Tag: FINANCE

TECHNOLOGY has transformed finance. Consumers bank and buy their insurance policies online. They use technology to manage their pensions and other investment portfolios. But can tech improve returns? Only if it is used wisely.

If it is cheaper to trade, then costs will take a smaller chunk out of long-term returns. Technology also allows fund managers to replicate stockmarket indices, giving investors access to broadly diversified equity portfolios for a fraction of a percentage point in annual fees.

But the ease and cheapness of trading, along with the vast range of options available, create a terrible temptation. Worldwide there are nearly 7,400 exchange-traded funds (ETFs) and related products. These funds are not used only by “buy and hold” investors. Nearly half of the top 20 traded securities on American markets, by value, are ETFs.

Just because you can trade does not mean you should. And just because there is a fund specialising in smaller Vietnamese companies, or one…Continue reading

MICROECONOMISTS are wrong about specific things, Yoram Bauman, an economist and comedian, likes to say, whereas macroeconomists are wrong in general. Macroeconomists have borne the brunt of public criticism over the past decade, a period marked by financial crisis, soaring unemployment and bitter arguments between the profession’s brightest stars. Yet the vast majority of practising dismal scientists are microeconomists, studying the behaviour of people and firms in individual markets. Their work is influential and touches on all aspects of social policy. But it is no less fraught than the study of the world economy, and should be treated with corresponding caution.

For decades non-economists have attacked the assumptions underlying economic theory: that people are perfectly informed maximisers of their own self-interest, for instance. Although economists are aware that markets fail and humans are not always rational, many of their investigations still rely on neoclassical assumptions as “good…Continue reading

The new NAFTA model has many moving parts

ONE year ago, a member of President Donald Trump’s administration drafted a short executive order to withdraw America from the North American Free-Trade Agreement (NAFTA), a trade deal with Canada and Mexico. The obvious interpretation was that Mr Trump was irresponsibly bullying the Mexicans and Canadians into giving America better terms. A kinder view held that he was aiming at a domestic audience. Congress was dragging its feet at the time over the confirmation of Robert Lighthizer, the president’s chosen trade negotiator. Mr Trump’s threats were a way to kick it into action.

One year on, with Mr Lighthizer long since in place, America’s attitude to NAFTA seems no less hostile. Its threat of withdrawal still hangs over the talks, and in March Mr Trump waved the stick of tariffs on steel and aluminium in case a deal to revise NAFTA could not be reached by May 1st. This tough talk may yield an agreement within the next few…Continue reading

THE pattern is familiar. Computer geeks develop technology that threatens to overturn established markets and habits. Regulators then scramble to understand and tame the beast. This is what is happening in the financial world in the wake of an explosion of crypto-currencies. Over the past year the pool of virtual currencies has both deepened, from $30bn to $400bn, and widened, with the spread of “initial coin offerings” (ICOs, a form of fundraising in which investors in young companies are issued with virtual tokens). Hedge funds, students and pensioners have all been caught up in the crypto craze.

This worries authorities, because the crypto-sphere is far from risk-free. Valuations can leap and plunge: after a giddy rise, between December and February the price of bitcoin dropped from nearly $20,000 to less than $7,000. (It is now around $9,000.) Several ICOs have turned out to be scams. Legitimate tokens are in danger of being stolen. Some crypto-currency exchanges have been…Continue reading

AS LONG as dirty money has been around, so has money-laundering. Between $800bn and $2trn, or 2-5% of global GDP, is washed annually, estimates the United Nations Office on Drugs and Crime. Criminals have swapped money for precious metals, mis-stated invoices, rinsed cash through casinos or simply strapped it to their bodies and flown to places where banks don’t ask questions. Now they have a new detergent: crypto-currencies.

Such data as there are suggest that crypto-laundering is still a small share of the whole. But crypto-currencies’ attractions—global availability, the speed and irreversibility of transactions and the ability to hide identities—are plain. Rob Wainwright, head of Europol, Europe’s police agency, has estimated that 3-4% of the continent’s annual criminal takings, or £3bn-4bn ($4.2bn-5.6bn), are crypto-laundered. He thinks the problem will get worse. America’s Drug Enforcement Administration believes international gangs are using crypto-currencies…Continue reading

SO THIS is how normality feels. Between April 13th and April 18th America’s biggest banks reported a strong set of first-quarter earnings, with a helping hand from the taxman. Some are more profitable than they have been for years. They are paying billions to shareholders; regulatory reins are being loosened. Yet the stockmarket shrugged. On April 18th the S&P 500 index of banks’ share prices was 4.1% lower than at the start of reporting season.

Banks expected three main effects from the corporate-tax cut signed into law by President Donald Trump in December. The first was a write-down of deferred tax assets—past losses that could be set against future bills—which clobbered most lenders’ bottom lines in the fourth quarter but did no real damage. (Some, including Wells Fargo, carried deferred liabilities and hence recorded a gain.) The second was a permanent reduction in their tax bills. The third was a boost to business from a more lightly taxed America Inc.

The direct benefits of lower taxes are plain. Although pre-tax profits at the six biggest banks rose by $4.3bn, compared with the first quarter of 2017, taxes fell at five of them. (At the sixth, Goldman Sachs, the bill was unusually low a year ago because of a change in the treatment of employees’ shares and options.) Of a total increase in net profit of $5.4bn at those five, lower…Continue reading

MOST governments are happy when foreigners want their bonds, especially when those foreigners are long-term holders, like central banks. But America is different. It worries that some foreign governments buy its debt to keep the dollar pricey and their own currencies cheap. This “currency manipulation” gives other countries a competitive edge, raising their own trade surpluses and America’s deficit.

Brad Setser of the Council on Foreign Relations, a think-tank, sees an “arc of intervention” across Thailand, Singapore, Taiwan and South Korea that has slowed the dollar’s decline over the past nine months. America has reportedly persuaded South Korea to forswear currency manipulation in a “side-agreement” to their revised trade deal. And on April 16th President Donald Trump tweeted that “Russia and China are playing the Currency Devaluation game…Not acceptable!”

Mr Trump’s tweet was at odds with his Treasury Department’s assessment. Every six months it must tell…Continue reading

DURING the financial crisis, Western governments poured hundreds of billions of dollars into their banks to avert collapse. The search for ways to avoid future bail-outs started before the turmoil ended. One of the niftiest proposals was the “contingent convertible” (coco) bond, which turns into equity when the ratio of a bank’s equity to risk-weighted assets falls below a predetermined danger point (since set at a minimum of 5.125% for cocos, although it can be up to around 7%). The ambition was grand. As the Squam Lake Group, composed of mostly American academics, put it in 2009, the automatic conversion of cocos would “transform an undercapitalised or insolvent bank into a well-capitalised bank at no cost to taxpayers”.

At first, regulators were keen. In 2010 Mervyn King, then the governor of the Bank of England, said he wanted contingent capital to be a “major part of the liability structure of the banking system”. Swiss regulators, too, pushed for coco issuance. The hybrid nature of cocos seemed a way to satisfy both regulators, who wanted banks to have bigger safety buffers, and bankers, who were reluctant to issue new shares because of the high cost of capital. The hope was that investors, too, might see the appeal of an asset that offered a higher yield than bank bonds but lower risk than bank shares.

Nine years after the first cocos…Continue reading