In the early part of 2018, the economy of the eurozone appears to be in very good shape after its GDP grew by 2.5 percent in 2017. This was the highest growth witnessed since a 3.4 percent increase in 2007 before the financial crisis hindered economic growth on a global scale. The higher growth rates also helped bolster the currency, as the euro’s value increased by 0.6 percent on a quarter on quarter basis in 2017 Q4 from its 2016 mark.
Economists and policy makers have been skeptical about the growth of the Eurozone after it sent was reeling from the effects of the recession and the Greek debt crisis. However, as the confidence of investors has begun its recovery and the European Development Bank has provided monetary stimulus, the economy is making progress again. More recently, the election of Emmanuel Macron in France has had a very positive effect. After years of economic stagnation due to complex labor laws, Macron’s agenda was a breath of fresh air for investors. Macron had promised to reform labor laws and give tax breaks to businessmen and entrepreneurs. In September, 2017, he signed decrees that made it easier for firms to employ people and dismiss them without too many legalities. This has led to a decrease in unemployment. Next, in October, the French Parliament adopted a budget that reduced wealth taxes by 70%. Moreover, the budget proposed a flat tax rate of 30 % on capital gains, dividends and interests. These steps have produced an environment conducive to increased private and business investment and have helped spur greater economic growth in France. Because France is a major economy in the region, its recovery has spilled over into its neighboring economic partners.
However, there are a lot of political challenges to be faced in 2018 that could threaten the fragile state of the economic recovery. Elections will be held in Italy on March 4, where the eurosceptic, anti-immigration Five Star Movement is leading all the polls. Moreover, according to the Bank of Italy, the government owes a public debt of 2.3 trillion euros, but no party has made this problem its priority. Additionally, negotiations over Brexit have stalled as the EU and UK disagree on crucial issues like the status of EU citizens in UK and the island's contribution to EU projects from the UK budget in subsequent years. Finally, in Germany, Chancellor Angela Merkel is ruling with shaky coalition. The voters of Christian Democratic Union (CDU) are not happy with the concessions Merkel made to form this government, and the Social Democratic Party (SPD) also think that its reputation was damaged by the previous coalitions. Furthermore, Alternative for Germany (AFD) is the main opposition party now and is heading several committees. This difficult balance could hinder the government controlling the Eurozone's largest economy, which may impact its ability to navigate the uncertain times approaching.
Despite all these uncertainties, analysts are hopeful that the economic growth in 2017 will have a carryover effect this year, and the area will continue to see furthered economic progress.
With the recent addition of new sanctions against Russia, some may advocate for continuing to isolate Russia from the world economy. Specifically, responding to Russian aggression in the East by forcibly eliminating Russian trade from the Baltic region. Doing so is a terrible idea.
Cutting off Russia from trade with the Baltics and Finland would decrease Russia’s exports, and GDP if unsubstituted, by approximately $12.7 billion. The Baltics and Finland, assuming Russian reciprocity, would lose $8 billion in exports, and require aid of a comparable amount (See Table 1) to mitigate the adverse effects of lost trade. In 2015, Russian trade generated 49% of GDP for a total of $669 billion dollars. The Baltics and Finland composed 15.40% of Russian trade (see Table 2). The Baltic economies rely more heavily on trade than the Russian economy. Estonia’s trade amounts to 154% of its GDP, and trade with Russia is 9% of total Estonian trade. Therefore, this policy would negatively affect the Russian economy, but is outweighed by the risk of severe economic downturn in the Baltics and increased vulnerability of Baltic energy supplies and infrastructure. Cutting off Russian trade from the Baltics and Finland should only be implemented if there is no doubt that funding would flow quickly and at a level the Baltics would normally earn from exports.
In replacing the approximate $8 billion in lost trade to the Baltics, it is important to note that this is strictly the amount needed to substitute for Baltic/Finish exports. An additional $1.6 billion to replace lost Swedish exports to Russia is included due to its importance to the Baltic banking sector. For example, Swedish banks compose 80% of Estonian banks. Sweden faces continued supply shortages and high prices in their housing market, and any further adverse effects on their economy only increases the risk of a downturn. A Swedish economic slowdown, resulting from loss of Russian trade, would likely spillover into the Baltics and Finland.
