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ApprovedBusiness and financeFINANCEFinance and economics

Might higher interest rates spoil America’s economic boom?

AMENDING a famous metaphor, Janet Yellen once said that the Federal Reserve would “keep refilling the punch bowl until the guests have all arrived”. This week investors began to wonder if Jerome Powell, who will shortly succeed Ms Yellen at the top of the Fed, might at last deem the party full. On January 29th the ten-year Treasury yield reached 2.7%, the highest since early 2014. The prospect of tighter money caused stockmarkets to sneeze. On January 30th the S&P 500 fell by 1.1%, its biggest decline since August, before recovering a tiny bit the next day. With unemployment low and tax cuts pending, investors are wondering whether inflation and interest rates might soon surge.

The economy grew by 2.5% in the year to the fourth quarter of 2017. According to Okun’s law, a rule of thumb relating unemployment to GDP, falling joblessness explains almost half of this growth. (The unemployment rate fell from 4.7% to 4.1% over the same period.) Early in the year inflation fell short, suggesting that fast growth could continue unabated. But pressure on prices has begun to build. Quarterly core inflation, which excludes volatile food and energy prices, was only just below the Fed’s 2% target at the end of 2017. Markets have recently come to believe rate-setters who say that they will tighten policy three times in 2018 (see chart), as happened in 2017.

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ApprovedBusiness and financeFINANCEFinance and economics

Cars block the road to a renegotiated NAFTA

ROBERT LIGHTHIZER, the United States Trade Representative, wants renegotiation of the North-American Free Trade Agreement (NAFTA) to speed up. When the sixth round of talks ended on January 29th with only three chapters agreed, he griped: “We owe it to our citizens, who are operating in a state of uncertainty, to move much faster.” But given the changes he wants, any more speed risks a crash.

One of the biggest fights is over Mr Lighthizer’s desire to rewrite NAFTA’s rules about cars. Seen one way, the deal has been a boon for the industry. Trade in vehicles and their parts accounts for a quarter of America’s two-way trade with Mexico and Canada. But NAFTA’s critics see it as a big reason for America’s trade deficit with Mexico, and for its falling share of car assembly (see chart). Rules riddled with holes should be rewritten, they think, to yank back American jobs.

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ApprovedBusiness and financeFINANCEFinance and economics

Direct-lending funds in Europe

WHEN Caronte & Tourist, a Sicilian ferry company, needs a new ship, it is cheap and easy to borrow from a bank. But in 2016, when Caronte’s controlling families wanted to buy back the minority stake held by a private-equity firm, banks balked at the loan’s unusual purpose. Edoardo Bonanno, the chief financial officer, also worried that the €30m ($33m) in extra bank debt might make shipping loans harder to obtain from them in future. So he turned instead to a direct-lending fund run by Muzinich & Co, an asset manager.

Such funds are only about a decade old in Europe (and not much older in America, where they started). Assets under management at Europe-focused funds increased from a mere $330m at the end of 2006 to $73.3bn by mid-2017, which includes $27.9bn of “dry powder”, or funds yet to be lent out (see chart). In 2017 alone 24 direct-lending funds raised a record $22.2bn. Such funds do what they say on the tin: lend directly to firms, usually in the form of big, multi-year loans. The borrowers are often either companies that are too small to raise equity or debt on capital markets, or private-equity funds buying such firms.

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ApprovedBusinessBusiness and finance

WhatsApp: Mark Zuckerberg’s other headache

“THERE’S too much sensationalism, misinformation and polarisation in the world today,” lamented Mark Zuckerberg, the boss of Facebook, recently. To improve things, the world’s largest social network will cut the amount of news in users’ feeds by a fifth and attempt to make the remainder more reliable by prioritising information from sources which users think are trustworthy.

Many publishers are complaining: they worry that their content will show up less in users’ newsfeeds, reducing clicks and advertising revenues. But the bigger problem with Facebook’s latest moves may be that they are unlikely to achieve much—at least if the flourishing of fake news on WhatsApp, the messaging app which Facebook bought in 2014 for $19bn, is any guide.

In more ways than one, WhatsApp is the opposite of Facebook. Whereas posts on Facebook can be seen by all of a user’s friends, WhatsApp’s messages are encrypted. Whereas Facebook’s newsfeeds are curated by algorithms that try to maximise the time users spend on the service, WhatsApp’s stream of messages is solely generated by users. And whereas Facebook requires a fast connection, WhatsApp is not very data-hungry.

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