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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,...

Myanmar’s state-owned enterprises show how much reform is still needed

Thu, 08/02/2018 - 16:07

NOTHING has been made in the engine factory in Thagaya, in the south of Myanmar, since April last year. Yet around 350 employees still turn up each day. In 2016 government-owned factories like this one made a loss of more than $200m.

When Myanmar moved from military dictatorship to a form of democracy, its new government embarked on a series of reforms. Since 2011 it has passed at least two dozen laws related to the economy. Foreign investment, much of it from China, has helped the economy to grow at around 7% a year. But it remains one of the region’s poorest countries. And vast swathes of the economy remain untouched.

State-owned enterprises (SOEs) employ about 145,000 people and provide about half of government revenue, excluding foreign aid. They collect around 12% of GDP in fiscal revenue and spend about the same. But the junta-era law that regulates them is a vaguely worded two-page document that is silent on what they are supposed to do. It simply states which sectors are...

A milestone is reached with the first zero-cost tracker funds

Thu, 08/02/2018 - 16:07

SINCE 1975, when the first retail investment fund that aimed simply to mimic a stockmarket index was launched by Vanguard, such “passive” funds have squeezed margins and profits right across the asset-management industry. On August 1st that trend reached its logical endpoint with the launch of two zero-cost tracker funds by Fidelity, a Boston-based firm built on active investing that is the industry’s fourth-largest, with $2.5trn under management. With no minimum investment required and an expense ratio (that is, net cost to investors) of zero, it will further shake up an industry that was already undergoing a major structural shift.

Fidelity’s competitors immediately felt the heat. Shares in BlackRock, the world’s largest asset manager and largest provider of passive exchange-traded funds (ETFs), closed 4.7% down on the day, as shareholders digested the implications for its business model. Those in Invesco, the fourth-largest ETF provider, dropped by 4.2%, and those in State Street...

Tech startups are reviving point-of-sale lending

Thu, 08/02/2018 - 16:07

AMERICANS shopping for a mattress online may find the selection at Casper, a New York-based mattress startup, somewhat lacking. Unlike brick-and-mortar shops, which offer dozens of models, the startup sells just three. And yet Casper’s customers are spoiled for choice at the till. Those who cannot afford to pay with a debit or credit card, or PayPal, can pay by instalments over six to 12 months. Those who make payments on time can enjoy the service free.

Such “point-of-sale” loans, which have been around for decades in one form or another, are becoming increasingly popular in America. Consumers who might previously have financed big-ticket purchases such as furniture, electronics or home-improvement projects with a credit card are now opting to borrow at the checkout, often with an initial 0% interest rate. These short-term credit products were once the domain of big banks like Wells Fargo, which finances consumer purchases, and Synchrony Financial, an issuer of store-branded credit cards. Now tech startups are entering the market with innovative techniques for underwriting and approving potential borrowers, often in seconds.

Demand is driven, in part, by younger consumers. Many young Americans tell pollsters that they dislike big banks. And they seem to have been scared off revolving credit by the financial crisis; according to the Federal Reserve...

The Industrial Revolution could shed light on modern productivity

Thu, 08/02/2018 - 16:07

HOW much yarn per day could an 18th-century British woman spin? Such questions are catnip for economic historians, whose debates typically unfold unnoticed by anyone outside their field. But a running debate concerning the productivity of pre-industrial spinners, and related questions, is spilling beyond academia. Each probably produced between a quarter of a pound and a pound of yarn a day, the historians have concluded. But at issue is something much more profound: a disagreement regarding the nature of technological progress that has important implications for the world economy.

Economic growth of the sort familiar today is a staggering departure from the pattern of pre-industrial human history. More than a century of study has not resolved the question of why it began where and when it did. This is a matter of more than historical interest. Weak growth in productivity has economists asking whether humanity is running out of ideas, and whether it is losing its ability to turn new...

Greece exits its bail-out programme, but its marathon has further to go

Thu, 08/02/2018 - 16:07

“NO ONE buys furniture in a crisis,” laments Konstantinos Vourvoulakis. He and his father used to sell handmade furniture, but as customers became strapped for cash, they shut up shop in 2014. A chatty man with a sunny disposition, he started driving a taxi instead, ferrying tourists around Athens and offering travel tips. But he doubts he will be able to afford a holiday himself any time soon.

Greece’s public-debt woes triggered an economic collapse that lasted longer than the Great Depression in America. In 2009 the new prime minister admitted that budget-deficit figures had been understated for years, and were perhaps double those originally reported. Ratings agencies downgraded its debt. Interest rates surged. In 2010 the government turned to the euro zone and the IMF for help. Their loans had strings attached: that Greece implement deep spending cuts and structural reforms.

On August 20th Greece exits the last of three bail-out packages. Both its creditors and its government...

Japan still has great influence on global financial markets

Wed, 08/01/2018 - 16:14

IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds....

Japanese banks’ foreign exposure may threaten financial stability

Thu, 07/26/2018 - 14:51

THE maelstrom that hit global financial markets a decade ago is known in Japan as the Lehman Shock, after the bankruptcy of the American investment bank that caused it. Japanese banks themselves escaped relatively unscathed, owing to defences built during the 1990s, when the country struggled with deflation and excessive debt. But they seem to have forgotten the lesson. Risk-taking is back.

