Digging into the finances of a professional corporation.
Digging into the finances of a professional corporation.
FINANCIAL markets are supposed to be the font of all wisdom, weighing up the information available and condensing it into a set of prices. Investors are presumed to have an insight into the future—falling bond yields are seen as a sign that the economy is slowing, for example.
But are investors that clever when it comes to politics? Gambling markets show how they assess political risk. They expected the Remain campaign to win the Brexit referendum and Hillary Clinton to become America’s president, and were proved wrong. Indeed, on Brexit, the mass of gamblers (the general public, in other words) backed Leave, but the odds were skewed by some wealthy punters who favoured Remain. Those rich gamblers were probably people who trade in financial markets; the plunge in the pound after the result suggests that most investors were caught on the hop.
Before the presidential election, most people on Wall Street to whom Buttonwood spoke thought that a victory for Donald Trump would be…Continue reading
FOR football clubs, August is often the costliest month, when they make vast bids for each other’s players. This year has been particularly lavish. On August 3rd Paris Saint-Germain (PSG), a French team, signed Neymar da Silva Santos Júnior, a Brazilian forward, from Barcelona for €222m ($264m), more than double the previous record price for a footballer.
With three weeks of the transfer “window” left, teams in Europe’s “big five” leagues—the top divisions in England, Spain, Germany, Italy and France—have paid €3.2bn, just short of the record of €3.4bn set last year. The €179m splurged by Manchester City, an English club, on defenders outstrips 47 countries’ defence budgets. Arsène Wenger, a veteran manager of Arsenal, a London team, and an economics graduate, describes the modern transfer market as “beyond calculation and beyond rationality”.
IT IS not a number to tweet about. President Donald Trump plans to plough $1trn of spending into America’s crumbling infrastructure. And a dearth of capital is not a problem: investors are keen on such assets. But investment seems to be falling.
Government infrastructure spending in the second quarter fell to 1.4% of GDP, the lowest share on record (see chart). According to Thomson Reuters, investment by American municipalities in the first seven months of this year, at $50.7bn, was nearly 20% below the same period in 2016. Private-sector infrastructure funds show a similar trend, according to Preqin, another data provider: deal volume in the first half of 2017 fell by 7.5%, year on year, to $36.6bn; the number of deals fell by a quarter.
Not long ago optimists were expecting an infrastructure-spending boom. In May Blackstone, a private-equity firm, announced with much fanfare a new $40bn fund for American infrastructure, with a $20bn investment from one of Saudi Arabia’s…Continue reading
WHERE can you find a 7% interest rate on a sovereign dollar-bond? You would have to take a time-machine to the mid-1990s to find such a yield on a ten-year American Treasury. Alternatively, you could slip back a few days to August 2nd and bid for the $1bn of five-year bonds sold by the government of Iraq. The yield was expected to be 7%, but it was trimmed to 6.75% once orders rose above $6bn.
Such eagerness for hard-currency debt from a country still reeling from a civil war shows just how far bond investors will now go to get a decent yield. Oversubscribed issues for risky sovereign bonds have become almost normal. The Iraqi sale came just a week after Greece (whose privately held debt was partly written off in 2012) raised €3bn ($3.5bn) in its first bond sale for three years. In June Argentina was inundated with bids for its 100-year eurobond, as dollar-denominated bonds are known. Sceptics noted that Argentina had defaulted on its debts six times in the previous century, with the most…Continue reading
WHEN the Commonwealth Bank of Australia on August 9th reported its profit for the year to June—above forecasts and just shy of A$10bn ($7.9bn)—it faced questions about cashflows of another sort. Six days earlier the Australian Transaction Reports and Analysis Centre (AUSTRAC), a regulator charged with gathering financial intelligence to combat money-laundering and terrorism, had launched proceedings against it for “serious and systemic non-compliance”. Citing “collective responsibility” for the bank’s reputation, Catherine Livingstone, its chairwoman, has announced cuts to bonuses for Ian Narev, the chief executive, and others.
