Thursday 25 April 2019

Market Failure via Help To Buy

Help to put up prices

People who use the government’s Help to Buy scheme to acquire their first home are paying 12% more than people who buy new-builds without the scheme, according to conveyancing comparison site Reallymoving. The company looked at 44,000 quote requests from users of its site, and found that in February people buying through Help to Buy paid an average of £303,000 this year, compared with £270,000 outside of the scheme. Last October, the gap was 8%.

The government’s Help to Buy equity-loan scheme lends first-time buyers up to 20% of the value of a new-build home. The loan is then interest-free for five years. But “these figures suggest that buyers may be paying more than the property is worth in order to get the help they need to raise a deposit”, says Rob Houghton of Reallymoving. “This could either be because developers are charging a premium or first-time buyers are encouraged to buy a more expensive property because the scheme gives them greater spending power.”

Reallymoving’s figures are only representative of a portion of the market. But they support the idea that Help to Buy has artificially inflated demand for housing and helped push up prices. The risk is that people overpay for a property, and then when they come to sell, it is worth less than they’d like; they struggle to sell, and have not built up as much equity as they hoped. Moreover, as it’s no longer a new-build, the house won’t be eligible for Help to Buy and thus cannot benefit from demand being fuelled up by the scheme.

Europe vs Japan - economic situation?

How times change. "Turning Japanese" was part of my dictionary after the 2008 crisis; this article suggests it may be time to change the country the concept is based on:

Europe turning Japanese? No, it's much worse.

Europe struggles to escape stagnation, while Japan is recovering from its lost decades

Peter Tasker

APRIL 24, 2019 03:01 JST

Japan's openness toward immigrant workers is a product of the confidence that comes from a tight labor market. (Photo by Ken Kobahashi)
Turning Japanese was a 1981 hit by a U.K. pub-rock band called The Vapors. According to the lead singer, the title means "turning into something you didn't expect to." In the financial markets, the phrase has become shorthand for an extended period of economic stagnation, on the lines of the "two lost decades" that followed on from the collapse of Japan's bubble economy in 1990.

As with the lyrics of the song, the initial idea was that the phenomenon - also known as "Japanization" and "Japanification" - was bizarre and highly unlikely to occur in Western countries. No longer. Low growth and rock bottom interest rates have characterized the economic landscape in much of the developed world since the global financial crisis of 2008.

This year disappointing data in Europe has set off another round of "turning Japanese" warnings from major finance houses such as Pimco, Societe General and Bank of America Merrill Lynch. Dutch bank ING has even developed an index that purports to measure "the risk of the Japanese disease." Based on research by Professor Takatoshi Ito of Columbia University, it blends such factors as gross domestic product growth, inflation, interest rates and demographic change.

So Japan the outlier has become Japan the precedent or front-runner. At the turn of the century, German 10-year government bonds yielded 3.5% more than the Japanese equivalent. Now Japanese and German yields have converged in negative territory. Demographics are also not very different. Indeed, Japan's total fertility rate is higher than the rates for several European countries, including, depending on the year and the source, Portugal, Poland, Spain, Greece, Italy and Germany.

There are however some significant differences -- and they are not in Europe's favor. Japan never experienced the disastrous mass unemployment that afflicted much of southern Europe. Even after several years of recovery, youth unemployment in Spain remains at 38%. Italy's GDP is no higher now than it was in 2004, making it a rare example of a country that has had a bust without experiencing a preceding boom.

Meanwhile, on the other side of the ledger, Germany's performance highlights a huge north-south divide -- its current account surplus stands at an extraordinary 7.5% of GDP, twice the size of the imbalances that triggered the drastic managed appreciation of the Deutschemark and the yen in the mid-1980s.

Not coincidentally, these countries are all members of the Eurozone, which means that adjustment by currency depreciation -- which worked wonders for distressed Asian countries in the aftermath of the late 1990s crisis -- is not an option. One-size-fits-all monetary policy and constraints on fiscal policy rule out other standard policy tools. As with the gold standard in the 1930s, membership of the euro has an inherent deflationary bias. Deficit countries like Spain are forced to retrench, but there is no offsetting pressure on surplus countries like Germany to increase demand.