The $8 billion cited above is purely exports, and assumes the Baltics and Finland can find substitutes for previously imported Russia goods that continue to flow without Russian interference. This number does not include additional funds that may be necessary to assist Latvia and Lithuania overseeing efficient allocation of these funds and preventing corruption in distribution. Estonia’s low level of corruption excludes it from these concerns.
The potential ramifications for Baltic energy are of significant concern. A loss of imported Russian energy would require increased imported liquid-natural gas (LNG). Non-Russian LNG currently comes from Norway and the United States into Lithuania’s Klaipeda port. The possibility of a Russian response to impede these imports, such as “accidently” parking their navy or having ships “break down” in such a way to block access to that port would cripple Baltic energy generation. There is no other port currently in the Baltics equipped to handle LNG, and Estonian shale oil production would not be enough to supply all three Baltic States.
In terms of infrastructure, the Baltic states have announced that they will disconnect their electric grids from Russia, in order to prevent Putin from manipulating the flow of electricity. The project is not expected to be complete until 2025. Therefore, the possibility for coercion from Russia persists. This coercion would be highly persuasive if combined with interfering with LNG shipments into Klaipeda.
The second concern is the necessity for appropriate timing of the funds to the Baltics and Finland. EU Structural Funds (EUSF) to the Baltics planned for 2014 did not start flowing until 2016. The 2-year delay of EUSF, supporting investment projects in the Baltics, lead to low investment and reduced growth. If export replacement funds become a multilateral project, the concern is the funds will be delayed in either starting and/or getting to full capacity. The Baltic countries’ reliance on international trade implies a high economic sensitivity to any funds cushioning against lost exports, so these funds would need to start flowing close to or at full capacity within a short time to prevent the start of an economic downturn in the region.
Blocking the Gulf of Finland straight would prevent Russian maritime exports to the Atlantic Ocean from St. Petersburg. This completely relies on Finish cooperation, as they control the entrance into the Gulf. If this cooperation materialized, Russia would still have the ability to utilize their Novorossiysk port on the Black Sea, from which Russia exports mostly grain to the area, and its Vladivostok port on the Pacific Coast. Russian exports would therefore suffer but would not be completely eliminated.
Current and future sanctions play an important role in deterring Russian aggression towards its neighbors, but it is important to recognize the dangers of completely cutting off trade with Russia. This policy would have the potential to destabilize the Baltic economies, in addition to Sweden and Finland, without sufficient aid to replace the lost trade. In addition to hurting valuable NATO allies, the failure of such aid to materialize may work to push the Baltic States closer to Russia in order to avoid a deep economic recession. Russian aggression may become a tougher and tougher pill to swallow, but facing an $8 billion price tag and risk of pushing the Baltics towards Russian cooperation
 The Baltic States are Estonia, Latvia, and Lithuania.
 World Bank
 Note that 154% of GDP indicates the value of all goods coming in and out of Estonia are worth 1.54 times as much as the overall Estonian Gross Domestic Product.
 “Banks in Estonia”. The Banks.eu
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.
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.
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.
The Organization of Petroleum Exporting Countries (OPEC) gathered in Algeria during the last week of September to discuss strategies to combat falling oil prices. Oil dropped below $30 per barrel earlier this year for the first time in more than a decade, and has remained stuck between $40 and $50 per barrel for the last several months. In light of this, OPEC left the conference announcing an initiative to cut their collective production in an effort to stabilize costs and benefit its member nations.
