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The slow-burning effects of Europe’s new data rules

Thu, 01/10/2019 - 15:51

FEW EXPECTED an overnight sensation. Still, January 13th 2018 was supposed to mark a big step towards exposing the European Union’s banking systems to digital competition. The EU’s revised payment services directive (PSD2) came into effect; so did a British variant, Open Banking, the fruit of an investigation by the national competition watchdog. A year on, there is little sign of a stampede to switch banks. Yet progress is quietly being made.

In essence, the new rules seek to ensure that digital technology sharpens competition, by loosening banks’ grip on customers’ financial data, but without compromising security. They allow third parties, whether tech firms or other banks, to gather information from several accounts—with customers’ permission—in one place, so that people can manage their finances better. They also make it easier for third-party firms to pay online merchants directly from customers’ accounts.


How economics is trying to fix its gender problem

Thu, 01/10/2019 - 15:51

FEMALE ECONOMISTS are rare. So every year, after the meeting of the American Economic Association (AEA), a group flock together. On January 6th, before the junior women seeking mentoring arrived, their seniors were asked to keep the tone positive, and to save discussion of their worst experiences of sexism for later, in the bar. What followed included inspiration (when submitting papers, aim high) and tips on how to get published, get tenure and work out who is likely to help your career.

The scheme is just one of a growing number aimed at raising the share of women among academic economists. Others were on display at the AEA conference, including some that drew on economists’ own intellectual toolkit. Donna Ginther of the University of Kansas, for example, presented results showing that participation in the mentoring workshop extends a woman’s network of collaborators, and that she thus publishes more. Another study cited at the...

The World Bank’s president resigns abruptly

Thu, 01/10/2019 - 15:51

BARACK OBAMA’S nomination of Jim Yong Kim as president of the World Bank was unexpected in Washington, DC, where the trained physician was little known. His imminent departure also comes as a surprise. Mr Kim said on January 7th that he would step down next month, three years before his second term ends, to take up a position at Global Infrastructure Partners (GIP), a private-equity firm in New York.

In fact Mr Kim probably decided to leave months ago. He would have felt he had secured his legacy after a triumph last year, when he persuaded shareholders to agree to a paid-in capital increase of $13bn, expanding the bank’s lending capacity from $60bn to $100bn by 2030. Once he had begun talking to his next employer, he could not stay long without creating a potential conflict of interest—GIP also invests in infrastructure in poor countries. He will not be missed by everyone. A reorganisation he oversaw was loathed by staffers, and...

For emerging markets, a more fearful Fed is a less frightful one

Thu, 01/10/2019 - 15:51

SPARE A THOUGHT for emerging markets. When America’s economy falters, they often share the pain, because America is an indispensable market for their goods. But when America’s economy prospers, they can also suffer, because the Federal Reserve will raise interest rates, lessening demand for emerging-market assets.

This catch-22 was vividly illustrated in 2018. America’s economy expanded robustly. But this boost to global demand was overshadowed by the Fed’s response to it: four rate increases that wreaked havoc on overvalued currencies and overstretched economies in the emerging world. An index of emerging-market equities compiled by MSCI fell by almost 17% over the year.

Emerging markets were therefore relieved by reassurances offered by Jerome Powell, the Fed’s chairman, on January 4th. He emphasised that American inflation remained “muted”, that the Fed will be “patient”, and that it will listen “sensitively” to...

Wall Street firms take aim at America’s stock-exchange oligopoly

Thu, 01/10/2019 - 15:51

Time for some old-fashioned customer service

ON JANUARY 7TH nine of America’s largest brokers and banks said they planned to launch a new equities exchange, dubbed the Members Exchange (MEMX). Though it has yet to gain approval from the Securities and Exchange Commission (SEC), the share prices of Intercontinental Exchange (ICE), Nasdaq and CBOE, the parent groups of America’s largest exchanges, fell by 2-3%. But MEMX is merely their latest reason to fret.

For more than a century stock exchanges were utilities: not-for-profit, self-regulated and owned by their broker members. Starting in the 1990s most became companies, often listed on their own exchanges. The New York Stock Exchange (NYSE) became publicly traded in 2006. Around the same time the SEC created the National Market System—rules designed to foster competition. Chief among these was Rule 611, the “order-protection rule”, which requires...

The fate of the dollar will shape financial markets in 2019

Wed, 01/09/2019 - 15:50

OVER THE holidays those who like their Christmas films free of seasonal cheer may have fixed on “The Lion in Winter”, with Peter O’Toole as Henry II and Katharine Hepburn as Eleanor, his estranged wife. Henry decides that none of his sons by Eleanor is a suitable heir and condemns them to death. Locked in a cellar as his father approaches, Richard resolves not to cower. “As if the way one falls down mattered,” mocks one of his brothers. “When the fall is all that is,” replies Richard, “it matters”.