With the Brexit saga hogging the newsflow, the flaws and contradictions of the euro project have become less topical, yet they will continue to pose serious risks to economic and political stability well after Britain's relationship with the EU is settled. Economic logic requires the Eurozone to morph into a single state with fiscal transfers from richer to poorer areas. Politics makes that impossible for the foreseeable future. The next significant recession could spark off a chain reaction of rising unemployment, populist rage and street violence that would make the recent "Gilets Jaunes" protests in France look mild.

Talk of the "Japanification" of Europe is doubly misleading because Japan today is not the stagnant and deflationary Japan of 1997 or 2010. The current economic expansion is, at 72 months old, on the cusp of becoming the longest since the war. During that period, employment has soared to unprecedented levels and business investment has risen to the highest share of GDP in a quarter of a century.

As noted in a recent speech by Yutaka Harada, one of the "doves" on the Bank of Japan's Monetary Policy Board, better economic conditions have been accompanied by improvements in several indicators of well-being. He cites the declines in suicide, personal and regional inequality, relative poverty of children and single parent households and the slight uptick in the marriage rate and birthrate.

Japan's new openness toward immigrant workers and free trade initiatives, such as the Trans Pacific Partnership, which it now effectively leads, is also a product of the confidence that comes from a tight labor market and a highly profitable corporate sector. The same could be said for domestic political stability, as Prime Minister Shinzo Abe's comfortable support rates continue to protect him from the kind of storms that assail his peers in Europe and North America.

Japan managed to shake off its long malaise via large-scale monetary easing, currency depreciation and some well-timed regulatory tweaks. Visa restrictions for foreign tourists were eased and inflows of temporary foreign workers encouraged and stock market practices improved. The recent hostile takeover of sportswear producer Descente by trading house Itochu is an example of change in corporate behavior.

The eurozone's problems are less tractable, but pressure on Germany to stimulate domestic demand hugely would be a useful palliative.

All in all, "turning Japanese" does not sound too bad a fate at all. "Turning European," on the other hand, could be disastrous.

Peter Tasker is an analyst with Tokyo-based Arcus Research.

Wednesday 17 April 2019

New jobs vs Old jobs

Short article about Spotify & London R&D centre - can be used as an alternative to FinTech. Bear in mind average pay at Google's London office is about £226K....

Spotify has opened up a new research and development hub in London that the music streaming giant said will create close to 300 new jobs in the capital.

The Swedish company confirmed it would move staff into the Adelphi Building near the Strand on Tuesday.

Spotif, which is listed in New York and has a market value of over $25bn, has grown rapidly from a music streaming upstart into a global firm with more than 4,000 staff. A spokesman said 550 people would be based in the new London office, up from around 260 current roles.

The new research team will be the company's first major technology division outside of its home base in Sweden and its offices in the US.

Spotify UK managing director Tom Connaughton said: “As one of Spotify’s biggest markets, it makes perfect sense to expand our team here, and to tap into the large and diverse talent pool to be found in London."

The Swedish company joins several other technology giants expanding their UK presence. Google, Facebook and Amazon have all built up their UK presence heavily.

Last year, Facebook said it would double its UK office space in London, creating enough space for 6,000 people near Kings Cross.

Google, meanwhile, is building a new £1bn headquarters that will have room for some 4,500 UK employees.

Mayor of London Sadiq Khan said: “London is the best place in Europe for tech companies to find a wealth of diverse talent. Spotify’s expansion is a further sign that London is open to ground-breaking technology.”

In February, Spotify announced it had made its first ever profit of around €94m as it continued to grow the free and subscriber memberships of its music streaming app. The Swedish firm floated in New York last year at a valuation of $30bn.

Great example of demand & supply in a crucial area of market failure

Although some of this may seem a bit technical, read it as an example of the unintended consequences of trying to regulate a market in order to correct market failure. It is the overall issue you should get your head around - a classic trading scenario, i.e. sell your permits to raise cash and flatter your earnings; discover you need to buy them back, except there aren't enough on offer, so the price sky rockets, crippling some companies:

Rocketing EU carbon prices spell big trouble for careless companies, and for coal

Coal has been priced out of the UK market by higher carbon taxes. Europe is now following CREDIT:PHYS.ORG

Europe's carbon market is on fire. New rules and a shortage of permits have driven futures contracts to an 11-year high of €27 a tonne, with an extra twist from the vagaries of Brexit.

