The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 1 hour 13 min ago

As yields turn negative, investors are having to pay for safety

Thu, 08/08/2019 - 14:45

PENGUINS ON A melting icecap must choose between budging up tighter and taking the plunge. Institutional investors such as pension funds and insurers now face a similar unappealing choice, with ever-fewer safe assets that do not lose them money. According to an index calculated by Bloomberg, a quarter of the bonds issued by governments and companies worldwide are now trading at negative yields. Creditors holding $15trn-worth of securities will make a loss if they hold them to maturity (see chart).

Yields on many European government bonds turned negative in the mid-2010s as central banks engaged in quantitative easing—colossal bond-purchase programmes. By 2015, 40% of the continent’s sovereign bonds offered negative yields. But as economies perked up, central banks changed course. By November 2018 many European bonds were back above sea level.

Now many have gone negative once again. France’s ten-year bonds have been flirting with negative yields for two months; they went below zero three weeks ago and stayed there. Ireland followed on August 5th. Fiscally conservative countries like Austria and the Netherlands are well past that point. Spain and Portugal may soon follow, says Iain Stealey of JPMorgan Chase’s asset management division. Germany’s entire yield curve is already submerged.

As the trade war between...

The surprising departure of HSBC’s chief executive

Thu, 08/08/2019 - 14:45

MARK TUCKER and John Flint always seemed an unlikely double act at the top of HSBC, Britain’s biggest bank. Mr Tucker’s first profession was football—he was on the books of Wolverhampton Wanderers, now a Premier League club—and you imagine he was robust in the tackle. He never made the first team, but instead became a star in the insurance business. He captained Britain’s Prudential and AIA, a big Asian life insurer, before transferring to HSBC, as chairman, in 2017.

The wiry Mr Flint, by contrast, completes triathlons and was an HSBC lifer, joining from university in 1989. He climbed the ranks in HSBC’s time-honoured way, running the retail and wealth-management division before becoming chief executive in February 2018.

On August 5th, to general surprise, HSBC declared that Mr Flint was standing down after just 18 months. Noel Quinn, the head of commercial banking, will take interim charge. The bank’s tradition has been to appoint its chief executives from within—Mr Flint’s predecessor, Stuart Gulliver, ran the bank for the last seven of his 38 years on the staff—but it will look externally as well as internally for a permanent replacement.

At first blush, Mr Flint’s ousting looks harsh. On the same day as it announced his departure, HSBC reported that its net income in the first half of 2019 had risen by 18.1...

The trade war escalates, and the fog of war descends

Thu, 08/08/2019 - 08:48

CARL VON CLAUSEWITZ, the Prussian military theorist, never wrote about currency wars. But some policymakers see them in his terms: as the continuation of trade politics by other means. That, at least, is how the Trump administration views China’s decision on August 5th to let its currency weaken past seven yuan to the dollar for the first time since 2008. Though arbitrary, that threshold has assumed huge symbolic importance among traders, economic officials and fund managers (see Buttonwood). They were left stunned.

America’s Treasury quickly branded China a “currency manipulator”, a charge it has not levelled against any country for 25 years. China, in the Americans’ view, was cheapening its currency to gain an unfair edge in retaliation for President Donald Trump’s surprise announcement four days earlier that he would impose new tariffs of 10% on roughly $300bn of Chinese goods.

This marked the end of investors’ hopes for a peaceful summer. At the end of July the Federal Reserve had cut interest rates to guard against a slowdown in America’s respectable growth rate, and trade tensions had “returned to a simmer”, as Jerome Powell, the Fed’s chair, noted with satisfaction. But after the yuan’s move America’s stockmarket suffered its worst day...

How yuan-dollar became the world’s most closely watched asset price

Thu, 08/08/2019 - 08:48

A PRINCIPLE FOLLOWED by traders who speculate on short-term movements in market prices is “cut your losses early”. This doctrine finds expression in the stop-loss—an order to sell a security, such as a company share, automatically when it hits a predetermined price. People being people, stop-loss orders tend to cluster at salient levels, such as whole or round numbers. They might instruct a broker to sell the pound at $1.20, say, or sell Apple at $200.

