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Finance and economics
Updated: 6 min 57 sec ago

What a rising current-account surplus means for the euro area

Thu, 08/23/2018 - 14:53

GREECE’S third bail-out programme came to an end on August 20th. A look at the causes of the country’s near-decade of crisis illustrates how external imbalances can reflect underlying troubles. Gaps in public finances, as well as investments in property, were financed by borrowing from Germany and other northern European countries. Wages and costs were pushed up, making exports less competitive—within the euro zone, there can be no currency devaluation—and further widening Greece’s current-account deficit. When foreign lending seized up, the government needed bailing out and the banks crumbled. Portugal (chiefly because of its public finances), Spain and Ireland (blame private-sector housing bubbles) have similar tales to tell.

As those four countries have stabilised or recovered, they have wholly or partly reversed their current-account deficits (see chart). But if the periphery has adjusted, the same is not true of the euro area’s creditor countries. Surpluses in Germany and the Netherlands have...

Are you a stock or a bond?

Thu, 08/23/2018 - 14:53

IMAGINE two college friends whose careers have taken different paths. Simon is an investment banker. He works long hours, especially when his bank is advising on a big merger. His pastimes include potholing and skydiving. Chris works as a senior civil servant. Early each evening the lights in his office dim to remind his colleagues of the importance of work-life balance. His spare time is spent on long country walks, playing golf and going to the theatre.

How should they invest their money? More specifically, how much of their savings should go to bonds and how much to shares? Textbook theory says it depends on how tolerant Simon and Chris are towards risk. If either can bear the sometimes violent ups-and-downs of stockmarkets, he should hold more shares, which have higher rewards to go with the extra risk. Should such price swings keep him awake at night with worry, he should tilt the mix of his investments towards safer government bonds.

A risk-lover such as Simon is happy to...

Global unease, from commerce to currencies, rattles raw materials

Thu, 08/23/2018 - 14:53

THEY make an intriguing posse: about 160 “scouts” in jeans and muddy boots, jumping out of cars with ropes in hand, plunging deep into corn (maize) and soyabean fields across the American Midwest. They are not just farmers. They include commodity traders and hedge-fund managers. Their quest: to predict this year’s harvest by using ropes as a measure and counting, to the last ear of corn and soyabean pod, the yield in a given area. “We have a really beautiful crop. I think this is going to be a record,” says Ted Seifried, a market strategist at Zaner Group, a commodities brokerage in Chicago, during a stop in Nebraska on August 21st. The mud on his boots is a reassuring sign of ample moisture in the soil.

But when he gets back into the car with others on the Pro Farmer Midwest Crop Tour, the talk turns to darker subjects, such as trade tensions, collapsing currencies and what he calls the start of an “economic cold war” between America and China. “While we’re driving the 15-25 miles from field...

The business of insuring intangible risks is still in its infancy

Thu, 08/23/2018 - 14:53

THE development, hundreds of years ago, of ship and cargo insurance was revolutionary. It marked the start of commercial insurance; protection against loss from looting, fire and the perils of the high seas fostered global trade. But in the 21st century the value of companies consists less of solid objects, such as boats and buildings, than of weightless, intangible elements, such as intellectual property (IP), data and reputation. “Today the most valuable assets are more likely to be stored in the cloud than in a warehouse,” says Inga Beale, chief executive of Lloyd’s of London.

As Western economies have shifted from making...

America’s stockmarket passes a milestone

Thu, 08/23/2018 - 09:48

ON AUGUST 22nd America’s bull market in equities turned 3,453 days old. Since hitting a low of 666 in March 2009, the S&P 500 index has increased more than fourfold, driven by strong corporate profits, low inflation, stable economic growth and a boatload of central-bank stimulus. Despite five corrections of at least 10%, the index has never entered bear territory, defined as a drop of at least 20%. Most commentators are declaring this to be the longest bull market in history.

Whether it is a record-breaker is disputed. Some contend that because a fall of 19.9% in 1990 did not quite reach the technical threshold, the bull market that ended in 2000 actually lasted a whopping 4,494 days and is the true champion. Others note a drop of 19%-plus in 2011 (and declines of 20%-plus in other share-price indices).

Whatever its precise status, the bull market is curiously unloved by investors. Ken Fisher, a fund manager, has called it the “most joyless” in history. In the boom...

