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How emerging-market local-currency bonds might fit in your portfolio

Thu, 03/28/2019 - 15:42

IN THE FIRST episode of “Cheers”, a 1980s television comedy, Diane Chambers, a graduate student, intends to elope with Sumner Sloan, a literature professor. In stark contrast to the genial barflies at Cheers, a Boston watering-hole, Sloan is well-educated and middle-class—but also, it turns out, vain and deceitful. He’s goofy, says Sam Malone, the bartender whose on-off romance with Diane is the show’s dramatic axis. “He’s everything you’re not,” she retorts.

And so is Diane. That she and Sam are dissimilar in personality and social background is one reason why “Cheers” is so funny. The yoking of opposites is a dependable ploy in situation comedies. It is also a useful trick in investing. The injunction not to put all your eggs in one basket can be found in any finance textbook. But there is more to diversification than that. The ideal diversifier is not just something other than what you own, but something that contrasts with it.

Suppose your investments are tilted heavily towards the S&P 500 index of America’s leading shares, a principal character in global capital markets. Where can you find a Diane Chambers to balance your Sam Malone? Emerging-market government bonds in the issuer’s own currency may be the contrast you are seeking. They are not stocks, they are not denominated in dollars and they are not widely...

How to solve southern Italy’s unemployment problem

Thu, 03/28/2019 - 15:42

ON A CLEAR day, from Messina in northern Sicily you can see Calabria on mainland Italy’s southern tip. The strait between them is the supposed location of Scylla and Charybdis, the mythical sea monster and whirlpool between which Homer’s Odysseus had to choose on his voyage home. Italians on either side of the strait face another hazard today—unemployment. In 2017 about a fifth of the workforce in the south, and over half of young people, were out of work.

Giovanni, a 25-year-old resident of Messina, has been jobless for seven months. None of his internships, including in nursing and shipbuilding, has yet led to a permanent job. Part of the problem is too few openings in the region, says Aldo Cammara of Education InProgress, an NGO that helps youngsters learn computer skills.

An economic downturn is making matters worse: Italy fell into recession in the second half of 2018. But longer-standing structural factors help explain why jobs are scarce in the south even as bosses up north complain of labour shortages. A recent paper blames centralised wage-bargaining, and computes the gains from switching to a Germany-style localised model.

Both Italy and Germany have big regional inequalities. Economic divergence during the cold war means that the average west German district is still 23% more productive than the...

Why is inflation in America so low?

Thu, 03/28/2019 - 15:42

ALMOST TEN years into the recovery from the financial crisis, American monetary-policymakers are still finding that inflation is strangely quiescent. Every time price pressures seem to build, they then dissipate. The latest peak was in July 2018. Inflation as measured by the personal consumption expenditure (PCE) index, which the Federal Reserve tries to pin at 2%, was at 2.4%, and, in a rare heated moment—by the standards of the past decade—consumer-price inflation hit 2.9%. But since then, even as unemployment has stayed low, both measures have sagged to below 2% once again.

The absence of stronger inflationary pressure has been a little bruising for the Fed. It has long predicted that upward price pressures would result from the economy—and in particular, the labour market—pushing against its natural limits. In preparation for that event, it has raised interest rates nine times since December 2015. Along the way it has explained dips in inflation as temporary. But self-doubt has grown all the while. Weakness in inflation is one reason that rate rises are on hold today, with Jerome Powell, the Fed’s chair, emphasising the need for patience.

Inflation is notoriously noisy, and therefore tricky to forecast. Energy prices, which are volatile, are responsible for much of the fall since last July. Core PCE inflation, which...

The Inter-American Development Bank cancels its big bash in China

Thu, 03/28/2019 - 15:42

FAMOUS FOR its hotpot and pandas, Chengdu, in China’s inland Sichuan province, is not an obvious venue for a conference about Latin America. But it was looking forward to hosting this year’s meeting of the Inter-American Development Bank (IDB), which provides aid, advice and cheap loans to 26 developing countries in Latin America.

