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Updated: 2 hours 35 min ago

Why rising bond yields are playing on stockholders’ nerves

Thu, 10/18/2018 - 14:51

THE FIRST full-length film made by Steven Spielberg features an unusual lead. So indeed does much of his more celebrated work. But the star of “Duel”, his 1971 debut, is nothing as exotic as a man-eating shark or cloned velociraptor. It is a tailgating lorry. In a nerve-shredding journey across the California desert, it torments a middle-aged salesman driving a rickety Plymouth Valiant. That its driver is faceless adds to the air of malice.

For investors in equities, bond yields are the juggernaut that looms menacingly in the wing mirror. Twice this year—first in February and again earlier this month—a jump in Treasury yields was followed by a sell-off in stockmarkets. There is reason for the jitters. A long bull market, driven in part by low interest rates, has left shares in America richly priced. And with interest rates still on the rise, nerves are rattled about the level of stock prices.

That is as it should be. By...

A new form of cryptocurrency promises to defy financial gravity

Thu, 10/18/2018 - 14:51

TO GET AN idea of just how volatile cryptocurrencies are, compare them with the stockmarket. Bitcoin, the biggest one, moves as much against the dollar in a single day as the S&P 500 does in 23. For speculators, this is a feature. For anyone who wants to use these digital monies for payments, savings or lending, it is a bug. In other words, volatility is a big obstacle to cryptocurrencies becoming much more widely used.

Stablecoins are an attempt to overcome this hurdle: they are cryptocurrencies designed to hold a steady price. Their number has multiplied recently. At least 20 are now traded on crypto-exchanges and many more are in development. Despite their growing number, they still account for just 1.5% of the value of cryptocurrencies in circulation. But they are involved in a large share of all trading.

Investors use them to park assets when they do not want to hold volatile cryptocurrencies...

The fate of Italy’s banks is still tied to public debt

Thu, 10/18/2018 - 14:51

IN ITALY’S BUDGET drama, the action is shifting away from Rome. Last month its populist government said it would run a fiscal deficit of 2.4% of GDP in 2019—wider than euro-zone rules permit, and than markets had expected. Cue a sharp rise in borrowing costs, to more than three percentage points above those in Germany (see chart). On October 15th it submitted its plans to the European Commission. With Brussels likely to raise objections to the budget, this spread could rise further still.

Fears about the sustainability of Italy’s huge public-debt burden have also infected its financial sector. Lenders’ share prices have fallen by 14% since the government unveiled its plans. Compared with Germany or Spain, a relatively low share of public debt—a third—is held by flighty foreigners. But that leaves the financial sector more exposed. So far banks’ improved liquidity and capital positions have cushioned the impact of sovereign-debt woes....

How to plug budget holes by managing public wealth better

Thu, 10/18/2018 - 14:51

PROPONENTS OF sovereign-wealth funds like to say that returns from publicly owned assets could in theory displace taxes. In countries that have not struck oil, however, the chance of politicians building up savings rather than running up debt seems remote. Yet states may not need to save in order to enable at least some tax-free spending. Most already have plenty of assets. The problem is that they do not sweat them hard enough.

Most public wealth falls into one of four categories: land and natural resources; property and infrastructure, such as ports and roads; public firms, such as utilities and state-owned airlines; and financial assets like those held by public pension funds. In estimates covering 31 economies released on October 10th, the IMF put the total stash at $101trn, or 219% of GDP.

The Fund’s estimates of governments’ assets and liabilities cast their fiscal health in a new light (see chart). Several...

Repair is as important as innovation

Thu, 10/18/2018 - 14:51

IN 1533 A noblewoman in Calais presented a visiting grandee with a peculiar gift: her personal toothpick, which, she was eager to point out, she had used for seven years. Whether it pleased her guest is not known, according to Hazel Forsyth, a curator at the Museum of London. But the story amused Ms Forsyth’s audience at last month’s “Festival of Maintenance”, a conference dedicated to keeping things in good nick.

Events about making new things are ten a penny. Less common are events about keeping things as good as new. Maintenance lacks the glamour of innovation. It is mostly noticed in its absence—the tear in a shirt, the mould on a ceiling, the spluttering of an engine. Not long ago David Edgerton of Imperial College London, who also spoke at the festival, drove across the bridge in Genoa that collapsed in August, killing 43 people (pictured). “We’re encouraged to pride ourselves on all being innovators and...