The round-number fetish is a strange one. But when a situation is uncertain (and financial markets are always uncertain) arbitrary numbers or thresholds are often charged with great meaning. And few have had the significance of seven yuan per dollar. So when the yuan broke through seven on August 5th, it prompted a violent sell-off in stocks and a rally in bonds. That was followed by a formal charge by the US Treasury that China was manipulating its currency.

On the face of it, that looks like an overreaction. If things were fine when the yuan was at 6.99, why did all hell break loose when it reached 7.01? Odder still is the idea that a currency that has only fairly limited use outside China is suddenly a prime mover in global capital markets. Yet China’s heft in the world economy has made it so. The yuan-dollar exchange rate is now the world’s most watched asset price....

Prices for many goods do not move the way economists think they should

Tue, 08/06/2019 - 16:43

TWO YEARS ago British chocoholics felt the pinch from the decision to leave the European Union. As sterling tumbled, global firms selling to the British market faced the same production costs as before, but got less money for each sweet sold. Rather than raise the price per chocolate, some chose to shrink the chocolate per price. The famous peaks on a bar of Toblerone grew conspicuously less numerous (though Mondelez, the bar’s maker, said Brexit was not the cause). Other products suffered the same “shrinkflation”: toilet rolls and toothpaste tubes became smaller. The threat of Brexit made the phenomenon more visible, but it is surprisingly common. Statisticians and policymakers need to take note.

Every first-year economics student quickly becomes familiar with charts of supply and demand, which place price on one axis and quantity on the other. Given a drop in demand, the charts show, firms can either sell fewer items at the prevailing price or cut prices to prop up sales. But online retailing, which makes it easier to collect fine-grained price data, reveals how poorly textbook models reflect real-world market dynamics. The prices of consumer goods, it turns out, behave oddly.

A forthcoming paper by Diego Aparicio and Roberto Rigobon of the Massachusetts Institute of Technology helps make the point. Firms that...

Portugal tries to lure emigrants back

Thu, 08/01/2019 - 14:46

FED UP WITH politics in America, Madonna left in 2017 and set up home in Lisbon. As Portugal’s population shrinks its government might hope that others will follow the pop star. It already has a “golden visa” scheme—which gives investors the right of residence—and offers highly skilled migrants tax breaks. A new scheme, launched on July 22nd, tries to lure back emigrants, even if they are neither highly paid nor highly skilled.

The Regressar (Return) programme is aimed at former residents who have lived outside Portugal for at least three years and are considering moving back. Returners are promised 50% off their income tax bills for five years. Those who take up jobs in Portugal receive help with the costs of relocation, such as travel, moving possessions and re-registering professional qualifications, up to a maximum of around €6,500 ($7,200). Those searching for jobs while still abroad can sign on with the Portuguese employment office.

As the economy was struck first by the global financial crisis and then by a sovereign-debt crisis, unemployment soared, to 17% in 2013. But since then the rate has dropped below 7%, and companies now complain that both skilled and unskilled workers are in short supply. A shrinking population makes matters worse. Since 2010 it has fallen by 300,000, or 3%. More...

Emerging-market dreams of rich-world incomes meet reality

Thu, 08/01/2019 - 14:46

FOR A RICH economy, a growth rate beginning with a five would be cause for ecstasy. For India, it is a huge disappointment. Its most recent quarterly growth figure translates into an annualised rate of only 5.8%, the fourth consecutive quarterly slowdown. That is slower than China (a 6.2% annualised rate in the second quarter of 2019, down from 6.4% in the first) and substantially slower than India believes itself capable of. Recent data suggest the swoon has since deepened (and an analysis published in June by a former adviser to the Indian government also suggests that the China-like growth rates posted in the recent past may reflect dodgy statistics). India is hardly doomed; if it might reasonably have expected to do better, experience elsewhere shows it could very easily have done worse. But the slowdown is yet another sign that the emerging-market narratives to which the world has grown accustomed are in need of serious revision.

