Posts in category Buttonwood’s notebook


Business and financeButtonwood's notebook

How do you solve a problem like Korea? Investors are unsure

EUROPEAN markets have started the day with losses of 1% or so, following a 2% decline in Hong Kong’s Hang Seng index and the 1% loss in the S&P 500 index on Thursday. The Vix, a much used measure of market fear, jumped to 16, its highest level since the presidential election.

These are significant moves by the standards of recent months but, to anyone who lived through 2008 (or 1987) they are hardly signs of outright panic. Gold is at $1,288 an ounce, up 2% or so over the week. The Japanese stockmarket was barely changed today, and Japan is right in the firing line of North Korea’s missiles. South Korea would suffer terribly in any war but the Seoul market was down just 1.7% today, and 3.2% on the week.

Clearly, the markets are more worried than they were on August 9th, when President Trump warned of “fire and fury” against Kim Jong-Un’s regime. Investors did not take too seriously the statement from the president, who is known for his intemperate (and often factually inaccurate) tweets….Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Where might the next crisis come from?

TEN years ago, BNP Paribas, a French bank, temporarily suspended dealings in three funds, citing “the complete evaporation of liquidity in certain market segments of the US securitisation market”. Many people treat this as the start of the credit crunch but one can trace it back to the need for Bear Stearns to rescue hedge funds that invested in mortgage-backed securities in June, or the signs of home loan defaults and failing mortgage lenders that emerged in late 2006. The subsequent tightening of credit and loss of confidence in the banking system eventually led to the collapse of Lehman Brothers, when the crisis reached its height in the autumn of 2008 (see picture).

The inevitable question on the occasion…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Capitalism and the absence of creative disruption

NINE straight highs for the Dow Jones Industrial Average might suggest that all is well with capitalism. But on the contrary, they could be a sign that things have been going profoundly wrong with the way the system is working.  

The main driver for the surge in share prices this year has been the strength of profits; second quarter profits for S&P 500 companies are around 12.6% higher than a year ago, according to Andrew Lapthorne at SG, a French bank. As the chart shows, relative to GDP, profits seem to be regaining their levels of recent years. And those levels are much higher than they have been in much of the post-war era (see chart).

Continue reading
Read more 0 Comments
Business and financeButtonwood's notebook

A tale of two markets

THE Dow Jones Industrial Average closed above 22,000 on August 2nd, something President Trump is almost certain to mention in a tweet soon*. So it might seem as if the “Trump bump”, which began perking American stocks on the night of the election, is continuing smoothly. But the picture is a lot more complex than that as a look at the dollar’s performance against the euro shows (see chart below). The euro fell (and the dollar rose) between election day and the end of 2016. But then came a turning point. The euro has been climbing (and the dollar retreating) for much of 2017.

For dollar-based…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Foreign investors snap up London's iconic buildings

LONDON’S skyline has altered a lot in the last 30 years. While it can’t match Manhattan or Chicago, there are quite a few trophy buildings that can be seen from this columnist’s office window (for the moment*). The British sense of humour means these offices often acquire their own nicknames, regardless of the developer’s intentions—the Cheesegrater or the Gherkin, for example.

And the buildings also tend to get snapped up by foreign investors (see map). The latest to go is the “Walkie talkie” at 20, Fenchurch Street which has been bought by Lee Kum Kee, a Hong Kong food company, for £1.3bn, the highest amount ever paid for a British building. Presumably the company, best known for its oyster sauce, is not planning to transfer production to the site; this is a punt on the London property market.

Ironically, it was only a year ago that many Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

The euro’s obituaries were premature

FIVE years ago, Mario Draghi, head of the European Central Bank, pledged to do “whatever it takes” to save the euro. At the time, many people were predicting that the euro zone would break up. But Mr Draghi pulled off the trick; no countries have left the single currency. Borrowing costs have come down and even Greece has been able to tap the markets.

