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Swiss banks: Swissness is not enough

Geschrieben von hkarner - 30. März 2014

Date: 27-03-2014
Source: The Economist

Big and small must adapt to survive

Swiss Banks hold foreign assetsLIKE their country’s watchmakers, Swiss banks have enjoyed a reputation for quality, reliability and watertight discretion. But since 2008, spectacular coups by neighbouring countries’ tax authorities and investigations by America’s Department of Justice have torn at their reputation. Now they are trying to rebuild one as squeaky-clean money managers.

The deceptive calm of shoppers on the Bahnhofstrasse in Zurich belies the turmoil behind the doors of nearby financial institutions. Foreign banks are selling out. The biggest Swiss names are dogged by litigation and calls for more capital just as costs are rising and margins falling. On March 13th they lost a prominent client: Uli Hoeness, president of Bayern Munich football club, was jailed for three-and-a-half years by a Munich court for avoiding tax on money in a Swiss bank account.

It is now clear to even the most obstinate Swiss banker that he must change his game or face ruin. Four of the classic Swiss private banks, Pictet, Lombard Odier, Mirabaud and La Roche, have opted for limited liability, ending the owners’ total responsibility for the core bank—mainly because of the risk these days of picking the wrong clients. That leaves a shrinking number of private banks in Geneva, of the sort whose offerings go beyond providing financial advice into something more akin to a lifestyle concierge service. Some are surely too small to survive.

Swiss bank secrecy is no longer a protection. Between them the OECD, a rich-country club, and the EU are insisting on a voluntary exchange of information that makes banks declare each account automatically to the relevant tax authority. America has dished out hefty fines, too, and forced lenders to hand over names, a once-unthinkable breach of client trust. Den Rest des Beitrags lesen »

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Inflation and interest rates: Up, up and away

Geschrieben von hkarner - 30. März 2014

Date: 29-03-2014
Source: The Economist

Higher inflation may be needed to leave extra-low interest rates behind

AT FIRST glance, rich-world central banks are going their separate ways. Cheered by sturdy growth figures, the Bank of England and the Federal Reserve are shuffling toward an exit from easy monetary policy; markets found Janet Yellen’s first Fed statement unexpectedly hawkish. The European Central Bank, in contrast, is tacking looser. On March 25th Jens Weidmann, president of the Bundesbank, suggested that the ECB might need to be more forceful in order to keep the euro-area economy out of the grips of deflation.

Interest ratesLook again, however, and the path forward appears similar across the rich world: low interest rates stretch off into the visible distance. The outlook is clearest in Europe, where the ECB may toy with negative rates as a means to fend off deflation. But even in America and Britain “normal” rates are a distant prospect. In February Mark Carney, the Bank of England’s governor, promised that eventual rate rises would happen gradually, and would level off below the pre-crisis norm. On March 19th Ms Yellen offered similar guidance. Markets project that short-term rates in both economies will still be just 2% in early 2017 (see chart 1), a level the euro zone will not hit until 2020.

As normalisation recedes toward the horizon, central bankers moan publicly about the costs of low rates. In February Daniel Tarullo, a Fed governor, said that they might encourage investors to take dangerous risks as they “reach for yield”. Even more worrying, low rates leave little cushion against future shocks. The Fed’s main policy rate was just 2% when Lehman Brothers failed in 2008, compared with 5% at the start of the 2001 recession and 8% when the downturn of 1990 began.

Yet rates are low for good reason: economies cannot withstand dearer credit. Central banks are battling against two sources of downward pressure on their main policy rates. One is the rock-bottom level of the real (ie, inflation-adjusted) interest rate needed to keep economies running at full tilt. This “natural” rate has been dragged down by long-term structural trends. A global savings glut is partly to blame: export powerhouses like the OPEC countries and China buy vast quantities of rich-world debt, depressing borrowing costs in the process. Rising inequality also adds to the pool of underused savings, since the rich save more of their income. Leaden real rates were reinforced by the financial crisis. Tumbling asset prices forced households to repay debts rapidly. As they struggled to deleverage, their interest in new borrowing and spending evaporated. Den Rest des Beitrags lesen »

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Geschrieben von hkarner - 29. März 2014

Date: 27-03-2014
Source: The Economist
Subject: Labour markets: A mighty contest

Job destruction by robots could outweigh creation

Robots“OUR ROBOTS PUT people to work,” says the rejected slogan still on the whiteboard in Rodney Brooks’s office. It was meant to convey the belief that led Mr Brooks to start Rethink Robotics: that robots in small manufacturing businesses can create new jobs, or at least bring old ones back from China, thus helping to launch an American manufacturing renaissance. But the message could also be read another way: robot overlords forcing human helots into back-breaking labour. Better left unsaid.

