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Finance and economics
Updated: 43 min 41 sec ago

Returns on stocks in 2018 were down across the board

Thu, 01/03/2019 - 10:18

ONE DAY in 1985 P. J. O’Rourke, an American humourist, invited a few friends to his home to take ecstasy. He wrote about the experience for Rolling Stone. For a veteran of the Age of Aquarius, the side-effects of recreational drugs—the frequent toilet trips; the grimy feeling on the skin; the fitful sleep later on—were familiar. It was all rather underwhelming. “Drugs are a one-man birthday party,” he explained. “You don’t get any presents you didn’t bring.”

Those who make a living navigating financial markets might understandably be reaching for the happy pills, or at least a couple of painkillers. For them, 2018 was a rotten year. Stockmarket losses were spread widely across the globe (see chart). The total return—capital gains or losses plus dividends—from the S&P 500 index of leading American shares was negative for the first time in a decade. Other markets were worse, notably China’s,...

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Wed, 01/02/2019 - 17:29

The chips are down

“SEEING POSSIBILITIES in potatoes” is the upbeat slogan of Lamb Weston Potato Products, Inc., an American exporter. But new trade deals mean that its foreign competitors have fewer obstacles blocking their view. One is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into effect on December 30th. Negotiated as the TPP between 12 countries and agreed between 11, after President Donald Trump pulled America out, the deal will phase out tariffs on frozen potato chips and mashed potato, benefiting Lamb Weston’s Canadian rivals. And another trade deal, between the European Union and Japan, to be implemented on February 1st, will do the same for its European ones.

The coming year is shaping up to be one of preferential trade deals, where two or a group of countries agree on their own trading rules. As well as CPTPP...

Why Americans and Britons work such long hours

Tue, 12/18/2018 - 16:11

THE YEAR ahead will, like every year, consist of just under 8,800 hours. Most people will spend about a third of that time sleeping, and another third or so arguing on social media. Much of the remainder will be spent at work. There is increased interest in corners of the political world in trying to reduce the amount of time people must spend on the job. The Labour Party in Britain has said it will consider introducing a four-day work week when it is next in power. Figures on the American left are similarly intrigued by the idea. To assess whether such moves to reduce working time have any merit first requires an understanding of why hours in those countries have not fallen more already.

Declines in hours worked per person are among the least-sung benefits of economic development. In the late 19th century workers in industrialised economies knew labour and little else. In 1870 full-time work generally meant between 60 and 70 hours of labour per week, or more than 3...

Why foreign investors are losing interest in India

Tue, 12/18/2018 - 16:11

IT WOULD BE wrong to say that the only people who attended English county cricket in the 1980s were scoreboard enthusiasts, old men with flasks of cold tea and red-faced types there for the all-day bar. A few oddballs went to watch the cricket. A big draw was Graeme Hick, a Zimbabwe-born batsman and a relentless runmaker for Worcestershire. He eventually qualified to play for England in 1991. In front of bigger crowds and faster bowling, he could not reproduce his blistering county form.

In cricket-mad India, a parallel might be drawn between Mr Hick and Narendra Modi, the prime minister. Mr Modi was also the object of high hopes. He was elected with a thumping majority in May 2014 on his record in Gujarat, a well-run Indian state. But on the bigger stage, the form he showed as a state minister has often deserted him. A recent clash with the central bank, the Reserve Bank of India (RBI), that led to the resignation of its...

China scrambles to sustain its trade truce with America

Tue, 12/18/2018 - 16:11

THEIR WORDS were guarded, their tone sober. At a Politburo meeting to discuss economic plans for 2019, China’s top leaders agreed that they should be ready for problems and must, above all, maintain domestic stability. It was a striking contrast with the same meeting a year earlier. Then the Politburo oozed confidence, concluding that China was the world’s economic engine, with a new level of power.

This nervous, inward turn explains why, after a year of eye-for-eye fighting with America, China is determined to bring the trade war to an end. The view, once commonly heard in Beijing, that it could outlast America in a grinding tariff battle has given way to the realisation that, as the country with the huge trade surplus, China has more to lose upfront. Optimism that the government could fight on two fronts—taming its heavy debt burden at the same time as taking on America—has also cracked. The economic outlook has darkened....