Keeping the euro together may have been the aim of the game, but was it worth it? As M&G, the fund management group, points out, the record has been mixed. Economic growth has rebounded to a respectable 1.5% year-on-year. This is not stellar but it is hard for the euro zone to grow rapidly when its population is ageing; the IMF suggests a greater proportion of older workers may weigh on productivity growth.  

Of course, the euro zone could get more of the current…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Britain: back to being the sick man of Europe?

IN THE 1970s, Britain was dubbed “the sick man of Europe”, a role previously played by the Ottoman empire in the late 19th century. A poor growth record since the second world war combined with terrible industrial relations (29m days lost to strikes in 1979) to make many ask the question “Is Britain governable?”.

The reason Britain joined what was then the EEC in 1973 (at the third attempt) was, in large part, a desperate attempt to find a way of forcing the country to become more competitive. Whether Europe was the key factor, or whether it was Margaret Thatcher’s reforms, by the mid-1990s, the trick seemed to have worked. In particular, London, which lost a quarter of its population between 1939 and the early 1990s, became a global, self-confident city, attracting expats from…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

The psychic Brexit ballot paper

DR WHO, the long-running British science-fiction hero, has a long-standing device to get him out of tricky situations; a piece of “psychic paper” that lulls the viewer into accepting the doctor’s credentials. Apparently blank, the paper says whatever the Doctor wants it to say.

The British government under Theresa May apparently thinks the 2016 EU referendum ballot paper had psychic qualities. The question merely asked “Should the UK remain a member of the EU or leave the EU?”. But on BBC Radio 4 this morning, Damian Green, who is (in effect) deputy prime minister, said Britain had to leave bodies like Euratom because the people voted for it. 

The argument seems to be that Britain must rid itself of all traces of the EU like someone leaving an area of intense radiation needs a complete detox. So no EU means no single market, no customs union, no free movement and no regulation by the European Court of Justice. It is the ECJ’s role that dooms Euratom, apparently.

Euratom governs the Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Can the fund management industry deliver a better deal for investors?

IMAGINE an industry where the average profit margins were 36%, where the regulator found little evidence of price competition and where the average person did not get the benefit of the lower charges available to the wealthiest customers. You would probably expect the regulator to throw a book the size of Thomas Piketty’s “Capital” at it. The industry’s executives ought to be as nervous as a very small nun at a penguin shoot.

But that has not happened with the report of the Financial Conduct Authority (FCA), Britain’s regulator, into the fund management industry. What the FCA proposes in terms of greater transparency of fees and better governance standards is fair enough. But one wonders how much difference it will make. The industry has reacted to the findings with equanimity.

Perhaps the most damning of the report’s findings is point 1.9

We find weak price competition in a number of…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Why the falling oil price isn’t hurting markets

INVESTORS could easily get confused about the impact of oil-price rises on the economy and markets. The story seemed to be clear: high prices bad, low prices good. The two great oil shocks in the 1970s were unambiguously bad for Western economies—ushering in stagflation and transferring spending power to the oil-producing countries. In turn, low oil prices in the late 1990s coincided with the dotcom boom.

But when oil fell in the second half of 2015, that was seen as a bearish sign for the global economy and markets. Now oil is falling again, with both Brent crude and West Texas intermediate dropping more than 20%. But the decline has barely made a dent in the upward march of the S&P 500 index.

The key to the differing market reaction is why the oil price is falling. Back in 2015, the fear was falling demand. Investors worried in particular that the Chinese economy was slowing. If that assumption had been right, demand for much more than oil would have suffered. The equity markets did not…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

The globalisation counter-reaction

WHEN the Archduke Franz Ferdinand (pictured right) was assassinated in 1914, there were few initial indications that world war would follow. In retrospect, many people have argued that the killing was a freak event that should not have resulted in the folly of war.

But was the subsequent war really an exogenous event? Or was it the near-inevitable consequence of the tensions resulting from the first great era of globalisation? If Franz Ferdinand had survived, maybe something else would have triggered the conflict. If the latter possibility is right, that may be a warning sign for the current era.

