US market researcher Jim Bianco warned that the Federal Reserve's decisive steps to curb runaway inflation would hurt Wall Street. In his opinion, all financial assets may suffer, writes CNBC.At the end of 2021, Bianco turned bearish on the stock market citing inflation as the biggest risk. The fault of the Fed is, in his opinion, that it has waited too long to end its pandemic-era “ultra-easy money” policy and raise interest rates.According to Bianco, the main risk is that it is not yet known how much such a catch-up will cost.The researcher said the Fed's only solution is to quickly raise interest rates and get people to stop spending money. At the same time, the bond market expects little relief from that as demand destruction may quickly turn into depression which may force the Fed to cut interest rates.“It will be a 50 basis point rate hike until the Fed raises it too much and breaks something. But the rate will not return to 25 points. If the Fed wants the stock market to go up, maybe it should talk about 75 basis points instead of 50 bp”, said Bianco.At the same time, the Fed does not want to create a recession, but going down this path and persistently trying to contain inflation, it is very likely that it could make a mistake.
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Saturday, April 9, 2022
How new technology is disrupting the insurance industry
No one likes dealing with insurance companies. But imagine one that will pay your claim in seconds rather than weeks or months. This is the promise of Lemonade, the flag carrier of the new insurance technology (insurtech) companies that are trying to disrupt the sleepy and conservative insurance industry. In 2017 Lemonade claimed a new world record for settling a claim in just three seconds.
A New Yorker called Brandon had his $1,000 Canada Goose coat stolen on a freezing January night. So he opened the Lemonade app on his iPhone to report a claim and recorded a minute-long video report stating where he had bought the coat and what had happened. Three seconds after hitting submit, the claim had been agreed by the firm’s anti-fraud algorithm and the cash was in Brandon’s bank account.
He couldn’t believe it – and neither could the worried chief executives of traditional insurance companies in New York and London when the word started to spread. On 2 July 2020, Lemonade had its initial public offering (IPO). The company was backed by highprofile tech investors including SoftBank and Baillie Gifford. By the end of the day the share price had reached over $69, up 139% from the IPO price of $29, prompting market commentators to state that the bankers had woefully underestimated the shake-up that Lemonade and its car-insurance peers Metromile and Root were going to give the old-fashioned insurance market.
Lemonade was the new Amazon taking on the tired Barnes & Nobles of the insurance world. By August 2021 the market cap of Lemonade had reached $10bn. Metromile, a pay-as-you-go car insurer for occasional drivers, and Root, which bases its prices on driving data collected from the policyholders, both floated on the US stockmarket shortly afterwards.
Growth is slowing, losses are not
Much has changed in the 20 months since then. The three great disruptors have failed to make the breakthrough that the analyst cheerleaders predicted and all three are now trading at around 80%-90% down from their peak prices. In part this is because “jam tomorrow” tech stocks such as Lemonade are no longer in vogue as investors prefer companies that are profitable today.
But, more importantly, it seems that selling insurance is not as straightforward as selling books, or even providing a banking service to smallbusiness clients. So what has gone wrong and what do the current numbers look like? All three are continuing to grow revenues, but the growth is slowing and they remain an insignificant part of the $1.3trn US insurance market.
Unfortunately, losses are growing at a much faster rate. When an insurer has been underpricing its business it is very difficult to correct this while maintaining growth. Increasing prices drives business away and the young customers of these insurtechs are particularly price sensitive. It is also an industry with limited economies of scale.
The biggest cost is paying claims and this grows proportionately with customer numbers. Lemonade has had to raise additional funds, diluting shareholders and causing the share price to tank.
The concept behind these companies’ business models was to use technology to price insurance risks accurately, understand claims trends and to make it easier to target pricing more effectively to maximise sales.
They look to employ more coders and data scientists than underwriters, claims and call-centre staff. To use the Canada Goose example, if your technology can confirm certain elements of the claim –such as whether the shop where the coat was bought is a registered stockist and whether the price looks right – then you don’t need to employ expensive claims adjusters to handle the claim.
Three fundamental errors
Unfortunately, Lemonade and the others made some fundamental errors in their business models. While it may seem obvious to target tech-savvy millennials, in practice they make poor customers for insurers since they have very little to insure. They are the asset-light generation who rent their accommodation, use Uber and Zipcar instead of owning a vehicle and even rent their music collection from Spotify. Lemonade also decided to have a “zero everything” offer with no rate rises guaranteed and no excess applied on claims. This only encouraged clients to use their policy as a cash machine, claiming for every little scratch. The timing of the launch and expansion of these challengers also coincided with the absolute bottom of the insurance-pricing cycle following several years of pricing declines. To take market share from incumbents meant cutting already depressed pricing still further. Insurance is also a highly regulated industry, especially in the US where pricing needs to be filed and agreed with the state insurance commission.
Finally, selling insurance is not like selling books. Insurance is an intangible product, a promise to pay in the future if something bad happens. For this reason, reputation and brand recognition is more important than for most other industries. Will a start-up with a silly name really be there for you when you need it – when your house has flooded, or when you are taken ill on holiday?
The knowledge that your policy is with a long-established firm helps you sleep at night. If Lemonade and the others had had some more people with experience of the insurance industry in their management teams and on their boards then some of these pitfalls might have been avoided.
