Tag: Buttonwood’s notebook

TRADE has changed a lot in the last 25 years. Indeed, we are still struggling to understand why trade growth was so rapid before the 2008 crisis, and has been relatively sluggish since. Richard Baldwin’s new book «The Great Convergence: Information Technology and the New Globalization» was reviewed in last week’s issue (and here are the thoughts of the FT’s Martin Wolf). But the book is so important that it is worth looking again at some of its insights.

The first is that we tend to think of competitiveness of individual states (particularly in an era of populist nationalism) – the US is competing against China and Germany. But goods are no longer assembled entirely within the bounds of one factory in one country. Instead, many goods are assembled in «global value chains» in which products are designed in one country, but made from parts built in several countries and assembled in another country. As Mr Baldwin…Continue reading

CENTRAL bankers are under fire. In America, President-elect Donald Trump said that the Federal Reserve chair Janet Yellen should be «ashamed of herself» for keeping rates too low; in Britain, Mark Carney of the Bank of England has been criticised for his views on the economic risks of Brexit; and in Europe, Mario Draghi has faced attacks from critics in Germany (for being too lax) and Greece (for being too tight).

In a new paper Ed Balls, who played an influential role in making the Bank of England independent, has teamed up with James Howat and Anna Stansbury to try to think through the role and wider responsibilities of the central bank. It is very much worth a read and here are my first thoughts (colleagues will doubtless chip in later).

As the paper points out, central bank power has increased in the wake of the 2007-08 crisis, extending well beyond the narrow pre-crisis focus on using interest rate policy to meet inflation targets. But the worry is that

Absolutist interpretations of complete central bank independence may both…Continue reading

POLITICIANS campaign in soundbites but reality deals in awkward paragraphs. For all the sloganeering (Brexit means Brexit) and the prevarication, the British government must finally decide what kind of trade-offs it is willing to accept when it leaves the EU. The UK trade policy observatory at the University of Sussex has an excellent new paper out on the choices facing the country, which was the subject of a lunchtime seminar today.

The British government seems to have four red lines. It wants to stop free movement of labour; to be allowed to pursue an independent trade policy; not to contribute to the EU Budget; and to break away from legal oversight by the European Court of Justice. (All of these can be summed up by the slogan «taking back control»). The EU’s sole red line seems to be that Britain cannot benefit from «cherry picking» – for example, benefiting from membership of the single market in terms of goods trade, but not allowing free labour movement.

To understand the trade-offs, we must first understand the terms. The single market is an…Continue reading

CONVENTIONAL wisdom gets turned on its head pretty quickly in the financial markets. Although many on Wall Street were gloomy about the prospects under a Trump presidency, the markets have switched round pretty quickly after the overnight decline on election day.

So many people (including us) had warned of the crazy policies of Mr Trump that there was always going to be a market for contrarians to say that he won’t be that bad after all. Especially among white, prosperous financial commentators there is a willingness to «normalise» Trump – to tell the groups he has insulted and threatened to get over their fears. What Trump does in office will be different from what he says on the campaign, they think.

What investors clearly hope is that Trump will get to implement some of his policies but not all – in particular the tax cuts for the wealthy and for business, increased military spending and financial deregulation. An early sign that this may not be that «revolt against the elite» that some commentators are claiming is a surge in bank…Continue reading

CONVENTIONAL wisdom gets turned on its head quickly in the financial markets. Although many on Wall Street were gloomy about the prospects under a Trump presidency, the markets have performed a sharp U-turn after the overnight decline on election day.

So many people (including The Economist) had warned of the crazy policies of Donald Trump that there was always going to be a market for contrarians to say that he won’t be that bad after all. Especially among white, prosperous financial commentators there is a willingness to “normalise” Mr Trump—to tell the groups he has insulted and threatened to get over their fears. What Mr Trump does in office will be different from what he said on the campaign, they think. (If you want to see what minority groups have to put up with from Mr Trump’s supporters, look here.) 