A debate about central-bank independence is overdue

Thu, 10/18/2018 - 14:51

THE FEDERAL RESERVE has heard worse. But when the president complains that it has gone “crazy” by tightening monetary policy, as Donald Trump did on October 10th, Americans fret that another norm is about to be overturned. An independent central bank is considered a pillar of a modern economy; presidents are supposed to mutter any criticisms they might have in private. But is that really for the best? Although Mr Trump’s complaints were not intended to start a high-minded debate, one is overdue.

Operational independence for central banks is relatively new. The principle grew out of work in the late 1970s and early 1980s by prominent economists working in the “rational expectations” school of economic thought, among them Finn Kydland and Edward Prescott, who were eventually awarded the Nobel prize. They considered the implications of people’s ability to look into the future and to anticipate the behaviour of self-interested...

CYBG buys Virgin Money

Thu, 10/18/2018 - 14:51

A HANDFUL OF lenders dominate British banking. Just four hold 70% of Britons’ main current (checking) accounts. Undaunted—and encouraged by financial supervisors and competition watchdogs—a platoon of challengers is nonetheless taking on the giants, on the high street and online. On October 15th one of them, CYBG, established itself as the leader of that pack, by completing its takeover of another, Virgin Money, for £1.7bn ($2.2bn).

With £84bn in assets and £59bn in deposits, CYBG is still dwarfed by the heavyweights of British banking (see chart). But the deal spreads its reach southward, adding Virgin’s 70-odd branches to those of Clydesdale, a 180-year-old Scottish bank, and Yorkshire Bank, founded in 1859. (Eventually all will bear the supposedly trendier Virgin name.) CYBG also expects to save £120m in annual operating costs by 2021. And it is taking pains to avoid the computing pitfalls that befell a rival, TSB...

A court ruling knocks another hole in Swiss banking secrecy

Tue, 10/16/2018 - 15:40

Too many yodels, not enough whistles

DURING HIS decade-long legal battle with the Swiss authorities, Rudolf Elmer, a bank whistleblower, has endured 48 prosecutorial interrogations, spent six months in solitary confinement and faced 70 court rulings. None, though, has been more important than the decision by Switzerland’s supreme court on October 10th, which set strict limits on the country’s famous bank-secrecy laws.

Mr Elmer had leaked data from Julius Bär after being sacked by the Cayman Islands affiliate of the Zurich-based bank. The court, dismissing an appeal by prosecutors, ruled that because he was employed by the Cayman outfit, not its parent, he was not bound by Swiss secrecy law when he handed data to WikiLeaks in 2008. The 3-2 ruling followed a rare public debate among the judges, held in only 0.3% of supreme-court cases, underlining the national importance of the issue....

People are including pets in their financial plans

Thu, 10/11/2018 - 14:49

Well looked after

ONE of Dianne Burns’ most important retirement plans involved a dapple-grey horse named Scout. The former forensic scientist had dreamed of riding once she stopped work. So it was a happy coincidence when she discovered that her financial planner—who advises clients on California’s central coast—loved horses, too. Thanks to precise financial modelling and strict budgeting, Ms Burns managed to set aside $20,000 for a pickup truck and $10,000 to buy Scout in 2016. Ms Burns says she plans to sell some shares next year so that she can buy her horse a trailer—though she hopes not to draw down her savings too much.

Ms Burns joins a growing number of people who are including their pets in their financial plans. Two-thirds of all horse-owners in America have made some provision in their wills for their pets, according to a survey by the American Pet Products Association. Over a third of American pet-owners say they would pay for animal-related expenses by...

Short-sellers are good for markets

Thu, 10/11/2018 - 14:49

Elon’s not a shorts man

IT IS a stressful time to be an investor in Tesla. On September 29th shares in the electric-car manufacturer soared by 17% after its boss, Elon Musk, settled fraud charges with America’s Securities and Exchange Commission (SEC). Just days later, on October 4th, a series of belligerent tweets by the firm’s outspoken founder sent shares tumbling by more than 7%.

The tweets in question, like many of Mr Musk’s market-moving social-media posts, were targeted at short-sellers, who aim to make money by selling borrowed shares and buying them back later at a lower price. With a quarter of its publicly traded shares lent out to facilitate short-sellers’ bets, Tesla is one of the most heavily shorted companies in America. Mr Musk has publicly feuded with short-sellers for years, calling them “haters”, “jerks” and “not supersmart”. Research suggests that such insults are undeserved. Short-sellers are savvy investors who help to keep the market’s...

When does the case for long-term investment make sense?