Squeezed at home by razor-thin margins and negative interest rates, both major and regional banks have been on a spree abroad. Banks have more than doubled borrowing and lending in dollars since 2007. Dollar-denominated assets of Japanese banks topped $3.5trn at the end of 2016, according to the Bank for International Settlements (BIS) in Basel. That leaves them vulnerable to currency swings and external shocks, it warns.

...

Private equity is piling into health care

Thu, 07/26/2018 - 14:51

LAST month KKR, a private-equity firm, announced that it would buy Envision Healthcare, one of America’s largest providers of doctors to hospitals. The deal was valued at $9.9bn, including debt. If shareholders agree to the sale, it will be the largest in a string of health-care investments by KKR, including an ambulance service, a company that helps treat children with autism and a maker of medical devices.

“Ten years ago only a few private-equity houses had dedicated health-care teams,” says Dmitry Podpolny of McKinsey, a consultancy. “Today nearly everyone does.” Last year saw a frenzy of deal activity, the highest by value since the go-go year of 2007.

Private-equity funds are not the only ones keen on the industry. Institutional investors, tech-focused funds, generalist asset managers and corporate buyers are sniffing around, too. As they chase a limited number of targets, they are pushing up prices. Not high enough to dampen interest, however: health care is loved by...

Why simple rules are best when spreading your investment bets

Thu, 07/26/2018 - 14:51

BENJAMIN GRAHAM is considered the father of value investing, the business of picking stocks that are cheap. He might also fairly be described as the father of not trying to pick stocks at all. In his book “The Intelligent Investor”, Graham distinguished between two archetypes. Enterprising investors are willing to devote time and care to stock-picking. Defensive investors want a quiet life. So they should simply buy a diversified list of leading stocks instead.

The emergence of low-cost indexed funds has made it easy to be this kind of know-nothing investor. Yet there is still a decision to make, namely asset allocation. How much of a portfolio should be in risky stocks and how much in safe bonds? In theory the split depends on expected returns, volatility (how much asset prices fluctuate), the investor’s appetite for such volatility—and even the investor’s age and job. Thankfully Graham had a simpler answer: a 50-50 split between stocks and bonds, maintained by adjusting as required by market prices.

The merit of this approach—or indeed the 60-40 rule favoured by many pension funds—is simplicity. There is a better chance of sticking to a simple, fixed-weights rule than a complex one. Deciding on the right portfolio weights is not the most important part of asset allocation. What matters is sticking to whatever weights are chosen. And that requires...

Car dealerships have become targets for cross-border investment

Thu, 07/26/2018 - 14:51

Wheeler dealer

DARREN GUIVER started out as a trainee at a Ford dealership in 1986. He moved quickly up through management, buying dealerships until he had created Spire Automotive group, a network of 12 across south-east England. Two years ago Group 1, America’s third-largest dealership network, made him an offer he couldn’t resist. So Mr Guiver joined thousands of small dealers selling out to global investors and dealership groups. 

Since 2014 around 1,000 such dealerships have been bought or sold in America. According to Kerrigan Advisors, a firm that helps sellers, around 200 more will change hands this year. The largest deal to date came in 2015, when Warren Buffett bought Van Tuyl Group, a network of 78 dealerships with over $8bn in annual revenue. Holding companies such as South Africa’s Imperial and Super Group have been buying showrooms across England. Penske, an American group, has become the largest dealer network in Europe by revenue.

...

As private-equity firms mature, the way they buy and sell is changing

Thu, 07/26/2018 - 14:51

“SELL in May and go away,” say the denizens of Wall Street, and to the usual summer lethargy is added the excuse of a heatwave. But for those working in private equity, there is no let-up. The “shops”, as private-equity funds like to call themselves, are stuffed with money and raising more: $1.1trn in “dry powder” ready to spend around the world, according to Preqin, a consultancy, with another $950bn being raised by 3,050 firms.

So hot is the market that there are rumours of money being turned away. Even the firms themselves, which receive fees linked to assets under management, cannot fathom how to use all that may come their way. It is not for want of trying. The year to date has seen nearly 1,000 acquisitions (see chart 1). Health care has been particularly vibrant (see next article).

...

America and the EU are both toughening up on foreign capital

Thu, 07/26/2018 - 14:51

“DEAR Donald, let’s remember our common history,” wrote Jean-Claude Juncker, the president of the European Commission, on a picture of a military cemetery in Europe that he presented to President Donald Trump during talks on July 25th. The reminder of shared values and sacrifices may have helped nudge the two men towards a truce in the incipient transatlantic trade war (see article). That truce will help America and Europe to co-operate on another front.

Both suspect that investment from China is a ploy to gain access to advanced technology and undermine domestic security. European officials are thrashing out the details of an EU-wide investment-screening mechanism, proposed by Mr Juncker in 2017. A government white paper on national security and investment published on July 24th suggests that post-Brexit Britain will be no...

Bond yields reliably predict recessions. Why?

Thu, 07/26/2018 - 14:51

AS NAMES for market phenomena go, “inverted yield curve” lacks a certain punch. It is no “death cross” or “vomiting camel”. But what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds. Economists and stockmarkets seem unconcerned that inversion looms again (see chart). But despite generally strong economic data, there is reason to heed the warning signs flashing across bond markets.

There is nothing particularly magical about the yield curve’s predictive power. Short-term interest rates are overwhelmingly determined by changes in central banks’ overnight policy rates—for example, the federal funds rate in America, which has risen by 1.75 percentage points since December 2015. Long-term rates are less well-behaved. They reflect the average short-term rate over a bond’s lifetime...

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