Transparency threatens Isle of Man insurers’ business model

Tue, 12/18/2018 - 16:11

Manx for the memories

THE SEASIDE promenade in Douglas, on the Isle of Man, a self-governing British Crown dependency, boasts grand Victorian buildings and a horse-drawn tram. Once they helped it to compete with the likes of Llandudno and Blackpool for the tourist masses of England’s north-west. When cheap air travel meant these holiday towns were abandoned, most fell into disrepair. But Douglas reinvented itself as an offshore financial centre. Today finance provides over a third of the island’s GDP, of which around half is from insurance. Now new transparency rules put that at risk.

From January 1st the island’s insurers will have to be more open with clients, in particular on the subject of brokers’ commissions. Britain has had similar rules since 2013. International organisations such as the OECD, a club of rich countries, and the Financial Action Task Force, an intergovernmental anti-money-...

The lives of the parties

Thu, 12/13/2018 - 15:44

THE NOTION that China’s economy, though nominally communist, resembles that of the Soviet Union seems on its face absurd. The fall of the Iron Curtain revealed a rusted shell of a country, incapable of manufacturing goods the West might want. China is the world’s biggest exporter; its cities are jammed with gleaming skyscrapers. Soviet citizens went without consumer luxuries or bought them dearly on the black market. China’s growing middle class can choose from scores of designer brands at the local mall.

The Union of Soviet Socialist Republics, formed five years after the Russian revolution of 1917, came apart at age 69. At 69, the People’s Republic of China seems destined for world domination. Yet the Soviet economy seemed modern and dynamic once. China’s GDPper person, at purchasing-power parity, remains below that in the Soviet Union on the eve of its collapse. And despite its capitalist trappings, the Communist Party is piloting China’s economy in a direction similar to...

Jair Bolsonaro must tackle Brazil’s soaring pensions spending

Thu, 12/13/2018 - 15:44

“WE CAN’T SAVE Brazil by killing old people,” says Jair Bolsonaro, Brazil’s next president. He is referring to the country’s main public-policy problem: a bill for pensions that eats up more than half of the federal budget and is growing at a rate four percentage points above inflation. He is not the only person in the incoming administration to have expressed ambivalence and a lack of urgency about reining the spending in. “We have four years to do it,” says Onyx Lorenzoni, his chief of staff.

And yet many are betting Mr Bolsonaro will act speedily to solve a problem that has bedevilled Brazil for years. Their optimism stems from his pick for economy minister: Paulo Guedes, who studied at the University of Chicago and co-founded BTG Pactual, Brazil’s foremost home-grown investment bank. Investors are placing their faith in him to lead the fiscal adjustment of 4-5% of GDP required to stabilise the public...

After a disastrous year, a whiff of optimism is in the air

Thu, 12/13/2018 - 15:44

ARGENTINA IS FAMED as much for its financial crashes as for its juicy steaks and nifty footballers. But even compared with its usual performance, 2018 was a particularly miserable year for the economy. The worst drought in 50 years wrecked the corn and soyabean harvests, knocking 2% off GDP. The peso lost half its value against the dollar, pushing inflation to 46%. That tipped the country into its second recession in three years and led to a crisis that forced it to seek one of the largest credit lines in the IMF’s history. The approval rating of Mauricio Macri, the president, is at an all-time low. But as the year ends, there are reasons to hope that 2019 will be better.

The crisis of confidence has embarrassed Mr Macri, who was elected in 2015 on a promise to put Argentina’s economy on a firmer footing. In May of this year, with US Treasury yields rising and the dollar strengthening, foreign investors began to yank...

Price guarantees are common at art auctions

Thu, 12/13/2018 - 15:44

Going, going, not guaranteed

“LADIES AND gentlemen”—the auctioneer scans the room one last time—“the Hockney is sold!” The hammer comes down at $90.3m (including fees). Last month a pool scene by David Hockney, a British painter (pictured), set a new auction record for a work by a living artist. What made it an even bigger splash was that it was sold “naked”: that is, without a minimum price or sale guarantee. It may be one of the last great auction nudes.

Many sellers of fine art are promised a minimum sale price, however the auction turns out. They are unnerved by cautionary flops, like Francis Bacon’s “Study of Red Pope”, which was estimated to fetch £60m-80m ($80m-105m) in 2017, but failed to sell. Guarantees are most useful for post-war and contemporary works, where the value is most speculative. Last month two-thirds of sales at the “evening” auctions—the highest-profile ones—in New York at...