Traditionally, OPEC has been responsible for controlling the oil market by virtue of its vast supply of natural oil wells. The organization was started by five countries in the 1960’s, and now consists of twelve member nations from the Middle East, North Africa, and South America. The goal of the organization is for all members to coordinate production in order to maintain a steady global supply that sets the commodity’s price at each nation’s profit-maximizing level. Although OPEC has enjoyed great success in the past (most famously during the 1973 Arab embargo of the United States), the organization has struggled to collude in recent years due to a failure to coordinate with Russia (one of the world’s largest producers of petroleum) and an increase in the United States’ domestic supply thanks to new drilling techniques. The last time the organization successfully slashed its production to raise prices was in 2008, when the financial crisis hampered international demand and sent the price of oil below $40 per barrel.
Oil prices surged in the two weeks following the announcement, but have slowly decreased over the last week because of perceived difficulties with OPEC’s proposal. After reaching a three-month-high price of $51.60 on October 19, the price has fallen back below $50 per barrel in the last week. Analysts’ main concerns over the likelihood of the proposal come from Iraq’s announcement that it is seeking to continue increasing production regardless of the organization’s policy, and from Iran’s current hostility toward the organization’s largest producer, Saudi Arabia. Although OPEC announced Russian backing on its decision, the Russian government has contradicted itself over the last two weeks, casting doubt on whether they will actually work with OPEC to taper production.
One of the ironies behind this proposal is that a decision to cut global supply may actually help the U.S. drilling industry that has suffered from the low prices in 2016. According to the Wall Street Journal, domestic oil company struggles have damaged the US economic performance, so while an OPEC agreement may hurt consumers, it could unintentionally help some of the organization’s competitors from higher market prices.
OPEC plans on announcing the specifics of the production shortage on November 30, which will test if it still has the organizational discipline to affect the world’s oil markets.
The U.S. Supreme Court, following the likes of the E.U. and Australia, has decided to investigate whether or not retailers can justly pose a surcharge to customers who use a credit card for a transaction.
New York’s 2nd U.S. Circuit Court of Appeals upheld the state’s decision to prohibit retailers from imposing a transaction fee on customers who use credit cards. Merchants appealed the decision to the Supreme Court Justices, who accepted the hearing in late September.
The primary complaints in the case revolve around “swipe fees”: a fee paid by a merchant’s acquiring bank to a cardholder’s issuing bank. These fees, which constitute a small portion of every credit card transaction, add up to $50 billion of lost revenue annually for merchants across the country.
The state’s defense references the value in having the ‘sticker price’ resemble the actual price at checkout - even though tax is often not included in the original price. The state also said that while the law prevents merchants from adding a surcharge, it is not against giving a discount to customers who use cash; this is widely met with disapproval by merchants as it would result in an apparent price increase for all items. Gas stations are a prime example of this type of business model as they have discounted cash-paying customers for years.
The ability to add a surcharge to credit card purchases is particularly essential to mom-and-pop shops and retail chains in New York, Florida, California, and Texas, since these states have banned surcharge fees. The 2-4% of revenue that ends up in the credit card companies’ hands makes it particularly tough for companies selling low-margin products to subsist.
The trial is tentatively scheduled for early 2017, when the Supreme Court could issue a verdict that would result in a price hike across the board, affecting nearly every consumer in the country.
On September 15, the US Justice Department concluded its probe into Deutsche Bank by announcing a $14 billion penalty as a result of irresponsible actions leading up to the 2008 financial crisis. The bank allegedly defrauded investors by concealing the nature of its Mortgage Backed Securities, an act that ultimately helped expand the housing market bubble and intensified the fallout following the collapse.
The German bank is adamant that it will pay much less than this initial amount, and will make its counteroffer in the near future. As of June 30 2016, Deutsche Bank had $6.2 billion in its litigation reserves, and the bank has stated that it plans on paying anywhere between $2-3 billion when the case is finally settled. Recently, analysts from JP Morgan Chase predicted that a settlement around $2.4 billion would be a great settlement with a negligible effect on the bank’s outlook, but that any settlement exceeding $4 billion would likely force it to raise capital and cost Deutsche Bank market share.
