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Finance and economics
Updated: 54 min 3 sec ago

IEX loses a battle but not yet the war

Thu, 09/26/2019 - 14:40

TECHNOLOGY HAS robbed stock exchanges of their theatrics. Opening days are an exception. Blue-chip firms listing on Nasdaq, America’s second-biggest exchange, get an hour of exclusive advertising on its tower in Times Square. On the New York Stock Exchange (NYSE), the biggest, they earn the right to be deafened by a bell above a 116-year-old trading floor.

Yet behind the pageant, competition for listings is cut-throat. Last year Nasdaq snatched 18 listings from NYSE; six went the other way. Now Investors Exchange (IEX), an independent upstart created in 2012, is giving up the fight. On September 23rd it said it would shut its listings unit to focus on trading and new services. “We’ve spent many, many, many hours flying around the world trying to educate companies,” says Brad Katsuyama, its boss. “The return on our efforts was not where it needed to be.”

Under America’s equity-exchange duopoly, Mr Katsuyama argues, retail investors pay too much for data and a fast connection, and are outpaced by high-speed traders’ algorithms (Cboe, the third-largest, focuses on exchange-traded funds). IEX’s fees, he says, are fair and simple by comparison. It also routes orders over a “speed bump”, a coil of fibre-optic cable that slows access to the market by 350 microseconds.

Listings were not originally part of its plans. All...

Repo-market ructions were a reminder of the financial crisis

Thu, 09/26/2019 - 14:40

FOR ANYONE who lived through the global financial crisis, trouble in the market for repurchase agreements, or repos, induces a cold sweat. During the week of September 16th the repo market—the epicentre of the crisis 12 years ago—ran short of liquidity, forcing the Federal Reserve to intervene suddenly by injecting funds. By the following week fears of a reprise of the global crisis were easing, though banks remained eager recipients of Fed liquidity. But the episode was a reminder that financial dangers lurk. At some point one will give post-crisis reforms a real-world stress test. It is unclear whether they are up to the challenge.

The financial crisis combined several storms into a single maelstrom. It was part debt-fuelled asset boom. A long run of rising home prices in America led to complacency about the risks of mortgage lending. Ever more recklessness fuelled the upward march of prices, until the mania could no longer be sustained. Borrowers began to default, saddling lenders with losses and creating a widening gyre of insolvency. Painful enough on its own, America’s housing bust became truly explosive thanks to an old-fashioned bank run.

Banks fund themselves on a short-term basis via demand deposits, but also on money markets, such as that for repos. Many bank assets, by contrast, are illiquid and long-term,...

The trade war did not start with President Donald Trump

Thu, 09/26/2019 - 14:40

Schism: China, America and the Fracturing of the Global Trading System. By Paul Blustein. CIGI Press; 280 pages; $35. 

AMERICA’S ECONOMIC relationship with China is rupturing. Tariffs now cover around two-thirds of the countries’ bilateral trade in goods, and will include almost all of it from December 15th. A timely new book by a former reporter for the Washington Post and Wall Street Journal explores the origins of the conflict, which date from well before Donald Trump’s presidency.

China hawks contend that America should have blocked China’s entry into the World Trade Organisation (WTO) in 2001. Even then, they reckon, it was obvious China would never embrace the Western economic model. Once in, they say, it abused other members’ trust, depressing the value of its currency for competitive gain, subsidising its industries and stealing American intellectual property.

But it is worth recalling that the terms set for China were much more severe than those for other emerging markets. It had to agree that other members could impose special, defensive tariffs on its exports. Many within China felt that it had been accorded second-class status. And to say that China’s accession achieved nothing is too harsh. China made significant...

Price distortions have created the world’s largest stockpile

Thu, 09/26/2019 - 14:40

OCEANS OF CLOYING chai; coils of sticky jalebi—Indians cannot get enough of the sweet stuff. Already the world’s largest consumer of sugar (though with relatively low consumption per person, at 19kg per year, against a global average of 23kg), last year India pipped Brazil to become the world’s biggest producer. On September 30th its sugar industry’s book-keeping year ends. A reckoning is due.

