After the surge of nationalist populism that permeated western politics in 2016, the world will be watching as the French people take to the polls on May 7 to elect a new president. After a first round of voting on April 23 narrowed the options to two candidates, voters will have to decide between Emmanuel Macron, a political novice with basically centrist policies, and Marine Le Pen, the face of France’s far-right National Front Party.
This election’s implications run far beyond France’s domestic concerns, as many commentators have framed the voters’ choice as another referendum on the fate of the European Union. After Great Britain’s voters opted to pass a resolution to leave the EU in June 2016, nationalist parties gained substantial support in other European nations by espousing their distrust and contempt for the EU. To these parties’ great benefit, Eurozone economic performance has been hampered by the lingering effects of the 2008 Financial Crisis and sovereign debt issues in nations like Greece over the last few years. Under this context, candidates like Marine Le Pen have used the opportunity to knock the opaque EU leadership in Brussels, and are advocating for their countries to follow Britain’s lead by leaving the union. Her ascension into the last round of voting in the French presidential election is evidence of populism’s recent surge, and economists fear that an EU without Britain or France would quickly crumble.
Thus, the stakes will be high on May 7. Currently, commentators predict a Macron win, with the Telegraph putting the odds at 60/40. Most analysts assume that his centrist policies will attract a greater number of voters than Le Pen’s extreme positions, and Macron already received a slim plurality of the votes in the April 23 election. Before the election, Macron served as an economy minister under the current president, Francois Hollande, and made his support for the EU clear early in the campaign. Markets responded favorably to his strong performance on April 23, as the euro strengthened more than 1% against the dollar in trading the following day and stock markets increased on both sides of the Atlantic.
The strength of Le Pen’s campaign is undoubtedly her hard stance against the EU. If she was elected, a French exit would be far from certain because that could only happen with legislative approval, but she would certainly demand reforms and put pressure on the union. Furthermore, her election would further bolster anti-EU sentiments in other nations. Her supporters hope that Jean-Luc Melènchon’s voters will turn her way, as the socialist candidate used anti-EU fervor to advance his campaign. However, she will need to persuade a certain amount of moderate voters to join her cause as well if she can eclipse the 50% mark and pull off a surprising victory.
Regardless of what happens Sunday, investors across the world will be looking at the results from France to gauge the strength of the EU’s support.
For most firms, an annual report is an opportunity for a company to present its financial position as well as explain past performance and discuss future growth prospects. But for Berkshire Hathaway, the annual report is a widely anticipated document lauded by investing enthusiasts well beyond the United States' public equity markets. Chairman Warren Buffett's 27-page opening letter is more than simply a review of Berkshire's routine outperformance over the market. In this year's letter, the Oracle of Omaha outlines his projections for macroeconomic growth, Berkshire's opportunities to expand, and broad investing advice to his readers. His wisdom is simple, powerful, and most importantly, puts all investors on an equal playing field. Buffett dissuades even the wealthiest from investing in actively managed funds with considerable management fees:
"The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive... My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade." (Berkshire’s report)
A decade ago, Buffett agreed to a $500,000 bet with several hedge fund managers. If Buffett's selection of a S&P 500 Index fund (passively managed) outperformed actively managed hedge funds, the third-richest man in America would walk away richer. If actively managed funds won, Buffett would lose some pocket change. Guess who won (hint: not the hedge fund managers).
Buffett’s successful bet demonstrates the advantages to investing in passive funds rather than trying to outperform the market and picking individual equities. Considering the average member of the Forbes 400 has a net worth of $6 Billion, $100 Billion is no drop in the bucket. Buffett employs the Keep-It-Simple-Stupid method to investing tremendous sums of wealth, and history suggests his advice is correct over extended periods. Furthermore, Buffett's confirmed hypothesis is impactful because this investing strategy is accessible to the masses. A hedge fund typically offers an entry level beginning at six figures, and a standard 2/20 fee structure (2% of total asset value + 20% of profits). To invest in a style that tracks the S&P, any investor can simply purchase a low-cost ETF that mirrors the 500 companies in the S&P, and watch it grow over time. Buffett perhaps alludes to this Vanguard S&P 500 ETF charging a whopping 0.05% expense fee (and Vanguard aims to decrease this cost even further).
Given the inherent positive bias of an annual report, investors consider it as one of many sources when arriving at an investing decision, and know they must consult other third-party analyses to formulate a well-rounded opinion. Berkshire's annual report is undoubtedly filled with self-promotion and endorsement, but is unique as it does not overlook poor performance. Buffett feels an obligation to inform his reader of such (albeit infrequent) acquisition disasters, and his subsequent efforts to learn from these mistakes. Buffett's performance at Berkshire and broader market advice will continue to shape the investing world, and influence investors regardless of economic status.
This article has been modified by the author and secondarily published by First Report Economics. See original work here:
Daniel Lombardo and Gelsson Ortiz
Elon Musk, co-founder of companies Tesla, SpaceX, and PayPal, is launching yet a new startup, this time for neuro-tech. However, this company is unlike anything Musk has ever been involved in before. What is NeuraLink, and more important, how does he plan to run this company while running Tesla and SpaceX?
