Tag: Buttonwood’s notebook

IT IS an enormous privilege, and responsibility, to write for The Economist and capture a small sliver of readers’ attention. All told, there have been well over a thousand posts on this blog (the site history runs for 98 pages) as well as 546 print columns (the last will appear at the end of the week). The first post, back in February 2009, was written in the depths of the crisis and “was looking for signs of hope, although without any confidence it can call the bottom exactly.” In fact, the market bottom occurred only a few weeks later. There have been a few wobbles along the way but that bull run is still going. The irony would be that, just as the start of this blog heralded the upswing, the last post might signal the demise of the great bull market.

This blogger has been a bit gloomy during his tenure, too gloomy as it turns out. So as well as three signs of danger, I wanted to close with three signs of optimism. First, the…Continue reading

BUSINESS school graduates do not all want to work in investment banking these days. The industry does not have the same kind of cachet it did before Lehman Brothers went bust. Still, 31% of those who left Harvard Business School last year went into financial services. That made it easily the most popular sector, as it has been in each of the lprevious four years. And it is hardly surprising; in London, for example, the average pay for a finance worker is around £72,000 – twice the level earned by other workers in the UK capital.

But is this high pay justified? The finance sector has four key functions. The first is to operate the payments system, without which the economy could not function. The second is to channel money from savers to those who need capital either through the banking system or through pooled savings vehicles like mutual funds. Third, it provides liquidity to the system by making markets, and thus establishing prices for financial assets. Fourth, it…Continue reading

IF YOU reach the age of 65 in the OECD, you can expect to live for another 19 years  or so (more if you are a woman, less if you are a man). If you stop work earlier than 65, and live a bit longer than average, you could easily be retired for 25-30 years, almost as long as you were in work. But people find it very hard to get interested in pensions, even though their financial future depends on them; retirement is too distant a prospect and the issue seems too complicated.

This blog has written a lot on the subject so it is time to summon some farewell thoughts. The executive summary: pensions are more expensive to fund, employers are less willing to do so, so you will need to save more (a lot more) and/or retire later. 

All pensions are paid for by the next generation. This may seem counter-intuitive; aren’t we contributing money every month? State pensions are paid for by current taxpayers (yes, there is a US Social Security…Continue reading

THE late Hans Rosling is best known for his Ted talks (here is one on the wonders of the washing machine). Sadly he died last year but before he did so, he worked with his son and daughter-in-law to write «Factfulness: Ten Reasons Why We’re Wrong About the World – And Why Things Are Better Than You Think.» It is a wonderful book, full of humour and humility, and it paints an optimistic picture of progress.

Take his 13 question test and you will probably be surprised. For example, has the proportion of people in the world living in extreme poverty over the last 20 years almost doubled, stayed the same, or almost halved? Over the last 100 years, has the number of deaths per year from natural disasters more than doubled, stayed the same or more than halved? In both cases, the answer is the most optimistic one; the latter statistic is particularly remarkable given the increase in the size of the population over the last century. 

Perhaps because the…Continue reading

SIR ELTON JOHN has a three-year farewell tour planned. This columnist has only a few weeks to go, before heading off to a new Economist beat. So it seems like a good idea to summarise some of the themes which have dominated this blog. 

To start, long-term investing. Here are a set of precepts every investor should remember.

1. You can’t start too early. Albert Einstein may not have said that compound interest is the eighth wonder of the world but it is a good motto to remember. Buttonwood started a pension plan for his daughters when they were three years old. Let us assume a return of 4% a year. That means a sum doubles in 18 years, quadruples in 36 and rises eightfold in 54. Looked at another way, say you have a set sum in mind for retirement. If you start saving at 20, you need to contribute only half as much money a month, as if you start…Continue reading
   

THE impact of technology on the economy is one of the most-debated issues of the moment, whether it is the potential for automation to cause unemployment, boost long-term productivity, or widen inequality. A good deal of the annual Barclays Equity-Gilt Study, published yesterday, was devoted to the subject. But one section caught my eye; the idea that technological change was making GDP a less useful measure.

The report says that

When GDP was first introduced, manufacturing accounted for a large share of the core advanced economies, and the (system of national accounts) was designed primarily to measure physical production.

But the modern economy is dominated by services and

Services cover a wide range of activities and are often customised, making their basic unit of production, as well as differences in quality and changes over time, hard to define

Furthermore, the report points out that

Digitised goods or services are often free: and without an…Continue reading

JEREMY Grantham is an investor with 50 years of experience in the markets who is known for his caution about the outlook for long-term returns (he works for the GMO fund management group). But he caused a stir earlier this year when he said the chances were high of a melt-up in the markets this year. 

Buttonwood caught up with him when he visited London this week and asked whether the recent volatility had changed his view. He does think that the odds of a melt-up have fallen. The acceleration stage of a bull market, as in 1928 and 1999, tends to be smooth and quick. The trade tensions evoked by President Trump could be very damaging. He thinks that it is likely that, in five years, the American market may be 20% lower but this will not necessarily be via a sharp crash but through a series of advances and retreats. 

The reason that the market has been doing well until now is the combination of low inflation and high profits; that…Continue reading

AMERICAN private-sector workers face a problem. Too few of them have private-sector pensions, and the government scheme, Social Security, set up by Franklin Roosevelt (pictured) is less generous than it used to be. One study estimated that 20m elderly Americans will be living in poverty or near-poverty by 2035.

A new book* by Theresa Ghilarducci and Tony James has a plan to deal with the problem. It comes complete with a foreword and endorsement by Timothy Geithner, a former treasury secretary who had to battle the financial crisis.

The authors set out the problem in admirably clear fashion. Some 64% of women and 56% of men claim Social Security earlier than the official retirement age (which is rising in stages to 67), and thus suffer a reduction in their pensions. Those who retire at 62 get a Social Security cheque that replaces just 29% of a median earner’s income. The average monthly Social Security payment is $1,300.

That would not be a problem if recipients also had a private pension. But 24% of retired Americans…Continue reading

CYNTHIA NIXON is the latest celebrity to run for office in America; the “Sex and the City” star is trying to be governor of New York. If she succeeds, she will follow in a long line of celebrities-turned-politicians including Sonny Bono, Arnold Schwarzenegger, Jesse Ventura and most notably, Presidents Ronald Reagan and Donald Trump.

This may not be a uniquely American phenomenon. Beppe Grillo, a comedian, launched the Five Star movement, now Italy’s biggest party. Silvio Berlusconi cultivated the celebrity style. George Weah, a footballer, has just been elected president of Liberia. Joseph Estrada, a movie star, was president of the Philippines.

Even conventional politicians are expected to show a bit of star quality. Al Gore failed in his run for president in part because his public demeanour was seen as wooden and dull (it was said he reminded women of their first husbands). The attempts in last year’s election campaign to create…Continue reading

IN THE original Godzilla movie, made in Japan back in 1954, the testing of American nuclear weapons leads to the creation of a giant dinosaur that threatens to destroy not just Japan, but the rest of the world. Now Asians face another American creation that seems to be laying waste to all around it.

President Donald Trump has already pulled out of the TPP (the Trans-Pacific trade pact) and the Paris climate change agreement. Now he appears determined to roll back the international trade arrangements that have been in place since 1945. Yesterday’s announcement of tariffs on $60bn of Chinese trade threatens to launch a trade war between the world’s two largest economies (the Chinese have already suggested retaliatory measures). Small wonder that Asian markets have taken a hit today (March 23rd); Japan’s Nikkei was down 4.5%, China’s Shanghai Shenzhen dropped 2.9%; Hong Kong’s Hang Seng 2.5%. European markets…Continue reading