Small and medium-sized companies are between 20 and 200 times less likely to use robots than large ones in similar sectors, according to a study carried out by Metra Martech, a consultancy, for the IFR. They could thus become an important market if someone were to offer them the right robots, which would open up new sectors of the economy to the productivity gains that can come with automation. Such robots would still do routine tasks but would be able to switch from one set of tasks to another as required, perhaps every few weeks, perhaps a couple of times a day. They would therefore be heavily dependent on their human fellow workers to set them up and get them going.

Den Rest des Beitrags lesen »

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Keynes and Hayek: Prophets for today

Geschrieben von hkarner - 19. März 2014

Date: 18-03-2014
Source: The Economist

friedrich-hayekON MARCH 10th 1944, seventy years ago this month, a relatively-obscure Austrian émigré published a book that would become one of the great classics of 20th-century economic literature. The new economic ideas of John Maynard Keynes were much in fashion in that period; this new book judged them rather harshly.

The dissenter from the growing consensus around Keynes was Friedrich von Hayek, an economist from Vienna. The book was the “Road to Serfdom”, in which Hayek argued that the extension of central planning is the start of the growth of constraints on individual liberty, which inevitably leads to the emergence of tyrannical regimes, both communist and fascist in nature. It was the culmination of four years’ work—and several decades challenging many of Keynes’ new economic theories, particularly on what governments should do during depressions.

That has often been portrayed more recently as a battle between two economic titans. Hayek, in the 1970s, came to be seen as opposing everything Keynes and the Keynesian consensus stood for. More recently, many see the change towards more free-market ideas since the 1980s as the victory of Hayek’s ideas over Keynes’—a process that has since reversed as a result of the Great Recession. This academic battle of ideas has even made its way into popular media. On Youtube, there is a series of rap parody videos of the academic battle between Keynes and Hayek.

But Keynes himself in fact did not dislike many of Hayek’s ideas in the “Road to Serfdom”. On the contrary, he had indirectly helped Hayek to write it. When Hayek and the rest of the London School of Economics moved to Cambridge in 1940 to escape the Blitz in London, Keynes found him rooms at his college, King’s, to live and work in, and the two remained in regular contact until Keynes’ death in 1946. Ideologically, they also sang from the same hymn sheet: both were liberals with a distaste for authoritarian regimes such as communism and fascism. Keynes agreed with Hayek that fascism was not a healthy reaction against communism, as many contemporaries in Britain thought, but was instead equally dangerous for liberalism. Den Rest des Beitrags lesen »

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Bitcoin’s future: Hidden flipside

Geschrieben von hkarner - 16. März 2014

Date: 15-03-2014
Source: The Economist

How the crypto-currency could become the internet of money

Bitcoin originalBitcoin: the original

THE father has been found in time for his child’s funeral. That would appear to be the sorry state of affairs in the land of Bitcoin, a crypto-currency, if recent press coverage is to be believed. On March 6th Newsweek reported that it had tracked down Satoshi Nakamoto, Bitcoin’s elusive creator. And on March 11th Mt Gox, the Japanese online exchange that had long dominated the trade in the currency before losing $490m of customers’ Bitcoins at today’s prices, once more filed for bankruptcy protection, this time in America.

In reality, things are rather different. Evidence is mounting that Dorian Satoshi Nakamoto, whom Newsweek identified as Bitcoin’s father, is not the relevant Satoshi. More importantly, Bitcoin’s best days may still be ahead of it—if not as a fully fledged currency, then as a platform for financial innovation. Much as the internet is a foundation for digital services, the technology behind Bitcoin could support a revolution in the way people own and pay for things. Geeks of all sorts are getting excited—including a growing number of venture capitalists, who know a new platform when they see one.