The contrarian case for emerging markets

Thu, 08/16/2018 - 09:48

TWENTY years ago, on August 17th 1998, the Russian government devalued the rouble, defaulted on its domestic debts and suspended all payments to foreign creditors. It was one of the most dramatic days of a year-long emerging-market crisis that began with the devaluation of the Thai baht. South Korea and Malaysia would suffer brutal recessions. President Suharto of Indonesia was forced to resign after 32 years that May. But it was Russia’s default that shook the world.

Talk of rich-world recession was soon in the air. The Federal Reserve would cut interest rates three times before the year was out. The MSCI index of emerging-market stocks, which had lost 40% of its dollar value in the year leading up to August 1998, dropped by more than a quarter in that month alone.

Emerging-market assets are not as scorned now as they were then. The panic resulting from Turkey’s crisis is not anything like as acute. But there is no shortage of reasons for investors to be wary.

Unloved asset...

Turkey’s crisis is not fundamentally contagious

Thu, 08/16/2018 - 09:48

IN 1546 Girolamo Fracastoro, a doctor and poet, published an elegant theory of contagion. Infections spread in three ways, he argued: by direct contact, via an intermediary, or at a distance, through the air. In medicine, his theory is now considered quaint. In economics, however, it still works pretty well.

On August 10th President Donald Trump sent a pathogenic tweet, announcing a doubling of tariffs on Turkish steel and aluminium. It followed earlier sanctions on two Turkish ministers involved in detaining Andrew Brunson, an American pastor, on dubious charges. The lira, which had already lost 38% of its value since the start of the year, shed another eight percentage points in the tweet’s aftermath.

Early medical scholars believed gluttons were more susceptible to disease than cleaner-living folk. Similarly, Turkey has become vulnerable to financial disorder through macroeconomic intemperance. Businesses have borrowed heavily in foreign currencies. The government, which has...

African governments let too many taxpayers off the hook

Thu, 08/16/2018 - 09:33

A stitch in time

TAX collection in Africa resembles an exasperating fishing expedition, in which the big fish wriggle into tax havens and the tiddlers hide in the informal sector. It is made even harder by a self-inflicted problem. Governments give out a range of exemptions, thereby poking holes in their own nets.

Consider “tax expenditures”, a measure of the revenue lost by deviations from usual tax rates. Taxmen in Kenya and Uganda let about 5% of GDP slip through their fingers in this way, according to the World Bank. In the few African countries where data are available, governments forgo revenues worth a third of those they actually collect. The cost is felt in crowded classrooms and on rutted roads.

Not all that money should, or could, be recouped. The figures include concessions for items like textbooks and medicines. And not every tax expenditure is a giveaway, argues Maya Forstater of the Centre for Global Development, a think-tank. For...

New software helps uncover Mafia crime masked as ordinary business

Thu, 08/16/2018 - 09:33

The code breaks the silence

FOR an inkling of how hard it is for Italian authorities to identify Mafia activity, consider how mobsters disguise the pizzo, or protection payments, they extort. The owner of a business may find that customers have been scared off by a menacing stranger. Within days a mysterious man visits. He may request a regular donation for a poor family, or ask a business to switch to a new supplier. Owners put two and two together, says Daniele Marannano, an anti-Mafia activist in Palermo: “There’s no need for further explanations.”

Such concealment is more common than in decades past, when payments were often collected monthly in cash. That has made it harder to spot extortion by analysing a business’s books, says Antonio Basilicata of the Anti-Mafia Investigation Directorate (DIA) in Rome. But software developed by Crime&tech, a firm in Milan, can still help identify companies with probable Mafia links by crunching...

Life-insurance policies with perks make it to America

Thu, 08/16/2018 - 09:33

PEOPLE only contact their insurers when things go wrong and they need to make a claim. This generally means losses for the insurer. It also means stress and hassle for the customer. In order to mitigate both problems, insurers increasingly offer extra services alongside their bog-standard policies.

Aviva, a British insurer, for instance, installs sensors on customers’ water pipes to detect even minuscule leaks, so that these can be repaired before causing greater damage. This spares Aviva the cost of a bigger claim, and the client the misery of a flooded basement. Other benefits are intended mainly to foster customer loyalty. Porto Seguro, a Brazilian insurer, offers access to locksmiths, electricians and taxi services.