The contracts have jumped sixfold over the past two years and have been the hottest trade in the commodity universe.

The German bank Berenberg said prices are likely to double or triple again over coming months as companies bid up the contracts in a desperate scramble to avert fines for pollution.

The spike spells trouble for industrial companies and airlines across Europe that have run out of permits, or those that tried to play the market by selling their allowances in the hope of buying back contracts at a lower price later. This trade has blown up in their faces.

“Industry has been ignoring the carbon price issue and now they are going to face a really big surprise,” said Phil MacDonald from Sandbag, which monitors the carbon market.

The EU contract is the price that 11,000 power plants, steel foundries and factories – covering 45pc of Europe’s greenhouse emissions – must pay for each tonne of carbon emitted under the “polluter pays principle”.

Lawson Steele, Berenberg’s utility strategist, said a twist in the EU rules has led to a chronic deficit of  allowances. “Companies should be trying to buy as many permits as they can to protect themselves but the level of knowledge in the industry is really low,” he said.

Mr Steele said it may ultimately take prices of €107 to clear the market. This is the penalty level for companies that fail to cover their C02 emissions.

British Steel has already had to request an emergency loan of £100m from the Government to avoid fines when the deadline expires this month, prompting sceptics to ask whether it tried to cash in its permits to create cash flow or to flatter its books.

“They sold their 2019 allowances to cover their 2018 emissions. They messed up,” said Mr MacDonald. The company’s allocated permits would be worth almost £140m at today’s prices.

He said a string of European companies in steel, chemicals and energy have been playing the same trick and are now in trouble.

The wise virgins such as German’s power utility RWE snapped up carbon contracts when they were going cheap and are now largely hedged into the early 2020s. The shake-out will produce a generation of winners and losers.

British Steel says it needs the emergency loan to manage the uncertainties of Brexit. Brussels has suspended the new allocation of permits this year for UK firms until the Withdrawal Agreement has passed.

Airlines are also under pressure because the growth of aviation has outstripped their permits, which they need for intra-EU flights.

Exeter-based Flybe said last October that carbon costs were part of its undoing. Lufthansa reported losses of €335m (£290m) for the first quarter. It blamed most of the damage on rising fuel costs but its short statement left many questions unanswered.

The carbon trading scheme is the spearhead of EU efforts to cut emissions by 40pc by 2030, compared to 1990 levels. It has so far been a rolling disaster, a byword for market illiteracy. It issued too many carbon permits, with no way of adjusting when industrial output collapsed during the Great Recession and again during the eurozone banking crisis. The carbon price collapsed. Coal use surged.

Brussels is now trying to restore sanity. A new structure launched this year empowers a market stability reserve (MSR) to soak up the glut of contracts. In theory it is supposed to operate like a central bank, tightening and loosening to keep the market in balance. In reality the scheme is lurching from one extreme to the other.

The price surge has become self-fulfilling. Industries with a stash of unused credits are hoarding them for gain rather than putting them up for auction.

What the new regime has achieved is to erode the cost advantage for coal, although it may take prices of €35 to €40 to force a full switch to natural gas. Wind and solar are gaining the edge even without subsidy. “We’re now at the tipping point where the cost of building new renewables is competitive with the running costs of existing coal and gas,” said Sandbag.

Britain has imposed an extra £18 a tonne on top of the EU carbon prices. This has already priced coal out of the UK market but it has also come at a competitive cost for heavy industries in the North that must compete with EU rivals.

The roles are now being reversed to some degree. The higher the price of EU carbon permits, the more it vindicates the UK’s huge investmentin offshore wind and zero-carbon power. Green countries come out ahead. Laggards in Eastern Europe pay a penalty that reduces their cost advantage on wages.

The Government plans to keep Britain tied to the EU trading scheme after Brexit. However, if there is no deal, the EU’s carbon prices could suddenly plunge again. British companies would no longer be able to use their permits. They would sell them and flood the EU market.