Founded 106 years ago, CommBank, as it is known, is one of Australia’s biggest banks. AUSTRAC traces its case to 2012, when the bank started installing “intelligent deposit machines”. They accept cash, let depositors stay anonymous and allow money to be switched to other accounts in Australia and overseas straight away. CommBank sets…Continue reading
LOOK only at unemployment and inflation, says Peter Conti-Brown, a historian of the Federal Reserve, and Janet Yellen is the Fed’s most successful boss of all time. The second indicator may be below target, but that is a blip compared with the recessions most Fed chairmen have endured. So it is perhaps not surprising that President Donald Trump is openly considering retaining Ms Yellen, a Democrat installed by Barack Obama, after her term ends in February 2018. Nor by historical standards is it odd: the Fed’s past three leaders were all reappointed by presidents from the other party. Yet Ms Yellen, whom Mr Trump criticised on the campaign trail, is not the leading candidate. PredictIt, a betting site, gives her a 28% chance of staying put. In front of her, with a 36% chance of appointment, is someone else Mr Trump is publicly weighing up: Gary Cohn (on the left above).
Mr Cohn was until January the chief operating officer and president of Goldman Sachs. He left that role to become the…Continue reading
Lenders want plastic more than ever.
IF A genetic test could tell whether you are at increased risk of getting cancer or Alzheimer’s, would you take it? As such tests become more accessible, more and more people are saying “yes”. The insurance industry faces a few headaches as a result.
Once used only for medical reasons, basic predictive genetic tests can now be ordered online for a few hundred dollars. One company, 23andMe, in California, has collected some 4,000 litres of sputum since 2007, enlightening 2m people on their ancestry, health risks and what they may pass on to offspring. In April it received regulatory approval to screen for risk factors connected to ten diseases and genetic conditions, including late-onset Alzheimer’s and Parkinson’s. The ruling could open the floodgates for others to sell direct to consumers.
“Information is power”, argue many who take such tests. But insurers fear that without equal access to such information, they…Continue reading
THE easiest way to get an economist to laugh sardonically is to compare a country’s finances to those of a family. It is both simplistic and wrong, they will argue, for politicians to say that a country “must live within its means”.
But in a new working paper* from the National Bureau of Economic Research, Patrick Bolton and Haizhou Huang make a different comparison; between the finances of a government and those of a company. A business can finance itself in three ways: through internal funds (its revenues); through borrowing; and through equity (the issuance of new shares). In the first two cases, it is easy to see the analogy with a nation state; governments can raise money from taxes or borrow in the form of government bonds.
But the paper’s most striking idea is that the national equivalent of equity is fiat money. Governments are able to issue money that can be used to settle debts and pay taxes—the term “fiat” comes from the Latin for “let it be done”….Continue reading
THE private-equity business presents a paradox. Its barons like to boast of revamping the companies they buy. But they themselves have been steadfast to their own business model, centred on funds with a ten-year life. Within this time span, fund managers, known as “general partners” (GPs), commit to buy, manage and sell a clutch of companies; investors commit to lock up their money for the duration. Sometimes GPs or investors chafe at the time constraint. A new segment of the secondary market, “GP-led” deals, has sprung up to help them.
Investors wanting to exit a fund early need to find a buyer for their stake in the secondary market. But sometimes none will offer an attractive price. Sometimes also, a fund nearing its expiry date may find itself still holding a large number of its investments. GP-led deals place the onus on fund managers to find buyers.
Such transactions have quickly grown from just 10% of the secondary market in 2012 to over one-third this year, according…Continue reading
EVERY working day, shortly before noon, British time, the London Interbank Offered Rate, or LIBOR, is published. For five currencies and seven maturities, from overnight to 12 months, it is the average, trimmed of outliers, of up to 20 banks’ estimates of the interest rate at which they can borrow from other banks. It is also the benchmark for financial contracts reckoned to be worth $350trn. Derivatives depend on it most. But plenty of asset-management products, as well as corporate loans and mortgages, are based on LIBOR and similar rates, notably EURIBOR, an interbank rate for euros.
Yet LIBOR’s days may be numbered. Regulators are promoting other benchmarks. On July 27th Andrew Bailey, the head of Britain’s Financial Conduct Authority, said that the FCA had spoken to banks about sustaining LIBOR until the end of 2021, but no longer. In April a working group set up by the Bank of England concluded that SONIA (the Sterling Overnight Interbank Average Rate), which the central bank…Continue reading
IN DIFFERENT circumstances the two people could be good friends. Each is rather shy and very smart. And each is passionate about bitcoin, a digital currency. One invented hashcash, which foreshadowed components of the crypto-currency; the other is the author of the first Chinese translation of the white paper in which Satoshi Nakamoto, the elusive creator of bitcoin, first described its inner workings.
