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The EU tries to strong-arm Switzerland into a new trade deal

Thu, 05/09/2019 - 14:54

SWITZERLAND’S HALF-IN, half-out relationship with the European Union has suited its traders and firms well. Shares of almost all the large Swiss companies that are traded on SIX, Switzerland’s main exchange, are also available within the EU through alternative exchange platforms known as multilateral trading facilities (MTFs). Traders based in the EU account for 60-80% of trading in Swiss shares by volume. Big Swiss firms like Nestlé, Novartis and Roche make up 20% of the market capitalisation of the Stoxx Europe 50 index. It is, to coin a phrase, a single market.

Now that system is at risk. It relies on “stockmarket equivalence”, a status granted by the EU that allows swift and seamless trading across borders. But if Switzerland refuses to sign a new, EU-drafted trade deal, its equivalence may be revoked. The EU has given Switzerland until the end of June to sign, or at least make progress. If the deadline is met, equivalence is likely to be renewed indefinitely.

If it is not, however, traders within the EU, who are supposed whenever possible to trade within it or on exchanges granted equivalence, would be pushed to trade Swiss stocks on European MTFs, rather than on Swiss exchanges. That would make Swiss stocks harder and dearer to trade, because it would segregate interested buyers and sellers. “You want to buy a...

When you have options, volatility is your friend

Thu, 05/09/2019 - 14:54

IMAGINE THAT, by some twist of fate, you become the ruler of an oil-rich state. A crash in the oil price has left a hole in its budget. You are forced to consider selling the kingdom’s assets. Among them is a mothballed oilfield in a remote part of the country—so remote that it costs $90 to retrieve each barrel of oil. That is above the prevailing price of $70 a barrel. Even so, you are advised to try to sell a licence to operate the field.

Who would buy such a licence? It is valuable only if a barrel of oil sells for at least $90. Yet there is always value in a right—if it carries no obligation. The greater the chance that prices will rise above $90, the more the licence can be sold for. The price will be higher if the licence is for a long period. Crucially, the price also depends on how changeable the oil price is. The more volatile, the likelier it is that it will hit a level where it is profitable to restart production.

Volatility is normally something to fear. People prefer a stable income to an erratic one, for instance, and they feel the same way about their wealth. In this regard, the jumpiness of stock prices is a source of discomfort. But where you have rights without obligations—options, in other words—things are different. Here, volatility is welcome.

Look closely, and the hypothetical oil licence...

Months after IL&FS collapsed, India’s markets are on a strong run

Thu, 05/09/2019 - 14:54

IN OCTOBER, SENTIMENT on India’s financial markets was bleak. The previous month Infrastructure Leasing and Financial Services (IL&FS), a Mumbai-based lender with scores of subsidiaries, had defaulted on a series of loans. Stockmarket indices fell sharply (see chart). Investors worried not only that the firm’s losses would directly harm other institutions, but also that similar problems might be lurking in other lenders.

Then the government stepped in. The management was replaced, and state-controlled entities ensured that other non-bank lenders had enough liquidity to enable credit markets to function. From a low point on October 26th, financial markets resumed a rise that, notwithstanding several reversals and a lull in recent days, has seen dramatic gains in the past decade. Late last month the major indices, including the Bombay Stock Exchange’s Sensex, which includes 30 companies, and a broader index of 500 companies, flirted with the heights they reached before the IL&FS scare—even though American sanctions on Iran pushed up the price of oil, India’s biggest import.

Looking lively

Crucial to the rally have been foreign buyers, whose activities are tracked and reported by local exchanges. Their importance is a consequence of the odd ownership structure of Indian companies. More than...

The state of America’s community banks

Thu, 05/09/2019 - 14:54

THE CLASS of the guests reflects the clout of the hosts. In a posh Washington hotel, two powerful visitors—first Maxine Waters, the Democrat who chairs the House of Representatives’ financial-services committee, and then Mike Crapo, the Republican head of the Senate banking committee—address a roomful of well-breakfasted bankers. After the speeches and a few polite but pointed questions, the bankers head to lobby Capitol Hill.

They are not from Wall Street, but are community bankers, from towns large and small all over America. Some belong to the third or fourth generation running the family business. They each oversee only up to about $10bn in assets, and most of them much less. But the Independent Community Bankers of America (ICBA) are both deeply rooted in their home soil and well organised. Almost every congressional district is home to at least one such bank.

Though their numbers have been falling for years (see chart), America’s small banks are, by and large, in fair shape. According to the Federal Deposit Insurance Corporation (FDIC), a regulator, the 4,979 community banks reported an average return on equity of 10.6% last year—less than bigger banks, but nearly two percentage points more than in 2017 and the most since the financial crisis. Only 3.4% lost money, the lowest share on record.