During most of the 20th century advanced economies outgrew poorer ones. But around the turn of the millennium a dramatic shift occurred. In terms of real GDP per person, adjusted for purchasing-power parity, just 24% of the countries now classified as emerging markets by the IMF grew faster than America did across the 1980s as a whole. In the decade starting in 2000, by contrast, 76% did so. Then the...

The LME is Europe’s only surviving “open outcry” venue

Thu, 08/01/2019 - 14:46

HER CLIENT’S huge order would cause prices to surge if the market got wind of it. She knew she needed to be crafty. “So I shouted as loud as I could, ‘I’ll sell at £795’.” The price sank. “By now I was pointing at everyone who had bid, but because they thought I was a heavy seller they backed off, only taking 25 tonnes at a time.” At the bell, the price fell to £780. That triggered automatic sell orders. At the next session she was able to buy back her stock—plus a few thousand tonnes for her client—on the cheap.

Every trader on the London Metal Exchange probably has a tale to tell of wrong-footed rivals. This story, told in “Ring of Truth”, a memoir by Geraldine Bridgewater, the LME’s first female trader, is from four decades ago. Little has changed. Traders still sit in a circle (the Ring) and yell orders for copper at each other, just as they have for more than a century. The LME is the only “open outcry” trading venue left in Europe. Its rituals seem as quaint as Morris dancing or the Trooping of the Colour.

Yet somehow the LME retains its relevance. It is now owned by Hong Kong Exchanges and Clearing (HKEX). Ms Bridgewater’s big trade was for the People’s Republic of China, a client she had shrewdly cultivated. China has since become the LME’s biggest source of custom. There is a rival exchange in Shanghai; China...

The currency-trading scandal continues to dog the banks

Thu, 08/01/2019 - 14:46

THE LAUGHING stopped long ago. Between 2007 and 2013, in online chatrooms called “Three Way Banana Split”, “Essex Express ’n the Jimmy” and other rib-ticklers, currency traders yapped about all sorts of things—including market tactics. The banter has cost their employers dear. Banks have been fined over $10bn for market-rigging by American and European regulators, including €1.1bn ($1.2bn) by the European Commission in May. An American class action cost 15 banks $2.3bn. But a lawyer’s work is never done. On July 29th Scott+Scott, an American law firm, filed a collective-action case at the Competition Appeal Tribunal (CAT), an antitrust forum in London.

Cases like this are still a novelty in Britain, despite a theoretically helpful change in competition law in 2015. Collective claims may now be brought to the CAT on an “opt-out” basis, in which members of a specified class are included in the claim unless they choose not to be. If a monopolist rips off its customers, it may do lot of harm in total, but the damage to each may be small. Given the cost of going to court, many may not bother suing. But the easier a collective-action case is to bring, the likelier they are to gain redress.

The expense of bringing a case to the CAT—and the risk of defeat—are borne by a newish breed of firms specialising in financing litigation...

The London Stock Exchange buys Refinitiv

Thu, 08/01/2019 - 09:33

AROUND 2AM, as the London Stock Exchange Group (LSE) hammered out an agreement with Blackstone to buy Refinitiv, a data-provider, mice scurried out of the corners. Unfair tactics, quipped the Blackstone side. But the American private-equity firm still struck a superb deal. On July 27th the LSE said it would buy Refinitiv (including its debt) for $27bn in shares. Blackstone has doubled its money in ten months after buying 55% of the data firm in a consortium last year.

The prospect of a 321-year-old British champion shaking off the Brexit gloom to buy a big international firm caused much glee in London. On July 29th the LSE’s shares closed up 15% on the day. Refinitiv’s sales span most asset classes, with three-fifths coming from North America and Asia. “The London Stock Exchange is turning away from Europe and endorsing Global Britain,” crowed one commentator.

