Don’t cheer a devaluation

THE pound has dropped to its lowest level against the dollar since March 2009, on fears that the support of Boris Johnson, London’s mayor, for the leave campaign has made Brexit more likely. While Mr Johnson’s economic adviser, Gerard Lyons, manfully suggested on BBC Radio 4’s The World at One that the decline was little to do with Brexit, the facts are against him. The pound fell against all major currencies and there were no economic data to drive the change; it has weakened in the past on polls indicating Brexit is more likely. British assets are less attractive to international investors because of the possibility of Brexit; those investors may be wrong in their view, but it is clearly their opinion. 

So what, advocates of Brexit might ask. A falling pound is good for exporters. It can be, although it also drives up the cost of imports; a big fall in the pound is 2008-09 did not eliminate the trade deficit. The key point, however, is that...Continue reading

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A hard pounding

CATERPILLAR is one of the most renowned industrial brands. It makes the kind of heavy machinery—loaders, excavators and off-road trucks—that is used in the construction, mining and transport industries when things need to get dug out or shifted somewhere. But the firm’s latest results, released on January 28th, show that it is struggling to shift its own products. “This past year was a difficult one for many of the industries and customers we serve,” it said. Revenues in 2015 were nearly 15% lower than they were in 2014, and 29% below the 2012 peak.

The company’s woes are emblematic of the problems facing manufacturers worldwide. Although manufacturing is a much smaller part of most developed economies than services—just 12% of output in America, for example—its recent weakness makes many economists nervous about the wider outlook.

Recent data point to the size of the problem. Big jobs cuts have been announced this year by GE, Tata Steel and Bombardier. In December industrial production fell by 0.7% in Italy, 1.1% in Britain, 1.2% in Germany and 1.6% in France. In China both the official purchasing managers’ index (PMI) of...Continue reading

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Smooth operators

HOW important is America’s ondemand economy? Some worry that the likes of Uber, a car-hailing app, and Etsy, which helps workers to sell arts-and-crafts, are destroying traditional employment and with it pensions and health-care benefits. Others hail the flexible hours, low prices and convenience such apps facilitate. Until now not many data have informed this debate. Official statistics track things like part-time working, self-employment and working from home, but the app economy is too small to move those needles. In fact, most indicators suggest it is boring traditional work, rather than app-enabled odd-jobbing, that is on the rise.

A new report plugs the gap. Researchers from the JPMorgan Chase Institute, a think-tank attached to the bank, studied the incomes of 1m of their customers with active current accounts of three years. They found that, in September 2015, 1% of them earned income through an (identifiable) on-demand platform. Of these, just over half used “capital” platforms, such as Airbnb, to lease stuff they own. The rest—about 0.4%—used labour platforms like Uber. Though small, the supply of ondemand labour and capital has grown...Continue reading

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Not dead, just resting

IN 1990 hedge funds were still rare birds; 500-odd funds managed around $40 billion, mostly for rich individuals. Few people understood what they did or bothered to find out. By the end of 2015, the sector had mushroomed to include nearly 9,000 funds managing roughly $3 trillion. Along with private equity, the industry was classed as an “alternative asset”, attractive to pension funds and endowments. But a recent wave of fund closures, and the expectation that more will follow, suggest the industry’s era of stratospheric growth may be in the past.

On the surface, fund closures are the norm in a cut-throat industry: every year hundreds of fund managers call it quits, only to be replaced by yet more would-be masters of the universe. But the gap between closures and launches is narrowing (see chart). In the first nine months of last year 785 new funds were launched and 674 were closed, according to Hedge Fund Research (HFR), compared with figures of 814 and 661 over the same period in 2014. In 2016, for the first time since the worst of the financial crisis, there may be more closures than launches, says Amy Bensted of Preqin, a data...Continue reading

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The lowdown

FINANCIAL markets may be drawing breath after their recent falls, but one industry in particular has little reason to feel calm. The life-insurance industry has deeper problems than just temperamental markets. Years of doling out goodies from a seemingly bottomless sack are now catching up with these actuarial Santa Clauses, who in their worst nightmares did not imagine that the interest income from their investment portfolios could stay so low for so long.

