky, formerly of Elliott Management. Both funds were involved in a fight with Argentina about its bonds in 2014, during which Cristina Fernández de Kirchner, then the president, dubbed them “vultures”. They were among six funds that held out for full repayment. In 2016 they settled favourably and were paid $9.3bn. Aurelius now aims to get the Supreme Court to declare the Puerto Rico oversight board unconstitutional, in the hope of improving on its offer to the territory’s creditors of 35-45 cents on the dollar.

In 2014 rating agencies downgraded Puerto Rico’s debt. It ended up defaulting. In 2016 Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (...

Britain’s equity market is shrinking

Thu, 10/17/2019 - 15:03

A FEW MONTHS ago Trian, a hedge fund, revealed that it had built a 6% stake in Ferguson, a London-listed company that supplies the building trade. Trian is run by Nelson Peltz, who has a long history as the sort of activist investor who buys stakes in firms and then uses his influence over management to boost the share price. Ferguson makes most of its profits in America. Yet its shares traded at a discount to peers listed there. Perhaps something could be done to change this.

Sure enough, Ferguson said last month that it would spin off the British part of the business to focus on its American operations. It also said it was considering moving its stockmarket listing. Should the firm leave, it will be part of a broader trend in Britain: the shrinking supply of equity capital.

America’s stock of equity has been getting smaller for a while, because of share buy-backs, a secular fall in the number of new listings and the growing incidence of leveraged buy-outs, in which low-interest debt replaces equity. Britain is now the leading candidate for such “de-equitisation”, says Robert Buckland, of Citigroup. The net stock of equity outstanding has fallen by 3% since the start of 2018, faster than in America. Cheap debt is a factor. But debt is cheap everywhere. What makes Britain so ripe for the picking is its culture of...

How the twists and turns of the trade war are hurting growth

Thu, 10/17/2019 - 10:03

AFTER WELCOMING the St Louis Blues, a championship-winning ice-hockey team, to the White House on October 15th, President Donald Trump fondly recalled a recent triumph of his own: last week’s tentative trade deal with China. Simply put, America will impose no further punitive tariffs on Chinese imports if China promises to buy American farm goods worth billions of dollars. How many billions? “It’s very big numbers,” Mr Trump emphasised. “I said, ‘Ask for 70.’…My people said, ‘All right, make it 20.’ I said, ‘No, make it 50.’”

Will this carefully calibrated amount ever materialise? China does not want to pay over the odds or deprive other, friendlier suppliers of its custom. It also wants America to go beyond promising no new tariffs and to start removing existing ones. The deal may unravel before it is written down, let alone signed by the two countries’ leaders next month at the Asia-Pacific Economic Co-operation forum in Santiago.

That unpredictability is a problem. Not just higher tariffs but “prolonged trade-policy uncertainty” are damaging the world economy, said Gita Gopinath, the IMF’s chief economist, this week as the fund again cut its forecast for global growth. “Manufacturing firms have become more cautious about long-range spending and have held back on equipment and machinery purchases,” the fund notes. The...

Greta Thunberg accuses rich countries of “creative carbon accounting”

Wed, 10/16/2019 - 19:21

IT IS 5AM, and New Covent Garden Market is in full swing. On its swarming 57-acre site in Battersea wholesalers are flogging fruit, vegetables and flowers to London’s greengrocers and restaurateurs. Costa Rican pineapples are stacked next to Kenyan passion fruits and Peruvian asparagus. Rows of Danish conifers sit by buckets of Dutch roses. Fresh produce shipped from all around the world is for sale.

But what is a boon to chefs—and apologetic spouses—has become a mind-bending problem for politicians and regulators. Under mounting public pressure they are busy setting targets to limit their carbon emissions. At least 60 countries and over 100 cities have promised to get to “net zero”. The trouble is that few account fully for the emissions created by products that are consumed within their borders but produced outside them.

Take, for example, a bunch of those Dutch roses. Britain’s “net-zero” target for its carbon impact includes only domestic emissions—the lorry trip carrying them on British soil, and so on. These carbon-dioxide emissions are trivial in comparison to the 30kg or so from heating greenhouses in the Netherlands and flying the roses to Britain. Through a production lens, Britain looks relatively virtuous. Through a consumption lens, it does not.

Flowers are just one tiny part of the equation. Across...

A Nobel economics prize goes to pioneers in understanding poverty

Tue, 10/15/2019 - 19:16

THE MOST important question in economics is also the hardest: why do some countries stay poor while others grow rich? In 2015, 10% of the world’s population lived on less than $1.90 per day, down from 36% in 1990. But more than 700m people remain in extreme poverty, and the number grows every day in certain parts of the world, in particular sub-Saharan Africa. For their contributions to understanding gaps in development, the better to close them, Abhijit Banerjee, Esther Duflo and Michael Kremer have been awarded this year’s Nobel prize for economics. All three are Americans, though Mr Banerjee and Ms Duflo are immigrants (and married to each other). Ms Duflo is only the second woman to have received the prize and, at 46, the youngest winner ever.

Thirty years ago, economists mostly looked at the big picture. They studied large-scale structural transformations: from rural and agricultural to urban and industrial. Macroeconomists built growth theories around variables such as human capital, then ran cross-country growth regressions to try to measure relationships—for example, between years of schooling and GDP per person. But data were scarce or poor, and the vast number of potentially relevant factors made it hard to be sure what caused what.

In the mid-1990s Mr Kremer, at Harvard University, tried something different....

A group of fintech firms are changing the way consumers borrow

Thu, 10/10/2019 - 14:46

JUST UNDER $1.1trn of revolving consumer debt—bills racked up on credit cards—was outstanding in America at the end of August. It is a dangerous type of debt. High interest rates and low minimum repayments mean balances can quickly balloon. But a group of fintech firms are growing fast by offering consumers an alternative.

Affirm, based in San Francisco, was founded in 2012 by Max Levchin, a serial entrepreneur who co-founded PayPal. Rather than offer a line of credit to be used at will, like a credit card, it gives loans of up to $15,000 for specific purchases, to be repaid in pre-agreed instalments. When a shopper makes an online purchase with one of its retail partners, for example Peloton, a seller of fancy exercise bikes, Affirm appears as a payment option at checkout. It does a roaring trade in financing for engagement rings and laptops.

Affirm makes some of its money from interchange fees of 3-6% paid by these merchants. On a three-month loan that works out at about as much as if the item had been bought with a credit card and paid off over the same period. That allows it to offer short-term loans at zero interest. On longer-term loans the cost is fixed when the loan is taken out and does not accrue as with cred it cards, even if a payment is late.

The model for such firms was Klarna, which was founded in...