A production bonanza, spurred by the brief scare of a shortfall in 2016-17 and by higher-yielding sugar-cane varieties, has driven India’s output to record levels. This year it is expected to hit 33m tonnes of crystalline sugar, compared with domestic demand of about 26m tonnes. The cumulative build-up of sugar means that the mills crushing fresh-cut cane could end up sitting on as much as 14.5m tonnes. That is thought to be the most sugar any country has stockpiled, ever.

India has long granted sugar-cane farmers special perks. It forces mills to pay sky-high prices for sugar cane and makes it hard for them to import it. Uttar Pradesh, the state with the greatest acreage of cane, sets an extra-generous “state-advised price”, which guarantees farmers a huge return on their basic costs and labour. Thanks to such artificial pricing, processing sugar anywhere in the country is more...

The Trump administration has made mixed progress on its trade agenda

Thu, 09/26/2019 - 10:18

PRESIDENT DONALD TRUMP teased trade-watchers on September 25th when he reannounced a deal with Japan (just weeks after announcing an agreement in principle). He promised it would mean “really big dollars for our farmers and for our ranchers”. A White House press release boasted about the extra access American exporters of beef, pork and cheese would get to the Japanese market. Robert Lighthizer, the United States Trade Representative, told journalists that American tariff reductions would arrive by January 1st. But despite all the fanfare, the text of the deal remained unpublished.

There had been hopes that Mr Trump might sign a mini-deal with India, too, during his meeting with the country’s prime minister, Narendra Modi, on September 24th. American companies complain that India’s price controls on heart stents and knee implants force them to sell at below cost price. The hope was that, in return for a package that solved that problem, India might be reinstated as a member of America’s Generalised System of Preferences, which offers lower tariffs on some products. But negotiators failed to resolve their differences in time.

The mismatch between the demand for photo opportunities and the supply of worked-out trade deals explains both anticlimaxes. Such agreements are complex legal documents, and the language needs to be...

Humanity will find ways to adapt to climate change

Thu, 09/19/2019 - 14:48

AFTER DESTRUCTIVE storms like Hurricane Dorian, those affected have decisions to make. Should they invest in cellar pumps and better drainage? Should they rebuild with more robust design and materials? Should they move? These judgments are informed by a harsh reality: the weather will get worse. Seas will be higher, rain more diluvial and storms fiercer. People with means will naturally adjust—as they should. Adaptation is essential to reduce the human and economic costs of climate change. But spending on adaptation may further complicate already-confounding politics.

Efforts to slow global warming must overcome devilish political obstacles. The benefits to reduced warming accrue over decades and centuries, whereas the cost of cutting emissions must be paid upfront by taxpayers who cannot expect to see much return in their lifetimes. And mitigation (as efforts to curb emissions are called) is subject to a vicious collective-action problem. Climate harms are determined much more by what everyone else does than by what you do. Each actor has an incentive to free-ride on the sacrifices of others. Cutting emissions requires every large country saddling voters with expense and inconvenience that will mostly help people elsewhere, or not yet born.

Adaptation, by contrast, can pay off even when a person acts alone, out of pure...

Two British bankers are on trial in Germany’s biggest tax case

Thu, 09/19/2019 - 14:48

OCCASIONALLY MARTIN SHIELDS slips into the jargon of financial markets: OTC (over-the-counter), for trades between banks and private customers); kd-1-11, a code for payments, which confuses his translator. But on September 18th, the first of two days’ testimony at a court in Bonn, the British investment banker does his best, with slides and a laser pointer, to explain to the judge the complexities of dividend arbitrage in general and “cum-ex” deals in particular. Even the most basic cum-ex deal, he says, involves 12 steps and a web of bankers, brokers, investors, asset managers, lawyers and consultants.

