Tag: Finance and economics

“QUANT” hedge funds have long been seen as the nerdy vanguard of finance. Firms such as Renaissance Technologies, Two Sigma and Man AHL, each of which manages tens of billions of dollars, hire talented mathematicians and physicists to sit in their airy offices and develop trading algorithms. But what if such talent could be harnessed without the hassle of an expensive and time-consuming recruitment process? That is the proposition Quantopian, a hedge fund and online crowd-sourcing platform founded in 2011, is testing. Anyone can learn to build trading algorithms on its platform. The most successful are then picked to manage money. Last month the firm announced it had made its first allocations of funds to 15 algorithms it had selected.

Quantopian would appear to have one striking advantage over its competitors: sheer weight of numbers. The difficulty of hiring and a desire for secrecy limit even big quant funds to a full-time research staff in the low hundreds (Man AHL, for instance, has 120). Quantopian boasts 120,000 members on its platform.

These are amateurs, however, not full-time employees. John Fawcett, Quantopian’s CEO, says many sign up to…Continue reading

WHICH Indian state sounds more likely to repay a loan: Bihar, the country’s poorest, with a budget deficit of nearly 6% of its state GDP last year and a hole in its finances after it banned alcohol sales; or Gujarat, a relatively prosperous coastal region with a deficit nearer to 2%? According to bond markets at least, both are equally good credits, and so pay the same interest rate. As welcome as such mispricing might be to the Bihari authorities, it is brewing trouble for the rest of the Indian economy.

The borrowing habits of Bihar, Gujarat, and India’s 27 other states used to be below the radar of all but the pointiest financial eggheads. The indebtedness of India, and its annual budget deficits—both high by emerging-market standards—could largely be blamed on the profligacy of the central government in Delhi. But an explosion in the net amounts borrowed by states over the past decade (see chart), from 154bn rupees in 2006 ($3.5bn then) to an estimated 3.9trn in the fiscal year…Continue reading

ON MAY 4th William Baumol, one of the great economists of the 20th century, died. Mr Baumol, who kept working into his 90s, published more than 500 papers across a dazzling array of topics; his best-known work, describing “cost disease”, was essentially a side-project. He was a scholar whose stray thought on a sleepless night could change how people see the world.

Mr Baumol was born in the South Bronx, attended New York public schools and took an undergraduate degree at the College of the City of New York. Shaped by his family’s left-wing views, in high school he read Karl Marx, which kindled an interest in economics. He did his PhD at the London School of Economics; he defended his dissertation “over whiskies and sodas at the Reform Club”. He spent most of his long career at Princeton University. He had long been on the shortlist for a Nobel prize; sadly, death means he cannot receive one.

His contributions will endure, however. Mr Baumol’s primary intellectual…Continue reading

MAKING money yourself from investing other people’s has been a good business for over a century. Asset managers established a key principle early on: they could charge an ad valorem fee on the amount they oversee. So when markets go up, their fees go up.

But as the title of a recent London Business School conference indicated, investment management is “an industry in disruption”. Abhijit Rawal of PwC, a consultancy, described the sector’s problems as the “four Rs”: returns are low; revenues are being squeezed; regulations are being tightened; and the robots are coming to take away business.

Plenty of potential for growth remains, as workers save for retirement. But the industry faces the same sort of cut-throat competition that technology has caused elsewhere. The oldest challenge comes from index trackers, funds that try simply to match the performance of a benchmark like the S&P 500. It took many decades for such “passive” funds to…Continue reading

RARELY has a Chinese city boss had more fans than Li Dakang, the earnest, driven Communist Party chief of Jingzhou. “I want development, I want speed and I want GDP,” he recently intoned. “But I want it to be modern GDP, GDP that comes without pollution.” Over the past month tens of millions have tuned in to watch him strive to fulfil these promises. On their smartphones, they share images of the heavy-eyed man with an easy smile, quoting his words and cheering him on. His policies have even been immortalised in a musical tribute, “The GDP Song”.

Li Dakang is not real, nor is Jingzhou. They exist only on “In the Name of the People”, a wildly popular 55-part television series about China’s battle against graft. Since its first broadcast in March, the show has attracted attention for its depiction of official corruption, unusual in the context of Chinese censorship. Less noted is the insight it has offered into a range of China’s economic problems—not just…Continue reading

THOUSANDS of second-hand cars, ranging from dented clunkers to Bentleys, glisten under the evening floodlights at Major World, a car dealership in Queens, a borough of New York. “Business has been good,” says a crisply-dressed salesman, scurrying between prospective customers. Almost everyone who wants to buy a car at Major World can get approved for a loan, he explains, regardless of their credit score, or lack of one: when banks turn buyers down, the dealership offers them its own in-house financing.