The startup, NeuraLink, is a company focused on linking the brain and computer without having to go through an operation. According to the MIT Technology Review, NeuraLink was founded in 2015 by two professors, Pedram Mohseni of Case Western Reserve University and Randolph Nudo of Kansas University Medical Center. The researchers were working on a neural lace technology that would help people with brain injuries by communicating with machines without having to go “through a physical interface” (Muoio, 2017). Without knowing billionaire Musk was behind it, the two had sold the name NeuraLink to him for tens of thousands of dollars.
Musk has stated there are multiple applications to brain-computer interface technology. The practical use would be allowing humans to stay healthy and reaping the benefits of computer software updates. According to The Journal, the first devices could be used to treat diseases such as depression and epilepsy. Modern day treatment for neurological disorders such as Parkinson’s Disease and Alzheimer’s does exist, but NeuraLink’s technology would provide much more than just treatment of certain conditions. Additionally, the chips could improve memory and drastically increase cognitive processing abilities.
This isn’t the first time Musk has brought up the idea of merging the human brain with neural lace; he mentioned that neural lace would be able to give humans an artificially-powered connection without the need for surgery Musk believes it is imperative for the future of mankind that humans develop alongside AI technology. This doesn’t necessarily mean that he believes in a man vs. robot doomsday event, but he does feel that in order to become what he describes as a “multi-planetary species,” we must merge brain and computer.
Musk will approach this goal through the more realistic aim of symptom control before pursuing total man-machine convergence. This takes on a similar narrative to Musk’s other companies in that he begins with a small operation focused on profitability, and accumulates business until it is a massive R&D machine aimed at accomplishing the impossible.
This means that he won’t be making the revolutionary merger of man and machine that many sources have claimed he would make right away. This “neural lace” brain implant would ultimately connect a person’s brain to various control devices and could hypothetically be used to improve a person’s memory since it would be able to increase a brain’s storage capacity.
One wonders, however, how Musk will accomplish his brilliant goal while also having to balance the workload of Tesla and SpaceX. Will Musk focus more on NeuraLink than the latter two? I would imagine, if Musk were to direct all of his effort and resources to Neuralink, he will delegate the key decisions of his other companies to his closest and most trusted executives. If he decides to maintain control over Tesla/SpaceX and balance time between the three, it seems most plausible to hire experts in the brain-chip technology field to lead the future success of Neuralink. Regardless of Musk’s management strategy, it’s safe to say all three companies are, at least, in competent hands.
Matt Cesare and Andrew Stiles
The Nxt Foundation is a non-profit founded in 2014 and focuses on promoting the use of the Nxt and Ardor platforms. The foundation’s goal, as stated by Nxt’s head of marketing Travin Keith, is to become “the primary point-of-contact for businesses and organizations that use or are interested in using Nxt Technology.” As demand for blockchain increases, the Nxt blockchain has potential to improve efficiencies in financial transactions by order of magnitude.
Blockchain technology is a network that does not have a centralized database. Instead of transferring information linearly from base A to base B to base C, information is updated through all parts of the chain. An example may clarify this: when sending a legal document via email, the receiver must sign that document, save the changes, and then send back the new version of the document. In contrast, blockchain technology is more similar to editing a document on Google’s live document editing tool; editors can change the document simultaneously, and all changes are updated and saved real-time, all while the record of the changes are kept. Blockchain technology streamlines digital transactions, which is particularly useful in business. Banking transactions will become faster with smaller room for error, and legal processes will have a shorter paper trail.
So far, blockchain technology has found great use because of its structure. It is precise, highly transparent, and virtually un-hackable, which provides high upside for people and institutions. Blockchain allows everybody involved in a transaction to see what is happening with the transaction when it is happening. There are no delays and no uncertainties.
Right now, Nxt technology is used by several 3rd-party projects like SuperNET, Janus, and Digital Billions. These projects are able to use the technology for different purposes which speaks to the versatility of the product offered by Jelurida, the corporation of developers behind Nxt. The Nxt community sees a bright future for the technology and Keith says that Nxt has witnessed “increasing levels of interest by numerous businesses in blockchain over the past year” and that “we can expect more businesses and organizations incorporating blockchain technology into their operations.” Per its website, Nxt is working on updating the code to broaden its technology and further influence the market.
The future for blockchain is bright because of its versatility and security. A multitude of industries ranging from finance to law can find use for the technology. If a majority of businesses use blockchain, the effect would be increased efficiency in transactions and less money invested in security for processing those transactions because of blockchain’s simultaneous updating and impeccable anti hacking features. Nxt technology sure isn’t going away, and blockchain will become a crucial facilitator of digital transactions in the not-so-far-off future.
Learn more about the Nxt Foundation here: https://www.nxtfoundation.io
In 2016 Tesla reported a loss of $774 million in its $7 billion reported revenue. This represents an improvement from 2015, during which it lost $887 million on its revenue of $4.04 billion. Tesla’s final quarter of the year saw losses of $.69 a share, which was less than the predicted loss of $1.04. Overall, Tesla increased profits this past year, mainly due to the Model S and Model X electric cars.
In the final three months of the year, Tesla delivered approximately 22,000 vehicles. This brings the grand total to 76,230 vehicles for the year, just shy of its 80,000 car goal. Although the automaker came up short, this was still a strong showing since it increased vehicle deliveries by 51% from the previous year.