Back at work, investors might usefully apply this aphorism to the fate of the dollar. In a volatile period for financial markets, it rose by 7% against a broad basket of currencies in 2018 and by 4% against a narrower group of rich-country currencies (see chart). One of the more robust principles of foreign-exchange trading is that what goes up must eventually come down. The dollar is over-valued on benchmarks, such as...

The outlook is dim for Americans without college degrees

Tue, 01/08/2019 - 17:15

AMERICA’S AGEING economic boom can still produce pleasant surprises. Companies added an astonishing 312,000 new jobs in December, the Bureau of Labour Statistics reported on January 4th, and raised pay at the fastest clip in years. For the third of working-age Americans without any college education, such spells of rapid income growth have been exceedingly rare, not only since the financial crisis but in the past half-century. But however long this expansion lasts, their economic prospects still look grim.

The misfortunes of the left-behind were a recurring topic at this year’s meeting, in Atlanta, of the American Economic Association, one of the biggest annual convocations of economists. David Autor of the Massachusetts Institute of Technology offered the most pointed characterisation, drawing on forthcoming research co-written with Juliette Fournier, also of MIT. The earnings of workers without a college education have scarcely risen in 50 years, after adjusting for inflation; for men they have fallen. This stagnation coincided with tectonic changes in American employment. The share of jobs that require either a lot of training, or very little, has grown since 1970. Much of the production and office work that requires moderate training, which once employed vast numbers of workers without college degrees, has disappeared,...

Amateur buyers of fine Burgundy fear a speculative bubble

Thu, 01/03/2019 - 16:31

EVERY YEAR Berry Bros & Rudd, Britain’s oldest wine merchant, issues a pocket-sized price list. Reading old copies makes amateurs of quality quaff want to time-travel. In 1909 a case of 12 bottles of Domaine de la Romanée-Conti 1891, Burgundy’s most famous Grand Cru, cost 180 shillings (about £1,000, or $1,300, in today’s money). In its historic London store, which opened in 1698, a single 18-year-old bottle of similar quality now sells for £25,000.

Fine wine is expensive to store, and its rarity and high transaction costs make it—oddly enough—an illiquid asset. Even so, its appreciation with age and perceived ability to diversify portfolios have made it popular with investors over the past two decades. The value of wine exchanged yearly between consumers, connoisseurs and collectors—the secondary market—has quadrupled to $4bn since 2000, says Justin Gibbs of Liv-ex, a wine-trading platform. He reckons that just...

The EU’s unbundling directive is reinforcing the power of scale

Thu, 01/03/2019 - 16:31

ANEW YEAR often begins with a headache. For asset managers and brokers, last year’s pain was intensified by the European Union’s revised Markets in Financial Instruments Directive (MiFID 2), which came into force on January 3rd 2018. Among other things MiFID 2 obliged fund managers (the “buy side”, in industry argot) to pay brokers (the “sell side”) separately for investment research, rather than receive it bundled with trading services.

Twelve months on, predictions that the directive would squeeze research spending and brokers’ revenues, and hasten market concentration, look broadly correct. In a report in November, consultants from McKinsey noted that sell-siders’ commissions from equity trading in Europe had fallen by 30% in a year. Recent signs of consolidation include the purchase by AllianceBernstein, a fund manager and research firm, of Autonomous Research, an independent analysis firm, and numerous takeover...

Investors’ appetite for transport infrastructure remains undiminished

Thu, 01/03/2019 - 16:31

STARTING ON December 19th, as Gatwick airport prepared to disclose a change of ownership, suspected drone sightings forced it to close its runway for a total of 36 hours. Passengers were delayed; so was the announcement. Only a week later could Britain’s second-busiest hub reveal it had been sold to Vinci, a French transport group, in a deal valuing it at £8.3bn ($10.5bn). The previous owners, including Global Infrastructure Partners (GIP), an American fund manager, will keep 49.99%.

The acquisition cements Vinci’s position as the world’s largest private airport-operator, with Gatwick the biggest of the 46 it runs. It is also a reminder of how fast the industry has been privatised: over 50% of European airports have some private participation, up from 22% in 2010. Nearly half of winning bidders since 2008 have been financial investors, according to Mergermarket, a research group. Returns have been juicy. GIP bought Gatwick for £1...

What the market turmoil means for 2019

Thu, 01/03/2019 - 10:18

AFTER A ROTTEN October and limp November, the S&P 500 tumbled in value by 15% between November 30th and December 24th. Despite an astonishing bounce of 5% the day after Christmas, the index finished the year 6% below where it started (see chart). The first trading day of 2019 extended the market wobble, with stocks closing down in Asia and gyrating in Europe. After markets closed in America, Apple warned that a sharp slowdown in China’s economy, and weak sales in other emerging markets, meant revenues in the fourth quarter would undershoot expectations by up to 10%. Coming a day after news that China’s manufacturing sector contracted in December, that spooked investors globally. S&P 500 futures dipped before Wall Street re-opened on January 3rd.


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...