Lessons for the industry
The future looks tough for these new insurers. They have had to raise significant additional funds to offset the losses and this has depressed their share prices. In November 2021, Lemonade announced a merger with Metromile, which should complete this year.
This will help it bulk up and diversify its business. However, in many ways this lack of success is a shame, as there is much to learn from these businesses for mainstream insurers. Their marketing and branding are exceptionally slick and the apps and websites very intuitive and easy to navigate. The focus on data analytics, process automation and streamlining of the underwriting process is important.
Traditional insurers are finally now responding to the challenge and increasingly working with tech companies from small start-ups to giants such as Alphabet to help them build sophisticated pricing models to automate much of the underwriting process. These can be linked to big data companies such as Experian and automatically bring in risk data connected with a company name or an address. This can include construction details, flood exposure and local crime statistics, which can all help to evaluate the risk and calculate the required premium. By combining the latest technology with a deep understanding and experience of underwriting these risks, many traditional insurers are now better equipped to take on and beat the new challengers.
Better times for traditional insurers When I last looked at the insurance sector in MoneyWeek at the start of last year I was forecasting better times ahead for traditional insurers. The pricing cycle had turned decisively in their favour and pricing levels have continued to rise at a strong clip (see chart below), with compound rises of around 60% over five years. In contrast to the insurtechs, many of my recommendations have had impressive results. For example, commercial insurance giant AIG (NYSE: AIG) reported a pre-tax profit of $12bn for 2021 versus a $7.3bn loss in Covid-19-affected 2020. The share price has risen some 50% since my tip.
In the UK, the London insurance market remains the pre-eminent global market for commercial insurance of all kinds. It is centred around the Lloyd’s of London marketplace, where some 80 syndicates compete for business. Lloyd’s recently reported a major turnaround in fortunes for the market when it announced an overall profit for 2021 of £2.3bn following a loss-making year in 2020.
Some Lloyd’s syndicates are backed by major global insurers, others by pension funds or private capital and a few are listed on the stock exchange. Of the listed firms Beazley (LSE: BEZ) has also had a significate change in its fortunes with a 2021 profit of £370m following a $50m loss the year before. Its Lloyd’s peer Hiscox (LSE: HSX) had its best result in five years.
Only Lancashire (LSE: LRE) disappointed due to a heavy exposure to catastrophe events last year and investors’ concerns about possible war losses from the Ukraine conflict. My preferred Lloyd’s of London play remains Helios Underwriting (LSE: HUW), which I own.
This company has stakes in several of the best syndicates in the market, has a very diverse portfolio and a long record of outperforming the wider market. It has grown significantly over the past year as it raised funds from institutions such as Polar Capital, which are specialists in the sector. It has used the capital to acquire syndicate capacity from private Lloyd’s investors.
I anticipate insurance sector results to be even stronger in the coming year as the benefit of the higher premiums flows through to the bottom line. If traditional insurers can learn the right lessons from the insurtechs then the outcome could be better still.
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How to invest in an environment of rising inflation and unpredictable central bank policy
A central banker gave investors a nasty wake-up call this week. It wasn’t one of the usual suspects – Federal Reserve chairman Jerome Powell, or Bank of England boss Andrew Bailey. It was Lael Brainard, who is set to take over as vice-chair of the Fed.
On Tuesday, she warned that quantitative tightening (QT – the process by which the Fed sells the bonds it bought under quantitative easing) will start earlier and be more aggressive than investors had hoped.
Why is this significant? Because when Brainard was nominated to take the vice-chair role by US president Joe Biden late last year, she was widely viewed as a “dove” who would err on the side of loose monetary policy, and had occasionally nodded towards the ideas of modern monetary theory (MMT – funding public spending via unlimited money printing). So much for that.
Markets are starting to wake up
Before you start imagining that we’re heading for a repeat of the early 1980s, with the Fed pushing interest rates well into double-digit levels to crush inflationary pressure, it’s worth noting that central bank resolve has yet to be tested by the market.
The particularly grim tone of news headlines right now, along with attention-grabbing volatility in oil markets, has obscured this fact, but the reality is that most global stockmarkets simply haven’t done that badly this year.
For example, from its most recent high at the start of 2022, to its most recent low in mid-March, the S&P 500 fell by around 13%. That’s a “correction” (down more than 10%), but not a “bear” market (down more than 20%). And since then, it’s rebounded by about 7%, meaning it’s only down around 7% for the year to date.
That might be painful for investors who have been conditioned to “buy the dip”, but it’s hardly a big fall. In the context of a major war in Europe, high and rising consumer price inflation, and even rising interest rates, some might argue that it is positively miraculous.
Of course, this sudden urgency to tackle inflation does rather imply that central banks are already too late. One sign that markets are now taking inflation seriously is that while bond prices have slid (and yields have risen, as a result) gold has performed well.
In recent years, higher bond yields have meant falling gold prices (gold pays no interest, so if bond yields rise, they should become more appealing in relative terms). Yet they have now “decoupled”. As Louis-Vincent Gave of Gavekal points out, “the fixed-income market and the gold market are sending the same message: deflation is no longer the main threat for portfolios”.
Novelty is out of fashion
So investors have to contend not just with rising inflation, but also with a less predictable Fed. That’s not an easy environment to invest in. So stick to tried and tested principles: buy cheap and buy stuff you understand. Novelty is out, and old-fashioned investing is back.