Tesla recently made two major acquisitions, buying out the companies SolarCity and Grohmann in November and January. Using SolarCity, Elon Musk is working to incorporate aesthetically appealing solar panels home roof power generation. He remarked, “I’ve never seen a solar roof that I would actually want...every one of them that I’ve seen is worse than a normal roof, without exception. So unless you beat a roof on aesthetics, why bother?” The tiles, created using hydrographic coloring, come in a variety of designs, including French slate, smooth glass, and Tuscan tile. Grohmann is a manufacturing company based in Germany which Tesla hopes will help ramp up production, and help it reach its goal of manufacturing 500,000 cars annually by 2018. This figure represents a 6-fold increase from their numbers this past year.
According to Tesla’s most recent shareholder letter, Tesla is “on track to start limited vehicle production in July” of the Model 3. Projections show that Tesla should “exceed 5,000 vehicles per week at some point in the fourth quarter and 10,000 vehicles per week at some point in 2018.” Some analysts question these expectations, remarking that Tesla has traditionally had issues meeting its goals. Bloomberg reported in January 2017 that “musk has a history of setting ambitious targets and timelines for Tesla and coming up short.” Speculation regarding a delay of the Model 3 negatively affected share prices just this past week.
The Model 3, which Tesla is now working to manufacture is being promoted as its “most affordable car yet,” at $35,000, getting 215 miles per charge. In order to make this a reality, Musk admits to pushing Tesla “very close to the edge.” However, he maintains that the expenditure is in the best interests of the company, and that Tesla will make up it's somewhat disappointing fourth quarter.
On February 20, Kraft Heinz Co. decided to withdraw its $143-billion-dollar buyout bid for Unilever PLC. The decision to drop the bid came only 2 days after the deal was made public, and Kraft attributed the decision to the hostile reaction that the deal unexpectedly generated.
During the weeks preceding the deal, investors largely expected Kraft Heinz to start targeting other food distribution firms for acquisition. The company’s current name and conglomeration was initiated when Berkshire Hathaway (Warren Buffet’s company) and 3G Capital, a Brazilian private equity firm, supported the company’s merger in 2015. This came only after the pair purchased control of Heinz Ketchup Co. in 2013.
In recent years, food processors have struggled to maintain sales against the trend of greater demand for healthier options among younger generations of Americans, so mergers and acquisitions have been commonplace in the market because companies are seeking alternative measures to boost revenues. Furthermore, 3G is particularly notorious for purchasing large companies, slashing the costs of production to maximize their profit, and then looking to further increase revenue by acquiring other companies. The firm previously made headlines when it purchased both Burger King and Tim Hortons to form Restaurant Brands International in December of 2014.
Despite the expectation of a major purchase, investors were surprised by Kraft Heinz’s choice of Unilever. Unlike Kraft, Unilever provides many of its services to developing markets and derives most of its revenues from personal care products, and therefore overlaps little with Kraft’s operations in well-established markets like the US. Because its operations had little overlap, it is unlikely Kraft Heinz could have saved much money by integrating their operations.
The deal was particularly interesting because Unilever is a Dutch company that maintains headquarters in London. According to Reuters, Buffet and 3G felt confident they could build off of their previous success in purchasing British-based Anheuser Busch last year, but were thrown off by the nation’s hostile reaction to the takeover, which was largely due to the lingering economic uncertainty caused by Brexit. Recently, Prime Minister Theresa May announced plans for the nation to become more proactive against foreign takeovers, and this sentiment eventually led Kraft to withdraw their bid.
While news of the pending deal had sent both stocks surging upward, the news of the deal’s failure reversed many of the gains. According to the Wall Street Journal, analysts believe the attempted takeover will serve as an alarm for Unilever, which lags well behind its competitors in terms of profit margins. Also, investors with 3G are reportedly hungry for another deal, as revenues are beginning to flat line after cost cutting measures from the 2015 merger are wearing off. Analysts appear to agree that these investors’ preferred choice is Mondolez International group, which was formerly a part of Kraft prior to being sold during the merger with Heinz. Mondolez, however, has not issued any statement on the speculation of such a deal, and at this point any interest on Kraft’s behalf remains a rumor.
Kraft’s attempted deal is the third largest takeover bid to ever fail, and it marks a recent trend of ambitious acquisitions failing to be executed. However, analysts note that the market has not treated these failures too harshly, and they expect companies to continue attempts at controversial mergers until the market begins punishing them more severely for their failures.
Kofi Ofori-Darko — Wesleyan University Student
On January 23, the White House signed an executive order to withdraw U.S. relations in the Trans-Pacific Partnership, a 12-nation deal that was negotiated under the previous administration. Though the deal was never formally approved by congress, the withdrawal from the TPP underscores America’s growing isolationism and decreasing commitment as a global trade partner.
This decision could be great news for one of America’s fiercest trade competitors: China. China is arguably the largest economic power in the region and has potential to take the lead on Asian development.
