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Thursday, October 22, 2020
Is the pandemic leading to a marked rise in defaults on loans to firms and households? Finance & economics THE HEALTH of America’s economy and that of its banks are closely intertwined. Sometimes, as in the global financial crisis of 2007-09, hazardous behaviour by the banks leads to the whole economy being laid low. But even when, as now, the banks are not the source of the country’s economic ills, their vital signs still tell you something about the broader picture—about the ability of people and businesses to repay debts, their willingness to borrow and the appetite of companies to raise capital in public markets. The banks’ third-quarter earnings season, which begins on October 13th, is the next opportunity to take the banks’ pulse and gauge how America’s economy is faring in its recovery from the ravages of covid-19. The economic turmoil caused by the coronavirus has cut both ways for banks. Commercial banking (basically, the business of taking deposits and lending) has suffered as the economy slumped, but investment banking has boomed. As markets see-sawed when the pandemic took hold, investment banks’ trading volumes soared,
WASHINGTON — An oversight panel responsible for monitoring $500 billion in federal aid has become stymied by disagreements about a program to prop up struggling state and local governments and has failed to send a legally mandated report to Congress for weeks.The standoff over the Municipal Lending Facility, which is operated by the Federal Reserve and supported by the Treasury Department, comes as talks between Congress and the Trump administration over additional stimulus have stalled. Those talks have run aground largely because lawmakers disagree about whether the federal government ought to provide more money to states and municipalities, with Democrats arguing for it and Republicans against it.The $2.2 trillion stimulus law passed in March created a Congressional Oversight Commission, which includes two Republicans and two Democrats, to keep tabs on some of that spending. By law, it must issue a report to Congress each month.While the passage of the stimulus legislation was overwhelmingly bipartisan, the oversight commission’s work has become politically charged. A Democrat on the commission recently accused his Republican colleagues of stonewalling its work.The dispute centers on whether the Fed’s lending program could be doing more to help lower borrowing costs for states, cities and other local governments.“The
WASHINGTON — On Tuesday, the bipartisan stimulus talks were off, abruptly ended by a series of indignant tweets by President Trump. On Wednesday, there was a glimmer of hope when he suggested he might reconsider, and top negotiators haggled privately by phone over possible legislation.By Thursday, the president performed a complete about-face and suggested that a deal could be at hand — then turned around and derided Speaker Nancy Pelosi of California, the top Democrat in the discussions, as “Crazy Nancy.” Ms. Pelosi, for her part, teased the announcement on Friday of legislation establishing a commission to advise Congress on whether the president should be forcibly removed from office for mental or physical impairments.As tens of millions of Americans, schools and businesses watched the flurry of developments that could determine whether they would receive another infusion of desperately needed pandemic relief, confusion reigned in Washington about whether an elusive stimulus compromise was dead, alive, on life support or somewhere in between.What remained clear was that the political stakes, which have long imperiled a bipartisan bargain, have only heightened. And the collateral damage across the country has continued to mount in the absence of federal funding, with more than 800,000 Americans
The high cost of health care is persisting during the pandemic, even for people lucky enough to still have job-based insurance.The average annual cost of a health plan covering a family rose to $21,342 in 2020, according to the latest survey by the Kaiser Family Foundation, a nonprofit group that tracks employer-based coverage. Workers paid about a quarter of the total premiums, or $5,588, on average, with their employers picking up the rest of the cost.An analysis of the results was published Thursday online in Heath Affairs, an academic journal. While premiums rose only slightly from the 2019 survey, the increase in premiums and deductibles together over the last decade has far outpaced both inflation and the growth in workers’ earnings. Since 2010, premiums have climbed 55 percent, more than double the rise in wages or inflation, according to the foundation’s analysis.About 157 million Americans had coverage from their employer before the pandemic, but millions have lost their insurance along with their jobs over the past several months. Many experts expect more people to lose coverage in the coming months as companies lay off workers or drop their health benefits.“Nothing changed much, but then everything changed,” said Gary Claxton, a
ELECTION YEARS are not often the best times for stockmarket investors. Over the past 90 years shares included in the S&P 500, an index of America’s biggest firms, have returned an average of about 8.5% a year. The twelve months leading up to each of the 22 presidential elections in that time have been leaner affairs, returning just 6%. Investors tend not to care whether the victorious candidate is Democratic or Republican, but they do like familiarity—returns are a shade higher in years when incumbents are returned to office. The democratic cycle, for all its virtues, tends to bring with it a dose of uncertainty—first about who will win and then about what that victor will do. And uncertainty tends to make financiers nervous. These jitters are most easily observed in VIX futures, derivatives that measure the level of volatility in stocks. Because periods of very high volatility are correlated with plunging share prices, VIX futures are often traded by investors as an insurance policy against losses in the S&P 500. Because there is usually more potential for volatility over longer time horizons, longer-dated VIX futures tend to be more expensive. They also tend to be dearer around uncertain
Applications for jobless benefits remained high last week, even as the collapse of stimulus talks in Washington raised fears of a new wave of layoffs.Unemployment filings have fallen swiftly from their peak of more than six million last spring. But that progress has recently stalled at a level far higher than the worst weeks of past recessions. That pattern continued last week, the Labor Department said Thursday: More than 800,000 Americans filed new applications for state benefits, before adjusting for seasonal variations, roughly in line with where the total has been since early August.“The level of claims is still staggeringly high,” said Daniel Zhao, senior economist at the career site Glassdoor. “We’re seeing evidence that the recovery is slowing down, whether it’s in slowing payroll gains or in the sluggish improvement in jobless claims.”That slowdown comes as trillions of dollars in government aid to households and businesses has dried up. Prospects for a new stimulus package, already dubious in a divided Washington, appeared to fall apart this week when President Trump said he was pulling out of negotiations. Economists across the ideological spectrum warn that the loss of federal help will lead to more layoffs and business failures, and more
EVEN ARDENT free traders have their limits. Most would agree, for example, on the odiousness of imports made with slave labour. They could also sniff at stuff made by children, or workers unable to join a union of their choice. And yet, as one person’s labour protections are another’s protectionism, baking such standards into the global trading rules has proven impossible. Increasingly, though, America and the European Union (EU) are toughening up on their own. This year America has added new rules to the books, and tightened enforcement of existing ones. It has applied 12 “withhold release orders” (WROs) mostly on products from China on the grounds that they had been made with forced labour in Xinjiang. These allow customs agents to seize suspicious shipments; in order to secure their entry into the country, companies must prove that the goods have not been made with forced labour. The USMCA, America’s deal with Canada and Mexico, which was implemented on July 1st, also builds in opportunities for enforcement. All signatories must enact bans on imports made with forced labour—Canada introduced its version in March. The deal also sets out a swathe of labour reforms for Mexico to implement. And a
Even as millions of people have lost their jobs during the pandemic, the soaring stock market since the spring has delivered outsize gains to the wealthiest Americans. And few among the superrich have done as well as corporate executives who received stock awards this year.Executives With the Biggest GainsCorporate leaders whose stock options or grants this year have appreciated the most.