Urjit Patel, the head of the Reserve Bank of India, resigns

Thu, 12/13/2018 - 15:44

LAST MONTH Viral Acharya, a deputy governor of the Reserve Bank of India (RBI), suggested in a speech that the Indian government was risking “economic fire” by meddling with the bank. If he was right, on December 10th the last chance of dousing the flames may have been missed. Urjit Patel, the RBI’s governor, abruptly resigned, citing “personal reasons”. He has been replaced by Shaktikanta Das, a career civil servant who is thought to be an ally of Narendra Modi, the prime minister. The rupee dropped by 1.8% against the dollar on the news.

Mr Patel’s resignation came ahead of a board meeting on December 14th (after The Economist went to press). These gatherings used to be unremarkable, but in recent months board members friendly to the central government, in particular Swaminathan Gurumurthy, a Hindu-nationalist journalist appointed in August, have turned them into battles over RBI policy....

The perils of trying to time the market

Thu, 12/13/2018 - 15:44

JESSE LIVERMORE earned his reputation as a talented speculator by pocketing a tidy sum during the Panic of 1907. Mindful that a scarcity of credit and a giddy stockmarket were a dangerous mix, he began to sell stocks short that autumn. When share prices crashed on October 24th, Livermore was up by $1m ($27m in today’s money). He then changed course. He started to buy stocks, which were now a lot cheaper. The market rallied. By the end of the year Livermore had made $3m.

Anyone who has ever invested in stocks has at one time fancied that they can time the market as exquisitely as Livermore did. Very often, they hope that a benchmark of fair value, such as the cyclically-adjusted price-earnings ratio, or CAPE, will be their guide. History shows that when stock prices rise a lot faster than profits—as they did in the 1920s, 1960s and 1990s—they tend subsequently to fall back (see chart). So the market-timer will sell...

In Africa, agricultural insurance often falls on stony ground

Thu, 12/13/2018 - 15:44

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JACKSON LEWANGU looks up at the clouds scudding above the dry plains of northern Kenya. And, somewhere higher still, a satellite looks down on him. Since 2012 Mr Lewangu, who keeps goats and cattle, has bought insurance designed by the International Livestock Research Institute, based in Nairobi. The satellite monitors vegetation; when it is unusually scarce, he gets a payout. He can then buy food for his animals or pay a rancher for access to grazing land, without which his cows would die.

Insurance could bring peace of mind to Africa’s pastoralists. It could also help the continent’s crop farmers, whose fields are almost entirely rain-fed. But Mr Lewangu’s neighbours are unconvinced. The satellite gives false information, says one woman; there is no payout in good years, complains another. Such scepticism is typical. Although schemes have proliferated in the past decade, almost all are...

Trade war has given agricultural merchants a boost

Wed, 12/12/2018 - 12:21

ON DECEMBER 10TH Bunge, an American agribusiness giant, announced plans to replace both its chairman and its CEO. The move may seem ungrateful: the company’s profits surpassed analysts’ expectations in the most recent quarter, marking a turn after a string of bad years. But industry insiders were unsurprised. Despite cost-cutting and divestments, Bunge’s share price is 28% below its February peak, even after a 3% jump when the reshuffle became public. Its travails are a sign of changing times for soft-commodity traders.

For decades ADM, Bunge, Cargill and Louis Dreyfus—the ABCDs of agribusiness—were unavoidable middlemen. From corn and cocoa to soya and sugar, they could best gauge supply and demand, thanks to superior intelligence on stocks and harvests. Their storage facilities placed them well to ride out price swings. State buyers and multinationals relied on their global footprint to source staples...

Donald Trump is strong-arming Congress into accepting the new NAFTA

Thu, 12/06/2018 - 15:42

FOR YEARS President Donald Trump has been itching to withdraw from the North American Free Trade Agreement (NAFTA), a trade deal between America, Canada and Mexico. But as long as negotiations about a revamp continued, he held off. The day after signing a new deal on November 30th, rebranded the USMCA, he announced that he would “shortly” indulge himself and terminate the original deal after all. That would force Congress to choose between the USMCA and a NAFTA-less world.

“If Trump’s new NAFTAis so great, why does he need to resort to brinkmanship to ram it through Congress?” asked Ron Wyden, a Democratic senator. The answer is that many do not think the new deal is so great. The AFL-CIO, a union of unions, calls it incomplete. Nancy Pelosi, the minority leader in Congress and probably the next speaker, says it is a “work in progress”. Some Republicans express misgivings. Mr Trump wants to silence such voices.