For example, on page 28 John Chambers looks at how technology hasn’t proved to be a magic bullet for the insurance sector as some had hoped, and recommends some rather more traditional Lloyd’s of London insurers instead.
Meanwhile, speaking of gold, on page 18 Dominic looks at why gold-mining stocks have done so poorly relative to gold. More importantly, he wonders if that might change soon, and how you might profit.
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Friday, April 8, 2022
USDCNH under Pressure
The USDCNH has been trading in a restricted price range throughout 2022 between 6.3045 – 6.4096. Like other currency pairs, investors’ interest in these intersections is determined by trend conditions, the rate of change and general volatility. Payments for coal and oil and other commodities from Russia, India could reduce the dominance of trade in US Dollars. This will bring about changes in the foreign exchange market, although not yet significant ones.
A trend would have a significant impact on the broader foreign exchange market. The USDCNH is currently moving above the key support at 6.2353 in a wedge drop pattern which indicates that the pair is still under pressure but is moving higher, especially if we see a break at 6.4096, that would lead to further strength of USD. A weaker current surplus, low inflation to 0.9%, and declining Chinese bond yields against the US pose an increased downside risk to the Yuan. China’s 10-year government bond yields fell below 2.8%, the lowest level in three weeks and close to the 20-month low of 2.67% on January 25, as sad economic data boosts the PBOC’s chances of further easing of monetary policy.
In the daily time frame, the deviation bias is visible, but requires confirmation of a break of the immediate resistance at 6.4096 (EMA200). In the event of a break and the price moves above it, the pair will target further price levels to start a wave of correction upwards to 6.5275 and 6.5868. If the price continues to move below the resistance level, the downtrend of the wedge pattern could continue to fall in support at 6.3045. Technically, the 2 oscillations support the upward movement, combined with the price movement above the Kumo. While the bias remains neutral, an upward break is needed to confirm the trend change, otherwise the movement will return to the continuing trend.
Click here to access our Economic Calendar
Ady Phangestu
Market Analyst
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
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Events to Look Out for Next Week
- Empire State Manufacturing Index (USD, GMT 12:30) – The highly volatile Empire State data is expected to show a positive reading significantly up from last month’s steep decline to -11.8 from 3.1 in February and -0.7 in January.
Click here to access our Economic Calendar
Stuart Cowell
Head Market Analyst
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
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Dollar Index Looks Set to Bounce Off the Round Level of 100, Should Help Euro to Recover
The outgoing week was marked by a continued rise in bond yields of developed countries and hawkish reassessment of the Fed’s interest rate path. At the same time, greenback demand rose, while for the currencies of countries with low interest rates, as well as countries dependent on imports of commodities, it decreased. EURUSD found equilibrium at the end of the week in the range of 1.08-1.09, while USDJPY approached the recent local maximum in the 125 area.Speculation continues about what level of depreciation of the yen the Bank of Japan considers unacceptable and will start interventions. However, so far there are few incentives for the Central Bank to keep the yen from falling. Inflation, although relatively high, is lower than in Europe or the US, and commodity inflation makes the main contribution to it (even more than in the EU):Since Japan is heavily dependent on imports of resources, there are few ways to effectively contain such inflation. The recent actions of the Central Bank on "unlimited" purchases in the bond market shows that the regulator remains set to maintain soft credit conditions to stimulate output in the economy. For these reasons, it is very likely that the USDJPY rally will continue (130 on the horizon), with a breakout of 125 expected next week.Bullish momentum has waned markedly in commodity-exporting currencies amid signs of easing of commodity markets rally. As currencies of countries heavily dependent on trade with China, the AUD and NZD are also feeling hit by the coronavirus outbreak in the country, which has led to lockdowns painful for economy and trade. As long as China maintains a “zero covid” policy in regards to outbreaks of the pandemic, the upside potential for the AUD and NZD looks limited.The sovereign debt market of developed countries again came under pressure this week. The yields of short-term bonds of Germany and the US, a proxy for market expectations of how central banks rates will rise, hit new local highs:Fed policymaker James Bullard said this week that raising interest rate to 3% this year looks reasonable. There is some progress in the normalization of ECB policy - published "Minutes" showed that ECB policymakers at the last meeting talked about several rate hikes this year and adjustments to the APP (the main asset purchase program at the moment). However, the reassessment of the Fed's policy this year is more active, due to fewer objective constraints on the Fed to normalize policy (for example, much lower risks of creating stagflation). That is why the attempts of upward EURUSD corrections to morph into a bullish trend have been futile so far. The Euro also has a large geopolitical premium – investors are demanding higher returns on local assets due to the risks associated with military operations in Ukraine.EURUSD is likely to retest 1.08 next week, however, to continue the bearish trend, a significant increase in geopolitical risks or new worrying inflation data will be required. At this stage, it will be difficult to surprise the markets. Therefore, a bet on a technical rebound of EURUSD with a target at 1.095 looks justified:
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USDJPY, H4 | Further Bullish Continuation
Type: Bullish BounceKey Levels:Resistance: 126.094 Pivot: 123.55Support: 122.619Preferred Case:Prices are on bullish momentum and abiding by an ascending trendline. We see the potential for a bounce from our Pivot at 123.55 in line with 23.6% Fibonacci retracement towards our 1st resistance at 126.094 which is an area of Fibonacci confluences. Prices are trading above our Ichimoku clouds, further supporting our bullish bias.Alternative Scenario:Alternatively, prices may dip towards our 1st support at 122.619 in line with 50% Fibonacci retracement.
