Tag: Finance and economics

COMPETITION between currencies is the stuff libertarian dreams are made on—and central bankers’ nightmares too. Already digital monies, in particular Bitcoin and Ethereum, are rivals. On October 28th a new crypto-currency will join the fray: Zcash. Many such “altcoins” are dubious affairs and don’t add much. But this one brings important innovations.

Zcash is based on Bitcoin’s code, but its creators, a bunch of cryptography researchers, have tweaked it. The new digital cash is minted more quickly and the system can handle more transactions. This makes for more liquidity and shorter transaction times, says Zooko Wilcox, who leads the project.

The newcomer also differs in the way it is governed. The incumbent started—and is still run—as an open-source project: a small group of volunteer developers decides which changes are made. Zcash’s code is also open-source, but its inventors have formed a company and accepted money from investors. In addition, 10% of the 21m coins to be issued are earmarked for founders, investors, employees and a putative Zcash foundation. All this, says Mr Wilcox, is to align incentives for all…Continue reading

ON OCTOBER 19th China reported that its economy grew by 6.7% in the third quarter. It would have been an unsurprising, reassuring headline, except that China had reported exactly the same figure for the previous quarter—and for the quarter before that. This freakish consistency invited the scorn of China’s many “data doubters”, who have long argued that it fudges its figures. China has expanded at the same pace from one quarter to the next on numerous occasions. But it has never before claimed to grow at exactly the same rate for three quarters in a row.

Has anywhere? This growth “three-peat” is not entirely without precedent. Seven other countries have reported the same growth rate for three quarters in a row, according to a database spanning 83 countries since 1993, compiled by the Economist Intelligence Unit, our sister company. The list includes emerging economies like Brazil, Croatia, Indonesia, Malaysia and Vietnam, but also two mature economies: Austria and Spain. Indeed, Spain has performed this miracle of consistency twice. It grew by 3.1% (year-on-year) in the first three quarters of 2003 and by 4.2% in the first…Continue reading

JUST outside Stanford University’s campus sits the headquarters of Symphony, one of the myriad tech companies that sprout like weeds in Silicon Valley. After a lunch break exercising in a nearby park, a dozen fit-looking employees, still in workout clothes, help themselves from buckets of fruit, energy bars and the food of the day (Indian), before plopping themselves in front of monitors in an airy room bathed in natural light. For the sought-after engineers making up most of the company’s 200-strong workforce, this sort of environment is the norm. Work is supposed to be healthy and relaxed—a far cry from the terrors of a New York bank with its incessant pressure to sell and complex internal politics, not to mention often unappetising, pricey food.

Across the continent, in a newly opened tower within the World Trade Centre, Kensho, a three-year-old company, has a similar feel. Like Symphony but a bit smaller, it is stuffed with talented engineers. In a New York approximation of the West Coast, it boasts “vertical gardens”—rectangular patches of vegetation like framed paintings—and a pool table.

Symphony is a messaging platform,…Continue reading

TRADITION suggests that Wall Street should favour the Republican Party. America’s conservatives usually back low taxes, free trade and a reduction in regulation. But the 2016 election seems to be an exception. A Bank of America Merrill Lynch poll of fund managers in October found that a Republican victory was seen as one of the biggest risks facing financial markets, along with the disintegration of the EU.

A study* by Justin Wolfers of the University of Michigan and Eric Zitzewitz of Dartmouth College found that in the wake of the first debate, there was a six-percentage-point rise in the probability of a Hillary Clinton victory on betting markets. In reaction, stockmarkets rose, and gold and Treasury bonds (two assets that benefit when investors become risk-averse) fell. “Financial markets expect a generally healthier domestic and international economy under a President Clinton than under a President Trump,” the authors concluded.

What makes this election different for investors is the nature of the Republican candidate—Donald Trump is a long way from the party’s mainstream. A Trump victory would throw up all kinds of uncertainty…Continue reading

IN 2007 financial dangers, piled up like so much tinder, ignited at last and caused a swathe of destruction across the global economy. The blaze also engulfed governments, which faced intense public pressure to prevent such calamities from recurring. Much has happened on the regulatory front since then. Few believe, however, that the problem of financial instability has been solved. To regulators’ frustration, in a world of global financial flows, efforts to safeguard one country often endanger others.

This bothersome tendency has become harder to ignore as cross-border capital flows have swollen. Annual gross financial flows in rich countries soared from roughly 5% of GDP in 1980 to around 25% of GDP on the eve of the financial crisis. This worldwide torrent of money has its benefits. Investors can more easily diversify their portfolios. Investors in slow-growing rich countries gain access to higher-yielding investments in poorer, capital-starved economies, and those poorer economies gain access to desperately needed capital relatively cheaply.

