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Updated: 2 hours 23 min ago

The progressive case for immigration

Thu, 03/16/2017 - 15:55

“WE CAN’T restore our civilisation with somebody else’s babies.” Steve King, a Republican congressman from Iowa, could hardly have been clearer in his meaning in a tweet this week supporting Geert Wilders, a Dutch politician with anti-immigrant views. Across the rich world, those of a similar mind have been emboldened by a nativist turn in politics. Some do push back: plenty of Americans rallied against Donald Trump’s plans to block refugees and migrants. Yet few rich-world politicians are willing to make the case for immigration that it deserves: it is a good thing and there should be much more of it.

Defenders of immigration often fight on nativist turf, citing data to respond to claims about migrants’ damaging effects on wages or public services. Those data are indeed on migrants’ side. Though some research suggests that native workers with skill levels similar to those of arriving migrants take a hit to their wages because of increased migration, most analyses find that they are not harmed, and that many eventually earn more as competition nudges them to specialise in more demanding occupations. But as a slogan, “The data say you’...

Correction: Green finance for dirty ships

Thu, 03/16/2017 - 15:55

Correction. We made a mistake in last week’s article on green-shipping finance. The oxides of sulphur and nitrogen emitted by shipping are very harmful; but they are not, as we asserted, much worse for global warming than carbon dioxide. Sorry.

Do smart-beta investment funds work?

Thu, 03/16/2017 - 15:55

IN THE world of investing, everyone is always looking for a better mousetrap—a way to beat the market. One approach that is increasingly popular is to select shares based on specific “factors”—for example, the size of companies or their dividend yield. The trend has been given the ugly name of “smart beta”.

A recent survey of institutional investors showed three-quarters were either using or evaluating the approach. By the end of January some $534bn was invested in smart-beta exchange-traded funds, according to ETFGI, a research firm. Compound annual growth in assets under management in the sector has been 30% over the past five years.

The best argument for smart-beta funds is that they simply replicate, at lower cost, what fund managers are doing already. For example, many fund managers follow the “value” approach, seeking out shares that look cheap. A computer program can pick these stocks more methodically than an erratic human. A smart-beta fund does what it says on the tin.

But does it work? The danger here is “data mining”. Carry out enough statistical tests, and you will always find some strategy that...

Why too much oil in storage is weighing on prices

Thu, 03/16/2017 - 15:55

IT SOUNDS like a scene from “The Big Short”, a film about financial speculation. Light aircraft fly photographers close to America’s oil-storage facilities, using infra-red imaging and photographs to gauge the rise and fall of levels of crude in 2,100 storage tanks, in an attempt to work out whether oil futures are overvalued or not.

In fact, it is less mischievous than that. The intelligence-gatherers work for a company, Genscape, that sells the information to traders everywhere, giving them a few days’ jump before storage surveys are published by the government.

These data are particularly useful at a time when near-record levels of oil inventories in America are weighing on oil prices and frustrating attempts by OPEC, the producers’ cartel, to prop up the market. The high level of inventories is vital to an understanding of why crude prices suddenly plummeted this month, according to the International Energy Agency (IEA), a forecaster. West Texas Intermediate is back below $50 a barrel, its level before OPEC in November agreed to cut output (see chart).

Three reasons explain why the tanks are so full....

Iceland lifts capital controls

Thu, 03/16/2017 - 15:55

Hope springs eternal

IT WAS one of the worst-hit casualties of the financial crisis 0f 2007-08, but Iceland this week took steps that symbolised its recovery. The last remaining controls on capital outflows were lifted, allowing pension and investment funds to invest their money abroad. And the central bank struck another deal with offshore holders of frozen krona-denominated assets—buying more of them back at a discount.

The country’s crisis experience was a cautionary tale of an over-exuberant financial sector. Three of its banks, with assets worth 14 times GDP, keeled over within a week; the krona fell by 70% on a trade-weighted basis in a year; Iceland was the first rich country since Britain in 1976 to need an IMF rescue.

To stem capital outflows and further falls in the krona, the government in 2008 slapped restrictions on money leaving the country. The measures also froze offshore holdings of krona-denominated assets, which at the time amounted to 40% of GDP. Even the IMF, usually in favour of more orthodox free-market policies, supported the move. The country nonetheless experienced a severe...

Sovereign-wealth funds catch on in Africa

Thu, 03/16/2017 - 15:55

SCRATCHING around for money to pay for free secondary schools, a government minister in Ghana last month floated an idea: raid the Heritage Fund. At least 9% of the country’s annual oil revenues are stashed there for future generations. The minister was rebuffed. But the row highlighted a trade-off: saving for tomorrow’s children makes it harder to help today’s.