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Why Russian sanctions could make the dollar less attractive
The West’s decision to sanction Russia’s central bank raises deep questions about the future of the global monetary system, says Jon Sindreu in The Wall Street Journal.
The US and its allies have frozen Moscow’s access to more than half of its $630bn in foreign reserves in response to its invasion of Ukraine.
The implication – that reserves held by unfriendly governments can be turned into “worthless computer entries” – is likely to drive a shift out of dollar assets and into alternatives such as “gold and Chinese assets”. That could undermine the dollar’s role as the world’s leading currency.
Challenging the dollar’s hegemony
Dollar dominance rests on two pillars. First, it accounts for about 59% of the foreign exchange reserves held by the world’s central banks, far above the second-placed euro, on 20%. China’s renminbi accounts for less than 3%, a lower share than the British pound. Second, the dollar is the default currency used in international transactions. Oil, for example, is almost always priced in greenbacks. “In February only one transaction in every five registered by the Swift messaging system did not have a dollar leg,” says The Economist.
Yet the more the US “weaponises the dollar” against the likes of Russia and Iran, the more it “undercuts the attraction of the dollar as a reserve currency”, says Andrew Stuttaford in National Review. Saudi Arabia has moved to start pricing “some of its oil sales to China in yuan”. That’s “a noteworthy step as the Saudis have been selling oil exclusively in dollars since 1974”. India and China are setting up alternative payment systems to buy Russian energy.
The greenback’s hidden strengths
Still, the dollar’s rivals face steep hurdles. The renminbi is not fully convertible, meaning there are limits on how much it can be traded on foreign exchange markets. In a future crisis, “the Chinese government might not appreciate Russia dumping renminbi… to prop up the rouble”, says Eswar Prasad in Barron’s. Investors also expect a reserve currency to be backed by institutions such as “independent central banks… and the rule of law” that are much better established in the West.
That may help explain why, even as the dollar’s share of global reserves has slipped over the last two decades, the “chief beneficiaries” have been not China, but the small, open economies of “Canada, Australia, Sweden, South Korea and
These currencies are not so much rivals as “extended buttresses… providing options for diversification while continuing to benefit from the liquidity and sophistication provided by America’s financial markets”.
China and its allies may start to trade more in renminbi, but this is unlikely to account for a big slice of global trade, says Neil Shearing of Capital Economics. Few currencies can compete with the “deep and liquid” markets for dollar assets. Tellingly, “as China and Russia have tried to reduce their use of the dollar in bilateral trade”, they have turned to “the euro, rather than the rouble or renminbi”. A decade from now, “the most likely outcome is a more fragmented global financial system – but one that still has the US dollar at its core”
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Investment Bank Outlook 08-04-2022
Credit AgricoleAsia overnight Global risk assets are haunted by the dual threat of tighter global financial conditions courtesy of the hawkish Fed and global growth fears. And, while the concerns about the European economic outlook have been around since the war in Ukraine began in February, more recently investors started worrying about the outlook for Asia, because of the worsening pandemic situation in China as well as some renewed fears about the country’s technology sector. Moreover, the efforts to boost oil supply seem to be helping global energy prices come off the boil and that is eroding the appeal of the most popular FX trade so far this year – longs in high-yielding currencies of energy exporters. Against this backdrop, the USD remains the high-yielding, safe-haven king of G10 FX with only the CAD and SEK able to hold their ground vs the currency. In contrast, the EUR has emerged as the biggest underperformer, dragged lower by lingering growth fears in the wake of the latest EU sanctions on Russia as well as growing political risks ahead of the French presidential vote over the weekend.CitiEuropean OpenG10 FX lacked inspiration through Asia trade as price action was subdued and activity dwindled. Central banks rate outlook remains top of mind and a key theme as we now see seven of the G10 central banks with over 100bps of tightening priced this year (total ~1400bps of hikes). RBI’s joined the pack with a tweak to interest rate corridor, offering a new step toward normalization which sent 10y yields back above 7%. JPY saw some short-lived gains as an ex-BoJ official appeared in the press suggesting BoJ could drop YCC sooner rather than later. USD was supported as Treasury curve got back to flattening as fresh 2y selling pushed short-end yields higher.Central banks remain a dominant theme after a hawkish shake-up in the ECB minutes on Thursday, we prepare for the doves on parade today with ECB’s Panetta, Stournaras, Makhlouf and Herodotou all due to speak. Finally, we see room for EUR risk premiums to rise as we head into the first round French elections on Sunday as polls continue to narrow. Otherwise, we see top tier data with CPI for TWD and HUF.CIBCFX FlowsEUR$ continued to trickle lower. Earlier this morning, German Chancellor Scholz said will use the 120-day transition to implement ban on coal, in other words, will continue to make use of Russian coal. US Treasury Department said it has officially blacklisted 2 Russian businesses, diamond-miner and a shipbuilder - barring their access to the US financial system. Focus will be previous low 1.0806. Small EUR put strikes due today 1.0850 and 1.0825. Nothing much above. ECB speakers today, de Cos, Centeno, Panetta and Stournaras. First round vote for the French Presidency this weekend, continues to loom large, with market increasingly cautious given the rise in support for Le Pen in the polls. Latest from BBC said if Le Pen does make it through to the 24 April run-off, opinion polls suggest for the first time that a Le Pen victory is within the margin of error.