Adam Back is the chief executive of Blockstream, a British startup, which employs some of the main developers of the software that defines bitcoin’s inner workings. Jihan Wu is the boss of Bitmain, a Chinese firm, which makes about 80% of the chips that power “miners”, specialised computers that keep the bitcoin network secure, confirm payments and mint new digital coins. But far from being fellow-travellers, each represents one of the two main camps in what has come to be called a “bitcoin civil war”, fought over how, if at all, the system should grow.
The worst seems…Continue reading
CAST your mind back to when Bill Clinton was president, Tony Blair and Vladimir Putin were fresh-faced new leaders and tweeting was strictly for the birds. That was when technology stocks, as measured by the S&P 500 tech index, last traded at their current levels.
The horrendous decline in share prices that followed the peak in 2000 was the first financial calamity of this millennium. The dotcom crash had much less impact on the broader economy than the mortgage and banking crisis of 2007-08. Nevertheless, the tech revival has caused some twitchiness among investors. Might history be repeating itself?
In the intervening years the world, and the tech industry, have changed a lot. In the late 1990s enthusiasm for tech shares was so great that the sector’s market value rose far faster than its earnings. The gap is nothing like as great today (see chart). Back then, leading firms like Microsoft and Oracle were valued at more than 20 times their annual revenues, let alone earnings….Continue reading
WINDSOR, a community of 6,200 people two hours outside Albany in New York state, offers many of the amenities commonly found in a small town, including a bakery, a car-repair outfit and several restaurants. There is just one thing missing: a bank. The town’s only financial institution, First Niagara Bank, shut its doors in October.
Towns like Windsor are becoming ever more common in America. Since the financial crisis, banks have closed over 10,000 branches, an average of three a day. In the first half of 2017 alone, a net 869 brick-and-mortar entities shut their doors, according to S&P Global Market Intelligence, a research firm. Some fret that branch closures risk turning poorer neighbourhoods into “banking deserts”, cut off from current accounts, loans and other basic services.
LAST year over 102,000 people died in nearly 50 armed conflicts across the world, according to the Peace Research Institute Oslo, a think-tank. Much of this violence is caused by tensions between ethnic groups—two-thirds of civil wars have been fought along ethnic lines since 1946. Yet historians differ over whether cultural differences or economic pressures best explain how tensions explode into violence.
A new study* by Robert Warren Anderson, Noel Johnson and Mark Koyama suggests that, historically, economic shocks were more strongly associated with outbreaks of violence directed against Jews than scholars had previously thought. The authors collected data for 1,366 anti-Semitic events involving forced emigration or murderous pogroms in 936 European cities between 1100 and 1800. This was then compared with historical temperature data from a variety of sources, including tree rings, Arctic ice cores and contemporary descriptions of…Continue reading
WHEN the Ebola virus hit west Africa in 2014, it took months to get together the money needed to combat the outbreak. Donors ended up committing more than $7bn. But the money came too late and too inefficiently, says Tim Evans, who directs the World Bank’s global health practice. Lives that could have been saved were lost. The bank estimates that GDP in Guinea, Liberia and Sierra Leone was reduced by $2.8bn.
Such outbreaks are likely to become more common: they have increased in frequency and diversity over the past 30 years, in step with the increased mobility of people, products and food. The World Bank says the probability of another pandemic in the next 10 to 15 years is high. That is why it has issued $425m in pandemic bonds to support its new Pandemic Emergency Financing Facility (PEF), which is intended to channel funding to countries facing a deadly disease.
The bonds cover six viruses likely to spark outbreaks: new…Continue reading
WITH the defeat of Marine Le Pen in her bid for the French presidency, establishment politicians in rich countries breathed a sigh of relief. The fortunes of extremist candidates have faltered since the populist surge that put Donald Trump into the White House. But it is hard to be confident that this was populism’s high-water mark without a better understanding of what caused the swell in the first place. The most convincing explanations suggest that populist upswings are not in the past.