If the case is settled this year, Deutsche Bank will be the third high-profile bank to settle with the Justice Department in 2016. In January of this year, Goldman Sachs reached a $5 billion deal with investigators, while Wells Fargo paid a $1.2 billion sum roughly one month later. The amount proposed for Deutsche Bank would be the second largest amount paid in relation to the events leading up to the 2008 crash, following the $16.65 billion Bank of America paid back in 2014.
Investors were clearly troubled by the size of the initial offer, as DB stock dropped 7.7% the day following the announcement of the penalties. On September 20, the bank’s stock hit its 52-week low, dropping to $12.43 per share.
The Justice Department is also currently investigating several other large European lenders, such as UBS, Credit Suisse, RBS, and The Barclays Group, for their role in the lead up to the crisis. Although no credible sources have revealed the expected payouts from each of these probes, it is certain that the Deutsche Bank negotiations will set the tone for the treatment of these institutions moving forward. Therefore, investors will be sure to keep a close eye on the Deutsche Bank case as it unfolds in the coming months.
Within 24 hours of Pokémon Go’s launch, the app was circulating through news headlines across the globe, and the world had finally caught wind of the technology that will change industry forever: Augmented Reality. By the end of this decade, we will depend on Augmented Reality (AR) as much as we depend on our Smartphones right now. AR is poised to disrupt nearly every existing modern industry, and open a market for its products that Digi-Capital estimates to be $150 billion by 2020, and rapidly growing.
Augmented Reality technology seems complicated, but is actually simple: it combines 3-D sensor technology with a miniature projector to display images on a pair of glasses. The images are projected in a manner so that they appear to the wearer as holograms, thereby ‘augmenting’ the wearer’s reality. Pokémon Go is a primitive version of AR, as it does not involve a headset or optical projection, but nonetheless blends the digital world with the physical world.
AR has been a fantasy for sci-fi and tech fans since the 1980’s, but the technology to develop it did not exist until the last decade. The majority of AR startups began during a three-year window from 2010-2013.
DAQRI, started in 2010, makes a helmet for industrial manufacturers and machine operators. The company is projected to be valued at $453 million by 2020. Matt Kammerait, Vice President of Marketing at DAQRI, states, “at DAQRI, we see AR allowing anyone to be or do anything, no matter where they are - across domains as broad as art and science. It fundamentally erases the gap between what you know and what you could know, which today is separated by requiring a search or access to digital stores of knowledge.”
Even Elon Musk’s SpaceX is jumping into AR technology, as he recently demonstrated SpaceX’s new software that allows engineers to pull apart a virtual rocket engine using hand gestures.
These, and hundreds of other companies are developing AR technology that applies to every industry – health care, technology, consumer products, sports – you name it, and there’s a crucial role for AR to fill in any industry.
The Silicon Valley gold rush has begun; tech behemoths such as Apple, Microsoft, Google, and Intel are competing for pieces of the future AR market, and have made numerous acquisitions of small AR startups.
In 2015, Apple started an entirely new ‘Augmented/Virtual Reality Department’, hired dozens of new employees, and bought out several 3-D scanning and facial recognition tech companies.
Google has been reworking its Google Glass after a less-than-spectacular launch a few years ago.
Microsoft developed an AR headset called the HoloLens, which is hitting the consumer electronics market right now.
Intel purchased Recon Instruments in 2012 for $175 million. Recon specializes in AR glasses for athletes, particularly runners.
Currently, most basic AR headsets cost just over $1,000. Specialized headsets are much more expensive. As these companies advance their technology from prototype products to economies of scale, the price of AR technology will fall over the next decade, first enabling businesses, and then consumers, to purchase their own headsets.
On Thursday, June 23rd, the people of the United Kingdom made the most important decision in their economic history. In one gust of wind, nationalist sentiment swept what according to polls seemed to be a deadlocked nation toward a 52-48 victory favoring to leave the EU.
The young, liberal, and educated tended to vote “remain”; 75% of citizens between ages 18-24 and 71% of citizens with a college degree chose to listen to the Bank of England’s recommendation that leaving the European Union would result in economic destabilization and bleak outlooks for the country in the near-term.