What investors clearly hope is that Mr Trump will get to implement some of his policies but not all—in particular the tax cuts for the wealthy and for business, increased military spending and financial…Continue reading

FINANCIAL markets went into the election night both favouring and expecting a Clinton victory. And the early results seemed to point to success for the Democrat candidate. But as the night wore on, Donald Trump’s position steadily improved and investors started to lose their nerve.

The Mexican peso was the most sensitive emerging market currency to the election news, given Donald Trump’s promises to build a wall on the border and his talk of renegotiating the Nafta free trade agreement. During the day, the peso was around 18.5/$ and it reached as high as 18.18/$ in early polling. But as the key state of Florida moved from a Clinton to a Trump lead, the peso plunged to more than 20 to the dollar. In contrast, the dollar lost ground against other major currencies, falling 3% against the yen.

A similar reaction was seen in equities. On November 7th, when Clinton’s lead in the polls was strengthening, the Dow jumped 300…Continue reading

GAMBLERS seem to think Donald Trump is a 3-1 outsider to win the election on Tuesday. The Predictit market has Hillary Clinton on 77% (where 100% is certainty). But what does that really tell us? On June 21, two days before the British referendum on the EU, Betfair was implying odds of 75% for Remain and 25% for Leave. This was despite quite a large number of polls that showed Leave ahead. As we know, Leave won 52% to 48%.

The idea of looking at betting markets is that “smart money” can assess all the information far more efficiently than opinion pollsters or newspaper columnists. It’s efficient market theory for politics. But what are the gamblers assessing? They are looking at the same poll as everyone else. in the EU referendum, some people seemed to believe that despite the polls, a status quo bias would ensure that Remain won (such a thing had been seen in previous referendums). But that wasn’t the case. Instead, as I feared in my Continue reading

THREE years ago, your blogger published a book called “The Last Vote”, a warning about the threats to democracy. It got a couple of nice reviews but disappeared into the morass that faces 95% of all published books; readers have limited time and money and there are too many tomes to choose from.

But the arguments made in the book seem even more pertinent today, with authoritarian leaders in control of Hungary, Poland, Russia and Turkey, and with the American election just four days away. 

First, democracy is threatened by a combination of complacency and cynicism. In many western countries, it has existed for all of living memory. It is thus the thing people have to rebel against. Politicians are held extremely low in public esteem; mocking or insulting a leader is a sure way to get a cheap laugh on a comedy show. They are assumed to be in it for themselves or to be the creatures of shadowy interests. The right to vote is not valued in the way it was when people were denied it – when women and the working classes fought for the right to vote in the 19th and early 20th centuries. “Why vote? It only encourages…Continue reading

YESTERDAY’s decline in the American stockmarket, on news of a narrowing in the poll gap between Hillary Clinton and Donald Trump (under two points according to Real Clear Politics), confirms the argument made in last week’s column. A combination of Mr Trump’s adverse policy proposals on trade, foreign policy and the Fed, and uncertainty about how much of this agenda would get through Congress, would hit equities hard were he to be elected.

But what about the dollar? The picture is far from clear. Over the last 24 hours, the US currency has lost ground against the Swiss franc, euro, yen and sterling but gained against emerging market currencies like the Mexican peso and Brazilian real. That makes some sense. A Trump victory would make international investors less confident about the direction of US economic policy. This in turn might lead to the Fed being less willing to tighten…Continue reading

THERE are few sure things in investing. But the chance to bet on a rigged coin sounds like a good one. Alas, a paper by two fund managers, Victor Haghani of Elm Partners (and co-founder of the collapsed Long-Term Capital Management) and Rich Dewey of Pimco, shows that it is possible to get even that wrong.

The paper invited 61 people, a combination of college-age students in finance and economics and some young professionals at finance firms (including 14 who worked for fund managers), to take a test. They were each given a stake of $25 and then asked to bet on a coin that would land heads 60% of the time. The prizes were real, although capped at $250. 

Remarkably, 28% of the participants went bust, and the average payout was just $91. Only 21% of the participants reached the maximum. 18 of the 61 participants bet everything on one toss, while two-thirds gambled on tails at some stage in the experiment. Neither approach is in the least bit optimal.

Apparently the right strategy is to use the Kelly criterion, named after a…Continue reading