It is tempting to dismiss the rise of radicalism as an inevitable after-effect of the global financial crisis. Studies show that the vote shares of extreme parties, particularly on the right, tend to increase in the years after a crisis. The Depression spawned some of the 20th century’s most dangerous and radical populist movements. But the facts do not fit that story precisely. In Europe, for example, populist parties have steadily won more voters since the 1980s. What is more, populist rage is…Continue reading
ACCORDING to company lore, Yunnan Baiyao, a musty-smelling medical powder, played a vital role during the Long March. As China’s Communist troops fled from attacks in the 1930s, trekking thousands of miles to a new base, they spread its yellow granules on their wounds to stanch bleeding. To this day, instructions on the Yunnan Baiyao bottle recommend application after being shot or stabbed. Many Chinese households keep some in stock to deal with more run-of-the-mill cuts. But the government has recently put its maker into service to treat a different kind of ailment: the financial weakness of state-owned enterprises (SOEs).
Yunnan Baiyao has emerged as a poster-child of China’s new round of SOE reform. The company, previously owned by the south-western province of Yunnan, sold a 50% stake to a private investor earlier this year. The same firm had tried to buy a slice of Yunnan Baiyao in 2009 but was blocked. Its success this time has been held up in the official press as proof that a…Continue reading
GOOD generals know that the next war will be fought with different weapons and tactics from the last. Similarly, financial regulators are right to worry that the next crisis may not resemble the credit crunch of 2007-08.
The last crisis arose from the interaction between the market for mortgage-backed securities and the banking system. As investors became unsure of the banks’ exposure to bad debts, they cut back on their lending to the sector, causing a liquidity squeeze. Since then, central banks have insisted that commercial banks improve their capital ratios to ensure they are less vulnerable.
Might the next crisis originate not in the banking system, but in the bond market? That is the subject of a new paper* from the Bank of England. The worry centres on the “liquidity mismatch” between mutual funds, which offer instant redemption to their clients, and the corporate-bond market, where many securities may be hard to trade in a crisis. The danger is that forced…Continue reading
IN MOST four-decade-old firms run by greying co-founders, investors would have long since demanded clarity on succession. But private equity works differently: the industry has been dominated by its pioneers ever since its origins in the 1970s. So an announcement on July 17th about its future leadership by KKR, one of the world’s largest private-equity firms, puts it a step ahead of its rivals. Its aim of ensuring that the firm has the right structure in place “for decades to come” is not obviously shared across the industry.
KKR has been run since 1976 by two of its founders, Henry Kravis and George Roberts (both in their early 70s). They are staying on as co-chairmen and co-chief executives but with less of a day-to-day role. Lining up behind them are a pair of 40-somethings, Joe Bae and Scott Nuttall, who will join the board and take the titles of co-president and co-chief operating officer.
Such explicit, public succession planning is unusual. Stephen…Continue reading
THE most recent time Moses Kibet Biegon needed a quick loan was when his roof blew away. He got one from the Imarisha Savings and Credit Co-operative, in Kericho in western Kenya. Imarisha channels the savings of its 57,000 members into loans for school fees, business projects or, in Mr Biegon’s case, roof repairs. It runs a fund to help with medical bills. And it pays dividends to its members from its investments, which include a shopping plaza that it opened last year.
Savings and credit co-operatives (SACCOs) like Imarisha are the African version of credit unions: member-owned co-ops, usually organised around a community or workplace. Some are rural self-help groups with a few dozen members and a safe. Others have branch networks and mobile apps. The largest SACCOs rival banks; Mwalimu National, which serves Kenyan teachers, has even bought one.
The co-operative model brings “a more humane face” to finance,…Continue reading
THIRTY-ONE years ago, The Economist created the Big Mac index as a way of gauging how different currencies stacked up against the dollar. The index is based on the theory of purchasing-power parity, the idea that in the long run, exchange rates should adjust so that the price of an identical basket of tradable goods is the same. Our basket contains one item, a Big Mac.
The latest version of the index shows, for example, that a Big Mac costs $5.30 in America, but just ¥380 ($3.36) in Japan. The Japanese yen is thus, by our meaty logic, 37% undervalued against the dollar.
IN 2008 Ethiopia’s conservative central bank experimented: it authorised interest-free banking. Interest is prohibited under sharia law, so the move was lauded as a step towards expanding financial services for the country’s large and often poor Muslim minority. But momentum soon stalled. An attempt to launch a fully-fledged Islamic bank foundered. Today most of Ethiopia’s big commercial banks offer a narrow range of Islamic financial products, but to few customers. Islamic finance in Ethiopia was stillborn.
Outside Africa, Islamic finance is in much healthier condition. Between 2007 and 2014, the sector tripled in size (although growth has slowed lately). Total assets are around $1.9trn. Sub-Saharan Africa accounts for less than 2% of this, yet it should be especially fertile territory. The continent’s Muslim population is 250m and growing. And according to the World Bank, as many as 350m Africans do not have a bank account.