The UK banks were right - partially, at least. The aftermath hit neither the UK nor the world economy as hard as some predicted. The Economist was correct in expecting significant volatility and a sharp depreciation in the British pound if the nation chose to leave. Growth was projected to slow from declining domestic demand, largely due to the depreciation of the sterling. Analysts at Goldman Sachs expect a possible technical recession (two consecutive periods of negative GDP growth) by the beginning of 2017. Bloomberg analysts believe that there will only be significant near-term economic disruption, but no technical recession as long as financial institutions continue to function properly.
On the day of the verdict, the pound fell 7.9%, crude oil fell 5%, gold rose 5%, US markets fell 3%, and S&P pledged to downgrade UK credit rating from AAA. These are all telltale economic indications of pandemonium. Theresa May recently stepped up as the new prime minister succeeding David Cameron, and chances of a second referendum (a revote) seem bleak under her leadership.
The Bank of England does not plan to cut rates from 0.5% this month, which has been unchanged for the past seven years; however, Mark Carney, the governor of the Bank of England, clearly states that they plan to cut rates in August. To stimulate the economy, the Bank of England is currently focused on quantitative easing (injecting the economy with more money to lower interest rates and stimulate spending) and rebuilding the value of the pound. The depreciation of the pound’s value makes imports much more expensive to Britain, while making exports cheaper for other countries. Unfortunately, if Britain is unable to retain access to the single market from negotiations with the EU, their exports will also be limited.
With quantitative easing always comes the fear of inflation, and the Bank of England is currently debating over how to provide an antidote to their paralyzed economy. If inflation does take off, analysts estimate that inflation will peak in 2017, yet they still expect positive growth in the economy as a whole since Britain will be a full year into its efforts to salvage or rebuild its economy.
Rumors are circulating that rates could rise in the latter quarter of the year, around October or November. As a result, spreads will tighten and bond prices will be driven back up after experiencing a credit shock of 100 basis points. Analysts also expect Brexit to lower GDP by 1.5% in 2017 or 2018, with the brunt of the damage taken in 2017. Brexit’s temporary stalling effect on the British economy and its subsequent rate fluctuations alongside weakened growth prospects make it hard for the UK to hit its two-year 2% inflation target.
For the US, analysts only expect a 0.1-0.2% impact on GDP growth in the next 2 years, with minimal trade effects on the US economy at large.
Major SIFIs (Systemically Important Financial Institutions) like JP Morgan have stated on their recent earnings calls that it is still too early to determine the impact that Brexit will have on their operations. They answer any and all Brexit-related inquiries with a one-size-fits-all response; ”we will continue to serve those in Europe and every country to the best of our ability.”
In reality, Brexit’s most widespread result - the breakup of the European single market - is projected to hurt financial institutions the most, because fewer companies will seek these institutions to underwrite acquisitions or perform transactions for them in a time of uncertainty. Instead, most are hoarding their money, cutting down their investments in volatile securities, and slowing their expansion strategies as gold prices soar from general market uncertainty.
To cope with Brexit’s consequences, the BOE holds more than $250 billion of potentially stimulating funds that could be injected into the market in order to support struggling companies. Britain banks have also raised 130 billion British Pounds [BP] worth of capital and retain 600 billion BP in liquid assets (10x as much money held than before Brexit). This reserve will provide banks with flexibility and enable them to take moderate financial risks and continue their operations as normal, providing corporate and commercial loans.
The impact of the Brexit on the world economy is certainly nowhere near that of the 2008 financial crisis; nonetheless, analysts, media outlets, and investors are speculating the numerous potential economic scenarios of the Brexit. The important thing for the EU to take away from Brexit is to avoid punishing the UK. The two bodies may be divorcing, but their economic fates are still intertwined, and what will hurt the UK will also hurt the EU. The EU must remain open to negotiations and help the UK stay in the single market in order to restore economic stability and enhance the UK’s recovery.