From 1870 to 1914, the first great era of globalisation saw rapid economic growth, trade grow faster than GDP, mass migration from Europe to the New World and convergence of real wages between the old and new worlds. In Europe, GDP per capita grew more than 70%; in the new world, (Argentina, Australia, Brazil, Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Britain’s political outlook seems toxic to investors

SUDDENLY Britain looks a lot less attractive as a home for international investors. The Conservative party under Theresa May gambled on a snap election to deliver a “mandate for Brexit”. It unveiled a muddled manifesto that alienated voters and was out-campaigned by the veteran left-winger Jeremy Corbyn. The party lost its overall majority and will now be propped up by the very odd ducks in Ulster’s Democratic Unionist party.

The markets reacted less severely than might have been expected. That seems to be based on the view that a “soft Brexit” looks more likely. But it is far from clear that this is the case. David Davis, Britain’s Brexit minister, seems to be ploughing ahead with plans to leave the single market and the Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Markets struggle to make sense of the election chaos

THERESA MAY decided to call a snap election on a walking holiday in Wales. History will regard it as the most disastrous ramble since Captain Oates wandered out of the Antarctic tent in 1912. Having failed to anticipate the result, investors (like everybody else) are struggling to understand what will happen next. 

It looks as if the Conservatives can carry on in power, with the support of the Democratic Unionists in Northern Ireland. This would give them a bare majority. But Mrs May’s position has been severely weakened ahead of Brexit negotiations. Another election later this year is possible.

For the markets, two factors are offsetting each other. On the one hand, there is uncertainty and the possibility that a left-wing Corbyn government could still take power in the near future. On the other hand, this result may change calculations about a hard Brexit. The Unionists backed Brexit but they will not want a hard border with the rest of Ireland; something that may require Britain to make concessions to the EU….Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Britain’s vote catches out the markets—again

SO AN election that was called to give Theresa May a mandate to negotiate Brexit looks like it has done anything but. The exit poll suggested that the Conservatives would have the most seats, but short of a majority with 314. Add in the Ulster Unionists and allow for the fact that Sinn Fein MPs don’t take their seats and Parliament would be a virtual tie.

This would lead to enormous uncertainty. Just before the polls closed, the pound was trading at $1.2950, while the euro was worth £0.866. Within minutes of the exit poll, the pound had dropped nearly two cents to $1.2768, while the euro was up to £0.8791.

If this poll is borne out by the results (and it was pretty close to the mark in 2015), there will be turmoil in the markets in the morning. The FTSE 100 index closed on Thursday down 0.3% at 7,449.98. Ten-year gilt yields rose three basis points to 1.03%. That left share prices close to a record high, and gilt yields close to a record low. That leaves plenty of scope for disappointment.

On the plus side, this…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

What will the markets do if Labour wins?

WHEN the British election started, a victory for Theresa May looked a nailed-on certainty. The Conservative lead was as high as 20 percentage points and the party was 1/20 on to claim the most seats. But a poorly run campaign means that the gap has narrowed; the latest from Survation had the Conservatives with just a one-point lead

The betting markets still assume that the Tories will win, albeit with a majority of 70 or so rather than the 100 plus that was assumed earlier in the campaign. But what if the gambling markets are wrong, as they were about Brexit and Trump? Nate Silver, the American polling guru, argues that Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

May’s mandate melts

THERESA MAY, Britain’s prime minister, called a surprise election for June 8th arguing that she needed a strong mandate for negotiating Brexit. The pound rallied on the news, in the belief that a large Conservative majority would allow Mrs May the flexibility to do a deal with the EU, and see off the hard-liners among her party.