The meeting was intended to mark ten years since China joined the bank in 2009, acquiring 0.004% of its shares. South Korea had similarly played host in 2005 to mark its tenth anniversary. At last year’s gathering in Argentina, the bank’s choice of Chengdu was celebrated by a Chinese dance troupe—and someone in a panda suit.

Now the suit must go back in the closet. The bank has said it will hold its meeting elsewhere, because China has refused a visa to Ricardo Hausmann (pictured), an economist at Harvard University who was recently approved as Venezuela’s representative at the bank. Mr Hausmann was nominated by Juan Guaidó, the leader of Venezuela’s legislature, who has been recognised as the country’s president by many of the IDB’s members (a notable exception is Mexico).

China, however, still recognises the presidency of Nicolás Maduro, the political heir to Hugo Chávez, who began a second term in January after rigging last year’s election. China was happy to hold the meeting without...

How Argentina and Japan continue to confound macroeconomists

Thu, 03/28/2019 - 15:42

MANY PEOPLE make fun of macroeconomics. But any theory that must explain both Argentina and Japan deserves sympathy. Why, in particular, is inflation so stubbornly high in one and low in the other? In Argentina, consumer prices were 50% higher in February than a year earlier, the fastest increase since 1991. In Japan over the same period, inflation was less than 0.2%, equalling the lowest rate since 2016.

The inertia in both countries is puzzling. Inflation has stayed low in Japan despite a drum-tight labour market (unemployment has remained at 2.5% or below for over a year) and high in Argentina despite a fast-shrinking economy: its GDP contracted by more than 6% year-on-year in the fourth quarter of 2018.

The two countries, of course, have long mystified economists. In 1950 Argentina’s GDP per person was three times that of Japan, according to the Maddison Project database. The Eva Perón charitable foundation, run by the president’s wife, shipped 100 tonnes of relief supplies to the war-battered Japanese. Thousands of Japanese migrated in the opposite direction, creating a population of 23,000 Nipo-Argentinos by the end of the 1960s.

But the two countries’ economic paths went on to cross decisively. Japan’s GDP per person eclipsed Argentina’s around 1970 and is now about twice as high, measured at purchasing-...

Flaws in Bitcoin make a lasting revival unlikely

Wed, 03/27/2019 - 18:15

“BE MORE BRENDA,” said the ads for CoinCorner, a cryptocurrency exchange. They appeared on London’s Underground last summer, featuring a cheery pensioner who had, apparently, bought Bitcoins in just ten minutes. It was bad advice. Six months earlier a single Bitcoin cost just under $20,000. By the time the ads appeared, its value had fallen to $7,000. These days, it is just $4,025 (see chart).

While the price was soaring, big financial institutions such as Barclays and Goldman Sachs flirted with opening cryptocurrency-trading desks. Brokerages sent excited emails to their clients. The Chicago Board Options Exchange (CBOE), one of the world’s leading derivatives exchanges, launched a Bitcoin futures contract. Hundreds of copycat cryptocurrencies also soared, some far outperforming Bitcoin itself. Ripple rose by 36,000% during 2017.

The bust has been correspondingly brutal. Those who bought near the top were left with one of the world’s worst-performing assets. Cryptocurrency startups fired employees; banks shelved their products. On March 14th the CBOE said it would soon stop offering Bitcoin futures. Bitmain, a cryptocurrency miner, appears to have pulled a planned IPO. (Miners maintain a cryptocurrency’s blockchain—a distributed transaction database—using huge numbers of specialised computers, and are...

Slower growth in ageing economies is not inevitable

Tue, 03/26/2019 - 17:09

FOR THE first time in history, the Earth has more people over the age of 65 than under the age of five. In another two decades the ratio will be two-to-one, according to a recent analysis by Torsten Sløk of Deutsche Bank. The trend has economists worried about everything from soaring pension costs to “secular stagnation”—the chronically weak growth that comes from having too few investment opportunities to absorb available savings. The world’s greying is inevitable. But its negative effects on growth are not. If older societies grow more slowly, that may be because they prefer familiarity to dynamism.