Life insurers have so far been slower to catch on. But that is changing. Often ancillary services nudge people to live more healthily. AXA, a French insurer, gives its customers access to check-ups. Union Life, a Chinese one, guarantees policyholders a place in an...

Australia’s lauded private-pension system is under scrutiny

Thu, 08/16/2018 - 09:33

High fees down under

PAUL KEATING, a former prime minister of Australia, calls the country’s superannuation system “the envy of the developed economies”. In many ways, it is. The “super”, as Aussies call their private-pension provision, was a crowning achievement of Mr Keating’s premiership. In 1992 he made it compulsory for employers to set aside 3% of all but the very lowest-income workers’ wages. The payment has since crept up to 9.5%, and, by law, will rise further in 2021.

Today 15m working Australians are sitting on a nest-egg for retirement. With assets of about A$2.6trn ($1.9trn), their private-pension pot has grown into one of the largest in the world. It is almost universal, which should relieve pressure on the means-tested public-pension system. Australia, in other words, has less reason to panic about supporting retiring baby-boomers than most other countries.

Yet pride is not the only emotion the system evokes. In December 2017, prompted...

How to design carbon taxes

Thu, 08/16/2018 - 09:33

ECONOMISTS view pricing greenhouse-gas emissions as an elegant way to reduce them. There are more than 70 national and regional schemes, covering perhaps a fifth of global emissions, which charge polluters for the carbon dioxide they belch out. But that leaves an awful lot of the world to be convinced of the merits of such schemes. Sceptics point to the lacklustre decarbonisation record of places that already price carbon. Higher charges would help; but then the politics also has to add up.

Governments have two ways to price carbon. They can levy a tax on each tonne of CO2 emitted, an approach pioneered by Finland in 1990. Or they can issue a fixed number of pollution permits to companies, which can then trade the permits with others. The European Union (EU), a handful of American states and, starting this year, China have opted for some version of this “cap-and-trade” approach. These schemes have tended to be limited to a few carbon-intensive industries, such as power generation,...

Litigation finance offers investors attractive yields

Thu, 08/16/2018 - 09:33

CONTINGENT fees, in which clients pay lawyers only if a case is won, have long been a feature of America’s legal system. Many other countries used to bar them, wary of importing America’s ambulance-chasing culture. But a belated acceptance of their benefits means they are now widely allowed. “No-win, no-fee” arrangements help shift risks from parties to a suit to their lawyers, and make it less likely that a would-be plaintiff decides not to press a strong case for fear of a big financial loss. 

Around a decade ago, some lawyers took the principle of risk-shifting further. They accepted money from third parties to fund cases in exchange for some of the winnings. Litigation finance has since taken off. Fortune 500 companies and New York’s elite law firms increasingly tap outside capital when pursuing multi-million-dollar suits.

Funds that invest in litigation are on the rise. In the past 18 months some 30 have launched; over $2bn has been raised. Last year Burford Capital, an...

Why the largest group of American corporate bonds is a notch above junk

Thu, 08/09/2018 - 14:50

BY HIS own account Christopher Hitchens, an author who died in 2011, was a poor student. He left Oxford with a third-class degree. This was not for want of ability. Hitchens would become a prolific essayist and fearsome debater. Rather, it was a choice. His tutors warned him about neglecting his studies. But he preferred to divide his time between his social life, political protests, books (other than the prescribed ones) and lively debates with other thinkers.

As Hitchens’s counterexample demonstrates, it is possible to regret the opportunities missed while striving for top grades. It is a lesson that many of America’s biggest companies have grasped. At one time, the sort of company that could tap the bond market for capital would be given an A-grade as a matter of course. These days the typical corporate-bond issuer has a credit-rating of BBB, only a notch above a junk rating (see chart).

That might seem to imply that business has become less efficient or lucrative. Yet profits have...

Is China losing the trade war against America?

Thu, 08/09/2018 - 14:50

WHEN Donald Trump tweeted on August 5th that tariffs were working “big time”, American media sprang into action to test the claim (see article). In China, editors were more circumspect. No major Chinese-language newspaper reported his tweets. One of his claims—that China’s stockmarket has fallen 27% in the past four months—was an exaggeration. But why would any self-respecting propagandist in Beijing dwell on that? Chinese stocks have indeed fallen sharply (see chart), which officials do not wish to emphasise.