For a while, it looked as if the plan was going well. The Conservatives had a 20-point lead in some polls. But the party’s campaign, heavily reliant on the appeal of its leader and the repeated use of soundbites like “strong and stable”, has been misjudged. The manifesto launch was disastrous and included a pledge to charge the elderly (a key Tory demographic) for social care. That pledge was quickly reversed, but Mrs May’s refusal to admit to an obvious U-turn undermined her strong leadership…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

The “I’ve paid in all my life” fallacy

SOCIAL security is often described as the “third rail” of American politics—touch it and you die. Britain’s prime minister has just tied herself into a tangle over the way to fund long-term care for the elderly.

The problem is made more difficult because of the way that such benefit schemes were established and marketed to the public—as insurance schemes in which what you receive in benefits relates to what you put in. When pension schemes were set up by Franklin Roosevelt (pictured left) in the 1930s or in Britain, by David Lloyd George (pictured, right) in the Edwardian era, the insurance notion was something people could easily grasp (private schemes already existed) and could be seen as fair. 

This was fine in the early years of such schemes when the number of people contributing was far greater than the number of people taking benefits. But as our societies age, the costs rise and the inadequacy of…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Not Maggie May, but muddled May

THE Conservative election campaign so far has been duller than an afternoon looking at Jeremy Corbyn’s collection of pictures of manhole covers. Blessed by an extremist opposition and a big opinion poll lead, the government is coasting, muttering platitudes like “strong and stable” and emphasising its newish prime minister, Theresa May, rather than its party name.

The odd thing is that the Conservatives are trying to develop a personality cult based on someone who (to put it politely) does not have a particularly fascinating personality. Perhaps that’s the point; people are looking for someone calm and competent.  Labour tried something similar with Gordon Brown—“Not flash, just Gordon” was the slogan—with little success. The Conservative strategy seems to be working for now but one…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Old McDonnell has a plan. He eyes IOUs

WITH the Labour party 17 percentage points behind in the opinion polls, it may not be worth analysing the tax and economic aspects of its manifesto. The belief that the party will lose is so widespread that you can get odds as high as 20/1 on a victory for the party; market indifference is such that its plans to nationalise the water industry have caused shares in the biggest provider, United Utilities, to fall just 1.6%. Still, the manifesto is such a mishmash of ideas that it is worth a look at the ideas of Jeremy Corbyn and John McDonnell (pictured).

One eye-catching proposal is for a £250 billion “National Transformation Fund”, spread over 10 years, to invest in

infrastructure – transport, energy systems, communications – scientific research and housing fit for the 20th century

There is an argument for borrowing to fund infrastructure. This depends on a couple of…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Markets uninspired by Trump tax plan

REMEMBER why the “Trump bump” began, all the way back in November? The rationale for the surge in stockmarkets was that the new administration would cut taxes and allow American growth to accelerate. And so we waited for the details. When they came yesterday, it was only a one-page set of bullet points, containing around 200 words. If, as one expert pointed out, it had really taken 100 experts to come up with the plan, they averaged two words each.

The response from the markets was a yawn. Analysts at Clear Treasury said that

Much of yesterday was a non-event, markets were waiting to hear what came of Trump’s tax plans but there was certainly an air of disappointment when finally released.

The S&P 500 and Dow Jones Industrial Average were slightly lower on the day, and the European markets have fallen today. Of course that could be related to the other story floating around yesterday – that the US might withdraw from Nafta. With the US also reviving its trade complaints about Canadian lumber and imported steel, Citigroup has taken to issuing a “US Protectionism Round-Up”. But this is only a reminder that, in market terms, there has always been a “Trump lite”…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Reports of populism’s death are premature

MONDAY was a day when, in the latest jargon, the markets went “risk on”. Equities rose, the spread between the yields of French and German bonds narrowed and the euro rebounded. The reason was the first round of the French presidential election. As the results emerged on Sunday night, it was clear that a) the nightmare of a second round between Marine Le Pen and Jean-Luc Mélenchon had been avoided and b) Ms Le Pen’s vote was no better than her poll rating, indicating there was no reservoir of shy, far-right voters. The centrist Emmanuel Marcon (pictured) topped the poll and is predicted to get more than 60% of the vote in the second round, far outside the pollsters’ margin of error.