Why investors in emerging-market bonds are so attuned to political risk

Thu, 12/06/2018 - 15:42

PAULO GUEDES might not be your first-choice brother-in-law. He is a close adviser to Jair Bolsonaro, Brazil’s populist president-elect, who is wistful for military rule. But if you invest in emerging-market government bonds, Mr Guedes is the sort of person you might want as economy minister, the post he will take up on January 1st. He was co-founder of BTGPactual, Brazil’s Goldman Sachs. He has a PhD in economics from the University of Chicago. He favours tax reform and privatisation.

Brazil is not the only focus of attention for such investors. This week Andrés Manuel López Obrador, a left-leaning populist, was sworn in as president of Mexico. He has cancelled a $13bn bond-financed airport that is already one-third-built. In November a committee of South Africa’s parliament resolved that the constitution should permit land reform without compensation. Some have begun to worry about what Narendra Modi might do to secure re-...

A trade truce between America and China is over as soon as it began

Thu, 12/06/2018 - 15:42

AFTER A WORKING dinner between Presidents Donald Trump and Xi Jinping on December 1st, it seemed as if a truce had been called in their two countries’ rumbling trade war. “This was an amazing and productive meeting,” said Mr Trump. But the truce is already at risk of unravelling.

On December 5th Canada’s justice department said that, on the same day that the two presidents dined, it had arrested Meng Wanzhou, the chief financial officer of Huawei, a Chinese maker of telecoms equipment, at America’s behest. For China, that looks like a political salvo. Huawei is a pillar of the Chinese economy—and Ms Meng is the founder’s daughter. The fate of the trade talks could hinge on her encounter with the law.

She was due to appear in a Canadian court on December 7th, after The Economist went to press. Her arrest is thought to be related to an American probe into Huawei’s alleged violation of...

Buying nuclear fuel is back in fashion

Thu, 12/06/2018 - 15:42

ON DECEMBER 3RD McIntyre Partnerships, a hedge fund in New York that normally buys equity and debt securities, told investors it was buying a commodity: uranium. This “slight anomaly” was justified by the metal’s impressive recovery, said its founder, Chris McIntyre. Uranium’s spot price has jumped by 41% since April, to near a two-year high (see chart), following an overdue reduction in supply.

Uranium fell out of favour after the Fukushima nuclear disaster in 2011, which led to plant closures in Japan and Germany and a slowdown in plant-building elsewhere. (Uranium, or plutonium, which is made from it, is an essential nuclear fuel.) Despite the recent surge its price, at $29 a pound ($64 per kilo), is still 60% below the 2011 peak, according to UxC, a consultancy. Production costs will be above that for perhaps three-quarters of this year’s output.

Uranium miners were slow to cut supply in response....

Quantitative easing draws to a close, despite a faltering economy

Thu, 12/06/2018 - 15:42

CENTRAL BANKING can be agonising. The effect of monetary policy on the economy is not immediate, so decisions must be based on expectations for two years’ time. That means putting faith in forecasts that could well turn out to be wrong.

Some soul-searching might be expected at the monetary-policy meeting of the European Central Bank (ECB) on December 13th. Since 2015 it has stimulated the euro-zone economy by buying bonds worth €2.6trn ($3trn) under its quantitative-easing programme. In June it said it planned to stop asset purchases by the end of the year (though it will continue to reinvest proceeds from maturing bonds), and to keep interest rates at their current rock-bottom levels “through the summer” of 2019. Since then, though, economic growth has slowed and inflation, stripped of oil-price rises, has stayed resolutely low. The question is how persistent these developments will be.

After an impressive showing...

Hard-up firms in China use cashmere and pork to repay loans

Thu, 12/06/2018 - 15:42

LI XINTONG DID not want one overpriced cashmere sweater, let alone a hundred. But when his loan to Jicai came due, the investment firm offered to repay him not in cash, but in sweaters. The value of 100 cashmere pullovers, it said, equalled his 150,000 yuan ($22,000) loan, and was thus fair compensation. Mr Li (not his real name) disagrees.

Perhaps he should count himself lucky. At least he did not receive dozens of packages of premium ham, as a troubled Chinese pig farm’s bondholders recently did, in lieu of interest. In another case, a financial subsidiary of HNA, a conglomerate that includes an airline, offered flight vouchers instead of cash when its clients’ investments matured.

The spate of unorthodox repayments highlights a squeeze in China’s financial system, which has hurt smaller companies and non-bank lenders most. So far this year companies have defaulted on 135bn yuan ($20bn) of bonds, more...