To understand the enthusiasm in this modern currency, it helps to think about a very old one. Until the early 20th century the people on Yap, an island in the Pacific Ocean, used large stone disks (pictured) as money for big expenses, such as a daughter’s dowry. Being very heavy, they were rarely moved when spent. Instead, they simply changed owners. Every transaction became part of an oral history of ownership, which allowed islanders to know the proprietor of each stone and made it difficult to spend the same stone twice. Den Rest des Beitrags lesen »

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Japan’s pension giant: Risk on

Geschrieben von hkarner - 16. März 2014

Date: 15-03-2014
Source: The Economist

The world’s largest pension fund is changing the way it invests, with big consequences for the market

WHEN George Soros, a billionaire investor, met Shinzo Abe, the prime minister of Japan, at Davos in January, he hectored him about asset management. Japan’s massive public pension fund needed to take more risk, he reportedly told Mr Abe. With ¥128.6 trillion ($1.25 trillion) of assets, the Government Pension Investment Fund (GPIF) is the world’s biggest public-sector investor, outgunning both foreign rivals and Arab sovereign-wealth funds. Yet its mountain of money is run by risk-averse bureaucrats using an investment strategy not much more adventurous than stuffing bundles of yen under a futon. It keeps around two-thirds of assets in bonds, mostly of the local variety. Like an investing novice, it mostly follows indices passively, and hardly ventures abroad.

The government would dearly love to oblige Mr Soros. Mr Abe is now taking steps to overhaul the fund. In November last year an official panel laid out a plan of far-reaching reform, some of which could take effect as soon as this year. To boost returns to future pensioners, it concluded, the GPIF should reduce its reliance on bonds, head into stocks and also invest in different asset classes including infrastructure and venture capital. Den Rest des Beitrags lesen »

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Are credit markets getting frothy again?

Geschrieben von hkarner - 15. März 2014

Date: 13-03-2014
Source: The Economist: Buttonwood
Subject: The big issue

Are credit markets getting frothy again?

SETH KLARMAN, who runs Baupost Group, a big hedge fund, is worried. In his latest letter to investors, he writes that “a sceptic would have to be blind not to see bubbles inflating in junk-bond issuance, credit quality and yields.” Recalling the credit boom, he adds that “here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason…and where caution seems radical and risk-taking the prudent course.”

Mr Klarman is right that investors are currently enthusiastic buyers of corporate debt, which offers at least some yield in a world of very low short-term interest rates. In the week to March 5th investment-grade bond funds received inflows of $1.8 billion and junk-bond funds had inflows of $1.1 billion, according to Bank of America Merrill Lynch. Den Rest des Beitrags lesen »

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Business in emerging markets: Emerge, splurge, purge

Geschrieben von hkarner - 8. März 2014

Date: 06-03-2014
Source: The Economist

Western firms have piled into emerging markets in the past 20 years.
Now comes the reckoning

Faded prospects in China

VODAFONE’S latest figures appear at first glance to vindicate the most powerful management idea of the past two decades: that firms should expand in fast-growing emerging economies. Sales at the mobile-phone company fell in the rich world while those in the developing world rose smartly. Corporate strategy is usually a contentious subject: there are fierce debates about how big, diversified and financially leveraged firms should be. But geography has seduced everyone. Vodafone is one of countless Western companies that have bet on the developing world.

Look closer, however, and those figures contradict accepted wisdom. At market exchange rates Vodafone’s sales in the emerging world fell, reflecting the widespread currency depreciations in mid-2013, when America’s Federal Reserve signalled it would taper its bond purchases. This drag may linger: in January the lira and rand tumbled in Turkey and South Africa, two biggish markets for Vodafone. On longer-term measures things look cloudy, too. Over a decade Vodafone has invested more than $25 billion in Turkey and India. These operations made a paltry 1% return on capital last year. Vodafone has created a lot of value for its shareholders—but through its American investments, which it has sold to Verizon for a stonking price. Den Rest des Beitrags lesen »

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China’s currency: One way no more

Geschrieben von hkarner - 7. März 2014

Date: 06-03-2014
Source: The Economist

Why China’s central bank is weakening its currency

CHINA’S currency has long been a source of controversy, especially among American politicians outraged by its cheapness. But it is rarely a source of uncertainty. Critics have argued fiercely about what it should be worth. But as to what it would be worth, China’s authorities have left little room for disagreement. For much of its history it has been pegged tightly to the dollar. More recently it has floated within a narrow band (now 1% either side of a benchmark fixed each morning by the central bank). Most people have assumed it would float upwards.

In recent days, however, China’s authorities have tested that assumption. At a two-day meeting ending on February 18th, the central bank decided to weaken the yuan, according to the Wall Street Journal. It has lowered its benchmark by a smidgen at a time for several days. The currency has also fallen from the strong side of its band to the weak side. In the space of a few days, it lost about 1% of its value. On February 26th China’s foreign-exchange regulator said that China’s ongoing exchange-rate reforms meant that “two-way fluctuations… will become the norm”.