So France will not follow the US and Britain down the path that led to the election of Donald Trump and the Brexit referendum. But it is way too early to say, as some do, that populism is in retreat. First, France has a much greater tradition of support for the far left…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

A market-related twist to the Dortmund bombing

WHEN three explosive devices hit a bus carrying the Borussia Dortmund football team on April 11th, it was immediately assumed that it was another Islamist attack. Notes were found at the scene of the crime alleging that Islam was the motivation, with the author claiming a link to the terrorist group Islamic State. But prosecutors in Germany allege a completely different rationale. They say that the suspect, a 28-year-old man, had borrowed money and taken out put options, which would benefit from a decline in Borussia Dortmund shares (which fell 3% on the day after the attack). 

As yet, the suspect has not been convicted. But if true, the story would seem to come straight out of Hollywood. In the film “Casino Royale”, James Bond (as played by Daniel Craig) foils a plot to blow up an airliner owned by the fictional firm Skyfleet, after villain Hugo le Chiffre had sold the company’s shares short (ie, bet on their price to fall). In “The Fear index”, a Robert Harris novel, a hedge fund’s trading programme shorts an airline’s stock just before a fatal crash. It was rumoured, after the September 11…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

Donald Trump, trade and the new world order

TWO months into the Trump administration and we have had more sound and fury than concrete proposals about its economic agenda. The most alarming sign so far is that America forced the G20 to drop a pledge about resisting “all forms of protectionism” from a joint statement but this may be purely symbolic.

Nevertheless, Mr Trump’s determination to shake up the status quo may yet have global consequences. In a research note, Chris Watling of Longview Economics suggests that

Trump’s policies might inadvertently bring about a new international monetary order as the administration struggles to fulfil campaign promises in the light of the original misdiagnosis of the ‘trade deficit’ problem.

The current monetary system emerged from the downfall of Bretton Woods in the 1970s. Under the Bretton Woods system, devised in part by John Maynard Keynes (pictured, left), currencies were fixed to the dollar (with scope for occasional devaluations or revaluations) and the dollar was fixed against gold. But this required America to act as the anchor of the system; other…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

The hole in Western finances

HAVE western governments, faced with angry voters, lost the ability to raise taxes? The question is raised by a farcical U-turn by the British government over a budget measure announced a week previously. The government retreated in the face of backbench opposition and the right-wing press. It seems eerily reminiscent of America, where Republicans have an absolute abhorrence of tax-raising measures.

The planned British increase (aligning the tax rates of the employed and self-employed) was perfectly sensible. Unless closed, this gap will erode the tax base over the long run. Most economists agree that differential tax treatments tend to distort behaviour for no long-term gains. But the government had promised at the 2015 election not to raise income tax, national insurance or VAT—three taxes that raise around two-thirds of revenues—and this (foolish) promise was used against it.

As the graph shows, British tax revenues have…Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

The hounding of Owen Jones

IN THE big scheme of things, the retreat of a Guardian columnist from social media is not a huge event—it will be drowned out by the latest antics of Donald Trump, the extraordinary diplomatic dispute between the Netherlands and Turkey, the triggering of article 50 by the UK and Scotland’s push for a second independence referendum.

Actually, though, I think that it’s possible to tie all these events together as evidence of a much wider trend; one that is corrosive to both global politics and economics. Let us start with the specifics. Owen Jones (pictured) is a left-wing writer; initially a great enthusiast for Jeremy Corbyn, Britain’s Labour leader, he has become disillusioned. Those who previously agreed with his columns have denounced him on Facebook and Twitter. As he wrote in one final post (complete with language that may offend some)

On a daily basis I have angry strangers yelling at me, on the one hand, that I’m responsible for the destruction of the Labour Party, and on the other, I’m a right-wing sellout careerist who’s allied to Tony Blair and possibly in the pay of the Israeli government (and that I’m a Blairite cunt who needs to go fuck myself,…Continue reading

Read more 0 Comments