Latest FT book review

19 Sep 2014

My latest book review for the Financial Times is on Joel Kotkin’s The New Class Conflict (free registration may be necessary to read). I will post the full text at a later date.


This blog post from Portugal was first published yesterday on Fundweb. Although I do not draw out the point in the piece it seems to me that the European Union, as an elitist technocratic project, has played a considerable role in inculcating the fatalist mood I describe.

 It was not originally planned that way but I was hoping that a visit to Portugal would give me some insight into the country’s economic plight. In the event it did but not quite in the way that I expected.

For the large football-loving section of the population there was a sense of national disaster but not over economics or politics. The Portuguese national team suffered a shock home defeat to Albania in its first Euro 2016 qualifying match. I cannot speak Portuguese, nor am I an expert in body language, but Paulo Bento, the team manager, looked embattled in the numerous television interviews he gave after the game. A few days later he announced his resignation.

 Beyond that I am more wary than most writers about drawing sweeping conclusions about a country on the basis of a short visit. I certainly do not believe that the standard journalistic technique of interviewing a local taxi driver is a reliable gauge of public opinion.

It would be easy to draw the misleading conclusion that the relatively large number of unoccupied shops and other buildings (although no more than in many British high streets) are a symptom of economic retrenchment. There probably is some truth in this but it is also the case that from as far back as the 1970s many shops and business have migrated to the outskirts of Portuguese cities. Although tourists tend to stick to seaside resorts and historic city centres many Portuguese prefer to spend spare time in American-style malls.

Young volunteers are a ubiquitous sight in many towns and on the transport system. Typically they travel in groups of three or more and they are set tasks such as aiding commuters or helping to keep beaches clean. No doubt this phenomenon is a reflection of the high levels of youth (16-24) unemployment. The rate of about 35 per cent is grim but down from a peak of over 40 per cent in February 2013. Presumably the young volunteers, who are evidently paid a small stipend, are not classified officially as unemployed.

High migration, particularly by the well educated, is another effect of unemployment. Some go to Portugal’s former colonies, such as Brazil and Angola, while others migrate to European destinations such as Germany. German classes at the local Goethe Institutes are reportedly full of young graduates learning the language in preparation for a working life in central Europe.

Talk to older adults and a different although parallel picture emerges. Incomes for public sector workers have been slashed while many aged 50 or over have come under pressure to retire early with a reduced pension entitlement. Whole sectors, such as construction, appear to be largely idle.

There is also much talk of privatisation of such entities as the airport operator and the insurance arm of the state-owned bank. Such initiatives appear to be a result of EU pressure to raise revenue rather than by what is sometimes derided as an ideological commitment neoliberalism.

However, the most striking feature of Portugal’s plight is the widespread fatalism of the population rather than the economic challenges themselves. People talk about “the crisis” as if it is a natural disaster. There seems to be little sense that the eurozone’s recent woes are at least partly the product of the monetary bloc’s structural flaws as well as bad economic policy.

Resigned acceptance is a poor starting point for working out how to generate a new round of prosperity.

I will be speaking at two sessions at this year’s Battle of Ideas weekend festival in London’s Barbican Centre on the weekend of 18-19 October.

On Saturday I will be debating the plight of the “Pigs” – Portugal, Italy, Greece and Spain – in the eurozone crisis. Philippe Legrain and Vicky Price will also be on the panel while Nikos Sotirakopoulos is the chair.

On Sunday I will take part in a discussion on the idea of “growth is good”. Ricardo Fuentes-Nieva and Kitty Usher are also on the panel. Angus Kennedy is chairing.

The entire weekend is well worth attending.

A reminder that Daniel will be introducing a discussion of America’s new technocratic elite at the Institute of Ideas Economy Forum in London tomorrow evening.

While most of you were off on your summer holidays the world’s top economic policymakers were up to something else. Although they enjoyed more salubrious surroundings than many they kept busy doing what they do best: blaming others for the economic mess they have played a key part in creating.

The summer’s top gig was the annual do for top financial types in at therustic resort of Jackson Hole in Wyoming. Its use as the event’s venue dates back to 1982 when it was evidently chosen to entice Paul Volcker, then chairman of America’s Federal Reserve, with its excellent fly fishing.

This year it was the turn of an Italian, Mario Draghi, to star. The president of the European Central Bank told the select audience that: “it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy”. In other words an area of policy outside his own remit should be used more actively.

He also emphasised the need for structural reforms. In particular he focused on labour markets, product markets and the business environment.

His call came shortly after Eurostat, the EU’s statistical agency, released miserableflash estimates for economic growth in the second quarter of 2014. It showed GDP in the eurozone was flat compared with the previous quarter. The poor performance comes several years after the emergence of the eurozone crisis in 2009.