In the short term, the U.S. withdrawal from the TPP creates a vacuum in Asia’s economy, leaving the door open for other trade superpowers, such as China, to facilitate economic development of the rest of the region. Also, U.S. agriculture could suffer because of the high export tariffs. According to Congressional Research Service, Japan applies a 38.5 percent tariff on beef. TPP would’ve implemented an immediate 11 percent reduction on that tariff down to 27.5 percent, which would make U.S. beef more competitive with Australian beef that currently benefits from a free trade agreement with Japan. Overall, the U.S. would have seen an $815 million increase in beef exports, and a $7.2 billion increase in agriculture exports over 15 years, according to the International Trade Commission.
Despite the speculation around future U.S. involvement in Asia, it’s difficult to see a complete withdrawal from Asian markets in the near term. The U.S. already has deep military involvement in Asia, and this has been complimented by economic activity from U.S. companies. Former Secretary of State James Baker denounced opposition to increasing relations in Asia and described it as, “[drawing] a line down the middle of the Pacific.” To balance out the military presence, “arrangements such as KORUS-FTA and TPP provide a crucial economic equivalent,” Matthew Goodman of Center for Strategic and International Studies said. Deals such as the KORUS-FTA are not going away - at least for now - which will provide some stability.
In the future, the ability for the U.S. to maintain its status as the number one global economic powerhouse is uncertain. With Asia’s rapidly expanding economy, the lack of participation from the U.S. leaves the U.S. economy out of future economic growth activities. The Asian economy is going to continue to grow, and the U.S. economy will be missing out on a valuable opportunity to influence this expansion. TPP is probably not going to survive with the U.S. withdrawal but if any other economic superpower decides to spearhead Asian economic development, a new trade deal could arise.
The world’s largest social media site, Facebook, saw profits skyrocket this past quarter as it continues its expansion into new markets. It`s been twelve years since Facebook was founded by Mark Zuckerberg, and four years since its IPO. Unlike so many social media sites, Facebook is continuing to achieve rapid growth with 51% growth in the final quarter of 2016.
Exceeding all expectation, Facebook achieved profits of $3.568 billion in the quarter, bringing the profits for the year to $27.6 billion. Alongside profits, the share price has also gained, rising 2.52% as a result of some after-hours trading.
¾ of internet using adults have Facebook in the US as of January 2015, and the most recent statistics show that the website hosts 1.86 billion active users each month. Each user brings in $18.25 in ad revenue.
A recent change in Facebook’s ad tactics has pushed their profits so high. Revenue from mobile ads now make up 84% of ad revenue. With the smartphone revolution, more people than ever are browsing on their mobiles. Shifting the targeting of ads from the website to the app, Facebook is able to maximize the profit for each ad slot.
The research firm eMarketer has predicted that Facebook will continue to profit from mobile advertising in 2017, and take in an estimated $29.71 billion. This would represent a 35.2% increase in profits, and although this is slightly less growth than the past quarter, it is still a huge boost in profits. Facebook says that its slowdown is going to be caused by their plan to reduce the number of ads each user views.
This decrease in ads per person will hinder the company, but it will most likely not cause serious concern for Facebook. In addition to having a stable and thriving market in the US, it is expanding rapidly in Asia and other parts of the world that were previously untapped.
We often wonder if unskilled labor is most susceptible to displacement by automation; however, large Wall Street firms are becoming increasingly automated beyond just complex trading algorithms, showing us that skilled labor is also at risk.
According to an article published by the MIT Technology Review, Goldman Sachs employed 600 equity traders at the start of the new millennium. Just 17 years later, that number has dropped to two. Some say this is just a harbinger of the transformation to come.
Marty Chavez, Goldman Sachs’s incoming CFO, thinks automation will not be relegated to just equity trading. Trading in currency and futures markets will become more automated, along with areas of finance that rely more heavily on human interaction and relationship building, like investment banking. Chavez has found that with currency trading, four traders can be replaced by a single computer engineer. Consequently, a third of Goldman’s staff are now computer engineers.
Chavez thinks that investment banking is in dire need of disruption. Since the job requires salesmanship and people skills, many investment bankers won’t lose their jobs entirely. Rather, Goldman Sachs has identified 146 steps taken during the process leading to an initial public offering that “are begging to be automated,” Chavez said.
Increasing automation in investment banking could significantly reduce costs for large banks.
According to Coalition, a UK firm that tracks and researches the finance industry, large banks, like Goldman, employ investment bankers working on corporate mergers and acquisitions for an average wage of $700,000 per year. As investment banking becomes more automated, banks will need less low-level employees. Babson College professor Tom Davenport believes that for those workers that do remain, there will be a major growth in the distribution of income similar to the broader economy. According to Davenport, “The pay of the average managing director at Goldman will probably get even bigger, as there are fewer lower-level people to share the profits with.”
With automation spilling into areas of finance beyond trading, we could see a paradigmatic shift in the way large banks operate. Along with the proliferation of fintech startups in Silicon Valley threatening to capture market share, Wall Street firms must innovate to stay competitive.
Previously, I discussed the Federal Reserve’s conventional monetary policy tools. Of these, open market operations was the primary method, with the discount window and reserve requirements playing a less prominent role. However, these are not the only tools the Fed can use. This is where unconventional policy comes into play. The Fed utilizes unconventional monetary policy in various circumstances, but primarily when the conventional tools are not sufficient in remedying economic downturns. These tools range from quantitative easing, which has received substantial press in recent years, to more simple strategies such as interest on excess reserves, or communication strategies.