Thu, 10/11/2018 - 14:49

ONE LUNCHTIME around 1960 a professor proposed a wager to a colleague. Flip a coin and call “heads” or “tails”. If you call right, you win $200. If you call wrong, you pay $100. This is a favourable bet for anyone who would take it. Even so, his colleague refused. He would feel the loss of $100 more than the gain of $200. But he would be happy, he said, to take 100 such bets.

The professor who offered the bet, Paul Samuelson, understood why it might be refused. A person’s capacity for risk could no more be changed than his nose, he once said. But he was irked by his colleague’s willingness to take 100 such wagers. Yes, the likelihood of losing money after that many tosses of the coin is vanishingly small. But someone who takes very many bets is also exposed to a small chance of far bigger loss. A lot of bets, reasoned Samuelson, were no safer than a single bet.

This lunchtime wager was of more than academic interest. It drew the battle lines in a debate on the merits of long-...

Which countries are raising the most productive humans?

Thu, 10/11/2018 - 14:49

DESPITE their dour reputation, economists frequently play with metaphor and simile, just like literary folk. One familiar example is “human capital”, as Deirdre McCloskey of the University of Illinois has pointed out. Economists have been likening knowledge, skill and stamina to physical capital, such as plant and equipment, since Adam Smith, who counted “the acquired and useful abilities” of a country’s people as one of several kinds of fixed capital, alongside “useful machines” and “profitable buildings”.

But unlike poets, economists prefer to quantify their analogies—to measure whether thou art 15% or 20% more lovely and more temperate. In that spirit, the World Bank this week unveiled a new measure of human capital for 157 countries. Its index combines five indicators of health and education (including the chances of dying before the age of five and between the ages of 15 to 60, the chances of stunted growth, the years of education an average child will complete by age 18, and...

Paul Romer and William Nordhaus win the economics Nobel

Thu, 10/11/2018 - 14:49

WHY do economies grow, and why might growth outstrip the natural world’s capacity to sustain it? There are few more important questions in economics. The answers require a working grasp of the mechanisms underlying growth. For the progress that the profession has made towards that understanding, it owes a particular debt to Paul Romer and William Nordhaus, this year’s winners of the Nobel prize in economic sciences.

Although both scholars have long been talked of as potential winners, they are not an obvious pairing for the prize. Mr Romer tends to be described as a growth theorist; Mr Nordhaus’s work is in the field of environmental economics. The Sveriges Riksbank, which awards the economics Nobel, found a common thread in their work incorporating two crucial processes—knowledge creation and climate change, respectively—into models of economic growth. But what most links their work is that they have improved the way the profession thinks about impossibly complex systems, while also revealing...

Britain’s war on dirty money lacks oomph

Thu, 10/11/2018 - 10:18

WHEN Bill Browder investigated a $230m fraud perpetrated by Russian officials against his investment company, Hermitage, he uncovered a money trail that led to several financial centres, including London. At least $30m of the stolen money flowed into British banks. Much was moved through British shell companies with British nominee directors, one of which was set up by a corporate-registration firm based near Mr Browder’s London office. The loot flowed on to, among others, British interior-design firms, estate agents and a personal concierge service.

No one knows how much dirty money is rinsed through London, but Britain’s National Crime Agency (NCA) reckons British banks and their subsidiaries (including those in overseas territories) launder “many hundreds of billions of pounds” each year. British companies and partnerships were prominent among the getaway vehicles used in some of the biggest money-laundering schemes of recent years, including the “Russian laundromat”, in which at least $20bn...

China inches towards stimulus as the economy slows

Thu, 10/11/2018 - 09:48

WHEN Wang Xianchen, a Chinese official in the early 1500s, tired of the scheming of imperial politics, he returned to his home in the southern city of Suzhou for a simpler life. He planted gnarled trees and built up rocky islets, creating what he called the “Humble Administrator’s Garden”, a fine place for tranquil contemplation. His garden remains stunning. But its tranquillity is long gone. During the first week of October, China’s National Day holiday, some 30,000 people walked over its stone arch bridges every day, with queues to get in stretching around the block. They were among the 726m visitors to domestic tourist sites during the week, a record and a rise of 9% on last year’s figure. China’s present-day administrators, less humble, touted this as proof of the economy’s resilience despite a growing catalogue of concerns.

The backdrop certainly looks ominous. The trade war with America is heating up. In a speech on October 4th, Mike Pence, the vice-president, accused China of...