So far, Donald Trump’s trade war has not derailed the global economy

Thu, 05/09/2019 - 14:54

A YEAR AFTER the start of trade skirmishes between America and China, America’s economy—and the world’s—seem to be holding up. Are trade wars, as President Donald Trump believes, not so costly after all?

The immediate impact was always going to be hard to spot. Though special tariffs now cover more than half of China’s exports to America, those exports account for less than 2% of American personal consumption and only around 5% of American business investment. Surveys suggest that tariffs are suppressing investment in America, but how much is unclear.

As with all taxes, much of the effect is to shuffle costs and resources around. Taxing imports hurts companies and consumers by making their foreign purchases more expensive, and as domestic producers respond to weaker foreign competition by raising prices. Exporters may lose out from retaliatory tariffs. But there are also winners, including domestic companies shielded from foreign competition and thus able to enjoy fatter profits—and the US Treasury, which gains new revenues.

A recent study by Pablo Fajgelbaum of the University of California, Los Angeles, Pinelopi Goldberg of the World Bank, Patrick Kennedy of the University of California, Berkeley and Amit Khandelwal of Columbia University totted up all such effects for the tariffs imposed by the Trump...

Mobile money comes to Nigeria

Thu, 05/09/2019 - 14:54

THE SHARED cars that shuttle between Abuja and Kaduna, two Nigerian cities, carry more than passengers. For a fee they will also carry cash, says Odedele Olusanmi, a driver. On a typical journey he takes five packages, each holding around 20,000 naira ($55). Only two-fifths of Nigerians have bank accounts, which is why some send money this way. Yet an alternative could already be in their pockets.

In the past decade a mobile-money revolution has swept through much of Africa, enabling the unbanked to make transfers, pay bills and save. Half of the world’s 866m mobile-money accounts are in Africa, not counting services which need users to belong to a bank. But not many are in Nigeria, its largest economy and most populous country, with 200m people, where mobile money was used for transactions worth just 1.4% of GDP last year (compared with 44% in Kenya). Four-fifths of Nigerians have never heard of it.

Until recently, the Nigerian central bank did not allow telecoms firms to offer financial services, except as the junior partners of conventional banks. Elsewhere mobile operators had been in the vanguard. A mobile-money system needs agents to take in and give out cash—boots on the ground, not just bytes in the pocket. In the early stages telecoms firms, which sell phone credit in the remotest villages, can run these...

America ratchets up the pressure in its trade war with China

Wed, 05/08/2019 - 18:11

CHINA’S PROPAGANDA machine grinds slowly. But its output is nothing if not consistent. It took more than 24 hours for state media to report President Donald Trump’s threats, tweeted on May 5th, to ratchet up tariffs on China. By that time Chinese stocks had already plunged, a foretaste of global market ructions. When the response finally came in official editorials, it was a familiar refrain from China’s canon of trade-war statements: “We do not want to fight, but we are not afraid to fight and, given no choice, we will fight.”

That sounds bellicose. Yet one lesson from the past year’s dispute with America is that China places more weight on the sentence’s first part, its desire to avoid a full-on fight. At multiple points when the Chinese government could have retaliated against America by targeting its businesses, it has instead tried to win them over.

Dodging a fight, though, does not mean giving in. As The Economist went to press, officials from both countries were preparing for talks in Washington to see if they could revive a deal which, until Mr Trump’s tweets, had seemed nearly done. The previous evening, America announced its intention to raise tariffs on $200bn of Chinese goods from 10% to 25% from midnight on May 9th. According to Reuters, citing American government...

Riding alone in a car is a luxury—an increasingly unaffordable one

Wed, 05/08/2019 - 18:04

UBER’S INITIAL public offering, due after The Economist went to press, will be one of the largest in tech history. The hoopla cannot drown out uncertainty about the firm’s future. Ride-hailing platforms have grown hugely in recent years, changing the face of urban transport. They have also been virtuosic losers of money (see article). Lyft made an operating loss of nearly $1bn in 2018; Uber, about $3bn. The flow of red ink mainly represents subsidies from investors to riders: cash that allows average Joes to feel as though they have a personal car at their beck and call. It will not last. But Uber passengers are not the only road-farers facing straitened circumstances. Car-related subsidies of all sorts are becoming harder to sustain. Their loss could reveal mass travel in single-occupancy cars to be a no-longer-affordable luxury.

The mania for tech platforms that match cars with riders rests on the idea that they can turn car-hire into critical urban-transport infrastructure. Perhaps ride-hailing could spare millions of people the cost of owning cars that mostly sit idle, and allow vehicles and roads to be used more efficiently. But increased scale has yet to...