Several countries are vying to become…Continue reading
DONALD TRUMP promised to unshackle America’s financial firms from mounds of stultifying regulation and the grip of bureaucrats with little practical experience of capitalism. One way to put that pledge into practice is to appoint officials with business backgrounds and deregulatory agendas. This element of the Trump strategy was on show this week, with a presidential nomination for a critical job at the Federal Reserve and the first public address by the new head of the Securities and Exchange Commission (SEC), another financial regulator.
Buried in the voluminous pages of the Dodd-Frank act, an Obama-era law passed in response to the financial crisis, was the creation of a new supervisory job at the Fed. Thus far, this powerful post has been informally delegated to an existing Fed board member, first Daniel Tarullo and, since his departure, Jerome Powell. That is set to change. Randal Quarles was formally nominated for the…Continue reading
ON JULY 12, the Larsen C ice shelf in Antarctica disgorged a chunk of ice the size of Delaware, a small state on America’s east coast. America’s government seems unfazed by the possibility that such shifts might one day threaten Delaware itself. Its climate defiance grows not only from the power of its fossil-fuel industry and the scepticism of the Republican party, but also from a sense of insulation from the costs of global warming. This confidence is misplaced. New research indicates not only that climate change will impose heavy costs on the American economy, but also that it will exacerbate inequality.
Calculating the economic effects of climate change is no simple matter. It means working out how a given increase in global temperature affects local weather conditions; how local weather affects things like mortality and crop yields; how those changes add to or subtract from regional GDP; and how thousands of local-level changes in GDP add up nationally or globally. No…Continue reading
A WIDELY read cover story on the impact of global warming in this week’s New York magazine starts ominously: “It is, I promise, worse than you think.” It goes on to predict temperatures in New York hotter than present-day Bahrain, unprecedented droughts wherever today’s food is produced, the release of diseases like bubonic plague hitherto trapped under Siberian ice, and permanent economic collapse. In the face of such apocalyptic predictions, can the world take solace from those who argue that it can move, relatively quickly and painlessly, to 100% renewable energy?
At first glance, the answer to that question looks depressingly obvious. Despite falling costs, wind and solar still produce only 5.5% of the world’s electricity. Hydropower is a much more significant source of renewable energy, but its costs are rising, and investment is falling. Looking more broadly at energy demand, including that for domestic heating, transport and industry, the share of…Continue reading
JUST what is the point of a minimum wage? It seems a straightforward enough question to answer. Minimum wages are designed to protect vulnerable workers who might otherwise lack the bargaining power to command a decent pay package. They are a means to …
IN JANE AUSTEN’S novel, “Sense and Sensibility”, Henry Dashwood’s death plunges his wife and two daughters, Elinor and Marianne, into financial distress, because his heir grants them only a meagre allowance. Bond-market investors have started to worry that something similar is about to happen to them.
Since 2009 central banks have been incredibly supportive of the financial markets—keeping short-term interest rates at historic lows and buying trillions of dollars worth of bonds. But in recent weeks, several of them have been hinting at reducing their largesse.
The Federal Reserve has been slowly pushing up interest rates and has talked about reducing the size of its balance-sheet, by not reinvesting the proceeds of bonds when they mature. There have been suggestions that the Bank of Canada might push up rates when it meets on July 12th. Both Mark Carney, the governor of the Bank of England and Andrew Haldane, its chief economist, have hinted that a rate rise may be on…Continue reading
A BIDDING war was briefly but eagerly anticipated. In the end, not a shot was fired. On July 4th the share price of Worldpay, a British payments processor, leapt by 28% after the company said it had received preliminary approaches from JPMorgan Chase, America’s biggest bank, and Vantiv, an American payments firm. The next day Worldpay said it had accepted a cash-and-shares bid from Vantiv, worth £7.7bn ($10bn), giving its shareholders 41% of the combined group. JPMorgan Chase, sniffily explaining that it had considered a bid after an “invitation” from Worldpay, which is a client, declined to proceed. Under Britain’s takeover code that refusal rules out a counter bid for six months. The shares slipped back by nearly 9%.
Vantiv and Worldpay are “merchant acquirers”: companies that have contracts with sellers of goods and services, and licences from credit- and debit-card companies, to accept and process card payments. They also provide…Continue reading