LIKE OTHER crises before it, covid-19 seems destined to accentuate troublesome features of the world economy. Take global imbalances. Though these were briefly suppressed when the pandemic first struck, they have now rebounded. America recorded its largest trade deficit in 14 years in August, despite having gone from being a big importer of oil to a net exporter in that time. Its goods deficit is neatly matched by a resurgent surplus in China. Temporary factors, such as a surge in China’s exports of personal-protective equipment, are partly to blame. But there is reason to worry that these fault lines will persist, adding a dangerous element to an already fraught global policy environment. Global imbalances reached a modern peak just before the onset of the financial crisis of 2007-09, when the absolute sum of countries’ current-account surpluses and deficits amounted to over 5% of world GDP. Current-account gaps were pushed wider in part by what economists called the “global saving glut”, the result of soaring oil prices, and precautionary saving by emerging-economy governments prepared for sudden reversals in global risk appetites. Gaps eased in the decade after the crisis as oil prices fell and China edged towards rebalancing its economy.
MARTIN AMIS, a novelist, was once asked why he preferred roll-ups to ready-made cigarettes. “It’s simply the best burn available,” he replied. In finance, a roll-up is a strategy of buying lots of small companies in the same industry and combining them into a big one. A big firm can cut costs by reaping economies of scale—in marketing or IT, say, or in negotiations with suppliers. The markets are attracted to the glow. They often assign big companies a higher valuation than small ones. Could a roll-up work in fund management? The question is often asked, only to be dismissed: you would have to be unusually daring (or smoking roll-ups of the jazz variety) to consider taking on such a challenge. So a few eyebrows were raised when it emerged last week that Trian, a hedge fund led by Nelson Peltz, a veteran agitator for corporate change, had taken stakes of almost 10% in two asset managers, Invesco and Janus Henderson. Asset management is undergoing significant change, noted Trian in its regulatory filings. Firms with scale and a breadth of products are better placed to succeed. So Trian has in mind “certain strategic combinations” to generate value from its
Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub IN 2012 DAVID VÉLEZ tried to open a bank account in Brazil. “It was like going to prison,” he says. He was ordered to leave his belongings in a locker before walking through bulletproof doors. After waiting an hour, he faced a barrage of questions from a hostile manager. It took five months for him to be offered a bare-bones account costing him hundreds of dollars a year and a credit card charging an annualised interest rate of 400%. The next year, in the hope of eroding Brazil’s crusty banking oligopoly, he founded Nubank, a digital lender. By early 2020 the bank was valued at $10bn. Then the pandemic came—and business really took off. This year alone the number of accounts at Nubank has risen by 50%, taking the total to 30m. In June it partnered with WhatsApp, which has 120m users in Brazil, to offer payments through the messaging service. In September it bought Easynvest, a digital broker, and launched operations in Colombia. In November Brazil will implement Open Banking,
SO IMPRESSIVE IS Germany’s trading prowess that when the coronavirus pandemic struck, it even found something new to export: its short-time working scheme, or Kurzarbeit. Most OECD countries deployed such programmes this year, as they sought to avert mass unemployment and support workers’ incomes during lockdowns. Those that had never had them, such as Britain, imported the idea wholesale. Others, such as Spain, drastically expanded access to existing programmes. America, however, went in another direction, preferring to increase the generosity of unemployment benefits. In April more than 26m workers in Britain, France, Germany and Spain were on furlough schemes, equivalent to a fifth of the workforce (see chart). While America’s unemployment rate swelled from just over 3% in February to 14.7% in April, in Europe it barely budged. A few months on, how has the picture changed? In the big four countries nearly 11m workers were still on job-retention schemes in the summer, or 9% of the workforce. The numbers have fallen dramatically in France and Spain. By contrast, 15% of British workers were still furloughed in July, according to official data, a fifth of whom worked in the hospitality industry. A survey of employers suggests the share