Yet there are costs as well. Emerging economies with less sophisticated financial markets and…Continue reading

TO MOST investors, Venezuela looks less like a market than a mess. The IMF expects output to shrink by 10% this year and inflation to exceed 700%. As the bolívar’s value has plunged, multinational firms have announced billions of dollars of write-downs. For much of this year, however, some strong-stomached investors have scented an opportunity. They rushed to buy bonds issued by the government and by the state-owned oil company, PDVSA.

They have been rewarded handsomely. Venezuelan government bonds have outperformed other emerging-market sovereign bonds tracked by JPMorgan (see chart). The government, led by Nicolás Maduro, boasts it has never missed a debt payment. Indeed he has given priority to debt service over other urgent needs, such as importing food. Mr Maduro is keen not to scare off the foreign creditors sorely needed by PDVSA.

However, Venezuela looks increasingly stretched. Two big PDVSA payments, of $1 billion and $2 billion, are due on October 28th and November 2nd. Last month the company proposed a bond swap to ease a looming payments crunch: investors holding PDVSA bonds maturing in 2017 (which are not…Continue reading

Will they Passera?

FROM the mists of Italian banking, new shapes are emerging. One is at last becoming flesh: on October 15th the shareholders of two lenders, Banco Popolare and Banca Popolare di Milano, approved a merger that has been months in the making. The substance of another—Banca Monte dei Paschi di Siena, the world’s oldest bank as well as Italy’s most troubled—is still shrouded, but it is likely to become clearer at a meeting of Monte dei Paschi’s board on October 24th.

The merged bank, to be called Banco BPM, will surpass Monte dei Paschi to become Italy’s third-largest lender. Its creation is a small triumph for Matteo Renzi, the centre-left prime minister. Last year Mr Renzi introduced a reform obliging Italy’s ten biggest popolari, or co-operative banks, to become joint-stock companies by the end of 2016. The hope was that this would spur takeovers, yielding fewer, stronger, more efficient banks.

The Banco BPM deal, which promises annual savings of €290m ($318m), or 10% of the combined cost base, is Mr Renzi’s first result. Two awkward obstacles stood in its…Continue reading

When you’ve eliminated the impossible…

JOINING “Hamilton”, a Broadway show, and concerts by Adele, a British soul diva, on the list of tickets-to-kill-for in New York is a screening in an ugly new office building that recently popped-up in the East Village, a place best known for offbeat culture. There is a ten-week-long queue to see simulations by Watson, IBM’s cognitive artificial-intelligence platform.

Initially known for stunts such as beating the world’s best chess player, Watson has been seeking a wider audience. It has found a vast potential one in the world of financial regulation. Rules have become so sprawling and mysterious that even regulators have begun asking for a map. In response, a market is springing up: for “regtech”, fintech’s nerdy new offspring.

On September 29th, IBM announced the purchase of Promontory, a 600-strong consultancy whose senior staff include former officials from the Federal Reserve, the World Bank, the Securities and Exchange Commission and other regulators. The hope is that person and machine will combine into a vast business. Promontory was founded in…Continue reading

JAMES CARVILLE, political adviser to Bill Clinton, the former president, famously said that he wanted to be reincarnated as the bond market so he could “intimidate everybody”. He was frustrated by the administration’s inability to push through an economic stimulus for fear of spooking investors and pushing bond yields higher.

More than 20 years later, the world looks very different. Many developed countries have been running budget deficits ever since the global financial crisis of 2008; their government debt-to-GDP ratios are far higher than they were in the early 1990s. Yet the bond market looks about as intimidating as a chihuahua in a handbag; in general, yields are close to historic lows.

In the 1990s “bond-market vigilantes” sold their holdings when they feared that countries were pursuing irresponsible fiscal or monetary policies. In Britain even fear of a “hard Brexit” is only now being reflected in rising gilt yields—and they are still below the (very low) levels seen before the vote to leave the EU in June. Even developing countries with big budget deficits can borrow easily. This week, for example, Saudi Arabia…Continue reading

AMERICANS who want a comfortable retirement, and who work in the private sector, have to look after their own interests these days. No longer can most rely on their employer to pay a pension linked to their final salary; such defined-benefit promises are too expensive.

Instead, workers are promised something called a defined-contribution (DC) pension which, truth be told, isn’t a pension at all. It is a savings pot to which employers and employees contribute, with some tax advantages. How big that pot will be, and what kind of income it will provide, is unknown.

Most of those savings will probably be invested in mutual funds. Yet as William Birdthistle, an academic lawyer, writes in an entertaining new book*, small investors need to become better informed about the way mutual funds work.

One might think, for example, that all investors in a fund are treated equally. But Mr Birdthistle cites a set of JPMorgan equity funds which have seven different types of shares, with opaque names such as Class R5. The main difference tends to be the fees that funds charge. Small investors usually pay most, even those in some DC schemes. These fees…Continue reading