It is striking that technocrats such as Draghi seldom accept any responsibility for the region’s morass. The fundamental structural weakness of the eurozone itself – that is its attempt to tie highly disparate economies into a monetary union – is not addressed. If anything the solution is seen as further integration – under the leadership of elite technocrats of course – rather than the dissolution of the currency bloc.

As I argued in a Fund Strategy cover story back in 2010 the eurozone is a bit like a layer cake. Its members exist on three levels: national, regional and global. Whereas all countries are subject to global problems, and all have national weaknesses to a degree, the design of the eurozone poses formidable additional challenges.

The structure of the eurozone inevitably leads to imbalances between the relatively strong economies, most notably Germany, and weaker ones, such as Greece and Portugal. Until 2009 these helped create a bubble in the region’s periphery, as cheap capital flowed into southern Europe, followed by savage austerity when the bubble burst.

A unified economy, such as the US, can deal with these problems by shifting resources from one area to another. However, this is a difficult process in Europe as it still consists of distinct nation states.

To be sure this design weakness is not all the fault of Draghi. The region’s politicians should take most of the blame. Rather than take responsibility for tackling economic problems they preferred instead to abdicate responsibility to central bankers and other unelected technocrats.

Meanwhile, in Lindau, a Bavarian town on the banks of Lake Constance, the fifth annual meeting of Nobel laureates in economics also took place in August. Although several were critical of the eurozone their perspective was not that different from Draghi’s. Joseph Stiglitz, for example, called for further moves towards in integrated Europe and a more active fiscal policy.

Both the policymakers and the supposed critics seem to share the same deadening technocratic consensus on the challenges facing the eurozone. It is high time that a new approach is tried.

This blog post was first published today on Fundweb

Spiked Israel podcast

22 Aug 2014

I discuss the Gaza conflict alongside Tara McCormack in the latest spiked podcast (although for some inexplicable reason I say “Kuwait” towards the end when I mean “Qatar”!).

When a blatant error is repeated frequently it is worth thinking about why. In this case the example is not directly related to investment or economics but there is an important parallel.

Some readers might have seen the recent report apparently showed six-year-olds outstripping adults in their understanding of information technology. Since it was reported widely in the media and the source given was Ofcom, the official communications regulator, the claim appeared unimpeachable. The coverage gave the impression that even young children are leaving adults behind in this brave new digital age.

But look carefully at the Ofcom website and a different pattern emerges: “The study, among nearly 2,000 adults and 800 children, finds that six year olds claim to have the same understanding of communications technology as 45 year olds” (added emphasis). The key phrase here is “claim to”. Just because a six-year-old believes something is true it does not mean it should be taken at face value.

Do Ofcom’s online digital aptitude test and things start to become clearer. Many of the questions ask respondents to rate how much they know about technologies such as Google Glass or smart watches. No doubt the typical adult is likely to be reluctant to claim they know a great deal about a subject unless they do. In contrast, young children are likely to have fewer inhibitions about exuding confidence.

What is really being measured here, contrary to what much of the media claimed, is confidence in the use of digital technologies. Young children are more confident because they do not appreciate the world’s complexity. They are unlikely to express doubts because they do not know any better. Adults, in contrast, tend to be more equivocal simply because they have a better appreciation of the vastness of human knowledge.

This confusion of confusion and knowledge is where the economic parallel comes in. It is often claimed that confidence is the key factor driving markets and economies. Consequently analysts often pay great attention to confidence surveys of consumers, investors and companies. Buoyant markets are also often associated with high levels of confidence.

The problem with this approach is that confidence is a poor indicator of economic strength. At best the two may be correlated. But it is more likely that any economic uptick is driving higher confidence than the other way round.

More likely the confidence numbers are simply a response to short-term buoyancy in the economy or markets. For instance, easy credit can give the economy a temporary boost that in turn boosts confidence. But in such circumstances the underlying fundamentals can remain weak. Key indicators such as productivity levels or the strength of corporate investment are not reflected in the confidence figures.

All the talk of confidence can also give a misleading impression of the challenges facing the economy. Mainstream economic debate often suggests that recovery is simply an act of will: if consumers and companies would only become braver an upturn will not be far behind. It sees little need to find ways to rejuvenate the real economy.

Confusing confidence with knowledge inevitably leads in the wrong direction.

 This blog post was first published today on Fundweb

I will be introducing a discussion of America’s technocratic elite at the Institute of Ideas Economy Forum on 16 September in London.

Much coverage of recent innovations in the financial markets seems to have a simple message: “beware of the dark side”. Like some bizarre offshoot from the Star Wars franchise it evokes a dimly lit world inhabited by a new, dangerous species.