Mr Shields and Nicholas Diable, another British banker, are the main defendants in Germany’s biggest post-war tax-fraud trial. They are accused of “aggravated tax evasion” for helping engineer 33 deals that cost taxpayers almost €450m ($494m) between 2006 and 2011. The charge sheet runs to 651 pages. Cum-ex trades are share transactions done at high speed on or just before the day dividend payments are recorded. Before payment, shares come with (cum) dividends, which are reflected in their prices; after, they come without (ex). A flurry of deals may allow two or more investors to reclaim tax on dividends, even though it has been paid just once.

Mr Shields describes the pressure on traders in London’s investment banks 15...

How T. Boone Pickens changed corporate finance in America

Thu, 09/19/2019 - 14:48

IN THE EARLY 1950s Thomas Boone Pickens worked as a geologist at Phillips, an oil firm based in Bartlesville, Oklahoma. He hated it. His working day was regimented. His colleagues lacked ambition. He found the waste and inefficiency sickening. “At Phillips, I met the monster: Big Oil,” he wrote. Mr Pickens left to form his own firm, Mesa Petroleum. Impatient with its progress, he devised an audacious plan. He would slay the monster by using Mesa to buy out larger, badly managed firms.

Against the odds Mesa’s first big bid, for Hugoton, a far larger natural-gas firm, succeeded in 1969. But Mr Pickens, who died on September 11th, is best remembered for the daring takeover bids he made in the 1980s, not least for his old employer, Phillips. These failed, but not before driving the targets’ shares up and making Mr Pickens a small fortune.

The one that had the most lasting impact on corporate America was his tilt at the Gulf Oil Company. Gulf was one of America’s top six oil firms in 1984; Mesa was a minnow by comparison. So it was a gutsy move. But what set it apart was that it was the first big attempt at a hostile buyout to be backed by junk bonds. Drexel Burnham Lambert, an upstart investment bank, supplied the financial muscle; Mr Pickens provided the oil-industry know-how. Corporate finance would never be quite the...

Wrapped in polite wording, the World Bank delivers a warning to China

Thu, 09/19/2019 - 14:48

CHINA LOVES political slogans expressed as numbered lists. There are, to name a few, the Two Centenaries, the Three Represents and the Four Comprehensives (not to be confused with the Four Modernisations or, heaven forfend, the Four Olds). In a new report the World Bank has made its own contribution to Chinese numerology, introducing the “three Ds”. These, it says, refer to what China must do to become more productive and innovative: remove economic distortions, diffuse technology and foster discovery. That might sound hokey, but it highlights a basic challenge for any external actor in China today: how to convey new ideas and criticism to a government that is increasingly set in its ways.

The World Bank has more experience than most in this, having loaned cash (more than $60bn) and expertise to China over nearly four decades. Its report, “Innovative China”, published on September 17th, reflects a slightly different approach. It is the third time since 2012 that it has jointly written a policy blueprint with the Development Research Centre, a think-tank under the State Council. It is, in theory, a way to put recommendations into the prime minister’s hands, and perhaps into the next five-year plan.

This report came with more controversy than the previous two. In March the Washington Post reported...

Why the Fed was forced to intervene in short-term money markets

Wed, 09/18/2019 - 21:12

THE FEDERAL RESERVE had plenty to fret about as it prepared to discuss policy interest rates on September 17th and 18th. Trade tensions and wilting global growth have seen businesses cut back investment in the second quarter of the year. In manufacturing, production and capacity utilisation have been falling since the end of 2018. Though the Fed has described jobs growth as “solid”, some analysts worry that the labour market is wobbling. As expected, these concerns prompted the central bank to lower rates for the second time this year, by 0.25 percentage points, to a target of 1.75-2%. But the meeting was overshadowed by turmoil in money markets.

On September 17th, for the first time in a decade, the Fed injected cash into the short-term money market. The intervention was needed after the federal funds rate, at which banks can borrow from each other, climbed above the Fed’s target. It rose as the “repo” rate—the price at which high-quality securities such as American government bonds can be temporarily swapped for cash—hit an intra-day peak of over 10%. On September 17th the Fed offered $75bn-worth of overnight funding, of which banks took up $53bn. The following two days it again offered $75bn-worth. Banks gobbled it up.

