A Deutsche Bank note that’s been gaining attention lately says that the “glory days” seem to be over for high-frequency trading. Depending on how you define glory, maybe they are. But the note would be more convincing if it didn’t repeat an irritatingly persistent Treasury-market myth, especially in a piece that’s ostensibly about equities.
Let’s all pause for a moment and remember the Great Fall of China’s stock market, one year ago this month, and remember that this evening is when MSCI tells China’s A-shares if they are to be allowed into its club after all. Done? Right, let’s all pause for a longer moment and consider the plight of the small Chinese investor who doesn’t quite have the same government support as some of the larger forces around him.
The DAO is a decentralised autonomous organisation, which the cryptocurrency faithful believe could disrupt corporate structures forever. It is, to put it simply, a kind of crowd-funded investment fund. It’s only been going for over a month or so but in that time the DAO has already raised stacks of illiquid and variably priced Ether (ETH) coupons for funding its potential ventures — worth some $150m at the last count (or there about, because mark to market). The faithful say the DAO will solve the problem of how revenue can be generated within a purely decentralized environment, with its core supporters claiming it is superior to a normal corporation because all the decisions it makes are transparent and because, well, its finances can be audited by anyone, making corruption impossible.
Sterling is under pressure ahead of next week’s EU referendum, Sir Philip Green is set to be grilled by MPs on the collapse of BHS. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Powa Technologies may be long gone, but the dust has yet to settle. Founder Dan Wagner is locked in a dispute with a former director of Powa over a loan made to the company when it was in desperate need of funding. Wagner personally guaranteed the loan, which is yet to be repaid, and on Friday, records show, he made an application to the bankruptcy court asking for a repayment demand to be dismissed.
After years of failed attempts to stabilise the Greek economy, the Greek government finally got debt relief in 2012. As we explained in our previous post, interest payments fell by more than half between 2011 and 2013. Since the 2012 modifications, Greece’s sovereign debt service costs have been significantly smaller as a share of total output than in Italy or Portugal. Yet it hasn’t helped much. The economy continues to contract and Greece’s depression since 2008 is among the absolute worst of any country in the world since 1980. Investment spending had already plunged by 60 per cent in real terms between the peak in 2007 and the end of 2011. Since then, it’s dropped another 13 per cent. Overall, Greece has had no economic growth since the beginning of 2013: Part of the reason: the debt modifications failed to convince private investors to return to Greece, despite having “solved” the problem of government debt service costs.
In the course of bringing you the FT’s Festival of Finance Camp Alphaville, the FT Alphaville team has stumbled into a modern day administrative nightmare which we presume applies more broadly to everyone. It seems, if you put one team into a position where they must liaise with at least three separate departments simultaneously, then give them all access to a version-controlled shared drive without a clearcut executive process to go with it, what you end up with isn’t work-flow harmony but unbounded database hell.
Once upon a time, going public was the pinnacle of achievement for a tech entrepreneur. This is no longer the case. Tech IPOs have taken a major hit and startups are staying private for longer. The US IPO market in general is experiencing the slowest year since the financial crisis, but it has been a particularly quiet year for tech IPOs, with only a few companies going public in the US.
Last week, we revealed a significant discrepancy between the Greek government’s net debt as reported by the International Monetary Fund’s World Economic Outlook database and what you’d get if you replicated the IMF’s standard methodology for netting out “financial assets corresponding to debt instruments” using data published by the Bank of Greece. Neither the IMF nor the Bank of Greece had responded to our requests for an explanation of the discrepancy at the time we wrote our original post, nor did either institution respond in time for our follow-up discussion of the Greek government’s equity portfolio. Four days after we’d emailed our original question (while we were on holiday) we finally got some responses.
Spread betting group IG says its punt on online advertising is paying off, Alliance Trust has confirmed RIT’s approach about a possible merger. FT Opening Quote, with commentary by Oliver Ralph, is your early Square Mile briefing. You can sign up for the full newsletter here.
According to data published by the Bank of Greece, which follows common standards set by the European Central Bank and Eurostat, the general government sector of the Greek economy owned financial assets worth about €86bn at the end of 2015. Of that, about €18bn consisted of claims by various levels of government on each other, specifically about €3bn in T-bills, €7bn in Greek government bonds, and €8bn in short-term loans from local government to the central government. Net out those claims and the general government sector of the Greek economy held financial assets of about €68bn at the end of 2015.
A couple of weeks ago, Bank of America Merrill Lynch put out a research note titled: “The Silver Economy — Global Ageing Primer”. The document, by equity strategists Beija Ma, Sarbjit Nahal and Felix Tran, is long. Really long. Like, 232-pages long. And people are scared they might be subsumed into the silver economy before they finish it. *opens note on global ageing* *discovers it's 232 pages long* *considers whether life is too short* — Richard Barley (@RichardBarley1) May 20, 2016
- James Heckman tells us why IQ is overrated
- Mihir Desai explains the wisdom of finance — Now with transcript!