Ageing slows growth in several ways. One is that there are fewer new workers to boost output. Workforces in some 40 countries are already shrinking because of demographic change. As the number of elderly people increases, governments may neglect growth-boosting public investment in education and infrastructure in favour of spending on pensions and health care. People in work, required to support ever more pensioners, must pay higher taxes. But the biggest hit to growth comes from weakening productivity. A study published in 2016, for example, examined economic performance across American states. It found that a rise of 10% in the share of a state’s population that is over 60 cuts the growth rate of output per person by roughly half...

A dispiriting survey of women’s lot in university economics

Thu, 03/21/2019 - 15:41

“WHY IS THIS an interesting question?” Éva Nagypál, then a junior economist presenting research at her first academic conference, had barely finished her opening sentence. She still remembers the interruption many years on. Later she came to learn that such rudeness was quite normal, and that economists were capable of worse. As a young woman, she also experienced some “inappropriate” behaviour, but brushed it off. “I could handle it,” she says. Being told she was “technically good, but not very creative” was harder to stomach. She left academic economics in 2009.

Economists have tended to be wary of reading too much into anecdotes like Ms Nagypál’s. A single data point does not prove that women are picked on or pushed away. Even Ms Nagypál’s departure from academia was complicated. She liked her colleagues at Northwestern University, but felt drawn to more collaborative, policy-relevant research. The pull of her family was also a factor.

But harder evidence of something amiss is building. Granted, more women are attaining senior positions in university economics. But women make up only around 30% of PhD students, and are likelier than men to drop away as they climb the career ladder. Among a group of 43 leading American universities, the female share of PhD students has been essentially flat for two decades (see chart...

Why book value has lost its meaning

Thu, 03/21/2019 - 15:41

BABY-BOOMERS may recall, perhaps wistfully, how the golden-arched sign outside every McDonald’s restaurant would proclaim how many customers had been served by the chain. As they became adults, the number kept on climbing: 5bn in 1969; 30bn in 1979; 80bn in 1990. Jerry Seinfeld, a wry chronicler of the trivial, was moved to ask: “Why is McDonald’s still counting?” Do we really need to know about every last burger? Just put up a sign that says, “We’re doing very well.”

The counting stopped. The signs said simply: “Billions and billions served”. If this seems unhelpfully vague, that is how the counting business sometimes is. Many of America’s biggest companies, including McDonald’s, report a negative book value, a gauge of a firm’s net assets. Many more have a book value that is small relative to their market value: their shares look dear on a price-to-book basis. Much of this is down to the complexity of valuing a firm’s assets in the digital age. But the result is that price-to-book is a bad guide to a stock’s true value.

Stockpickers make a distinction between the price of a share and what it is truly worth. Price is a creature of fickle sentiment, of greed and fear. Value, in contrast, depends on a firm’s capabilities. There are various shorthand measures for this, but true “value” investors put the greatest store by...

Commerzbank and Deutsche Bank start discussing a merger

Thu, 03/21/2019 - 15:41

SO MUCH FOR the sepulchral calm of a German Sunday. On March 17th, after months of prodding from the German government and chatter in the financial press, Commerzbank and Deutsche Bank, Germany’s two largest listed lenders, said that they would begin exploring a merger.

A deal, both banks are at pains to add, is far from certain. If it happens, it would create Europe’s third-biggest bank by assets, behind Britain’s HSBC (which does most of its business in Asia) and France’s BNP Paribas. It would also join together two chronic underperformers. Last year Deutsche’s return on equity, a puny 0.4%, was its first positive figure for four years. Commerzbank’s has bettered last year’s anaemic 3% only once since 2011.