In both America and Britain new-car sales reached record levels last year (2.7m cars in Britain and 17.5m in America), as did second-hand-car sales in Britain. So too did car loans: £31.6bn ($42.8bn) in Britain and $565bn in America. Even folk with poor credit records (“subprime” borrowers) have been able to find financing. So some are asking whether this latest credit boom might have sown the seeds of a new crisis.

In America worries have centred on rising delinquencies in subprime asset-backed securities (ABSs) based on car loans. Bundling car-loan repayments into ABSs to sell on to investors represents an important source of financing, particularly for non-bank lenders. Cumulative net losses on subprime car-loan ABSs issued in 2015 are at levels not seen since 2008—over 6% after only 15 months.

Some hear echoes of the financial crisis….Continue reading

HOW can governments borrow most cheaply? The answer matters hugely for taxpayers. Take America: it has $14trn in outstanding national debt, fully three-quarters of GDP. Interest payments alone are expected to reach $280bn this fiscal year—ie, more than three times the combined budgets of the Departments of Education, Labour and Commerce.

The problem largely comes down to deciding how much long, medium and short-dated debt to sell. Almost every country issues a combination of these maturities. In the current low interest-rate environment, however, many argue that governments should sell proportionately more long-dated bonds to make sure they are able to pay historically low rates for many decades to come, thereby saving taxpayers money in the long run.

Some countries have already ploughed ahead. In recent years Britain, Canada and Italy have sold 50-year bonds; Mexico, Belgium and Ireland have issued 100-year debt. The latest country to flirt with the idea is America: last month the Treasury sent out a survey to bond-dealers to gauge market appetite for 40-, 50- and 100-year bonds. On May 3rd officials said that Steve Mnuchin, the…Continue reading

Pricier than snake-oil, and deadlier

A DEAD rhino, with a bloody stump in place of its horn, means different things. For the species it is the danger of imminent extinction; for wildlife-lovers it is barbarism; for law-enforcers it is failure. For its poachers it means income; the horn will be exported illegally to fetch tens of thousands of dollars. For economists, it means market forces are at work.

South Africa is in the throes of a poaching epidemic. Official figures show poachers killed 1,054 rhinos in 2016, up from just 13 in 2007. In Kruger National Park, home to the world’s largest rhino population, numbers are dropping despite a fall in recorded poaching incidents. Tom Milliken of TRAFFIC, a wildlife-trade monitoring network, worries that poachers have become better at hiding the carcasses.

The problem is international. The rhino-horn supply-chain sprawls from South Africa, home to nearly three-quarters of the world’s rhinos, to Asia, and in particular to Vietnam, where rhino horn is coveted as medicine, prescribed for fevers, alcohol dependency and even cancer.

Prohibitionists call for better law-enforcement. Demand for…Continue reading

AS THE second-richest person in the world, and with a half-century record of investing success, Warren Buffett is a household name worldwide. But in China, he is something more: a celebrity. In March a special edition of Cherry Coke, featuring a cartoon image of the 86-year-old investor, hit Chinese shop shelves (Mr Buffett not only loves the sugary beverage; he is Coke’s largest shareholder). On May 6th thousands of Chinese investors will descend on Omaha for the annual meeting of Berkshire Hathaway, his holding company, and many more will tune into a live-stream of the event. Mandarin is the only foreign language into which the proceedings will be simultaneously translated. Those who miss the broadcast can pick up one of the hundreds of Chinese books about his approach to minting money.

Mr Buffett’s stature in China stems partly from good timing. China’s modern stockmarket was launched in 1990. Just as neophyte investors grappled with earnings reports and trend lines, the Oracle of Omaha’s reputation as the world’s best stock-picker was blossoming. Compared with the regular booms and busts of the Chinese stockmarket, the steady returns of Berkshire Hathaway…Continue reading

TEN years ago this month investors were pretty confident. True, there were signs that problems in the American housing market would mean trouble for mortgage lenders. But most people agreed with Ben Bernanke, the Federal Reserve chairman, that “the impact on the broader economy…seems likely to be contained.” The IMF had just reported that “overall risks to the outlook seem less threatening than six months ago.”

That was reflected in market valuations. In May 2007 the cyclically-adjusted price-earnings ratio (CAPE), a measure that averages profits over ten years, was 27.6 for American equities (see chart). That ratio turned out to be the peak for the cycle. As the problems at Bear Stearns, Lehman Brothers and others emerged, and as the world was gripped by recession, share prices plunged. By March 2009 the CAPE had fallen by more than half.

Central banks then kicked into action, slashing interest rates and buying assets via quantitative easing (QE). The stockmarkets recovered rapidly and the S&P 500 is now more than 50% higher than it was ten years ago. And the American stockmarket’s CAPE, at 29.2, is also higher than it was…Continue reading