Fears of recession have faded

Thu, 05/02/2019 - 14:46

INVESTORS STARTED the year brooding about the risk of an American recession. Torsten Slok of Deutsche Bank, Germany’s biggest lender, says clients around the globe were worried. Financial indicators were flashing red, the stockmarket was weak and yields on low-grade corporate debt had jumped. The Federal Reserve’s decision to raise interest rates in December had been unsurprising, but unwelcome.

At the end of the year a model from economists at JPMorgan Chase had put the chances of a recession within 12 months, based on the S&P 500 index and corporate-credit spreads, at 65%. But the mood has now improved. By April 29th JPMorgan’s model was putting the chances of a recession at just 15%.

“It’s eye-popping how quickly the narrative has changed,” says Mr Slok. One reason for the improvement in sentiment is the Fed’s evolving monetary-policy stance. In January it turned more doveish, abandoning its plans to raise rates in 2019. “We don’t see any evidence at all of overheating,” said Jerome Powell, the chairman of the Federal Reserve, on May 1st after announcing that the Fed would maintain its patient stance. He also repeated his view that the data do not warrant higher rates.

Investors have been delighted by the Fed’s pause. But the timing and extent of their change of mood suggests that is not the full story....

Concern about cryptocurrencies could lead regulators to crack down

Thu, 05/02/2019 - 14:46

DAYS AFTER allegations of misuse of customer money against Tether rocked the cryptocurrency world, the shock wave has temporarily subsided. The four-year-old currency, which fell to 97 cents last week, has returned to parity with the American dollar. And after a 10% fall, to $4,953, the price of a single Bitcoin, its best-known peer, has steadied at around $5,400. But cryptocurrency-watchers remain wary. Beneath the surface, trouble may be brewing.

Doubts had long swirled about the bona fides of Tether, which has more than $2.8bn-worth in circulation, and Bitfinex, the exchange it is traded on. On April 25th New York’s attorney-general, Letitia James, accused both of a cover-up intended to hide a loss of $850m in client and corporate funds. That hit the value of other cryptocurrencies because of Tether’s unique status. Cryptocurrencies stem from libertarian attempts to create a currency resistant to central control. Many exchanges thus struggle to get hold of dollars, because banks, which must comply with fraud and money-laundering rules, do not want their custom. For them Tether, which is pegged one-to-one to the greenback, acts as a dollar substitute. Traders use it for transfers between one cryptocurrency and another.

For years Tether said that every coin it issues is backed by a real dollar in a real bank account....

Foreign-exchange trading is finally turning digital

Thu, 05/02/2019 - 14:46

THE FOREIGN-EXCHANGE (FX) market is as opaque and old-fashioned as it is enormous. Most of its $5trn of daily trading happens “over-the-counter” (OTC), in deals negotiated between banks and private customers, rather than on exchanges. Many orders are still placed by phone. Gauging the market’s size and structure usually means relying on outdated surveys. The most comprehensive review, by the Bank for International Settlements, is conducted only once every three years. 

Yet modernity is arriving—in fits and starts. Last month it emerged that Deutsche Börse, Europe’s third-largest stock exchange, was close to buying FX all, an electronic FX-trading platform, for a reported $3.5bn. If it happens the deal could end up being one of the largest in Deutsche Börse’s history. It hints at a shake-up in a sector that has long been deemed antediluvian. 

The FX market serves not only investors, but corporations and governments seeking to protect trade or bonds against currency swings. FX contracts can be “spot” (for immediate delivery), “forward” (for delivery at a later date) or “swap” (when currency is exchanged back at maturity). Buyers go through dealers (mostly banks), which source liquidity. Specific needs, such as matching cash-flow dates, are more easily met using OTC trades, which can be tailored, than over...

Business and finance correspondent

Thu, 05/02/2019 - 14:46

The Economist is looking for a writer to work at its headquarters in London. The ideal candidate will combine the ability to write informatively, succinctly and wittily with a knowledge of finance. Applicants should send a CV and an unpublished article they think would be suitable for publication in either the Business section or the Finance and Economics section to The closing date for applications is May 31st 2019.

The quest to find companies that have a lasting competitive edge

Thu, 05/02/2019 - 14:46

IN 1965 WARREN BUFFETT acquired Berkshire Hathaway, a textile company based in New England, for his investment partnership. When he began buying the stock, in 1962, Berkshire had working capital worth $16 a share; the shares sold for $8. So Mr Buffett was getting the rest of the firm’s assets for less than nothing. This was the sort of “value investing” that had made Mr Buffett and his partners a tidy pile over the preceding decade.

