Posts from April 2014

Libor: Do you get what you pay for? [Updated]

As brands go, the London Interbank Offered Rate – Libor – is right up there with Enron and Lehman Brothers.

So it might come as a surprise to the poor souls forced to track the level of Libor on a daily basis that the new compilers are demanding $10 a month for what used to be free for users of terminals such as Bloomberg and Reuters to look at. Read more

The funny money debate rumbles on

Paul Krugman is puzzled why it’s suddenly news that banks have the power to create money. As he noted on his blog this week, it’s hardly something that contradicts standing economic theory. We have, as he notes, known about the money-creation role of banks for a long time — a point we’ve also made before on numerous occasions.

So why then is it suddenly such a talking point? Who is it really that’s been misunderstanding the system for so long and how much damage has this been doing?

Part of the problem according to Krugman is that Econ 101 theory tends to over-simplify things, teaching conclusions without lingering on the peculiar features and complexities of finance. But as he notes:

…this doesn’t mean either that they have unlimited ability to create money or that they are somehow outside the usual rules of economics.

 Read more

Six questions for Warren Buffett

On Saturday Warren Buffett will answer questions about his company in public, in front of an audience of 20,000(ish) people at the Omaha CenturyLink Center. It is part of the Berkshire Hathaway annual meeting.

There will be six each from analysts Jay Gelb of Barclays, Jonathan Brandt of Ruane, Cunniff & Goldfarb, and Greggory Warren of Morningstar. Shareholders in attendance can queue up at a microphone, while journalists Andrew Ross Sorkin of the New York Times, Becky Quick of CNBC and Carol Loomis of Fortune will ask the best questions sent to them by email.

As FT Alphaville won’t be there (and would be exiled to the stadium’s rafters with the FT’s Stephen Foley and the rest of the world’s press anyway), here are the questions we suggest that someone put to the great Sage — with some explanation of why they’re important. Read more

If you flip a euro forever…

Euro chart du jour, from Nomura:

We’d call it the new yen, but we all know what happened there. Read more

Where the tech innovation goes

It’s day two of the London TfL strike, which calls for another installment in the robot vs jobs debate. This time we present the findings of Daron Acemoglu, of MIT, in a new working paper which explores technological capital biases and why it is that the benefits of technological innovation don’t always flow neutrally across the economy.

Acemoglu’s paper expands on the seminal work of Atkinson and Stiglitz on technological change in 1969, and uses a neat North/South analogy to explain the why these biases develop in the first place (our emphasis): Read more

Markets Live: Wednesday, 30th April, 2014

Live markets commentary from 

The (early) Lunch Wrap

Alstom forges ahead with energy unit sale to General Electric || China poised to pass US as world’s leading economic power this year || Shell’s first-quarter profit beats market expectations || Twitter hit as user numbers disappoint || Rolls-Royce nears sale of £1bn energy unit to Siemens || Pfizer flies in to clear path for £60bn AstraZeneca takeover || BNP warns of US fines ‘far in excess’ of $1.1bn provision || Markets Read more

We’d prefer to be compared with our previous attempts, thanks very much

Stress tests in Europe maybe aren’t the mugging by reality they used to be… they’re putting up a little bit more of a fight this time. Though how much?

Here’s Citi cruelly putting the European Banking Authority’s recently released methodology against the US’s CCAR:

In the EU, the proposed adverse scenario leads to an overall cumulative deviation of EU GDP from its baseline level by 7.0% over the 3-year period to end-2016, with EU unemployment deviating by 2.9% versus the baseline scenario. This would imply a cumulative real GDP decline of -2.1% over 3-years, notably less than the stress applied in the US CCAR (a -4.75% decline over 15 months) and a peak unemployment rate of 13.0% versus US CCAR 11.25%. Equity prices are expected to decline by 19% relative to the baseline (US CCAR -50% decline), residential house prices by -21% (US CCAR -25%) and commercial property prices by -15% (US CCAR -35%).

Also, no deflation in the EU adverse scenario? Read more

Further reading

Elsewhere on Wednesday,

– In eastern Ukraine there is no ethnic basis for strife, but hate is still being manufactured.

– The Fishermen.

Hugh “Skip” McGee III is a banker’s banker…

– Synthetic biology, who is it good for?  Read more

The 6am London Cut

Markets: “Asian stocks swung between gains and losses as investors weighed corporate earnings before the Federal Reserve decides on U.S. monetary policy. The Bank of Japan refrained from expanding stimulus.” (BloombergRead more

The Closer


– Meet the Fed’s secret cybersecurity unit. Read more

The Matthew effect on the Internet

From an excellent writeup by Ed Yong about a study from the team of sociologist Arnout van de Rijt:

On Kickstarter, where people raise money for specific projects, [the researchers] picked 100 out of 200 projects and donated a small proportion of their funding goal. On Epinions, where users review products and are paid based on the quality of their appraisals, they gave a “very helpful” rating to some new, unrated reviews. On Wikipedia, where dedicated editors can get status awards to honour their commitment, the team gave awards to a random subset of the most productive editors. And on, where people call for signatures to support their campaigns, the team gave a dozen signatures to 100 out of 200 early-stage campaigns. Read more

Video: activists in court battles for the boardroom

We plan start experimenting more with videos soon. This one is a tl;dr version of Stephen Foley’s analysis of activist investors last week and my own recent post.