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Why investing in SPACs is a big gamble
It now looks as if investors in London will, just as their US counterparts have for a while, be offered the curious privilege of handing over lots of money to management teams who promise to spend it on some great deals, even if what they are actually going to buy is still kept carefully under wraps.
Marwyn, a London-based sponsor of acquisition companies, has announced plans for a £500m acquisition vehicle to be listed in London.
At the same time, Sky News reported that a £150m acquisition vehicle called Finsac, set up by former executives from KBN and Munich Re, would be listed in London soon. There could be plenty more in the pipeline.
Dodging the bullet
At the height of the boom in Spacs – special purpose acquisition companies that raise millions in capital with the aim purely of buying other companies – in New York, there was plenty of criticism that London was missing out.
As so often in the past, the US market was innovating furiously, while the British one was getting left behind.
There was even a Brexit twist to the tale, as Amsterdam, London’s main rival in the equities industry now that we are out of the EU, managed to list more than 30 Spacs, while the City listed almost none. The LSE tweaked its rules to make it easier, but still no one seemed interested.
The UK might have dodged a bullet. It turns out that Spacs were not such a great idea after all.
Spacs boomed in New York in 2020 and 2021 with billions raised on little more than reputation and promises. In a single year, more than 1,000 shell companies were listed, raising a total of $160bn, with backed by a vague promise to buy something or other sometime one day soon.
The vast majority of them have proved very disappointing. Some of the most high-profile among them, such as the digital-media company BuzzFeed, have delivered terrible results.
An index of post-merger Spacs – that is, the ones that have found and acquired a target – fell by 23% in January alone, a much worse performance than the broader Nasdaq, which fell by just 9% over the same month.
A clutch of companies such as the clean-energy manufacturer Heliogen and the 3D printing start-up Matterport fell by more than 50% over the course of a single month. True, a handful, such as ChargePoint Holdings, have done well.
But the vast majority have floundered, and a worryingly large number have crashed.
A solution in search of a problem
In truth, Spacs are a waste of time and money. If a company wants to come to the market there is nothing wrong with the traditional route – come up with a clear and detailed plan, appoint advisers, issue a prospectus and sell shares. It was perfectly straightforward, and anyone who wanted to invest could make a decision based on the prospects of the business. Spacs were a poor solution to a non-existent problem.
It is hardly surprising that so many have crashed. By raising the capital first, and then trying to find a target, they put themselves in a position where they would inevitably end up wildly overpaying for anything they bought. The founders of most Spacs tried to claim that their contacts and expertise meant they could find fantastic deals that wouldn’t otherwise be available. There was not much evidence of that. In reality, the market is generally very efficient, and there are not many opportunities out there. Entrepreneurs know that they have plenty of options. They can go for a traditional initial public offering. They can sell to a venture-capital or private-equity firm, or they can persuade a bigger company to take them over. The only real reason for selling to a Spac was that it was offering a lot more cash than the business was really worth.
London was lucky to miss out on the Spac boom. Perhaps it was inertia, or laziness, or good fortune. More plausibly, perhaps, the world’s oldest and savviest financial centre simply sensed that it was a scam, and quite rightly stepped back from getting involved. Whatever the explanation, the City has had a lucky escape. And the last thing it should try and do is jump on the bandwagon a year too late.
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Will higher trade-union power cause a wage-price spiral?
What’s happened?
The cost of living crisis; rising taxes and prices, especially for energy; redundancies and other hardships imposed by the government’s response to Covid-19; the increasingly insecure nature of work for many; decades of inflationary monetary policy; war and supply-chain disruptions – all have laid the foundation for a revival in trade-union membership that may mark the start of a new golden age for the movement. Union membership rose by 118,000 to
6.6 million in 2020, the fourth year in a row that it has increased, says Anne Cassidy for the BBC.
In the US, the overall level of union membership has remained flat, but among workers aged 25-34 it rose from 8.8% in 2019 to 9.4% in 2021. The experience of home working may have contributed to the resurgence, says Cassidy, as people stuck in their bedrooms felt the lack of collective community and became more intolerant of bad practices at work that affect mental health and wellbeing.
A team of Amazon workers in New York recently forced the retailer to recognise a trade union in the US for the first time. That may be a straw in the wind.
Hasn’t pay been on the rise?
Yes, but it’s not keeping up with inflation. The chancellor’s spring statement offered no more money for public services, which unions warn could lead to a “mass exodus” of key staff unless they get pay rises that at least match inflation, says Toby Helm in The Guardian. Analysis by the Trades Union Congress (TUC) of official data shows that average pay in the public sector was down £81 a month in real terms in January 2022 compared with a year before. Forecasts from the Office for Budget Responsibility show that average real pay for workers, in both the public and private sectors, is set to fall by 2% in 2022. That seems like a kick in the teeth, especially for workers who worked on in stressful conditions throughout the pandemic and are struggling to make ends meet.
So workers are fighting back?