The world economy looks dependent on booming America

Thu, 10/11/2018 - 09:48

IT HAS been a nervy few days for financial markets. A sell-off in bond markets, prompted by monetary tightening in America, this week infected global stockmarkets, too. The S&P 500 share-price index fell by over 3% on October 10th, its worst day in eight months. Markets in Shanghai hit their lowest level for nearly four years the next day; those in Japan and Hong Kong closed around 3.5% lower.

At first glance, the sell-off seems odd. The world economy is still growing briskly enough: this week the IMF only slightly trimmed its forecast for world GDP growth for 2018, from 3.9% to 3.7%. But investors are right to fret. Whereas acceleration was synchronised across much of the world in 2017, the global economy’s expansion now looks increasingly unbalanced.

Two divides stand out. The first is between emerging markets, which are suffering from particularly volatile financial conditions, and advanced economies. The cause of this divergence is a strong dollar, which is making...

A bail-out for IL&FS raises wider worries about non-bank lenders

Thu, 10/04/2018 - 14:43

CAN a big financial firm’s credit rating fall from AAA one month—good enough for pension funds and life insurers—to junk the next without causing a crash? India’s government decided it did not want to find out. Last week it granted Infrastructure Leasing and Financial Services (IL&FS), one of India’s biggest shadow banks, a parachute. Plenty are worrying that it will not be enough.

As recently as early September, IL&FS raised few concerns. A couple of weeks later it had defaulted on several payments to creditors. By the end of the month it had said it would raise 45bn rupees ($630m) of fresh capital through a rights issue from its owners, including the Life Insurance Corporation of India, a state-owned insurer. On October 1st the government forced out the board and appointed a new one. It was, in effect, a shadow-bank bail-out.

IL&FS is a very Indian beast. It was founded in 1987, with the support of state-owned banks, to provide finance to local governments for infrastructure. It has grown into a vast conglomerate, with 169 group companies. It finances, builds and runs everything from toll roads to “smart cities”, not just in India but abroad. Though it is private, the projects it runs, and the roughly 40% of its equity that is owned by nationalised firms, make it what Indian analysts call “quasi-sovereign”. If it went bust, projects...

Economists care about where they publish—to the cost of the profession

Thu, 10/04/2018 - 14:43

LIKE most academics, economists are obsessed with how many research papers they produce, and where they are published. A new paper by James Heckman and Sidharth Moktan from the University of Chicago shows why—and why that might not be good for the profession.

The authors analyse the career paths and publication records of researchers at 35 highly regarded economics departments in America. They consider the impact on tenure decisions of publications in different journals, assuming that they are cited the same number of times. Young academics who had three papers published in what are universally regarded as the top five journals were nearly five times as likely to gain tenure in a given year as those with papers in less prestigious journals. A single publication in the top five nearly doubles the chance. The impact of a top-five publication is weaker for women, which means they need more publications for the same outcome—though the authors warn that their sample includes only a few women, and...

Loopholes allow some pensioners in the EU to retire tax-free

Thu, 10/04/2018 - 14:43

Tax-free? I don’t believe it!

WHEN the financial crisis hammered Portugal’s economy, hundreds of thousands of its people left, taking advantage of the European Union’s rules on free movement to find work in countries that were hit less hard. Now Portugal is welcoming older people going in the other direction, not for jobs but for a warm, cheap retirement. Well-off baby-boomers are flocking to Lisbon, Sintra and the Algarve, drawn in part by Portugal’s tax exemptions on foreign income. Under its non-habitual-residency scheme, pensions from abroad can be drawn tax-free for a decade.

Bilateral double-taxation agreements are intended to ensure that income does not end up being taxed twice. But some countries, seeking to boost domestic demand by luring wealthy immigrants, have arranged matters so that they can avoid paying any tax on income earned outside their country of residence, such as pensions, capital gains and rent. To qualify, foreign pensioners who move to...

Bought and paid for

Thu, 10/04/2018 - 14:43

IT HAPPENS often enough that it scarcely elicits comment. After an election, some politicians leave government—only to reappear on the payrolls or boards of large companies. Such firms argue that they need to understand the political process and to engage in lobbying so they can extract themselves from a tangle of red tape. Tech giants, in particular, see themselves as champions of innovation and productivity within economies that have too little of either. But precisely because the biggest firms are increasingly dominant and profitable, the connections between the corporate and political worlds merit close scrutiny.

That such connections exist is not necessarily a problem. Firms that use political influence to obtain relief from stifling rules may thereby contribute to growth. Uber’s ride-hailing services often flouted the spirit, and occasionally the letter, of rules governing the hired-car business. To shield itself from legal action, it required influence. To build that influence, it hired...