Combining two struggling banks looks like an improbable method of creating the robust “national champion” of which German ministers have been dreaming. Years of ultra-low interest rates and an overcrowded banking market—most of which is served by public-sector and co-operative lenders—have sapped profitability, even though both Commerzbank and Deutsche Bank are well capitalised and amply liquid. A merger is unlikely to change that.

Encouragement from Berlin alone is not—or should not be—reason to merge, although the government is Commerzbank’s biggest shareholder, with 15%. The right gauge is what all the...

FIS’s $43bn takeover of Worldpay

Thu, 03/21/2019 - 15:41

YOUR HOME is about to become a department store. Of the 27% of American consumers who own voice-activated speakers, more than a quarter already use them to shop. You may soon start ordering groceries via a panel on your fridge or buying accessories through an interactive mirror in the bedroom. Social-media outlets are also after your money: before long, that red coat you liked on a friend’s Instagram page will be just a click away.

The continuing boom in e-commerce—which is still growing at a breakneck 18% a year—is forcing speedy change on a once-staid sector: the invisible pipework that powers payments. On March 18th FIS, an American company which provides information technology to around 14,000 banks, agreed to buy Worldpay, a payments plumber, for $43bn including debt—the largest deal ever in the payments industry. It marks a sharp escalation in the battle for a market that BCG, a consulting firm, expects almost to double in size, to $2.4trn, between 2017 and 2027.

Payment technology is already pretty nifty. When a shopper swipes her credit card at a till, the company providing terminals to the shop (the “merchant acquirer”) asks the lender that issued the card (the “issuer”) to confirm that she has enough funds. That electronic query reaches the lender—whether around the corner or across the world—in milliseconds....

Alan Krueger, natural talent

Tue, 03/19/2019 - 17:58

FEW ECONOMISTS can claim either to have successfully challenged the bedrock beliefs of their field or to have altered how governments pursue policies that affect millions. Alan Krueger, who died on March 16th, managed both. In research with David Card in the early 1990s, Mr Krueger showed, through careful data analysis, that increases in the minimum wage did not lead to reductions in employment, as standard models suggested they should. The research, which the authors summarised in a seminal book, “Myth and Measurement”, published in 1995, drew a scathing initial response. Critics assaulted their motivations, data and analysis until allowing, finally, that the pair had a point. Their work changed economics and politics. It also exemplified Mr Krueger’s career as both scholar and public servant.

Mr Krueger did not come across as the combative type. He was gracious and generous in person, and a skilled communicator. That came in handy during his time in Washington, as chief economist of the Department of Labour when Bill Clinton was president, and in the Treasury and the White House under Barack Obama during the most tumultuous economic times since the 1930s. He often wrote for the New York Times and appeared on television. Helping people understand what economists had learned was, he believed, part of an...

FIS and Worldpay agree on a $43bn merger

Mon, 03/18/2019 - 18:43

THE PROCESSING of payments was once regarded as a boring piece of financial plumbing. So dull, in fact, that even banks shunned it. Fidelity National Information Services, aka FIS, which provides computing systems for thousands of financial institutions, finds pipework positively alluring. On March 18th the Florida-based financial-technology group agreed to take over Worldpay, a payment-processor, for $43bn including debt. The deal is the largest ever in the payments industry. It is also the latest in a series of mergers, as the race to build global payment powerhouses accelerates.

Until recently, most merchants entrusted banks with processing payments and moving money on their behalf. But it was never really banks’ core business, so little investment was made into making such activities more frictionless and consumer-friendly. “Traditionally, it’s been a poor cousin in the bank relative to investment banking,” says Todd Latham of CurrencyCloud, an international payments platform....

David Autor, the academic voice of the American worker

Sat, 03/16/2019 - 21:22

IT IS hard not to notice it, when you first meet David Autor: the earring, there in the lobe of his left ear, in the shape of a gecko. It has become something of a theme among his students and colleagues, who have given him all sorts of gecko-related paraphernalia. The earring is one half of a pair bought with his wife, before they were married and long before he became the Ford Professor of Economics at the Massachussetts Institute of Technology. It is an eye-catching accessory, fitting for a man whose career has followed unconventional paths.