Some certainly are. “Long and bitter battles over pay look certain as the cost of living crisis grows,” according to Helm. Indeed, those battles have already started, as the Financial Times reports. Teachers in schools, staff working at universities and on trains, at Airbus and GE Aviation Systems, and binmen, lorry drivers and cleaners in many parts of the country are taking industrial action. It’s not just pay, but also a “sense of injustice that is fuelling the country’s most confrontational pay bargaining season in years”.
Won’t this cause a wage-price spiral?
The standard, if contested, view in economics is that it might. Rising prices cause workers to seek pay rises. Those pay rises then put upward pressure on prices, and so the cycle begins again, putting prices on an ever-upwards path. It was the fear of this that led Andrew Bailey, governor of the Bank of England, who takes home more than £500,000 a year, to call for wage restraint earlier this year.
But as Martin Sandbu argued in the Financial Times, if the wage-price spiral is a risk, why call for wage rather than price restraint? Why couldn’t profit margins take the hit instead? Besides, the assumption being made is that trade unions are as strong now as they were in the 1970s and hence in a position to win inflation-busting pay rises.
And they aren’t?
No. When inflation surged in Britain from the mid-1970s to the mid-1980s, union membership was at all-time highs, peaking at more than 50% of all employees, as James Meadway points out in The New Statesman. Since then, membership has been on a “near continuous slide”. In the private sector, just 12.9% of employees are unionised.
Overall membership is down to 23.5%, just above its all-time low of 23.3% in 2017. More important than membership is collective bargaining. By 1979, 82% of all employees in the UK, whether union members or not, were covered by some form of collective workplace agreement on pay and conditions.
By 2019, the percentage was as little as 15% of the private-sector workforce. Despite the slight uptick in membership in recent years, unions remain weak, with next to no presence in manyparts of the service sector where low-paid workers are concentrated, as the Financial Times points out. Even where effective, the 2016 Trade Union Act has placed onerous limits on union action.
But all this could change?
Indeed, but it will be a battle. As Owen Jones points out in The Guardian, a study by the TUC found that the vast majority of young core workers hadn’t even heard of trade unions and couldn’t provide a definition. Organisers seeking to recruit them will have their work cut out. Unions themselves haven’t helped matters, shifting their activities in recent decades from the hard graft of organising workers to basically signing them up for union magazines and offering discounts on insurance policies.
But the example of unions such as the IWGB, a small but militant outfit that has worked hard to organise outsourced workers such as cleaners and security guards, with some notable successes, show that the decline is far from inevitable.
A fightback has begun.
So employers should be worried?
See it as an opportunity instead. Companies need a strategy to prove to younger and
left-leaning employees that all the blether about stakeholder capitalism isn’t just talk, says Steve Hawkes in City AM. Bringing unions on board would be a good way forward. “Union insiders themselves admit to the need for a more mature relationship with boardrooms,” says Hawkes, and there could be benefits in terms of unlocking productivity gains, as demonstrated by Germany’s model, where pay, hours and working conditions are set by work councils and employers’ associations. “You could call it the most successful example of levelling up we’ve seen.”
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UBI which was once unthinkable is being rolled out around the world. What's going on?
The law for any great social reformer is “First they ignore you, then they laugh at you, then they fight you, then you win”, a quote often attributed to Mahatma Gandhi (wrongly, though he had expressed similar ideas).
The battle for universal basic income (UBI) – the idea that everyone should get a regular sum of money to live on from the state with no strings attached – seems like it might be entering the final stage.
The response of governments in the rich world to the Covid-19 pandemic made the idea seem plausible – as businesses were shuttered, states picked up the wage bill for workers, sent them cheques in the post, and boosted benefits for the jobless and the sick. And trials of a basic income proper – or of something resembling it – have been carried out, or are about to begin, in countries around the world.
South Korea’s presidential candidate Lee Jae-Myung, for example, was in favour of introducing one nationwide following a six-month trial he introduced while governor of Kyonggi province. (Sadly for UBI enthusiasts, Lee lost narrowly to the conservative candidate in March.)
In the US, there are more than 20 trial schemes handing out direct cash payments to poor families – Bloomberg reckons they’ll have handed out at least $35m by the time they end if they run as planned.
Similar experiments have been run in Canada, Brazil, Kenya, Iran, Finland, Germany, Spain, the Netherlands, Namibia, India, South Africa, China and Japan. And the idea is washing up on these shores too: the Welsh government has committed to running a trial, and the Scottish government and several English cities are keen too.
And why not? Many welfare states already guarantee their citizens access to health and education. Why not to an income too?
What the Alaskan experience teaches us
Perhaps the best place to start to consider the merits of the idea is Alaska, as Martin Sandbu points out in the Financial Times.
When oil tax revenues started flowing in 40 years ago, the state set up a permanent fund with the idea of preventing politicians wasting the money and paying out dividends to every citizen.
In a good year, such as in 2015, when oil prices were high, the dividend reached $2,072 per person – so more than $8,000 for a family of four.
What the long Alaskan experiment has shown – and it’s a result borne out in most of the long list of studies carried out so far – is that such payments do not lead, as some critics fear, to idleness, or people refusing jobs or wasting the money on frivolities, but to more secure and hence happier individuals, families and societies.