Truth be told, the LSE might still have snapped up Refinitiv had the referendum of 2016 gone the other way. The rationale is clear. Several years ago it pivoted from listings towards selling financial-markets data and analytics, for which demand is voracious. And Refinitiv is the owner of Eikon data terminals, used by traders and fund managers, and Elektron, a data-feed business. Other stock exchanges have seen the same opportunity: in 2015, for example, ICE, the...

The Fed cuts rates for the first time in over a decade

Wed, 07/31/2019 - 20:52

INTEREST RATES set by the Federal Reserve have been rising since 2015. The gradual approach, explained the Fed’s chairman, Jerome Powell, last September, was intended to leave time to see how well the economy could absorb each raise. “So far the economy has performed very well, and very much in keeping with our expectations,” he said back then.

Now America is being treated to what some are calling “Powell’s pirouette”. On July 31st Mr Powell announced America’s first interest-rate cut in over a decade, of 0.25 percentage points (see chart). At the press conference after the announcement he blamed weak global growth, trade policy uncertainty and muted inflation. “We’re trying to sustain the expansion,” he said.

The move was widely expected, though not universally understood. By many measures America’s economy still seems buoyant. After dipping a little, earlier in the year, consumer confidence is almost back to its post-recovery peak. Figures published on July 26th revealed that Americans are still...

What Wall Street thinks of Elizabeth Warren

Wed, 07/31/2019 - 14:37

CONVERSATIONS WITH bankers about the Democratic primaries invariably turn to Elizabeth Warren, a senator for Massachusetts. That is not because they like her. Most would prefer to see the Democratic ticket headed by Joe Biden, who leads the polls, or Pete Buttigieg, a business-friendly mayor from Indiana. They know Ms Warren as the candidate who wants to break up big banks, bring in a wealth tax and make private-equity firms liable for the debt of companies they buy. After the crisis of 2008-09 she was instrumental in creating the Consumer Finance Protection Bureau, an agency to police shady practices at banks. “I took on Wall Street, and CEOs, and their lobbyists, and their lawyers,” she boasted during the second Democratic debate on July 30th—“and I beat them.”

But mutual contempt has bred familiarity. Perhaps surprisingly, bankers are fretting just as much about a candidate who is a racing certainty to make it onto the ballot: President Donald Trump.

Wall Street’s finest think they have already got all they are ever going to get from Mr Trump. They hoped for two things from his election in 2016: a big corporate-tax cut and sweeping revisions to Dodd-Frank, the post-crisis regulatory bill. They got their tax cut. And though Dodd-Frank was tweaked only modestly, they think there may not be much more to be...

The Mittelstand’s corporate success comes at a cost

Tue, 07/30/2019 - 17:32

THE MITTELSTAND, exports and thrift—all are matters of German national pride. Thanks to them Germany has run the world’s biggest current-account surplus since 2016, last year just shy of $300bn (7.3% of GDP). This sign that it saves more than it invests at home, and sells abroad more than it imports, has earned the ire of President Donald Trump, who would like thrifty Teutons to buy American.

The IMF has long wrung its hands at the savings glut. Last month, in its annual report on global imbalances, it repeated a warning that Germany’s current-account surplus was “substantially” stronger than warranted by economic fundamentals. In a separate paper it presented evidence that the growing current-account surplus was accompanied by increasing inequality (see chart). The link, it says, is high corporate profitability.

Around the turn of the millennium Germany’s exports took off, as rapidly growing emerging economies started to buy its high-value-added manufacturing goods in bulk. That,...

How big stars maximise their take from tours

Thu, 07/25/2019 - 15:07

BUYING TICKETS to a marquee music show can be a miserable experience. You go online as soon tickets are released only to find they are sold out and available only on resale sites at a hefty markup. Touts often use bots to buy up tickets. But it has long been a dirty secret in the music industry that some end up on the secondary market at the behest of performers themselves.