In normal times of economic distress, financial institutions decrease loans and turn to safer investments such as treasury bonds. This lowers the money supply and decreases economic activity. A central bank implements quantitative easing in order to stimulate investment and consumer spending.
Under Quantitative Easing, the central bank purchases bonds or other financial assets from commercial banks in order to increase the supply of money in the open market. For example, in the sub-prime mortgage crisis in 2008/2009, the Fed responded by purchasing mortgage backed securities from financial institutions.
A “twist” on quantitative easing can also occur when the central bank purchases long-term bonds while selling short-term debt in order to flatten the yield curve. Flattening the yield curve functions to encourage investment and consumer spending that relies on long-term borrowing (such as purchasing a house). This took form during the second round of quantitative easing when the Fed performed “operation twist”.
The second form of unconventional policy is changing interest on excess reserves. This means that the Fed pays financial institutions to hold reserves. This interest prevents financial institutions from flooding the market with money, or promotes financial institutions to invest their reserves in the open market with the intention of gaining higher returns. An example of increased interest on excess reserves can be seen in recent years. The Fed fears that money from financial institutions resulting from quantitative easing could flood the markets and potentially lead to inflation. Therefore, they increased interest, incentivizing these institutions to hold their cash.
The final form of unconventional monetary policy is the Fed’s communication strategy. The Fed’s rhetoric has enormous influence on the economy. After every meeting, they convey their economic outlook and strategies moving forward. If the Fed believes the economy is too weak to raise interest rates, asset markets and financial institutions usually respond with policies to accommodate these weak conditions. These responses often further stagnate the economy or slow its growth. Conversely, if the Fed believes the economy is strong, the markets will continue investing, further growing the economy. This has been seen in recent months as the Fed began raising interest rates for the first time since the Great Recession, thus signaling a positive economic outlook. Asset markets have progressed substantially in response to the Fed’s optimism. Though the Fed can use this to its advantage, unclear communications often negatively impact economic growth.
When the Fed conveys its strategies, they can also impact future economic growth. An example can be seen when they discuss plans to continue raising rates over time. This signals that the most recent interest rate hike is not the only one and will be followed by further rate hikes. Though this positive outlook can often be good for the economy, it also conveys that lending will be more expensive and the Fed is intentionally slowing down growth.
Whether communication is positive or negative, the Fed must ensure that they stick to their conveyed strategies. If they fail to do this, the public can lose faith in the Fed’s policies and the Fed will lose influence. One of the Fed’s key phrases in press releases is that they will “remain data dependent,” allowing for future flexibility in case of unexpected activity.
These three strategies constitute the majority of unconventional monetary policy. Quantitative easing is the youngest of these strategies, as it was first utilized in the U.S. during the Great Recession. Though these are the main three, recent implementation of alternative strategies shows that the Fed is willing to experiment with various forms of unconventional policy in response to unprecedented economic downturns.
On Monday, January 16th, eyewear juggernaut Essilor announced that it had reached an agreement for an industry mega-deal. The company will merge with Luxottica, with a transaction value of $49 billion, to form a new entity named EssilorLuxottica.
Both Essilor (est. 1849) and Luxottica (est. 1961), design, build, and distribute optical lenses and frames. Luxottica owns popular brands Oakley, Ray-Ban, and many others. The two companies differ in that Essilor is a wholesale distributor and Luxotica has retail stores.
The combined company is estimated to have annual revenues in excess of $16 billion, and operate in over 150 countries. Based on 2015 figures, Essilor estimates the combined net EBITDA to be over $3.7 billion, and mid to long-run cost synergies of over $430 million.
Under the terms of the deal, Luxottica’s majority shareholder, Delfin, will exchange its 62% stake in Luxottica for Essilor shares. Essilor will then exchange its shares for the remaining outstanding shares of Luxotica. The exchange ratio will be .461 Essilor share per 1 Luxottica share. Essilor will become the holding company, renamed EssilorLuxottica.
In its press release, Essilor stated that the new company will “benefit from a robust balance sheet and strong cash flow generation, giving it financial flexibility to invest in its future growth both internally and externally.” Essilor CEO Hubert Sagnieres expressed his confidence in the deal during a call with analysts and investors; “for the first time we will bring lenses, frames, and distribution under one single roof… [and] equip our company extremely well to serve an inspiring purpose.”
The deal is proposed to close in the second half of fiscal year 2017.
Last week, some of the world’s political leaders traveled to Davos, Switzerland to discuss economic policy for their countries. Speakers like Chinese President Xi Jinping and British PM Theresa May were some of the prominent names at the conference. Each year the World Economic Forum comes to Davos to give reports on the economic situations surrounding countries, opinions on global economic trends, and future prospects of the economy. This year’s forum was centered on the changing trend across many countries toward protectionism with regard to trade and the role of the European Union in economic matters with the impending Brexit.