For those just about managing, the money comes as a welcome helping hand for meeting the mortgage or putting food on the table. The more well-to-do invest the money in their children’s educations, their properties, or their businesses.
Small businesses and community organisations get a boost as people spend their dividend cheques.
In other words, the Alaskan experiment and the studies being carried out around the world all follow faithfully in the social-science tradition of revealing what you might call the bleeding obvious – that more money is better than less, especially if you are poor, and that a windfall is often taken as an opportunity to improve one’s lot, a means to help us acquire all the things money can buy, or establish a more stable base for enjoying all those things it cannot.
A nice Christmas present
What none of these studies really test, however, is the actual proposal. The ideas behind UBI (also known variously as citizen’s, basic or guaranteed minimum income) were first floated in this country around the time of the enclosures. If people were not henceforth to be entitled to enough land to live on, then they should instead, as they flocked into the towns and cities in search of work, be given a sum of money that would achieve the same end.
The argument has been reheated at regular intervals since, employing a similar logic. If new technology and robots are taking all the jobs, as one modern version of the argument goes, then the gains from these technological developments should be shared out to everyone in the form of a basic income. UBI proper is, then, the idea that every citizen should be paid a sum of money sufficient to live on with no preconditions – that is, regardless of willingness to work or any other qualification. And that has never been tried.
By comparison, the Alaskan scheme seems more like a very nice Christmas present. Other trials around the world have generally given sums much smaller than would be required to cover living expenses, and only to a small group of an area’s poorest citizens. Whatever else can be said in favour of these efforts, one cannot say that the UBI proposal has actually ever been tested. Why not, then, actually test it?
What would it cost?
The eye-watering sums involved would be one reason. True, as MoneyWeek pointed out at the start of the pandemic, the pile required – think annual costs of more than £260bn, around twice the NHS budget, for a basic income paying only £5,000 a year, or just a third of the poverty line – looked somewhat less towering in relation to those that were already being shovelled out the door to pay for furlough and other pandemic-related economic assistance.
But the UBI proposal would be to keep on shovelling for ever, when it seemed far more likely that states would one day have to get a grip on the escalating costs of the crisis.
That day obviously arrived some time ago – furlough and other assistance schemes have ended, and taxes are rising, to say nothing of the less visible consequences.
A basic income, whatever the merits of the idea in the abstract might be, is simply not affordable at levels that would come anywhere near providing a liveable income, as economist John Kay has pointed out.
And so that is essentially the end of the matter.
But is it though? Martin Sandbu of the Financial Times begs to differ. He proposes “two simple measures” that would lower the cost of a “meaningful basic income” to something affordable.
He would implement UBI as a “negative income tax”, paid through the monthly payroll, or in some other way for those with different tax or work circumstances. The negative income tax would then work as a flat refundable tax deduction – everyone in effect gets a tax cut, and those without much or any taxable income would get the basic income paid out in cash, or the difference between the basic income and the amount they owe in tax.
A basic income of a third of average household disposable income per capita of £7,150 a year would then cost about 17% of GDP – an amount, as
Sandbu says, no government could countenance.
But in this design, much of the bill is not an outlay but a tax cut – it is money the government doesn’t take in, rather than something it pays out, for everyone who owes more tax than the UBI amount. That makes the income tax and national insurance thresholds – whereby earners are exempt from tax up till the threshold amount – redundant.
Sandbu’s first measure would then be to scrap those thresholds – the basic income would then replace the zero tax bands on income, so everyone gets the basic income, but is charged tax from the first penny earned. That reduces the cost to less than 10% of GDP.
Sandbu’s second proposal would be to scrap the basic state pension. Many are opposed to UBI for fear that it would replace current benefits (others see this as a positive feature), and hence risks doing more harm that good, but if just this one change was made, it would make no difference to those receiving the benefit as the amount of basic income they would get instead would be almost exactly the same and most recipients are likely to have little other earned income benefiting from the zero tax bands.
Subtracting the cost of the state pension would then reduce the cost of UBI to close to 5% of GDP. This is a “large, but conceivable amount to raise”, perhaps through a combination of wealth taxes and other benefit cuts.
In the grip of the technocracy
Sandbu, then, gives us a glimpse of what “and then you win” looks like in a technocratic age. Whatever your opinion on the merits of UBI, it was once at least a bold utopian vision of what human life, freed at last from the “economic problem”, might look like.
Proponents would wax lyrical about a future free from the daily grind, where people would hunt in the morning, fish in the afternoon and write poetry in the evening.
Liberated from the need to earn a crust, they would care better for their children and parents, participate more fully in thriving communities, volunteer to help those in need, organise festivals and celebrations, participate joyfully in community theatres or sporting competitions, make music, make merry, create a society where the condition for the full flourishing of all is the nurturing of each individual.
Even if we didn’t believe that such a future was within our grasp, it was good to think with. Why can’t we live like this? If a basic income won’t get us there, what might?
Once the bread is on the table, what is a human life all about? If we didn’t have to work for money, what would our attitude be to work and to leisure? What goals should we be pursuing?
The price of UBI coming close to “winning” is that these questions have once more receded from view and been replaced by a narrow technocratic exercise that, in return for an income that remains a small fraction of the present household average, promises to deliver a simplified and digitised welfare bureaucracy to save on costs and more equally distribute misery, perhaps solving a few of the more heinous problems in society just so long as we can get the details just-so, even if at the risk of transforming the general population into wards of the state and turning a determined blind eye to the law of unintended consequences.