That sent shivers down spines. A spiking repo rate was an early warning sign before the...

Changing weather could put insurance firms out of business

Tue, 09/17/2019 - 18:24

THE PILOTS of the Port of London Authority are the cabbies of the Thames estuary. Based in Gravesend, 33km from the capital, they navigate some 10,000 ships into London terminals every year. Dispatched offshore on fast patrol boats, they use rope ladders to board ships as tall as buildings. Much like London’s black-cab drivers, who know its 25,000 streets by heart, they must recall every sandbank and wind farm at the mouth of the river.

They are essential links in supply lines relied on by south-east England for everything from food to fuel. But when winds are too strong, pilots cannot board ships. If delays accumulate, terminals get clogged. The fiercer storms that could soon come to British shores could paralyse trade for days. Such a chain reaction is an example of the costs carbon emissions may bring.

Insurance companies are uniquely exposed to these sorts of changes. Tens of millions of businesses buy policies every year to protect themselves from risks. Last year the premiums paid for property and casualty insurance worldwide reached $2.4trn, according to Swiss Re, one of the big reinsurance firms on to which consumer-facing insurers pass the risk of mega-losses. Extreme events becoming the norm could force insurers to fork out ever greater payouts to policyholders, and lower the value of the assets they hold...

Steven Mnuchin begins reforming America’s giant mortgage-guarantee firms

Thu, 09/12/2019 - 14:59

“THE LAST unfinished business of the financial crisis”: that is the rallying cry of those seeking to reform Fannie Mae and Freddie Mac, the two giant government-sponsored enterprises (GSEs) that back much of America’s mortgage industry. In 2008, amid the wreckage of the housing market, they were bailed out by the federal government to the tune of $188bn and placed in “conservatorship”, a form of government control. On September 5th Steven Mnuchin, the treasury secretary, published a long-awaited plan to reprivatise them. “We want to make sure they are not in conservatorship on a permanent basis,” he told the Senate on September 10th.

Mr Mnuchin set out two alternatives. The first, more sweeping, would need congressional approval. The second could be carried out by the Treasury and the Federal Housing Finance Agency (FHFA). Mr Mnuchin says passing reform through Congress is his preferred option. A senior Treasury official says administrative actions will start promptly, in part to lay the groundwork for legislation. But the administration will proceed whether or not Congress acts. The Trump administration is presenting America’s housing-finance industry with a “fork in the road”, says Jim Parrott of the Urban Institute, a think-tank.

The two GSEs have been central to America’s housing market for decades. Fannie was...

How rock-bottom bond yields spread from Japan to the rest of the world

Thu, 09/12/2019 - 14:59

IT WOULD BE hard to think of a business that is on the face of it quite as dull as Norinchukin Bank. A co-operative, it was founded almost a century ago to take deposits from and lend to Japanese farmers. Yet Norinchukin came blinking into the spotlight earlier this year when it emerged that it had been a voracious buyer of collateralised loan obligations (CLOs)—pools of risky business loans used to finance buy-outs by private-equity firms. At the last count, in June, Norinchukin owned $75bn-worth.

The escapades of Norinchukin offer a parable. One part of its lesson is that when interest rates are stuck near zero for a long time, as they have been in Japan, banks’ normal source of profits comes under pressure. The other part is the lengths to which they must go to boost those profits, in this case by buying exotic foreign securities with attractive yields. Norinchukin is not alone. Japanese banks and insurance companies have been big buyers of the triple-A-rated tranches of CLOs, as well as other sorts of investment-grade corporate debt.

For this, blame negative bond yields. When the Bank of Japan’s board meets on September 19th, it is not expected to reduce its main interest rate, currently -0.1%. But any increase in interest rates seems a long way off. And as long as rates are at rock-bottom in Japan, it is hard for...