Such dilemmas are acute in sub-Saharan Africa. The region has about a dozen sovereign-wealth funds, most of them established in the past decade. They have few models to emulate. A Norwegian approach—build a fund, invest abroad, and spend only the annual returns—works in places that are small, ageing and rich. Most African countries, unfortunately, are none of those things.

The oldest and largest African fund, Botswana’s $5.3bn Pula Fund, was created in 1994 from diamond revenues. Angola and Nigeria, the biggest oil exporters, have both established funds in the past few years; governments from Kenya to Zambia are talking of doing the same. Even Rwanda, with no great commodity riches, is soliciting patriotic donations to build its own (civil servants coughed up $2.5m last year...

The South Korea-US trade agreement turns five

Thu, 03/16/2017 - 15:55

IT SHOULD have been a happy anniversary. On March 15th 2012, KORUS, a trade deal between America and South Korea, came into effect. It slashed tariffs, tightened intellectual-property rights and opened up South Korea’s services market. When it was signed, the head of an American manufacturing lobby hailed it as meaning “jobs, jobs and jobs”. Wendy Cutler, its American negotiator, calls it “the highest standard deal we have in force”.

Five years on, jubilation has given way to anxiety. On the campaign trail, Donald Trump referred to the deal as a “job-killer”. On March 1st his administration’s official trade-strategy document singled it out for criticism. America’s trade deficit in goods with South Korea has more than doubled since 2011. “This is not the outcome the American people expected,” it lamented.

Trade between America and South Korea has indeed fallen short of expectations. When the deal was signed, the United States International Trade Commission predicted that it would boost American goods exports to South Korea by around $10bn. In fact they fell by $3bn between 2011 and 2016. The deal suffered teething...

As the Fed raises rates, Janet Yellen’s legacy is pondered

Thu, 03/16/2017 - 09:48

THIRD time lucky. In each of the past two years, the Federal Reserve has predicted multiple interest-rate rises, only to be thrown off-course by events. On March 15th the central bank raised its benchmark Federal Funds rate for the third time since the financial crisis, to a range of 0.75-1%. This was, if anything, ahead of its forecast, which it reaffirmed, that rates would rise three times in 2017. “Lift-off” is at last an apt metaphor for monetary policy. But as Janet Yellen, the Fed’s chairwoman, picks up speed in terms of policy, she must navigate a cloudy political outlook. The next year will define her legacy.

Ms Yellen took office in February 2014 after dithering by the Obama administration over a choice between her and Larry Summers, a former treasury secretary. Left-wingers preferred Ms Yellen, in part because she seemed more likely to give jobs priority over stable prices. Indeed, Republicans in Congress worried that she would be too soft on inflation. The Economist called her the “first acknowledged dove” to lead the central bank.

Today Ms Yellen looks more hawkish—certainly than Mr Summers, who...

As the Fed raises rates, Janet Yellen’s legacy is pondered

Wed, 03/15/2017 - 20:31

THIRD time lucky. In each of the past two years, the Federal Reserve has predicted multiple interest-rate rises, only to be thrown off-course by events. On March 15th the central bank raised its benchmark Federal Funds rate for the third time since the financial crisis, to a range of 0.75-1%. This was, if anything, ahead of its forecast, which it reaffirmed, that rates would rise three times in 2017. “Lift-off” is at last an apt metaphor for monetary policy. But as Janet Yellen, the Fed’s chairwoman, picks up speed in terms of policy, she must navigate a cloudy political outlook. The next year will define her legacy.

Ms Yellen took office in February 2014 after dithering by the Obama administration over a choice between her and Larry Summers, a former treasury secretary. Left-wingers preferred Ms Yellen, in part because she seemed more likely to give jobs priority over stable prices. Indeed, Republicans in Congress worried that she would be too soft on inflation. The Economist called her the “first acknowledged dove” to lead the central bank.

Today Ms Yellen looks more hawkish—certainly than...

The end of “secular stagnation”?

Thu, 03/09/2017 - 16:30

IN PERIODS of economic stress all sorts of theories are entertained about the nature of the problem. When better times return, some theories fade from memory. Others linger, however. During the economic mess of the past decade, economists frightened themselves with tales of “secular stagnation”: a nasty condition that dooms its victims to chronically weak growth. Now that the economic outlook is brightening a bit—deflation has been dispatched, and for most advanced economies 2017 is forecast to bring a third consecutive year of economic growth—it is tempting to laugh off the idea of secular stagnation as a bit of crisis-induced hysteria. Tempting, but also premature.

In a time of secular stagnation, the normal relationship between saving and investment goes haywire. People save some portion of their income each year. Because one person’s spending is another’s income, such saving can drain away demand and lead to recession, unless the funds set aside by savers are reinjected into the economy through lending to those looking to invest: as when banks lend savers’ deposits to businesses, for example. Central banks help manage this process....