The EU carbon price has now become a Brexit barometer. Every time the pendulum swings towards no deal the contracts surge: as it swings back to a softer Brexit the price falls again.

Perhaps it is time for Europe to find a better way to tax carbon.

Friday 12 April 2019

Great article on UK trade deficit - good bits for essays:

COMMENT

april 12 2019, 12:01am, the times

Trade deficit looks symptomatic of an unbalanced economy

oliver kamm

Amid huge political ructions, Britain’s economy is still expanding. Latest figures show GDP growth of 0.3 per cent in the three months to February. Yet there is some evidence that stockpiling, to mitigate the risk of a no-deal Brexit, had an effect and the growth rate is appreciably slower than in the same period in 2018. Moreover, Britain’s trade balance is deteriorating. And that, on the face of it, is surprising. Whatever happens in Brexit negotiations, this is likely to be a stubborn problem for Britain’s economic prospects.

Or is it? What exactly is wrong with a trade deficit? It’s not as clear as conventional commentary, with its stress on exports as a desirable thing, makes out. It all depends on the reasons for the deficit.

Data released this week shows that Britain’s total trade deficit (goods and services) widened in the three months to February by £5.5 billion to £13.6 billion. Essentially, the goods deficit expanded by a lot and the services surplus expanded by a little. And it’s the goods part of the equation that is most significant: Britain’s goods exports fell by £1.6 billion while imports surged by £4.9 billion.

You can’t base too much on three months of data but the goods deficit is persistent and it’s intuitively surprising that imports should be so strong when the economy is merely chuntering along. There were big increases in imports of machinery and transport equipment (mainly cars) and of chemicals.

Part of this, again, is due to Brexit uncertainty. The chemicals figure includes pharmaceutical imports, which would be vulnerable to a no-deal Brexit. But the goods deficit is widening both with the European Union and non-EU countries, suggesting that it’s not likely to be reversed even under the rosiest of assumptions to do with Brexit.

It’s not inherently a problem but it may become one under certain scenarios. Though politicians and businesses often refer to a supposed need to boost exports, economists would typically see exports as a cost and imports as a benefit. Exports are what we give up in order to enjoy the benefit of expanded choice and quality. In addition, imports put competitive pressure on domestic industries in price and quality; consumers are the beneficiaries.

A widening trade deficit is a factor contributing to Britain’s longstanding current account deficit. This means that, by definition, there is a surplus on Britain’s capital account. Essentially, an inflow of capital from abroad enables British consumers to enjoy a higher standard of living than would otherwise be possible. That’s the benign way of looking at it. And a big current account surplus, such as Germany enjoys, can be a problem — it means that the surplus country can’t easily boost growth in a downturn by stimulating domestic demand. Growth will depend on the willingness of foreign consumers to carry on spending.

For all that, a deficit can be a problem. It indicates an imbalance of investment and savings: there aren’t enough domestic savings to fulfil profitable investment opportunities. The gap is filled by foreign companies buying UK assets, which will generate cash flows for their owners away from Britain. And a persistent deficit may show, as it very probably does in Britain’s case, an unbalanced economy whose growth relies excessively on consumption. When consumption relies on drawing down savings, there’s a limit to the sustainability of growth. That broadly is where Britain now is. The economy isn’t collapsing but it is unbalanced. If Brexit takes place, it won’t correct that problem. It will instead make trade more difficult with our closest partners while transplanting the problems of a deficit to our trade with other markets. Britain’s fortunes do to some extent depend on selling more goods (and services) in those markets.

Oliver Kamm is a Times leader writer and columnist. Twitter: @OliverKamm

Nice post on the need for regulation/oligopoly

From Fortune magazine, via CapX - note the gap between EU & US regarding rules; good context for market failure?

By CHARLIE THAXTON

April 3, 2019

Your money’s no good here. At least, that’s true at a growing number of stores and restaurants that are ditching cash and switching entirely to credit and debit cards. Cashless retail is still relatively uncommon, but it’s on the rise and has begun to concern some lawmakers. New Jersey recently banned cashless retail. Philadelphia has done the same. Other cities may soon follow.