Chinese President Xi Jinping headlined an Asian delegation to Davos that was the largest on record for the World Economic Forum. President Xi made a surprising announcement at the forum by coming out in total favor of globalization. President Xi is a member of the Chinese Communist Party and with that said, the relation between globalization and communist theory is not apparent. Xi stated that “Many of the problems troubling the world are not caused by economic globalization.” Many saw this as an attack on rhetoric that politicians, like US President-Elect Donald Trump, have used to stand hard against global trade and favor protectionism.
In addition to President Xi, Managing-Director of the International Monetary Fund, Christine Lagarde, also came out in favor of maintaining a globalized world and that “To turn our back on globalization…is exactly the wrong approach.”
As for the European Union and the UK, British PM May stressed that her country does not want to shut itself out from the rest of the world. She made her point clear that the UK wants to be active on the world stage economically whilst pulling itself out of the EU in the next couple of years. Insiders were not as optimistic or sold by the British PM’s comments and had their doubts about the economic future for the nation.
What will come out of this conference with regards to new policy is uncertain. However, it could be interesting to see if the new populist, protectionist wave that has been hitting countries for the past year is countered with some resistance built out of last week in Davos.
On January 17th, British Prime Minister Theresa May delivered a speech in Lancaster House. She charted Britain’s course toward a clean break from the European Union, in which she stated that her “job is to get the right deal for Britain.”
May has said the UK cannot remain within the European single market, for doing so would mean “not leaving the EU at all.” She announced her priorities for Brexit negotiations, which included preserving common travel between the UK and Irish Republic, and control of migration between the UK and the EU.
However, opting out of the single market has reduced options for maintaining barrier-free trade between the U.K. and the E.U. Kallum Pickering, a senior economist in London’s Berenberg Bank, stated that while the E.U. is not to be expected to compromise its principles, “the U.K. is set to face significant economic consequences from Brexit.”
The extent to which May is willing to compromise in order to maintain some access to the single market and the customs union for goods is unclear. The customs union limits individual free-trade deals between member countries and non-European countries. Therefore, the Prime Minister wanted a deal that would allow Britain to trade freely with the world, but still maintain as much tariff-free trade as possible with European Union countries.
Labour leader Jeremy Corbyn argued that May still needed to “be clearer” about her long-term objectives. He believes that Britain needs a deal that ensures access to the market, for many British jobs are dependent on that market. This, he states, is “what we'll be pushing for.”
Strong 2016 Q4 results in the financial sector continue to roll out this month. As a whole, the sector’s earnings growth totaled 17.4% in the past year behind only the Utilities sector’s earning growth of 19.9%. Specifically, Goldman Sachs, Citigroup, JPMorgan Chase, Morgan Stanley and Bank of America all enjoyed strong results in the wake of a historical post-election stock market rally. A company’s earnings, which is another way of expressing a company’s profitability, are often compared to another company through the Earnings Per Share (EPS) ratio, which indicates a company’s profitability on a share-by-share basis. Notably, Goldman Sachs reported an EPS of $5.08 beating the expected EPS of $4.76. Morgan Stanley also beat analyst expectations by $0.16, reporting an EPS of $0.81.
Recent macroeconomic trends have created a desirable climate for the financial sector. A Trump presidency has come with the bullish expectations of a conservative fiscal policy. The prospects of easing regulation and a change in tax policy have largely contributed to this sentiment. On top of that, the Federal Reserve has begun raising interest rates. For the banking industry, similar changes in policies historically have lead to an increase in profitability. For one, a conservative fiscal policy is likely to increase the risk appetite of banks across the industry. In addition, continued rate hikes from the Fed will allow banks to continuously increase their net interest margin. Essentially, this means that as interest rates increase, banks can widen the spread between the rate at which they lend money to customers and the rate at which the banks borrow money from the central bank.
Strength in the financial sector can be a good indicator as to the direction of the economy. Banks become more willing to lend as their net interest margin increases, and more money will flow through all sectors of the economy. The shift to credit products in banks is already apparent in the Q4 results. Goldman Sachs’ fixed income, currencies, and commodities revenue are up a total of 78% from last year. However, challenges exist in the coming quarters for the banks. For Goldman, equity revenues are down 9% from last year, and similar trends are reflected across other banks. Most notably, though, will be the challenge of self-managing shareholder interests and customer interests. In an economy with less oversight, banks may stand in a position where they will have to make a decision amidst the pressure to make profits and the consequences of risky practices.
A new chapter of US-Cuba relations began a few years ago when Barrack Obama lifted the United States’ embargo on the country. Since then, a US embassy opened in 2015, and Obama visited the island nation in March of that year to meet with the Cuban leader Raul Castro. Now, the Obama Administration has successfully solidified deals between the Cuban government and major US companies such as General Electric, Alphabet Inc., and several cruise lines.
Bringing American industry to Cuba will propel the country’s economic status into that of an emerging market. Both foreign investors and Cuban citizens stand to benefit from the new relationship.
Many Americans reject the notion of restoring relations with the communist regime that once harbored Soviet nuclear warheads within a stone’s throw of our homeland; however, the implications behind restoring relations with Cuba are more complicated than merely lifting a grudge.
One such implication is oil. OPEC, the oil cartel that controls vast quantities of global crude production, has deep roots in Cuba’s neighborhood. The major South American member is Venezuela, a country that has been staunchly anti-United States since Hugo Chavez led the nation in the late 1990’s. Venezuela has cut the US out of its oilfield development projects that total 20% of global reserves.