Insurers tend to be prudent investors who like steady returns, which is why around 80% of their assets are in fixed-income securities. This served them well during the financial crisis, but today—with bond yields at historic lows, and even in negative territory—it hurts their investment income. This is particularly true for life insurers, which own over $21 trillion of the industry’s $28 trillion assets, and rely heavily on this investment income to pay policyholders.

European insurers are especially exposed. Over two-thirds of life-insurance policies in force in the EU today offer some sort of guarantee. More than half of these policies have promised a higher income to policyholders than insurers can currently earn on newly-issued bonds, according to the European Insurance and Occupational Pensions Authority, a regulator.

To make matters worse, many of these life insurers have a mismatch...Continue reading

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Nope to NIRP

Kuroda corrodes the banks

UNTIL this month bond traders were the most voluble complainers about the Bank of Japan’s vast programme of quantitative easing (creating money to buy bonds). The central bank’s interventions had slashed trading volumes in their market. But their gripes had a tiny audience and, understandably, received scant sympathy. Things have changed with the central bank’s new negative interest-rate policy (NIRP), which went into effect on February 16th. It has pummelled banks and spooked Mrs Watanabe, the archetypal Japanese saver. Fans of the new policy are hard to find.

For around two trading days after the BoJ announced on January 29th that some bank reserves would be charged -0.1%, financial markets responded as intended—the yen weakened and the Nikkei 225 share index rose. Then, with the European Central Bank hinting at an extension of its own negative-rate policy, investors sought safety in the yen, which rose sharply. In turn that dragged down the stockmarket, since Japan’s exporting giants may earn less if their competitive position is eroded.

Even after a rally on February 15th,...Continue reading

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Liquid leak

ECONOMISTS have been a bit puzzled by the market turmoil of early 2016. It seems to be driven, in part at least, by fears of either an American recession, or a sharp Chinese slowdown, neither of which looks likely from the data. Perhaps the answer to the conundrum is that market movements are not being driven solely by fundamentals but by recent developments in market liquidity.

Central banks’ support for markets, via quantitative-easing (QE) programmes, is well known. Emerging-market central banks have also been big buyers of government bonds as they have built up their foreign-exchange reserves. But the Federal Reserve stopped its QE programme in 2014 and, in recent months, Chinese foreign-exchange reserves have fallen by around $700 billion. This means the Chinese authorities are net sellers, rather than buyers, of financial assets. Low oil prices mean that sovereign-wealth funds in oil-producing countries may also be selling assets.

CrossBorder Capital, a research firm, says that the combined balance-sheets of the Federal Reserve and the People’s Bank of China were growing at more than 10% a year for much of the past...Continue reading

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Another Doha merry-go-round

QATAR’S capital is an inauspicious place for dealmaking. The Doha round of world-trade talks meandered on for almost 15 years. An agreement there on February 16th between Saudi Arabia and Russia, two of the world’s biggest oil producers, to freeze production at January levels if others join in, may presage a similarly never-ending saga to shore up oil prices.

That seemed the likely outcome when, on February 17th, Iran’s petroleum minister, Bijan Zanganeh, emerged from a meeting with his Iraqi, Qatari and Venezuelan counterparts in Tehran saying that Iran supported the freeze, but without indicating whether it would take part. Oil prices climbed afterwards, but unless Iran participates fully, a production freeze is likely to be a non-starter. After years of sanctions it, more than anyone, has an incentive to wrest back market share from countries that cap their output (see chart).

Oil-market bulls say that any sort of discussion about a freeze is a positive surprise. It comes despite tensions between Saudi Arabia and Russia over Russian military intervention in Syria. It coincides with production cuts in America’s...Continue reading

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Rally, rally, rally. But for how long?

STOCKMARKETS are fickle beasts, particularly in a world of short-term trading philosophies. Those who have gone short (bet on a falling price) may decide to take profits; prices may fall to levels that seem attractive; news may emerge that changes sentiment. Ever since my last post, the mood seems to have changed; the S&P 500 has rebounded 5.3% and London's FTSE 100 climbed briefly back above 6,000 (it is back below that level at the time of writing).

Short-covering and bargain-hunting probably played their part. The latest Bank of America Merrill Lynch survey of fund managers, a useful contrarian signal, showed they had average cash levels of 5.6%, their highest since 2001.  A preponderance of managers expected profits to fall, and world growth to slow, over the coming 12 months. In other words, the bad news was priced in. 