The alternatives to privatisation and nationalisation

Thu, 09/12/2019 - 14:59

IT SOUNDS VAGUELY elvish, like something from the pages of Tolkien. In fact, the Charter of the Forest is one of Britain’s founding political documents, dating from the same period as Magna Carta, the “Great Charter”, as the Charter of Liberties was known to distinguish it from its sylvan partner. Whereas Magna Carta concerned the interests of a few privileged barons, the Charter of the Forest was intended to safeguard those of commoners—in particular, their time-honoured right to make a living from the bounty of the great wild commons. As an economic institution, the commons now seems as old-fashioned as constitutional documents sealed by noblemen in meadows. To many economists, the spread of private property rights was essential to the creation of the modern world. But the shortcomings of commons can be overstated. They could usefully be granted a place in public policy today.

An ecologist, Garrett Hardin, coined the phrase “the tragedy of the commons” in a (shockingly eugenicist) essay in Science in 1968. But the free-rider problem that afflicts public goods has been well-known to economists for a century. Consider a pasture on which every herdsman may graze his cattle. Each has an incentive to use it as intensively as possible: since it is open to all, restraint exercised by one herdsman simply frees up...

Were Mauricio Macri’s mainstream policies doomed from the start?

Thu, 09/12/2019 - 14:59

“WHENEVER I VISIT a country they always say…here it is different,” Rudiger Dornbusch, a legendary economist, once told his students at the Massachusetts Institute of Technology (MIT). “Well, it never is.” For most countries, his words are a warning. For Argentina, they are a comfort. The country has lurched from one economic crisis to another, culminating in the recent reimposition of currency controls and rescheduling of debts. Its voters, who also lurch from populists to liberals and back, look poised to oust Mauricio Macri’s liberal government in October in favour of a populist duo, Alberto Fernández and Cristina Fernández de Kirchner, the former president. It is therefore easy to believe that Argentina is different. Just not in a good way.

Dornbusch’s words provide the epigraph for a new paper* by Federico Sturzenegger, a former MIT student and Mr Macri’s central-bank governor from when he took office in 2015 to mid-2018. It makes a contrarian defence of Mr Macri’s fiscal gradualism and inflation targeting. These policies worked elsewhere and could have worked in Argentina, he argues, had they been faithfully followed.

Mr Macri inherited a troublesome budget deficit. To avoid the austerity associated with previous right-leaning governments, he proposed to balance the books at a politically palatable pace. The...

Hong Kong’s bourse seeks to snap up the London Stock Exchange

Wed, 09/11/2019 - 20:41

RECENT MONTHS have been eventful for bosses in Hong Kong, including Charles Li, the head of the island’s stock exchange. Last month, just days after a huge deal in his industry was announced—an agreement by the London Stock Exchange Group (LSE) to buy Refinitiv, a data provider, for $27bn—the Chinese People’s Liberation Army released a video of troops performing anti-riot drills, a scenario that Mr Li had warned Beijing against. The protests continue, but Hong Kong Exchanges and Clearing (HKEX) is keeping calm and carrying on. On September 11th it made an audacious bid to scupper the Refinitiv-LSE deal and buy the British exchange for £31.6bn ($39bn) itself.

In normal times pundits might have hailed the proposal as visionary. Hong Kong is the world’s fourth-largest financial centre. Combined with London, it could rival New York. It is well positioned to benefit from the strength of Asian emerging markets. In its proposal HKEX dangled the prospect of Britain capturing growth as China’s currency, the yuan, internationalises—for example, with more Chinese firms listing in London.

And under Mr Li HKEX has proved an adept buyer of foreign assets. Its acquisition of the London Metal Exchange in 2012 for $2.2bn has gone well. As other exchanges have done, HKEX has diversified beyond...

Kristalina Georgieva is the sole contender to be the IMF’s next boss

Tue, 09/10/2019 - 15:08

KRISTALINA GEORGIEVA has been mentioned in connection with every leadership role going at international organisations, from secretary-general of the UN to the head of the European Commission. Were the presidency of the World Bank decided on merit alone, with no consideration of nationality, Ms Georgieva, its chief executive, might have been a shoo-in. She briefly stood in as president after Jim Yong Kim resigned in January, but in April the job went to David Malpass, an American.