Berkshire would become a wildly successful investment vehicle. On May 4th, 40,000 of its shareholders gather for its annual general meeting in Omaha, Nebraska, for a dose of Mr Buffett’s folksy wisdom. It continues to make a wide range of financial investments: witness this week’s offer to buy $10bn of debt-like securities and warrants in Occidental, an oil firm that is negotiating a merger.

Yet he came to regret buying Berkshire stock. The return on investment was paltry, because the firm had no unique edge or products. Textiles are commodities. No one ever asked his tailor for a Hathaway suit lining.

In its way, Berkshire provided a valuable lesson. Mr Buffett’s strategy shifted. Instead of “buying fair companies at wonderful prices”, he would buy “wonderful companies at fair prices”. To make the grade, a firm must have a lucrative position in the marketplace. But it needs more. To...

How a few missing words hurt Turkey’s turnaround

Thu, 05/02/2019 - 14:46

A CENTRAL BANK’S words have power. Three of them (“whatever it takes”) calmed the euro area’s debt panic in 2012. Another few (the Federal Reserve mulling a “step down in our pace of purchases”) started the taper tantrum that upset emerging markets in 2013.

What is left unsaid can also be powerful. After its interest-rate meeting on April 25th, Turkey’s central bank failed to repeat eight words that had been included in each of its seven previous statements: “if needed, further monetary tightening will be delivered”. The omission cast doubt on its commitment to fight inflation, which was almost 20% in the year to March. In response, the lira fell by more than 1% against the dollar. It has fallen by 11% this year.

The mishap was an uncomfortable reminder of last summer’s currency turmoil, when the central bank (browbeaten by Recep Tayyip Erdogan, Turkey’s president) failed to raise interest rates swiftly enough to prevent a collapse in the currency. But the parallels should not obscure what has changed in the interim. Turkey’s economy is better balanced now than it was then.

In September the central bank reasserted itself, increasing interest rates to 24%, where they have stayed since. The combination of tighter money and a cheaper currency curbed import spending and encouraged exports. As a result, Turkey’s...

Emi Nakamura wins the John Bates Clark medal

Thu, 05/02/2019 - 10:18

THE YEAR 2007, when Emi Nakamura earned her PhD, was a strange one for her chosen discipline of macroeconomics. It marked a turning point between complacent consensus and humiliating division. Pre-crisis macroeconomics had such strong faith in the stabilising power of monetary policy that it neglected the dangers of financial shocks and the merits of fiscal stimulus. Like joining the cavalry in 1914, it was presumably a bad time to be entering the profession.

Not a bit of it. “I think it was a good time,” says Ms Nakamura, who now works at the University of California, Berkeley, and this week won the John Bates Clark medal for the best economist aged under 40 in America. “Macroeconomics”, she points out, “is a countercyclical field.”

Yes, financial shocks of the sort that caused the Great Recession were understudied, but the consequences were Keynesian, she says. And the need for a response turned theoretical curiosities (such as the liquidity trap that can stymie monetary policy) into major policy dilemmas.

For students of economic ups and downs, the crisis also met a crying need: for a new data point, a new down-and-up to examine. The lack of data had made macroeconomics unfashionable. Its practitioners crunched the same quarterly, national numbers, which failed to illuminate ever more refined theories of how...

Advice from a dismal scientist to new parents

Tue, 04/30/2019 - 15:40

FOR NEW parents, it is a terrifying moment. The hospital doors close behind them, leaving them with a new and helpless human being. The baby’s survival into adulthood seems impossible. What if it will not eat? What if it is allergic to water? What if an owl carries it off? Probably, few parents wish at that moment for the help of an economist. But “Cribsheet”, a new book by Emily Oster of Brown University, shows that in the hectic haze of parenthood an economist’s perspective can prove surprisingly clarifying.

Ms Oster’s academic work relates to health and health policy. A recent paper, for example, studied how food-purchasing decisions change in response to being diagnosed with diabetes. Five years ago she published a book on pregnancy, drawing on her training as an economist and her own experience (her husband, Jesse Shapiro, with whom she has two children, is also an economist at Brown). “Cribsheet” tackles the next step in the journey from childfree person to parent. Deciding whether to have a child in the first place fairly obviously involves economic calculations, from the impact on the parents’ earning potential to the resources that must be set aside to pay for nappies, child care and university. The decisions that come in a torrent after the birth, in contrast, such as whether to breastfeed or how to manage sleeping...