So far, the debates leading up to these laws have mostly centered on how cash-free establishments impact the many low-income people who lack bank accounts and credit cards. But there’s another major problem with going cashless. Cashless retail—and credit cards in general—allow a handful of giant banks and credit card monopolies to siphon more and more revenue from the productive economy, at the expense of consumers and businesses.

Retailers are essentially locked into a “partnership” with financial services monopolies. To get a sense of how inflated our rates truly are, the EU has capped rates at one-seventh of ours and, believe it or not, credit cards are still a profitable and growing business in the European economy.

We need to do the same. Unless the U.S. follows suit, banks and card networks will continue to extract a kind of monopoly rent across a growing share of consumer spending, skimming money from both consumers and businesses, and dampening real, equitable economic growth.

Cards are big business. Over half of all credit cards are issued by the Big Four banks: JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America. Interchange fees alone—the “swipe fee” retailers pay to the banks in order to process cards—netted these and other card issuers $64 billion in 2018, more than doubling the revenue of 2012. Processing associated with those fees made the card network market’s uncontested duopoly, Visa and Mastercard, about $15 billion last year.

Those numbers are so elevated because the U.S. has the highest swipe fees in the world, between 1.5% and 2%—and oftentimes nearly 3%—of a transaction, depending on the type of purchase. And the market is highly concentrated: Visa is a credit card titan, controlling 60% of the credit and debit card market last year. Mastercard had a full 25% of the market and American Expresscaptured 13%, which left Discover to clean up the dust, with just a 2% share.

This market dominance allows the networks to largely dictate card fees to merchants. Retailers and restaurants cannot feasibly refuse Visa and Mastercard, ensuring there is no true competition in the market. Card network technology has only become more efficient over time—yet, fees keep rising, forcing merchants to pay more for the same service year after year.

While big retailers like Walmart and Amazon have some leverage to negotiate down fees, small independent businesses do not. This all but ensures that the increasing use of cards favors big business, and shifts the largest cost burden to those who have the least ability to negotiate. Small businesses are forced to both accept the fees and pay a higher relative price than the chains do. In other words, concentration in the card market is helping to propel growing concentration in retail.

This is further exacerbated by Amazon’s new fleet of “Go” stores, for which cashless (and cashier-less) retail is central to the business model.

Such stores will lead to death by a thousand cuts for the American economy. The cashless trend puts more power and control in the hands of billion-dollar credit card companies and trillion-dollar banks—who play an inconsequential role in the doings of your local restaurant, bookstore, or independent retailer. Yet, these giants profit handsomely from inserting themselves between you and your neighborhood businesses. And their gain comes at a real cost: Local retailers are stuck paying tribute to monopolists far removed from the operation of their businesses, instead of offering better wages, adding new services, or lowering prices.

Ultimately, the high cost of cards is passed down to consumers in the form of higher prices. Whether they use a card or not, consumers are effectively paying a premium to subsidize the banks and card companies. Federal Reserve data shows strong credit card issue and spending growth year over year, which means consumers are not only using their cards more, they’re paying more—millions more—in hidden interchange fees every year to do so.

No consequence, legal or economic, stands in the way of card companies hiking their rates. And that’s exactly what they plan to do in April.

So what’s the solution? In 2015, the EU took charge and set a strict cap on interchange fees at 0.2% for debit and 0.3% for credit card transactions, keeping more money in small businesses’ hands. Visa and Mastercard make a little less, but millions of businesses and consumers make a lot more. People still use credit cards all the time in Europe.

In the meantime, legislation to ban cashless on the local and state level is a good starting point. Cities like San Francisco, Chicago, Washington, D.C., and New York are all considering cashless bans. None of these proposed laws forbid the use of credit cards, they merely require businesses to honor their customer’s cash. That protects consumer choice, and allows those unbanked Americans to participate in the economy.

Cash, for all of its contingencies, is a much more anonymous, resilient, and democratic system. Cities and states are right to insist that it continue to be an option for consumers. But with card transactions almost certain to become more expensive, we also need to cap these hidden fees so that giant financial interests cannot continue to use their monopoly position to drain more revenue from the economy.

Charlie Thaxton is a researcher with the Institute for Local Self-Reliance’s Community-Scaled Economy program.

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