The coming revolution in insurance

Thu, 03/09/2017 - 16:30

IN THE stormy and ever-changing world of global finance, insurance has remained a relatively placid backwater. With the notable exception of AIG, an American insurer bailed out by the taxpayer in 2008, the industry rode out the financial crisis largely unscathed. Now, however, insurers face unprecedented competitive pressure owing to technological change. This pressure is demanding not just adaptation, but transformation.

The essential product of insurance—protection, usually in the form of money, when things go wrong—has few obvious substitutes. Insurers have built huge customer bases as a result. Investment revenue has provided a reliable boost to profits. This easy life led to a complacent refusal to modernise. The industry is still astonishingly reliant on human labour. Underwriters look at data but plenty still rely on human judgment to evaluate risks and set premiums. Claims are often reviewed manually.

The march of automation and technology is an opportunity for new entrants. Although starting a new soup-to-nuts insurer from scratch is rare (see...

A New York startup shakes up the insurance business

Thu, 03/09/2017 - 16:30

When insurance quickened the pulse

IT IS not typhoons or earthquakes that insurers should fear most, but geeks alert to their businesses’ inefficiencies. Daniel Schreiber and Shai Wininger, tech entrepreneurs with no insurance background, spotted that the industry is huge (worth $4.6trn in global premium income a year, reckons Swiss Re, a reinsurer), distrusted, antiquated and hopelessly unreformed.

In September they started Lemonade, a New York-based insurer for homeowners and renters. Some describe it as a peer-to-peer insurer (“Spiritually we’re a tech company,” says Mr Schreiber). Most agree that its app makes insurance a lot easier. This appeals to the digital generation: of 2,000 policies sold in its first 100 days, over 80% were to first-time buyers.

Insurance, the founders reasoned, suffers from misaligned incentives. Every dollar paid out comes from insurers’ pockets, encouraging poor behaviour. Normally upright people have few qualms about defrauding their insurer (as 25% of Americans do), pushing up premiums. Lemonade’s solution is to take 20% of premiums as a fee and to reward under-claiming...

A big merger in the asset-management industry

Thu, 03/09/2017 - 16:30

From fishing buddies to co-CEOs: that is how the relationship between Martin Gilbert, chief executive of Aberdeen Asset Management, and Keith Skeoch, his counterpart at Standard Life, will change after the companies this week announced plans to join forces. The merged company, to be based in Scotland, will have £660bn ($800bn) in assets under administration, making it Britain’s largest, and Europe’s second-largest, “active” asset manager.

Competition is forcing asset managers to consolidate. Henderson and Janus Capital teamed up last October; Amundi and Pioneer did the same in December. They hope to defend market share from fast-growing “passive” fund managers, whose funds track market indices rather than try to beat them, as active funds do. The research involved in trying to pick winners inevitably makes actively managed funds dearer than passive ones; once these costs are factored in, active managers tend to underperform passive ones. The fee gap is wide enough to have attracted scrutiny from British and European regulators: in Britain passive funds’ fees are around 0.15% of assets under management, compared with 0.9% at...

The subdued mood in Singapore’s financial industry

Thu, 03/09/2017 - 16:30

SINGAPORE owes its existence, and its prosperity, to its place at the heart of intra-Asian trade. In more than 50 years of independence, the city-state has striven mightily to attract investment from all over the world. Such has been its success, indeed, that others hope to imitate its open, low-tax model. In Britain, for example, there has been talk of the country turning into a “European Singapore” once withdrawal from the EU is complete. (It would be a nice start if London’s Tube operated with anything like the same efficiency as Singapore’s subway network.)

The current mood in Singapore, however, is far less buoyant than you might imagine. Singapore has survived and thrived by steering a middle course between America and China. It has been alarmed both by the isolationist rhetoric of President Donald Trump and by recent, highly unusual, public spats with China.

Global trade growth has slowed in recent years. Despite signs of a pickup, this has had a big effect in a city that has the world’s second-busiest port and that (according to Barclays, a bank) is the country most exposed to the global value chains created by multinational...

Foreign buyers push up global house prices

Thu, 03/09/2017 - 16:30

MANY Americans were taken aback when news broke in January that Peter Thiel, an internet billionaire and adviser to Donald Trump, had New Zealand citizenship. For five years this backer of an “America first” president had kept his Kiwi passport quiet. Then the government released details of his $10m-lakeside estate.