Now the Bulgarian seems at last to have nabbed one of the top jobs on a permanent basis. A transatlantic understanding dating back to the Bretton Woods conference in 1944 means that an American leads the World Bank while a European leads the IMF. In August Ms Georgieva became Europe’s nominee to replace Christine Lagarde at the fund’s helm. Despite noises from the British that they would put forward their own candidate, the deadline for submitting nominees passed on September 6th with Ms Georgieva the sole contender. Her official appointment by early October seems assured.

Since 2017 she has been responsible for much of the running of the World Bank, where, before a stint at the European Commission, she also spent many years as a staffer. As chief executive she is credited with smoothing over differences between Mr Kim and...

Soaring pork prices hog headlines and sow discontent in China

Tue, 09/10/2019 - 13:24

ECONOMISTS RARELY think about the average gestation period of pigs (115 days) or the length of time a sow needs to reach sexual maturity (roughly six months). But in China, a basic knowledge of hog-breeding cycles is part of the job. Pigs are so central to the Chinese diet that the ups and downs of pork prices have an outsized impact on inflation. Once again, porcine expertise is in demand: African swine fever has devastated China’s pigs, complicating its economic outlook.

New data show that pork prices leapt by 23% in August from July, the highest monthly jump on record. On an annual basis they were up by 47%. The feed-through to broader inflation has been modest so far. But pork is certain to become more costly in the coming months, pushing consumer prices up further (see chart).

In the past, when pork prices soared farmers quickly produced more pigs. That is harder now because the population of breeding sows has collapsed. The central...

Why Americans pay more for lunch than Britons do

Thu, 09/05/2019 - 14:46

THIS SUMMER Pret A Manger, purveyor of sandwiches to desk-workers in the white-collar cities of the West, added lobster rolls to its menu. In Britain they cost £5.99 ($7.31); in America $9.99. In both countries they are filled with lobster from Maine, along with cucumber, mayonnaise and more. Rent and labour cost about the same in London as in downtown New York or Boston. Neither sticker price includes sales tax. Yet a Pret lobster roll in America is a third pricier than in Britain, even though the lobster comes from nearer by.

This Pret price gap is not limited to lobster rolls. According to data gathered by The Economist on the dozen Pret sandwiches that are most similar in the two countries, the American ones cost on average 74% more (see chart). An egg sandwich in New York costs $4.99 to London’s £1.79, more than double. A tuna baguette costs two-thirds more. The price mismatch is intriguing—the more so for The Economist, which publishes the Big Mac index, a cross-country comparison of burger prices, which shows a 43% transatlantic disparity.

Menu pricing starts with a simple rule, says John Buchanan of the consulting arm of Lettuce Entertain You Enterprises, a restaurant group: take the cost of ingredients and multiply by three. Then ask yourself how much customers...

Part-time jobs help women stay in paid work

Thu, 09/05/2019 - 14:46

GETTING HOLD of a Dutch woman on a Wednesday can be tricky. For most primary schools it is a half-day, and as three-quarters of working women are part-time, it is a popular day to take off. The Dutch are world champions at part-time work and are often lauded for their healthy work-life balance and happy children. But these come at a price. Among western European countries, the Netherlands has the largest gap between men’s and women’s pension entitlements, and the largest in monthly income. Even though a similar share of Dutch women are in the labour force as elsewhere in western Europe, their contribution to GDP, at 33%, is far lower, largely because they work fewer hours.

In the rich world part-time working took off in the second half of the 20th century, as services replaced manufacturing and women piled into the labour market. It remains essential to helping women work, particularly after giving birth, and in countries with traditional gender norms. But it can prolong—or even worsen—gender inequality and make women less independent by locking them into jobs with worse pay and prospects. Differences in working hours explain a growing part of the gender pay gap. That share could increase as labour markets disproportionately reward those willing and able to work all hours—who are mostly men.

Almost one in five workers...