Mr Autor is an ever-so-slightly manic figure, who speaks quickly and engagingly. He is not a household name but he is enormously influential, in large part because of his groundbreaking work on the effects on American workers of China’s extraordinary rise. Economic models have long allowed for the possibility that trade between rich countries and poorer ones with an abundance of cheap labour could harm workers in the richer country. But...

Indians may be falling out of love with gold

Thu, 03/14/2019 - 15:43

P.N. GADGIL & SONS, a jewellery shop in Thane, a suburb of Mumbai, is gearing up for the wedding season—a busy time for gold sales, even if demand is brisker still during Hindu festivals, when jewellers stay open almost round the clock. Free samosas and Pepsi are offered to those queuing outside; inside, the noise and bustle are non-stop.

Indians have long regarded gold as the surest store of wealth. Brides bring it as dowry. Newborns are given bangles and anklets. Astrologers prescribe gold rings for stress. Indian households own 23,000 tonnes, three times more than the bullion held by America’s Federal Reserve. In the year to March 2018 gold imports, at $74.7bn, ranked after only oil.

The government has tried repeatedly to break Indians’ addiction, increasing import duty fivefold since 2013. In 2015 it began a scheme allowing investors to exchange gold for interest-bearing bonds and get it back when the bonds mature. Television commercials nudge viewers to invest in mutual funds instead.

Such efforts long seemed unavailing, but something seems to have shifted. Demand has fallen by a fifth since 2010.

Consumer preferences are one reason: many prefer lighter jewellery for daily wear. Millennials, a third of the population, spend more than older generations on mobile phones and other electronic...

Wells Fargo takes a pasting, from Congress and a regulator

Thu, 03/14/2019 - 15:43

“YOU HAVE not been able to keep Wells Fargo out of trouble,” Maxine Waters told Tim Sloan, the chief executive of America’s fourth-biggest bank, on March 12th. Ms Waters, the Democrat who since January has chaired the House of Representatives’ Financial Services Committee, is not alone in her ire. Patrick McHenry, the committee’s senior Republican, piled in too. Soon after Mr Sloan faced the panel, the Office of the Comptroller of the Currency (OCC), a regulator, said it was “disappointed” with Wells’s “performance under our consent orders”, corporate governance and risk management. “We expect national banks to treat their customers fairly, operate in a safe and sound manner, and follow the rules of law.” A public dressing-down from politicians is one thing; such a rebuke from a regulator is a true ear-burner.

Over the past three years a series of misdeeds has been uncovered at the San Francisco-based bank. Under pressure to meet demanding sales targets, staff opened 3.5m fake accounts and signed customers up for credit and debit cards without their consent. The bank charged people for car insurance they did not need and overcharged members of the armed forces for refinancing mortgages. Wells has had to set aside money to reimburse foreign-exchange and wealth-management clients. It has even had to refund mis-sold pet insurance.

...

How to be a rock-star bond investor

Thu, 03/14/2019 - 15:43

ONE NIGHT in 1965, Keith Richards woke up with a riff going around inside his head. He reached for his guitar, played the bare bones of a song into a cassette recorder and promptly fell asleep. Mick Jagger was soon scribbling lyrics by the swimming pool. Four days later, the Rolling Stones recorded “(I Can’t Get No) Satisfaction”.

Hit records are not made like that any more, according to John Seabrook’s book, “The Song Machine”. Instead they are assembled from sounds honed on computers. It can take months. A specialist in electronic percussion does the beats. Another comes up with hooks, the short catchy bits. A third writes the melody. Everything is calibrated against what worked well on previous hits.