Yuan exchange ratesFor the past year, a different norm has applied: the fluctuations have been mostly one way. China enjoys a sizeable current-account surplus and it still attracts more foreign-direct investment than it provides. Other kinds of capital flows are more volatile. But in the last quarter of 2013, a net $22 billion of “hot money” flowed inwards. Much of this qualifies as a “carry trade”: speculators have borrowed cheaply in dollars, then lent in yuan, eluding China’s capital controls in the hope of benefiting both from higher Chinese interest rates and the yuan’s appreciation.

All of this has put upward pressure on the currency, fulfilling the carry-traders’ designs and inspiring others to emulate them. Despite the central bank’s heavy purchases of foreign exchange, the yuan rose by 2.8% against the dollar in the year to January, even as the currencies of other emerging markets plummeted. The resulting loss of competitiveness is best illustrated by an index calculated by the Hong Kong Monetary Authority, which compares China’s currency with those of other emerging economies that compete with it in third markets (the countries China trades “against”, not necessarily the countries it trades “with”). This index shows the yuan rising by over 13% in the year to January and by almost 2.6% in January alone (see chart).

China’s authorities did not say they had stepped in to sap the yuan. But their intervention left fingerprints all over the money markets. In buying dollars to weaken the currency, the monetary authorities (and their accomplices, the state-owned banks) put additional yuan into circulation. The central bank withdrew a fraction of this extra money by selling securities to the banks. But the banks were still left with extra yuan, which they tried to lend to each other. This pushed down interbank interest rates, despite the central bank’s withdrawals. As Yao Wei of Société Générale points out, “No factors other than foreign-exchange intervention seems able to explain that.” Den Rest des Beitrags lesen »

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Peer-to-peer lending: Banking without banks

Geschrieben von hkarner - 1. März 2014

Date: 27-02-2014
Source: The Economist
By offering both borrowers and lenders a better deal, websites that put the two together are challenging retail banks

SAVERS have never had a worse deal but for most borrowers, credit is scarce and costly. That seeming paradox attracts new businesses free of the bad balance sheets, high costs and dreadful reputations which burden most conventional banks.

Foremost among the newcomers are peer-to-peer (P2P) lending platforms, which match borrowers and lenders directly, usually via online auctions. The loans issued often comprise many tiny slivers from different lenders. Some P2P platforms slice, dice and package the loans; others allow lenders to pick them. Either way, the result is a strikingly better deal for both sides. Zopa, a British P2P platform, offers 4.9% to lenders (most bank accounts pay nothing) and typically charges 5.6% on a personal loan (which is competitive with the rates most banks charge).

peer-to-peer-lendingElsewhere, returns (and risks) are higher. IsePankur, which lends to more than 60,000 people in four euro-zone countries, pays its lenders (who include your correspondent) a stonking 21.45% average net return (after a 3% default rate). Its typical borrowers do not flinch at rates of up to 28%: they are refinancing far costlier credit-card debt and doorstep loans.

Peer-to-peer lending is growing fast in many countries. In Britain, loan volumes are doubling every six months. They have just passed the £1 billion mark ($1.7 billion), though this is tiny against the country’s £1.2 trillion in retail deposits. In America, the two largest P2P lenders, Lending Club and Prosper, have 98% of the market. They issued $2.4 billion in loans in 2013, up from $871m in 2012. The minnows are doing even better, though they are growing from a much lower base.

Neil Bindoff of PwC, a professional-services firm, speaks of a “perfect storm” supporting P2P’s growth. Interest rates are close to zero, the public is fed up with banks, costs are low (one third of a typical bank’s, according to Renaud Laplanche of Lending Club), and e-commerce is becoming part of daily life. People use the internet for peer-to-peer telephony (Skype) and shopping (eBay), so why not loans?

Awareness is still low—a survey by pwc found only 15% of Britons claimed to have heard of the big P2P firms such as Zopa, Funding Circle and RateSetter; 98% had heard of the main banks. Another hurdle in Britain is that P2P is not fully regulated; that will change on April 1st. The Financial Conduct Authority will issue the new rules imminently. In America, people saving for retirement can apply tax breaks to their loans, and offset their losses against profits. Britain’s P2P industry is awaiting a decision to extend tax-free savings schemes to its lenders. Den Rest des Beitrags lesen »

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