About two weeks ago, fifty-two percent of UK voters decided to leave the European Union. The decision was a major shock, as many thought the vote would not pass. What does this vote, which is commonly referred to as the Brexit, mean for the global economy?
First, one must know the function of the European Union. Many UK voters apparently did not know this, as Google’s top hits in the UK the day after the vote were, “what is the EU?” According to the BBC, the European Union was formed after WWII and allows for free trade among member countries as if they are a single market. Additionally, people migrating from a EU country to another member country can work without a visa.
Second, what were the reasons that people voted for the UK to leave the EU? Many stated that because of the single-market economy, the EU migrants were taking away British jobs; this was a point that many used in favor of staying in the EU. Another reason that swayed voters was that the EU had difficulty fixing problems such as high-unemployment rates in member countries, leading voters to feel as if the EU was not effective when it came to solving these kinds of economic issues.
UK citizens have already felt some effects of the Brexit. Right after the vote was tallied, stock markets dropped, the value of the Pound fell, and David Cameron announced he would step down as Prime Minister of the United Kingdom effective October. As a result of the drop in the value of the Pound, travelers will find it more affordable to visit the UK, which may bring some money into the UK’s economy.
The Brexit decision has sparked a laundry list of theories about the long-term effects the Brexit. Some believe that in reaction to the large migrant population in Britain, the UK will make it harder to obtain visas and citizenship. Others speculate that inflation rates will increase—which will be good news to some investors. Analysts also predict that many UK businesses will move their headquarters to EU member countries, which would move jobs away from the UK.
These long-term effects are highly contingent upon the final agreement between the EU and the UK. While the UK still has two years left as a member country of the EU, we still have a bit of time to see the long-term effects of the referendum.
For months now, the world’s central banks have been contemplating the use of negative interest rates. This means that central banks lower their target interest rate below 0%.
During times of economic recession, most banks, including the Federal Reserve, and the European Central Bank, lower their interest rates to near-zero values. This is designed to encourage borrowing and keep money moving through the economy; however, consumer confidence in Western Europe has fallen so low that people still won’t borrow, despite record-low interest rates.
Because of this, some central banks have decided that more aggressive measures, such as negative interest rates, need to be implemented to encourage consumption and borrowing. A negative interest rate reverses the traditional relationship between depositor and bank; instead of the depositor receiving interest for keeping their money in the bank, they must now pay interest to the bank to hold their money. The idea is that people will find it more economical to use their money for consumption, investing, and other purposes instead of letting their wealth dwindle away in a bank account.
Few times in modern history has a central bank implemented negative interest rates– one example being Switzerland in the 1970s. For the most part, negative rates are uncharted monetary policy territory.
The brave souls to venture into the world of negative rates thus far are Japan, Sweden, Denmark, Switzerland (again), and the European Central Bank. The rest of the world banks are waiting to see what happens to these lab-rats before taking the plunge.
As for the United States, negative interest rates are becoming a more likely scenario as time goes on. The Fed recently released its 2016 stress test, which assesses the ability of systemically important financial institutions (massive banks on which the economy depends) to withstand economic shocks and other unexpected financial market events. One such scenario was the implementation of negative interest rates. This has lead many investors to speculate that the Fed is seriously considering negative rates as an option for their near-future policies.
So far, the negative interest rate experiment has gone surprisingly well. Banks feared that discouraging deposits would result in depositors running on banks to stuff cash under their mattresses - as was common practice in the US during the Great Depression. In reality, however, the negative rates are performing exactly as policy makers hoped - people are using their money more actively, since there is less incentive to store it in a bank.
Many players in the financial industry are still highly skeptical of negative rates. Huw Van Steenis from JP Morgan Chase & Company recently stated that negative rates are a “dangerous experiment” that has severe long-term consequences for monetary policy.
If, in the following months, negative interest rates don’t prove as disastrous as some fear, then more countries could adopt this policy – the United States’ Federal Reserve is no exception. The question will become not about the impact of dropping rates below zero, but rather, how to raise them back above what economists used to call the “zero lower bound.”