As for fundamental factors, a few may have been at play. China reassured the markets that it was not planning a big devaluation;...Continue reading

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Some ways in which the Chinese economy might evolve

THIS week began with the release of a staggering number. In January, new debt issued in China rose to just over $500 billion, an all-time high. Not all of the "new" debt was actually new; some represented a move out of foreign-currency loans and into local-currency borrowing (in order to reduce foreign-currency risk). But the flow of red ink is not a mirage. China's government opened the credit taps early in 2016 in order to reduce the odds of a sharp economic slowdown. Private borrowing in China has grown rapidly and steadily since 2008, even as nominal output growth has slowed. As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP. China is rapidly becoming one of the most indebted countries in the world.

So what? There is a cottage industry of analysts out there gaming out the ways in which a crisis of some sort might unfold within China. But with debts of this magnitude accumulating, you don't need to posit a looming crisis to draw some reasonably strong, and reasonably gloomy conclusions about the near-term future of the Chinese economy—and the world as a...Continue reading

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Do millennials save?

IN RECENT days there have been a few articles bemoaning the woeful finances of Britain's millennials. For instance, this piece in the FT talks about why millennials (supposedly) go on holiday instead of saving for a pension. Then this article, called "Generation spent", makes a similar sort of argument. As the FT article puts it, "the concept of saving seems so futile, they [millennials] spend freely, insisting on a #yolo lifestyle (translation for oldies—you only live once) despite their restricted means."

There is no doubt that Britain's youngsters have seen better days. A recent report from the Institute for Fiscal Studies found that "younger cohorts are on course to have less wealth at each point in life than earlier generations did at the same age." Another recent IFS report found that for employees aged 60 and older, median real hourly pay in 2014 was back to its 2008 level, but for those aged 22-29 it was still 9% lower than in 2008.

However, I'm not sure if this means that young people's attitudes to money become quite as fatalistic as many articles suggest (the "I'll never be able to afford a house so I may as well blow everything on a...Continue reading

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Clutching at straws

This week we discuss whether policy-makers are out of ammunition to fight global financial jitters, pondering efforts to prop up oil prices and signs that central banks will ease monetary policy further

 

How much has the IMF really given to Ukraine?

ARSENIY YATSENYUK, Ukraine's prime minister, has survived a no-confidence vote in parliament. But Ukraine's political turmoil looks set to continue. This may mean that the IMF, which is keeping the government from bankruptcy through a series of loans, may delay disbursing more money or pull out altogether. The truth, though, is that the IMF's support for Ukraine was never as significant as many think.

In April 2014 Ukraine agreed a $17 billion bail-out with the IMF. Then in March 2015 Ukraine agreed a new, $17.5 billion dollar bail-out. You would be forgiven for thinking that in the last two years the IMF had disbursed $35-odd billion to Ukraine.

In reality, as it does to other countries, the IMF drip-feeds money; it does this in order to ensure that the conditionalities it sets down in the bail-out agreements are being followed.

Ukraine, particularly the finance ministry, is meeting some of these targets. It is embarking on a severe austerity programme (for which the hapless Mr Yatsenyuk is taking much of the criticism)....Continue reading

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Discomforting brew

WHEN governments bailed out banks during the financial crisis, they tended to insist that shareholders suffer big losses. Most bondholders, however, got off scot-free. In theory, bondholders should have lost money too—but working out just how bankrupt the banks were, apportioning the losses and risking contagion among bondholders elsewhere seemed too risky to contemplate as the financial system was seizing up.

Regulators have since pushed banks to fund their activities with less debt and more loss-absorbing capital. The simplest form of capital is equity—the money raised by selling shares or retaining profits. But trimming dividends or increasing the number of shares reduces the value of the existing ones. So bankers and regulators dreamt up a new financial instrument that would act like debt, thus sparing shareholders dilution, unless capital was urgently needed. These instruments are called contingent convertible bonds, or “cocos”, also known as additional Tier-1 securities. In exchange for annual interest of around 6-7%, investors take on the risk that, if the going gets tough, the bank may suspend interest payments, convert the...Continue reading

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A tempest of fear

Taxing times

If only the budget were as finely balanced

SRI LANKA ought to be sitting pretty. Its growth has averaged 6% a year over the past decade. Seven years after a protracted civil war ended, its economy is still reaping a peace dividend. It is also a beneficiary of the collapse in commodity prices, which has trimmed its hefty bill for imports of fuel. Yet last week, after long debate, its leaders requested a loan from the IMF.