A growing horde of rich foreigners see New Zealand as a safe haven. In 2016 overseas investors bought just 3% of all properties. But their purchases were concentrated at the expensive end of the market, which is growing fast: sales involving homes worth more than NZ$1m ($690,000) increased by 21%. That helped push prices in the country up by 13% over the past year, to lead The Economist’s latest tally of global house-price inflation (see table).

New Zealand is one of several countries where the impact of foreign money on housing is under scrutiny. Prices have also risen rapidly in Australia and Canada. Central bankers fret about the dangers fickle capital flows pose to financial stability. London’s mayor has ordered a study on foreign ownership in the capital after property prices...

Deutsche Bank raises capital, and changes course

Thu, 03/09/2017 - 16:30

THREE times since the financial crisis, Deutsche Bank’s bosses have turned to its shareholders for cash: €10.2bn ($13.6bn) in 2010, €3bn in 2013 and €8.5bn in 2014. Since becoming chief executive in 2015, John Cryan has had no plans to ask for more. Deutsche still needed to thicken its equity cushion, but disposals, cost cuts and earnings (if any: it has made losses for the past two years) would provide the stuffing.

Well, plans change. On March 5th Mr Cryan announced an €8bn rights issue. Some comfort for investors: the price, €11.65 a share, is 39% below the previous close; and Mr Cryan, who had suspended the dividend, promises a return to “competitive” payouts next year. In another reversal, Deutsche will keep rather than sell Postbank, a mass-market retail business that was once part of the post office. Deutsche has owned it since 2010.

Postbank and the posher “blue” Deutsche Bank brand will be more closely integrated—notably, sharing computer systems. Mr Cryan is also selling a slice of Deutsche’s asset-management division and some lesser assets. And he is reorganising its corporate and investment bank to concentrate on...

Economists argue about the impact of Chinese imports on America

Thu, 03/09/2017 - 16:30

COMPETITION from Chinese imports may have cost some Americans jobs, but economists have done pretty well out of it. Since 2013 David Autor, David Dorn and Gordon Hanson have published nine separate studies digging into the costs of trade. They have found that, of the fall in manufacturing jobs between 1990 and 2007, one-quarter could be attributed to a surge in imports from China. Other sectors failed to soak up the extra workers. Their research also suggested that the China shock has cut the supply of marriageable men and opened the door of the White House to Donald Trump.

In recent weeks a dispute has erupted over their results. Jonathan Rothwell, an economist at Gallup, a pollster, alleged “serious flaws” in one paper, prompting a fierce eight-page response from the authors, and an acrimonious public tiff.

The row centres on how the effect of the China shock is measured. The trio wanted to isolate the effects of extra Chinese supply, rather than of something happening in America, so they checked that imports of particular Chinese products were surging in other rich countries, too. They then compared places in...

Green finance for dirty ships

Thu, 03/09/2017 - 16:30

Smokestack lightening

SHIPPING may seem like a clean form of transport. Carrying more than 90% of the world’s trade, ocean-going vessels produce just 3% of its greenhouse-gas emissions. But the industry is dirtier than that makes it sound. By burning heavy fuel oil, just 15 of the biggest ships emit more oxides of nitrogen and sulphur—gases much worse for global warming than carbon dioxide—than all the world’s cars put together. So it is no surprise that shipowners are being forced to clean up their act. But in an industry awash in overcapacity and debt, few have access to the finance they need to improve their vessels. Innovative thinking is trying to change that.

A new report from the Carbon War Room (CWR), an international NGO, and UMAS, a consultancy, highlights the threat that new environmental regulations pose to the industry. The International Maritime Organisation, the UN’s regulatory agency for shipping, has agreed to cap emissions of sulphur from 2020. Last month the European Parliament voted to include shipping in the EU’s emissions-trading scheme from 2021. Without any retrofitting of ships to meet the new...

The retreat of globalisation threatens the Dutch economy

Thu, 03/09/2017 - 16:30

AS ANY football fan knows, little delights the Dutch more than beating the Germans. So, as the country prepares for an election on March 15th, it should be cheering an economy that, after lagging behind Germany’s for years, is at last outpacing it. GDP grew by 2.1% last year, which was the fastest rate since 2007 and a stronger performance than its neighbours, including Germany. Unemployment has fallen to 5.3% and more people are in work than before the crisis in 2007-08.

After years of belt-tightening, households are spending again, thanks to a strong housing-market recovery and rising wages. Government finances are sound. This year the budget may be in balance—perhaps even in surplus—and public debt may drop below 60% of GDP. Yet this sunny outlook has not brightened the mood of a tetchy election campaign.

That is not so surprising. Marieke Blom, the chief economist at ING, a bank, attributes the positive forecast mostly to tough government reforms over the past few years—particularly raising the retirement age to 67 (from 2021) and reforming the financing of the health-care system. Years of reform, austerity and...

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