- Mihir Desai explains the Wisdom of Finance
- Can we avoid another financial crisis?
- Hirschmania, the final chapter
- The life and speeches of Sadie Alexander
- Kim Rueben on the fiscal impact of immigration
- A sit down with Adair Turner
- Stephen Kotkin explains how Stalin defined the Soviet system
- Richard Florida on geographic inequality
- Further reading
- Jeremy Adelman on Albert O Hirschman’s “Exit, Voice & Loyalty”
- Dan Drezner on the marketplace of ideas
- Robert Lustig on the science behind our addictions
- The economic impact of immigration
- Further reading
- Ricardo Hausmann on the tragedy in Venezuela
- Does Amazon present an anti-trust problem?
- Mary Waters on the integration of immigrants into the US
- Lee Buchheit and Mitu Gulati on Venezuela’s debt
Why you should attend Camp Alphaville[0:58] Outdoorsy fun in the sun, economics and finance wonkery, robots, drones, and alcohol.
Time is a flat circle, which is why the Greek government is set to run out of money before debt payments are due to the European Central Bank in July — just like last year, and despite last summer’s supposed deal between the Greek government and its various “official sector” creditors. As before, the immediate cause of this latest crisis is the persistence of disagreements about the size of the budget surpluses (excluding interest) the Greek government is expected to generate, the specific “reforms” the government needs to implement, and the need for debt relief. The fundamental cause, however, is that the Greek government can’t raise money from the private sector at reasonable rates. Why?
Back in January, Renaud Laplanche, the ousted chief executive of Lending Club, said that his business wasn’t interested in taking credit risk. To do so would be a betrayal of the company’s investors, he suggested. “The representation we made to our equity investors is that we operate as a marketplace and that we don’t take credit risk,” he told FT Alphaville. Now that promise, like Laplanche’s reputation, lies in tatters.
The trick with investing is owning things that go up and not owning things that go down. Unfortunately, it’s really hard to know which is which in advance. For most people, the best choice is to buy lots of different things and hope the stuff that goes up makes more money than the stuff that goes down loses — a strategy that, over time, tends to work pretty well. But if you could somehow avoid buying the worst assets before it’s obvious to everyone else how bad they are, you could do even better. This, in a nutshell, is the appeal of the short-seller.
Because if his Royal Highness the prince wants the world’s largest sovereign wealth fund — then who’s to say no? As for the Arab and Islamic depth, we have the Qiblah of Muslims. We have Medina. We have a very rich Islamic heritage. We have great Arab depth. The Arabian Peninsula forms the basis of Arabism. The kingdom constitutes a large part of it. That issue has not been exploited in full. We have a pioneer investment power at the level of the world. Today, you see that many statements are being made, including statements indicating that the Saudi Sovereign Fund will be the largest fund in the world by far, compared to the other funds. That will be the main engine for the whole world and not only the region. There will be no investment, movement or development in any region of the world without the vote of the Saudi Sovereign Fund.
Consider this headline from the New York Times last year: Goldman Sachs Plans to Offer Consumer Loans Online, Adopting Start-Ups’ Tactics Alongside this one from the Wall Street Journal last week: Prosper Talks With Goldman, Others to Replace Citigroup on Loan Arrangement That’s Prosper Marketplace, the online lender whose lunch Goldman Sachs is planning to eat with its own consumer loans product, trying to get the very same investment bank to buy-to-securitise Prosper’s personal loans.
The behaviour of lenders in the boom part of a credit cycle can be summarised fairly simply. When times are good, lenders try to maximise the money they make by lending as much as possible. There is only a finite amount of high credit quality borrowers, so the lenders lend to riskier borrowers in order to continue maximising the money they are making. This behaviour has a lot to do with herding and optics. Here is a paper by David Aikman, Andy Haldane and Benjamin Nelson from 2010, discussing this effect in banking:
During the financial crisis, the real-time, practical manifestation of the liquidity v. solvency debate was about what financial institutions were worth saving. It went something like, if a bank was merely short of funding needed to meet near-term obligations but otherwise had assets worth more than its liabilities, then it was worth rescuing. Matt Klein discussed this here in 2014. The liquidity/solvency debate also has an important implication for corporate governance.
Back when the Basel III regulations were being debated in the wake of the crisis, it was common to hear dire warnings that rules limiting how much banks can borrow would constrict lending and lower real output. Even some who ostensibly support higher equity capital requirements think there are “trade-offs” between a safer financial system and economic growth. New research from Leonardo Gambacorta and Hyun Song Shin of the Bank for International Settlements suggests this thinking is backwards: “both the macro objective of unlocking bank lending and the supervisory objective of sound banks are better served when bank equity is high.”