First, there are the “dark pools”. These are private trading venues, typically housed inside big investment banks, which match buyers and sellers anonymously. Only after trades are made is the identity of institutional investors who use these entities revealed. For such investors the advantage is they can trade large blocks of shares without moving the market.

Clearly the term “dark pools” can itself, whether rightly or wrongly, be taken to imply something underhand is going on. There are certainly suspicions on the part of the authorities. For instance, in June New York state’s attorney general filed a complaint against Barclays for alleged fraud and deceit in its dark pool. In response Barclays has asked a court to dismiss the complaint arguing in a memorandum that it “fails to identify any fraud” or establish any “actual harm”.

This brings us to the new alien species in the franchise: the high frequency traders. These are individuals who use computer algorithms to make markets. Such players often attempt to “trade ahead” of the market by buying available shares before investors. A tiny fraction of a second later they then sell the shares at a slightly higher price.

Michael Lewis, one of America’s leading financial writers, claimed in his book Flash Boys that such traders have in effect rigged the market against the interests of ordinary investors. High frequency traders counter that they are reducing trading costs by using computers rather than overpriced humans. Such traders contend that it is the mainstream asset management firms that charge excessively for their services.

Finally, there are shadow banks. These are institutions that act like banks, in that they play a role in the provision of credit, but are technically not banks. For example, money market mutual funds can act in this way. Yet shadow banks are not subject to the tight rules that regulate the banking industry.

Concern about the dangers of shadow banking is widespread. For example, Mark Carney, the governor of the Bank of England, has argued in the Financial Times that they played a central role in the financial crisis. Many others have claimed that the burgeoning shadow banking sector in China threatens global financial stability.

What all the critics have in common is that they look to what they see as the dark side of finance as a key source of instability bedeviling markets and the economy beyond. They fail to understand that if companies fail to use capital for productive investment it tends to flood the financial markets.

The kneejerk demands for ever-more rules provide no solution. Indeed the tighter regulation of banks helped supply the impetus for the rise of shadow banking. As long as high levels of surplus liquidity are circulating around the economy it will find its way into the markets.

The solution is not to shine light on the supposed ”dark side”. Instead it is to find ways to encourage firms to harness capital productively in the real economy.

This blog post was first published today on Fundweb.

Debate concentrates the mind. It is easy to dismiss opinions you disagree with from the privacy of your own living room. Debating articulate exponents of contrary views is another matter – even more so when the discussion takes place in front of a large audience.

I found myself in the position of having to sharpen up my arguments for a recent debate on behavioural finance at the City of London festival (plugged at the end of my last blog post). An edited version of the debate was broadcast in the Radio 3 Free Thinking slot and is available to listen to online here.

Instinctively I was suspicious of behavioural finance beforehand. I was familiar with respected pundits, such as Dan Ariely and Richard Thaler, who were all too ready to dismiss human beings as scarred by irrationality or condemned by frailty.

Such contentions did not accord with my experience or understanding of humanity. We may not be perfect but it seemed to me that from the long-term perspective of human history we have achieved a huge amount over the years. We have literally moved from living in caves to, at least relatively speaking, hugely more prosperous, technologically advanced and even humane societies. Such progress would not have been possible without the operation of considerable powers of human reason.

However, reading some of the more subtle material, and debating the likes of Greg Davies of Barclays and Frances Hudson of Standard Life Investments, made me realise that the more moderate proponents of behavioural finance have a point. It is not that we are irrational but we do have what could be called cognitive biases.

For example, most people, given the choice, would evidently opt for having £100 today rather than £102 tomorrow. This is despite the fact that – except in conditions of hyperinflation – £102 tomorrow would be worth more.

To my mind this is not irrational but it is significant. We may, for instance, prefer £100 today because we are sceptical about being given it tomorrow. Perhaps the donor will run away or simply forget. Or we may have an urgent spending priority. Preferring the £100 represents a bias on our part but it is overstating the case to condemn it as irrational.

This example may appear trivial but there are many others that could be given. For instance, the common human preference for avoiding losses over making equivalent gains; or our underestimation of the effect of compound interest on investments.

Nevertheless it still seems to me that what might be called the strong form of behavioural finance is fundamentally flawed. In our debate this perspective was represented by Adrian Wooldridge of the Economist. His approach was essentially to run through a catalogue of financial bubbles over the years as a way of demonstrating innate human irrationality.

To me this approach is deeply ahistorical and superficial. It ignores the specific factors driving each bout of volatility and simply asserts that human irrationality was to blame.

In any case the debate, or at least edited highlights, are available to listen to on the BBC website so you can judge for yourself.

This blog post was first published today on Fundweb.