A secret, that is, until July 19th, when Billboard, an industry magazine, reported on a phone conversation in 2017 between an executive at Live Nation, a concert promoter, and someone claiming to represent Metallica, a heavy-metal band. The representative asked Live Nation to place 88,000 tickets for an upcoming tour on ticket-resale sites, bypassing outlets where they could be bought at face value. Live Nation admitted that it had previously placed concert tickets on resale sites for other artists.

“None of the bands who had tickets on the secondary market would ever take responsibility,” says Paul Hutton of Crosstown Concerts, a British music promoter. “It was always blamed on an unscrupulous manager or agent.” Live Nation’s admission has destroyed that defence.

The reason for the ruse is that performers want to be rich, but not to make fans think them greedy. In an article in 2016 for The Ringer...

America considers retaliating against currency manipulation

Thu, 07/25/2019 - 15:07

THE SOUTHERN SHRIMP ALLIANCE, an industry association based in Florida, is angling for tariffs. It has tried repeatedly to have foreign competitors harpooned with duties. Now some new opportunities have surfaced. The Department of Commerce is proposing a rule enabling tariffs on imports from currency manipulators. Crustacean-catchers are keen.

American businesses disgruntled by what they see as distorted exchange rates may soon have more weapons at hand. After weeks of fulmination by President Donald Trump on Twitter about countries that keep their currencies artificially weak to America’s detriment, financial analysts are speculating that the Treasury might use its Exchange Stabilisation Fund (ESF) to weaken the dollar. Elizabeth Warren, a Democratic presidential hopeful, has also called for the dollar to be managed to promote exports, referring to proposals by Fred Bergsten and Joseph Gagnon of the Peterson Institute for International Economics, a think-tank.

The chatter is odd in one respect: other countries’ currency manipulation does not seem to be the reason for the dollar’s strength. Although an IMF report published on July 17th said that the dollar was overvalued by 6-12%, it also said that foreign-exchange intervention had been playing “a much more muted role in recent years”. America’s loose fiscal policy—and...

Domestic demand has sparkled against the euro-gloom

Thu, 07/25/2019 - 15:07

A STONE’S THROW from the bustling arcade of Atocha railway station in central Madrid are the offices of Spotahome, a startup that matches tenants and long-term rentals. Set up five years ago, it lists 65,000 properties in 11 European cities and employs more than 300 people. An example of Spain’s small but fast-growing startup scene, its success reflects an economic resurgence in Madrid and some other European cities. The supply of rental properties has grown since Spain’s deep housing crisis, notes Alejandro Artacho, its boss. Demand comes from exchange students, as well as an expansion that has lured foreign businesses and workers. Spain’s population fell after recession struck for the second time in three years in 2012, as more people moved abroad than came in, but that trend reversed in 2016.

Since 2018 a slowdown in trade and manufacturing, concentrated in Germany and Italy, has cast a pall over the euro area. But matters would be far worse had other countries and sectors not held up. Spain alone accounts for a tenth of the zone’s GDP, but in recent years has contributed a fifth of growth and an outsize share of new jobs. Across the bloc sectors that rely on domestic demand have expanded, as recovering labour and credit markets have boosted household and business spending.

In the growth league table, the euro area’s...

Why investors favour economically orthodox political strongmen

Thu, 07/25/2019 - 15:07

A GOOD WAY to start an argument that never ends is to try to define populism. Dictionaries say it is politics directed at ordinary people who feel neglected by elites. That leaves a lot out, not least economics. In 1990 Sebastian Edwards and the late Rudiger Dornbusch sketched what is meant by “economic populism”. It is an approach, they wrote, that denies that budget deficits or inflation are constraints on economic growth. The Latin American populists they studied printed money to pay for public-spending binges. It ended in tears.

There is no shortage of leaders in middle-income countries who fit the dictionary definition of a populist. But economic populism in its purest form is now quite rare (though its results are sadly evident in Venezuela). These days a lot of would-be champions of the people prefer their macroeconomic policies on the orthodox side: inflation targets, fiscal restraints, free-floating currencies, that sort of thing. They are happy to let technocrats get on with it.