The past decade has brought a compliance boom in banking

Mon, 04/29/2019 - 19:51

COMPLIANCE OFFICERS are the killjoys of finance. To bankers and traders keen to let rip, they are the po-faced types who frown at any transaction that might breach this rule or contravene that regulation. A recent episode of “Billions”, a television drama about Wall Street, captured the rainmakers’ frustration: so fed up is “Dollar” Bill Stern with having his wings clipped by Ari Spyros that the veteran trader rams the side of the compliance chief’s Porsche when he pulls out of the car park of their hedge fund, Axe Capital.

But pity not finance’s in-house policemen, for they have had a golden decade since the crisis. While swathes of banking have laboured under cutbacks and stiff capital requirements, their headcount and clout have grown. Banks fined for aiding corruption, money-laundering and sanctions-busting have beefed up their compliance, risk, legal and internal-audit teams. Compliance officers will never be the rock stars of finance, but they have moved from drums to rhythm guitar. And though some banks hint at having reached “Peak Compliance”, staffing and investment are likely to remain well above pre-crisis levels.

Combating financial crime is central to compliance. Enforcement has tightened since America passed the Patriot Act, which targeted money flowing to terrorists and other bad actors, after the...

Why investors are careful buyers but careless sellers

Thu, 04/25/2019 - 10:48

JACK SCHWAGER was once a moderately successful trader who wondered why he was not an immoderately successful trader. Perhaps if he knew the secrets of trading superstars, such as Paul Tudor Jones or Jim Rogers, he might improve. So he asked them for those secrets. “Market Wizards”, his book of interviews with hedge-fund traders, was published in 1989. A second volume soon followed.

Both books have since been pored over by a generation of hedge-fund wannabes. They are full of great stories and tips covering a range of investing styles. Yet there are common elements. It is striking, for instance, how little emphasis the wizards put on getting into a position—finding the right trade at the right entry price—compared with when to get out of it. That makes sense. Deciding what and when to sell surely matters at least as much as, and perhaps more than, deciding what to buy.

The wizardly injunction to cut your losses and let your winners ride has hardened into hedge-fund doctrine. Even so, it is not widely practised in mainstream investing. Fund managers pay lots of attention to buying decisions. But they are remarkably careless in deciding what to sell.

That is the central finding of “Selling Fast and Buying Slow”, published late last year by a trio of academics—Klakow Akepanidtaworn of the University of Chicago’s...

Deutsche Bank and Commerzbank call off merger talks

Thu, 04/25/2019 - 10:48

AFTER SIX weeks of rumour, a progress report was due. Deutsche Bank, Germany’s biggest bank, had promised investors an update on merger discussions with its Frankfurt neighbour, Commerzbank, on April 26th, alongside its first-quarter earnings. The update came, unplanned, a day early. On April 25th the two banks said they had called off the talks, the announcement prompted by a Reuters report that negotiations were about to fail.

The pair said that a deal would not justify the “additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration”. Outside the two banks and the German government, Commerzbank’s biggest shareholder with a 15% stake, plenty had reached that conclusion even before the banks said in mid-March that talks were under way and embarked on weeks of negotiation. Two troubled lenders looked unlikely to make one strong one. Deutsche eked out only a tiny profit in 2018, its first for four years, while Commerzbank has made paltry returns. Deutsche’s shares have been trading at about 25% of book value, Commerzbank’s at little more.

Though Commerzbank has done a lot of reconstructive work since taking over Dresdner Bank during the global financial crisis, Deutsche still resembles a building site. It is still attempting to integrate Postbank, a retail...

Mauricio Macri emulates his rival, Cristina Fernández de Kirchner

Thu, 04/25/2019 - 10:48

“I JUST WANT an end to the price madness,” says Sonia Valverde, a mother of three, at a supermarket in Buenos Aires. She points to a government sticker advertising new price controls, which have frozen the price of 64 products, including sachets of milk. The only difficulty is that no sachets remain on the shelf.

Ending Argentina’s price madness was Mauricio Macri’s guiding mission when he won the presidency in 2015. He lifted currency controls imposed by his populist predecessor, Cristina Fernández de Kirchner, and began to cut energy subsidies. He gave the central bank a target for inflation and let the statisticians measure it honestly. And he loosened price controls Ms Fernández had imposed on hundreds of items, including soap and chicken.

But Argentina’s maddening prices refuse to be tamed. When inflation fell less quickly than hoped, the government relaxed the central bank’s inflation target in late 2017, undermining its credibility. As American Treasury yields rose months later, the peso dropped and inflation soared. Argentina embraced the IMF and abandoned its inflation target in favour of the more direct goal of constraining the money supply. But even after the central bank promised to freeze the quantity of money until the end of this year, the peso wobbled and annual inflation soared, to almost 55% in March (...