 Read more

Chart of the day: US vs UK median real wage growth since 1988

That’s from an essay by David Blanchflower and Stephen Machin. Read more

Robots, jobs and TFL strikes

On a morning which saw London grind to a halt because of a two-day strike by Transport for London workers protesting the closure of ticket offices (that is, due to automation)…

FT Alphaville was invited to participate in a panel debate about the implications of technological progress on jobs and labour, organised and hosted by the think-tank Resolution Foundation.

(Though to be fair, the tube strike didn’t seem to impact attendance and almost all of us arrived on time.)

Chairing the event was Channel 4 News’ Faisal Islam. Joining yours truly among the panelists was economist and author Diane Coyle, of Enlightenment Economics, Alan Manning, Professor of Economics at LSE and Michael Osborne, machine learning expert and associate professor at Oxford University. Read more

Markets Live: Tuesday, 29th April, 2014

Live markets commentary from 

The (early) Lunch Wrap

Good morning New York,


EU sanctions, the sequel

Following part 2 of Ukraine-related US sanctions against Russia — this time including Sechin the Rosneft chief executive — we get a new EU list of 15 names.

Of note: deputy Russian prime minister Dmitry Kozak and “Igor Dmitrievich SERGUN… Responsible for the activity of GRU officers in Eastern Ukraine.” Consensus is a tricky thing. Read more

Of Apple, stock splits and odd lots

Before going any further read Matt Levine. He nailed a lot of this already, including the ever worthwhile point that the Dow is ridiculous:

Apple’s stock is trading at around $565 today. Apple thinks that number is too high, and so is going to cut it by six-sevenths, to some number around $80, by giving everyone six extra shares for each share they currently hold. This is not the sort of story where I explain to you that changing the nominal price of a stock doesn’t change the economic value of the company; I hope we are all grown-ups here.

So, if the split doesn’t have any economic impact, why bother?

Indeed. And with that in mind there are a few things worth adding Read more

Further reading

Elsewhere on Tuesday,

– The spoor of peak Piketty.

– The cure for Neo-Fisherism: History.

Narrow banks won’t stop bank runs.

– Herbalife sure is buying a lot of stockRead more

The 6am London Cut

Markets: Asian bourses offered mixed reactions to Monday’s latest slip in US technology stocks, while also reflecting caution ahead of the US Federal Reserve’s meeting that is due to commence later today. (FT’s Global Markets OverviewRead more

The Closer


– Robert Pickering on the myth of the banker pay death spiral. Read more

When ETFs make things more volatile

Do ETFs impact the volatility of the underlying stocks they are based on?

A new paper by Itzhak Ben-David, Francesco Franzoni and Rabih Moussawi suggests they do. Read more

Financial intermediation and shadow banking through commodities

Craig Pirrong’s white paper on the economics of commodity trading firms (CFTs), sponsored by Trafigura, has been released and can be found here.

Overall conclusion: commodity trading firms are not systemically risky because they do not engage in the sort of maturity transformation that banks do. They also tend mostly to operate on a hedged basis, via “basis trade” exposure. Short-term assets meanwhile are funded with short-term debt while long-term assets are funded with long-term debt, meaning the institutions are not heavily leveraged at all, though balance sheets are exposed to liquidity or rollover risk. Read more

“SECHIN, Igor; DOB 07 Sep 1960”

Part 2 of Ukraine-related US sanctions against Russia — this time including the Rosneft chief executive.

Meanwhile, looking at some of the companies on there…

 Read more

On the intriguing drop in commodity correlation

Banks are selling off their commodity divisions for regulatory reasons but also because commodities are turning out to be less profitable for them than they used to be.

On which note, an interesting development has emerged since banks started winding down their commodity divisions in 2013. According to David Bicchetti and Nicolas Maystre, who wrote a paper in 2012 highlighting increasing correlations between a number of major commodities and indices from 2008 onward, these correlations have now begun to dissipate. Read more

Markets Live: Monday, 28th April, 2014

Live markets commentary from 

The (early) Lunch Wrap

Good morning New York,


If the GPIF suit fits…

If you were a Japanese prime minister intent on being radical (where it’s practical) and you had the world’s second largest public pension reserve fund refusing to switch out of domestic bonds and into riskier assets as aggressively as you’d prefer it to…

You too might consider shaking things upRead more

Further reading

Elsewhere on Monday,

– Cornering markets in securities is unequivocally not ok, in property it is fair game.

– Of the IMF’s preferred creditor status.

Ukraine’s Russian bonds – a Gazprom clause?

– The Koch attack on solarRead more