For decades, Venezuela has provided Cuba with billions of dollars in oil supplies to meet the country’s energy needs. CNN reports that in return, Cuba offers political loyalty, medical supplies, military guidance, and even professional sports trainers to Venezuela.
However, Venezuela is currently facing a severe economic recession. Hunger is a growing problem, and many citizens are calling to impeach the current president, Nicolas Maduro. The United States’ advances with Cuba are forcing Venezuela to improve relations with the US. This will allow Venezuela to remain aligned with Cuba and also receive global assistance with its current crises. In effect, the United States gains more political leverage in the South American region, potentially opening access to oil reserves that were once off-limits.
Another factor complicating US-Cuban relations is the Cuban expropriation, during which Fidel Castro confiscated land and property from Cubans and Americans with businesses in Cuba prior to the regime’s occupation. The New York Times notes that the value of expropriated property is as much as $8 billion; however, depending on how the number is calculated, it could be closer to $2 billion.
Regardless, the Cuban government faces a hard-lined stance from the incoming Trump administration, which recently gave Raul Castro an ultimatum: comply and reform, or the United States will restore the embargo. If Cuba hopes to continue building relations with the US, it will have to return billion of dollars worth of property to both Cuban citizens and American corporations.
The new relationship that the Obama Administration has forged with Cuba will give the United States unprecedented diplomatic leverage and economic development opportunities in the region. However, once commerce between the two countries begins full swing, Trump, Castro, and Maduro will face a new set of problems to maintain a beneficial relationship. Trump will likely have his eye on Venezuela’s oil, Castro will face pressure to ink business deals with other superpowers such as Russia and China, and Maduro must cautiously handle Venezuela’s position in the dynamic while averting impeachment or a coup. Cuba will undoubtedly be front and center for global relations in 2017.
President-elect Donald Trump recently announced his pick for Secretary of the Treasury, Steven Mnuchin. Mr. Mnuchin is a well-known Wall Street executive who worked at Goldman Sachs for many years and has no public sector experience. Many pundits have commented on the pick as going against Trump’s rhetoric on the campaign trail, as Trump regularly criticized Wall Street’s connections to politicians in Washington.
With the nomination of Mnuchin, stocks continued to rise, in addition to the boost that they previously received from Trump’s presidential nomination several weeks ago. The most excitement on Wall Street surrounds the future of Fannie Mae and Freddie Mac. Ever since the 2008 financial crisis, the two firms have been under government oversight. Recently, Mnuchin asserted that one of his priorities in Trump’s administration will be to privatize the two firms. The two firms’ stock prices each rose roughly 30% after the appointment and have increased two-fold since election day.
In addition to the privatization of Fannie Mae and Freddie Mac, Mnuchin aims to loosen the regulations imposed by the Dodd-Frank Act of 2010 to give banks more freedom in trading and lending. Mnuchin has indicated that he shares some of Trump’s positions on loosening regulations in other sectors of the economy and lowering taxes. Some of Trump’s constituents are dismayed from his choice, given Mnuchin’s close ties to hedge fund managers and other Wall Street executives.
Mnuchin’s policies could mark a turning point in the United States economy. While Vice President Joe Biden stated that the Obama administration’s policies were designed to “get the car out of the ditch and moving” (referring to the 2008 stimulus package and ensuing economic recovery policies), Mnuchin will face a new set of problems, notably, expanding America’s middle class and improving financial conditions for such citizens.
Following in the footsteps of Amazon Prime Video, Netflix now allows users to download movies and shows to watch with no internet access. As of November 30th, subscribers can now ‘binge-watch’ shows like Breaking Bad and Narcos offline.
Many users wonder why downloadable content via Netflix didn’t emerge earlier, since the concept seems simple and practical. The reason is that rights needed for downloading TV shows and movies are different than those needed for streaming. Netflix thus had to acquire a new set of rights before it could unleash this feature. The complex laws surrounding intellectual property and internet downloads are part of the reason why Netflix has invested so heavily in its original content.; however, even some of Netflix’s content won’t be available for offline viewing due to licensing restrictions.
According to Chief Content Officer Ted Sarandos, the new downloading feature is paramount to Netflix’s success regarding its expansion into demographics for which high speed internet access is limited or non-existent. In Netflix’s largest markets, Wi-Fi is becoming ever more ubiquitous, making the download feature somewhat superfluous. However, as subscriber growth has leveled off in developed markets, the company is now looking into emerging markets to expand its user base, such as Asia and Africa.
Earlier this year, Netflix expanded into 130 new countries, bringing its total reach to a whopping 190 territories. In the last quarter, Netflix added 3.2 million new international subscribers. Netflix will continue to look to international markets for future growth as domestic markets saturate.
Although other streaming services have provided similar downloading features, such as Amazon Prime Video and Vudu, these services are not primarily subscriber-based like Netflix. Netflix’s closest competitor, Hulu, does not yet offer downloading, but the Chief of User Experience at Hulu stated that they are “working on it.” However, pioneering downloadable subscription content could prove sufficient to catapult Netflix to unprecedented levels of growth and global exposure.