If so much is so rosy, why is Sri Lanka going cap in hand to the IMF? The immediate concern is the capital flight that has buffeted emerging markets around the world. Although Sri Lanka’s current-account deficit had been declining steadily over the past few years, the country suffered big capital outflows last year as foreign investors sold down their holdings of government bonds.

The central bank fought against the tide for a while, using up some $2 billion, or more than a fifth, of its foreign-exchange reserves to defend the rupee. After it relented in September, the currency fell to a record low against the dollar and has since weakened further. To hear it from Ravi Karunanayake, Sri Lanka’s...Continue reading

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Girl power

LABOUR markets are hotbeds of inequality. For every dollar a white American man in full-time work earns, the average white woman earns 78 cents and the average Latina only 56 cents. Marriage is a boon for male earnings; motherhood drags female earnings down. Likewise, gay men earn about 5% less than heterosexual ones in Britain and France, and 12-16% less in Canada and America, even after controlling for things like education, skills and experience. Yet one minority appears immune to this scourge: lesbians.

Marieka Klawitter of the University of Washington looked at 29 studies on wages and sexual orientation last year.* On average, they found a 9% earnings premium for lesbians over heterosexual women, compared with a penalty of 11% for gay men relative to straight men. This discrepancy has been borne out by research on America, Britain, Canada, Germany and the Netherlands. Even after adjusting for the fact that lesbians are on average more...Continue reading

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Slaves of the markets

CENTRAL banks are supposed to target inflation and in some cases, economic growth or full employment. As the “lender of last resort”, they also have responsibility for safeguarding the financial system. But do they in fact target asset prices as well?

That has been the suspicion from the late 1980s onwards, when the Federal Reserve began cutting interest rates when equity markets wobbled. This approach became known as the “Greenspan put” (Alan Greenspan was the chairman of the Fed from 1987 to 2006, and the put option is a form of insurance against falling prices). The implicit guarantee from central banks became a bit more explicit in the era of quantitative easing (QE)—the creation of new money to buy assets. Central banks hoped that QE would have a “portfolio rebalancing effect”, with investors being forced out of low-yielding government bonds and into corporate debt and equities.

However, the relationship between market movements and central banks may have an even longer history. That is the implication of new research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School for the...Continue reading

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Optimising romance

DATING is a treacherous business. There may be plenty of fish in the sea, yet many are unhygienic, self-absorbed, disconcertingly attached to ex-fish, or fans of Donald Trump. Digital dating sites, including a growing array of matchmaking apps, are meant to help. Their design owes more to hard-nosed economics than it does to the mysteries of the heart.

In a sense, searching for a mate is not so different from hunting for a job. Jobs, like prospective partners, have their strengths and weaknesses, which makes finding the right one a matter of complicated trade-offs. Such exchanges are different from other transactions, in that both parties must be enthusiastic about the match for it to happen. A supermarket, in contrast, does not particularly care whose wallet it is draining, nor does the power company agonise about whether a customer is worthy of its watts.

Alvin Roth, who won a Nobel prize in economics for his work on market design, made a career of studying such “matching markets”, where supply and demand are not balanced by price. Instead, people transact based on information. An apple-seller can nudge down his prices until the whole...Continue reading

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A hedge against ignorance

Fuelled by economic uncertainty

THE Valentine Day’s special at Sharps Pixley, London’s first high-street bullion showroom, is a £115 ($166) rose dipped in gold. But what that special someone would really want is the £27,000 “kilobar”, smaller than a slab of chocolate but reassuringly weighty in this time of turmoil in financial markets. Both have sold well since the shop opened last month, says Ross Norman, the boss. Yet he is struck by how “apologetic” his British clients are about buying gold. It suggests many are novices, gingerly placing their first bets against the global economy.

They are not alone. From libertarians in America to Indian housewives, gold’s fans have helped push spot prices up sharply this year, defying the rout in global commodity markets (although gold also defied the prior boom in commodities—see chart). In early trading on February 11th gold surged above $1,200 an ounce, its highest level in more than eight months, amid a big sell-off in global stockmarkets. Mr Norman notes that January rallies in the past two years quickly petered out, partly for seasonal reasons: retail buying in the...Continue reading

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