This brings us to Bill Gross, who founded PIMCO, the world’s biggest bond firm, and ran its market-beating Total Returns fund from 1987 until 2014. Mr Gross, who retired last month, is often called a rock-star fund manager. A new paper by Aaron Brown of New York University and Richard Dewey of Royal Bridge Capital, a hedge fund, gives him the “Song Machine” treatment, breaking his performance into constituent parts. It finds that even if you could simulate his strategy, a human factor would remain that algorithms cannot match. A Stones fan might call it inspiration. In finance, it is known as alpha.

What were Mr...

Euro-zone fiscal policy is easing for the first time in a decade

Thu, 03/14/2019 - 15:43

IT IS HARD to defend yourself with one hand tied behind your back. Yet the euro area’s economy has been repeatedly asked to do just that. Whenever it is taking a beating, it has had to fight back with monetary policy alone. The European Central Bank (ECB) has cut rates to zero and below, bought bonds by the bucketload and lent super-cheaply to banks. Fiscal policy has been barely used—and has sometimes done more harm than good. Debt crises forced governments in the south of the bloc to tighten their belts; those in the north chose to do the same.

The economy is struggling again, and the ECB’s firepower is waning. The central bank said on March 7th that it would keep interest rates on hold at least until the end of this year and extend its programme of cheap loans to banks. Even then, it does not expect inflation, now 1.5%, to reach its target of close to but below 2%. Its interest rates are already at rock bottom. Its bond-buying programme cannot easily be expanded because its holdings of German government bonds are close to legal limits.

Just as well, then, that for the first time in a decade fiscal policy in the euro area is expected to loosen this year (see chart). But the extent of easing is small and its composition is not best suited to kick-starting growth. The zone has no common budget—although its members’...

China’s current-account surplus has vanished

Thu, 03/14/2019 - 15:43

IN A CONTROL room at the headquarters of Ctrip, China’s largest online travel agency, dozens of fluorescent lines flash every second across a big digital map of the world. Each line represents an international flight sold on Ctrip’s platform. The top destinations on the morning of March 11th, when your correspondent visited, were Seoul, Bangkok and Manila. A live ranking for hotel reservations put Liverpool in first place among European cities, Merseyside’s rough-hewn charms briefly trumping Venice and Barcelona (and apparently benefiting from a special offer).

In this century’s first decade Chinese citizens averaged fewer than 30m trips abroad annually. Last year they made 150m, roughly one-quarter of which were booked via Ctrip. That is not just a boon for hotels and gift shops the world over. It is a factor behind a profound shift in the global financial system: the disappearance of China’s current-account surplus.

As recently as 2007 that surplus equalled 10% of China’s GDP, far above what economists normally regard as healthy. It epitomised what Ben Bernanke, then chairman of the Federal Reserve, called a “global saving glut”, in which export powerhouses such as China earned cash from other countries and then did not spend it. China’s giant surplus was the mirror image of America’s deficit. It was the symbol...

The struggle to restore Turkey’s stricken economy

Thu, 03/14/2019 - 15:43

DURING TURKEY’S constitutional upheavals in 2016-17, when President Recep Tayyip Erdogan faced down an attempted coup and gathered up new political powers (and prisoners), the country’s economic reformers remembered better days. They talked wistfully of an imminent return to “factory settings”. Turkey, they believed, had a default set of successful policies, from which it had recently deviated and to which it could quickly revert, undoing any mistakes in between.

Instead the economy suffered something closer to a system crash. Excessive lending, some of it guaranteed by the government, contributed to rising inflation and a widening current-account deficit. The central bank’s ability to restore order was stymied by Mr Erdogan’s hostility to orthodox monetary policy (he compared interest rates to tools of terrorism). When the government fell out with President Donald Trump over the arrest of an American pastor working in Anatolia, foreign investors (and many Turkish depositors) lost their nerve. Turkey’s currency, the lira, fell by 40% against the dollar in the first eight months of 2018.

That drop was excruciating for the many companies that had borrowed in euros or dollars: foreign-currency corporate debt amounted to over 35% of GDP in 2018. Hundreds of firms have since defaulted or applied for ...

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