While some are concerned that Netflix’s goal is to export American content around the world, Sarandos argues that “our goal is to export great storytelling from everywhere in the world, to everywhere else in the world.” Soon, everyone will have access to Netflix’s massive breadth of content.
The Federal Reserve’s Federal Open Market Committee (FOMC) met on December 14th to discuss the state of the economy, and with that the status of the interest rate. The Fed agreed to an interest rate hike for the second time since the Great Recession, implying solid economic recovery. The FOMC will increase the interest rate to .5% - .75%.
All this talk about the Federal Reserve (the Fed) increasing interest rates leads many to question, “How exactly do they do this?” The Fed can change rates in several different ways, using conventional and unconventional monetary policy. This article will discuss conventional policy tools, while the next issue will discuss unconventional tools.
It is first important to understand that the federal funds interest rate is simply the price at which banks lend to each other and to the open market. There are different interest rates for different purposes, yet the one everyone is talking about is the federal funds rate, or the rate that banks lend to each other overnight. It is also important to bear in mind that supply and demand are the sole drivers of these policies. If demand increases then prices rise, while if supply increases then prices fall, and vice versa. In controlling the money supply, the Fed changes the price that banks lend to each other and the open market.
The federal funds rate is important because it carries on to the open market. When the federal funds rate increases, banks are less incentivized to lend to the public at lower rates. Therefore, they will increase their lending rate, making loans more expensive. Higher interest rates on loans makes investing more expensive and thus contracts the economy.
Conventional monetary policy is primarily implemented through open market operations, but can also be implemented through the discount window and reserve requirements.
The Fed primarily conducts open market operations by buying and selling securities to banks for a period of one day. These are called repurchase agreements (repos) if the Fed is buying securities, and reverse repos if the Fed is selling securities. When the Fed conducts repos, they are temporarily buying securities from banks with the intention of selling them back the next day with minimal interest. In doing this, the Fed temporarily increases the money supply. When the Fed plans to increase the federal funds rate for an extended period of time, they conduct reverse repos for many days in a row. In order to lower interest rates and stimulate the economy, the Fed reverses these policies, which decreases the price of loans and increases investment.
The Fed can also conduct policy through the discount window by directly lending to banks. However, the discount window is usually not used for monetary policy as it is intended to provide funds for banks when those funds cannot be found in the federal funds market. When the Fed makes loans, it increases the money supply. If the Fed instead needed to provide funds to banks without conducting monetary policy, they conduct open market operations to counteract the effects of the discount window. This is called sterilization.
Finally, reserve requirements can be used to directly control the money supply. The Fed currently requires banks to hold a specific proportion of their deposits in cash, instead of lending it out. This is essentially keeping money on hand, either on reserve at the Fed or literally in the vault. They do this so banks have cash in the case of an unexpected withdrawal. The Fed can implement monetary policy by changing the proportion of required reserves. To decrease the money supply, they increase this ratio, forcing banks to reduce lending in order to hold more cash. As discussed earlier, when the supply of money shrinks, lending between banks becomes more expensive, which increases the federal funds rate. Although theoretically, the Fed can use reserve requirements to conduct monetary policy, minimal changes can lead to major fluctuations in the money supply. Therefore, they do not usually conduct policy through reserve requirements.
As the price of college tuition continues to climb, concerns about student loans, and thus student debt, have increased. Roughly 71% of newly graduated students in the US come out of school with some form of debt. 65% of these graduates admit to not having a clear understanding of how their student loans work. Student debt now totals over $1.2 trillion dollars. How do these loans work? And how do these massive figures of debt affect the economy.
Student loans are comprised of two main categories: federal and private. Typically, federal loans have low, fixed interest rates. However, they also have a maximum amount that can be lent. Many times this maximum amount isn’t enough to cover all the expenses of attending school. The most common form of federal loans are known as stafford loans; these low-interest rate loans are available to almost all students.
On the other hand, private loans have variable interest rates but do not have a limit on the amount borrowed. The variable interest rates are based either on the rate banks charge each other for loans, otherwise known as L.I.B.O.R., or on the creditworthiness of the borrower, otherwise known as the Prime Rate.
Despite loans being relatively easy to obtain, it has become very difficult to default on them as restrictions and regulations have increased over the years. Though the interest rates can theoretically begin compounding immediately upon signing, both private and federal loans typically offer forbearances which essentially are grace periods when no interest is compounded onto the outstanding loan. Without such grace periods, a student who signs a loan for $100,000 with a 9% fixed interest rate can face an outstanding balance of $136,000 upon graduation. Because of this dilemma, the government subsidizes some of these loans and effectively pays off the interest while the student is attending school, so that upon graduation, they only face their original loan of $100,000.
$100,000 is a lot of money. As a result, paying down this debt reduces the amount of money people can spend on other goods and services. Economists have noted changes in the behaviors of the millennial generation which has become bogged down by increasing student debts. For example, after graduation, roughly 27% of college students move back in with their parents to save money. People also are holding off on key decisions such as buying cars or applying for house mortgages - even marriage - because of their student debts.
Student debt serves as a setback to many and limits borrowers from interacting in the consumer economy. As student debt continues to climb, the implications for the economy will become more severe, and Washington will face growing pressure to address the problem.