This poses a mild dilemma for rich-world investors—which is soon resolved. They may be appalled by the social and foreign policies of such strongmen. Yet as professionals they are also unthrilled by inflation, default, devaluation and adverse shifts in politics, which are hazardous to a bond portfolio. They tend to favour autocrats...

Many consumers neither read nor understand the contracts they sign

Thu, 07/25/2019 - 15:07

“TERMS AND conditions apply” vies for being the most morale-sapping four-word phrase of modern times, along with “The plane is delayed” and “You’re trending on Twitter”. Consumers read about a juicy offer, but fear a catch is hidden in the small print. The obvious solution—to read that small print—is not always feasible. Facebook’s online terms and conditions run to more than 3,200 words. Not too daunting? One section lists another 11 “other terms and policies that may apply to you”, including “community standards” on the content that users may post. A lot of further reading will be required.

Even when users do read, they may not understand. Last year Which?, a British consumer-advice group, asked 24 volunteers to read the fine print on a selection of 40 insurance documents and answer a series of questions. They gave the wrong answers to between a quarter and a third; only four got top marks. Language analysis showed that the documents were harder to understand than the late Stephen Hawking’s “A Brief History of Time”.

All this matters because “freedom of contract” is fundamental to the economic system. If two parties freely contract to make an exchange or enter a long-term relationship, both must perceive that it is to their advantage. But there is an asymmetry of information between an ordinary consumer and a...

Betterment wants your bank account as well as your investments

Wed, 07/24/2019 - 11:55

THOSE SAVING for retirement face plenty of quandaries. Spending today is more fun than waiting to spend tomorrow. Once savings have been amassed you must decide what to do with them. The possibilities are many and complex. And people are prone to error, buying when asset values are high and panic-selling when they dip. The promise of robo-advisers, which offer computer-generated financial advice, is to assist savers with these problems far more cheaply than human ones.

Rock-bottom fees, usually just 0.25% of assets, have helped them grow fast. Betterment, a robo-adviser based in New York that was founded in 2008, manages $16bn-worth of assets. Wealthfront, a rival from San Francisco, manages $11bn. But skimpy fees mean they need hefty assets to survive. In a report in March HSBC claimed that robo-advisers need to oversee $11bn-21bn of assets to break even. Jon Stein, Betterment’s boss, says that the company is profitable, helped by low costs for running the accounts. But it is probably a close-run thing. Betterment has launched some pricier, fancier products—but its business model would suggest that revenues of just $40m must pay for nearly 300 employees, swanky midtown Manhattan offices and advertising blitzes.

Competition in robo-advice is fierce, as established asset managers have muscled in. Vanguard...

A society’s values and beliefs matter for its economy

Tue, 07/23/2019 - 17:29

MAKE AMERICA GREAT AGAIN is more than text on a red cap. It is an argument about the nature of American success: one which President Donald Trump elaborated on in racist comments last week. On July 21st he questioned whether four Democratic congresswomen, all non-white, were “capable of loving our Country”. The same day Stephen Miller, an adviser to Mr Trump, said the president’s criticisms of America differed from those of his critics because he was defending the “principles of Western civilisation”. The comments seemed to imply that American greatness is built on a cultural inheritance that some people cannot access, whether born in America or not.

Cultural arguments once loomed large in explanations of the ways in which countries differed economically and politically. Economists mostly abandoned such reasoning in the 20th century, not only because it provided cover for racists but also because of its lack of explanatory power. In 1970 Robert Solow, a Nobel prizewinner, quipped that attempts to explain growth with variables such as culture generally ended up “in a blaze of amateur sociology”. This position is changing, however, and not before time. A better grasp of how cultures work may be needed to understand modern political economy.

The responsible intellectual use of cultural arguments begins with clear...

Pages