Tariffs on steel and aluminium are creating some winners

Thu, 08/09/2018 - 14:50

Flame wars

DONALD TRUMP credits the tariffs he has imposed on steel and aluminium imports, and on a range of Chinese products, with almost magical potency. Either they will force other countries to drop trade barriers and crown him as dealmaker-in-chief, or they will pay down government debt while saving favoured industries. “Plants are opening all over the US, Steelworkers are working again, and big dollars are flowing into our Treasury,” he tweeted on August 4th. How do those claims stack up?

Tariffs are taxes on imports and so will bring some cash to treasury coffers. But comparatively little. In 2017 America’s government borrowed around 3.5% of GDP. Had the new tariffs been in place, and under the (extreme) assumption that the same goods had been imported despite costing more, they would have raised only 0.08% of GDP. Even including all Chinese imports, the number would have risen to just 0.7% of GDP. And that is before considering tariffs’ depressive effects on...

Why is macroeconomics so hard to teach?

Thu, 08/09/2018 - 14:50

LAST month Nick Rowe had a bad dream. It was five minutes before the first class of the autumn term at Carleton University in Ottawa, where he has long taught macroeconomics. But he could not find the classroom. Then he woke up and remembered with relief that he had just retired.

Learning macro is a source of anxiety for many students. Teaching it can give their professors the jitters, too. The subject is notoriously difficult to explain well. During his 37 years at Carleton Mr Rowe remained, by his own admission, “fairly low down the totem pole” as a researcher. But he became a thunderbird at conveying macroeconomic intuition. In the past decade this served him well in his second intellectual career, contributing to Worthwhile Canadian Initiative, an economics blog. Many a controversy has benefited from one of his ingenious analogies or numerical parables, usually involving some kind of fruit.

Professors may find themselves ill-prepared for the macro classroom. To become...

Factor-based investing spreads from stocks to bonds

Thu, 08/09/2018 - 14:50

COMPARED with equity investing, bond investing can seem stuck in the dark ages. As hedge funds and asset managers use whizzy algorithms to trade shares automatically, bond-fund managers still often call traders by phone. So when new investing strategies do arise, they make an even bigger splash. “Factor” investing is the latest example.

This is the idea, credited to economists Eugene Fama and Kenneth French, that predictable, persistent factors explain long-term asset returns. Their 1992 model for equities used the size of firms and what became known as “value” (the tendency for cheap assets to outperform pricey ones). Later models added factors such as “momentum” (the tendency of prices to keep moving in the same direction). Factor-based analysis has squeezed active managers (since it explains much of their returns) and helped drive the rise of passive investing. Investors can access factors in equities, often called “smart beta”, through cheap index-tracking funds or exchange-...

Blockchains could breathe new life into prediction markets

Thu, 08/09/2018 - 14:50

WILL a Democrat win America’s next presidential election? Will Tesla file for bankruptcy by the end of 2019? Punters now have a new option for such bets: Augur, an online prediction market. Whether it takes off will be a gauge of the viability not only of such markets but of decentralised applications built on blockchains, the databases underlying crypto-currencies.

Augur is not the first online service that allows people to buy and sell predictions like shares. Since 1988 it has been possible to bet on American elections via Iowa Electronic Markets (IEM), run by the University of Iowa. PredictIt, a site based in New Zealand but with a largely American audience, and Betfair Exchange, a British service, also let users bet on political events. Some firms run such markets internally, for instance to predict demand for a product. All have the same goal: to gain insights into the future by giving those who hold useful information an incentive to reveal it.

But legal barriers have long...

Our cities house-price index suggests the property market is slowing

Thu, 08/09/2018 - 09:48

FROM Auckland to Amsterdam, Sydney to San Francisco, house prices in the best locations have gone through the roof. The Economist’s new house-price index covers 22 of the world’s most vibrant cities (see table). They are home to 163m people, with an economic output equal to Germany and Japan combined. The average price of a home in these cities rose by 34% in real terms over the past five years. In seven cities it rose by more than half.

Some of this is a rebound from the global financial crisis, which started with a housing bust. Prices in our cities fell by an average of 22% in real terms, peak to trough—in Dublin by 62%, and in San Francisco by 42%. But they have since risen by an average of 56%, in real terms, from their lowest points. In 14 cities prices are above their pre-crisis peak—by an average of 45%.

Before the crisis, city and national prices broadly rose in tandem. They fell together, too, after the bust. But when they started to rise again,...