It’s all very well for technocratic chin-strokers to whip out their pens and calculators and prove that something like a UBI is affordable in principle.
But those sensitive to what it feels like once government bureaucrats set about determinedly helping you and solving your problems – the pandemic held lessons for us all – might baulk.
Don’t trust Big Brother
But whether we are talking about the grand utopian vision or technocratic fixes, one of the biggest arguments against UBI has always been that it would destroy the incentive to work – which is a bland way of saying that it would be like lobbing a spanner in the machinery we all rely on to put the dinner on the table, to say nothing of the broader social consequences.
Can giving youngsters the option not to work and more incentive than they already have to disappear into their basements and play video games all day be a good idea?
The studies of UBI-like experiments often claim to show no, or at least no very worrying, decline in people’s willingness to work – but again, this is not very surprising when the amounts being doled out are so small, and the scheme is time-limited.
It’s quite a leap from there to wanting to run the same experiment with every man, woman and child in the country, promising them a fixed income for life, in perpetuity, regardless of behaviour.
Any parent would surely think twice about such a scheme for their children, yet technocrats seem relaxed about Big Brother snatching the power of discrimination and judgement away from parents and doling out the pocket money to everyone.
A UBI would also, of course, change incentives for employers, who would be relieved of the responsibility of providing a living wage for their workers.
This is sometimes seen as a positive feature – enterprises doing socially valuable things will need to find less money to stay in business. But the risk is clear – that, over time, more and more people will become dependent on the state for their living, even as their alternative sources of income shrink.
Friedrich Hayek warns of the dangers of this in his classic book The Road to Serfdom. In a competitive society, if someone fails to satisfy our wishes, we can turn to another, he wrote. But if we face a monopolist, we are at his mercy. Hayek was warning of the consequences of an authority directing the whole economic system.
But we would surely be no less at the mercy of one that was responsible for our income. Just how long would it be before that authority would seek to use its power to encourage behaviours of which it approved and prevent those it disliked?
The appeal of China’s social-credit system is not limited to openly authoritarian systems, after all, as the pandemic showed. How long before the U in UBI would be
replaced with strings? And how long before those strings throttled our liberties? As Hayek says, even in the best of worlds our ability to exercise freedom of choice in how and for whom we work will be very limited. But we should think twice before abandoning what liberties and choices we do have in a misjudged pursuit of social and economic perfection.
A better way forward
In the end, the debate over UBI will turn, as Sandbu admits, not solely on the trials and the evidence, or on grounds of affordability, but on how we view human nature and the role of government.
Even those with presumably very different ideas from MoneyWeek’s readers can see the point: “It is necessary and possible to raise funds to bring greater security, opportunity and power to all people, but the money needed to pay for an adequate UBI scheme would be better spent on comprehensive reforms and building the infrastructure and values essential for a just and environmentally sustainable economy”.
That is from Stewart McGill of the Communist Party, writing in the Morning Star – not a publication often quoted in these pages. We of course differ from McGill in the precise meaning he attaches to his words. But he’s not wrong.
There is a reason why historically trade unions have been against, or at the least cautious, about such innovations as national minimum wages and universal basic incomes. When economic times are good and productivity and profits are rising, unions exist to help make sure that the workers’ share of the pie keeps pace with the growth.
When times are bad, they seek to make sure that the losses are not unfairly loaded onto those least able to bear them.
They will also be concerned with limiting job losses and pay cuts when there are other options. Only the craziest ideologues are unconcerned with local knowledge and economic circumstances and push always for the impossible in the belief that in that struggle a new utopia will be forged. The likelier result will be, to quote Marx, the common ruin of the contending classes.
Good trade unionists realise that minimum wages are a blunt tool that can do more harm than good in some circumstances.
They tend also to advocate using specific tools for specific jobs when it comes to tackling issues with the social safety net too.
Against the utopian plans of the technocrats, we should hope instead for a reinvigoration of the trade unions and civil society – work that is perhaps now just beginning
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AUDUSD H4 | Potential for Bullish Pressure
Type: Bullish BounceKey Levels:Resistance: 0.75893Pivot: 0.74678Support: 0.74303Preferred Case:We see the potential for a bullish bounce from our pivot level at 0.74678 in line with 38.2% Fibonacci retracement towards our 1st resistance at 0.75893 in line with 61.8% Fibonacci retracement and 61.8% fibonacci projection. Our bearish bias is supported by the stochastic indicator where price is at support level.Alternative Scenario:Alternative Scenario:Alternatively, price might continue to dip to 1st support level at 0.74303 in line with 50% fibonacci retracement.
from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/audusd-h4-or-potential-for-bullish-pressure"
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Market Update – April 8 – “Behind the Curve” – Bullard
- USD & Yields Bid, Stocks sink – Fed Hawk Bullard calls for 300-25 bp rate hikes this year. (3.5% year end rate) EUR & JPY pressured (worries over French election & weak over night data respectively)
- Stocks weak but closed flat for the day (NASDAQ -2.5% for the week so far) – Asian shares mixed & also lower for the week. (NIkkei -3%) & European FUTS higher.
- Yields perked up again, 3-day inversion over – with short-dated 2 & 5-yr rising with 30-rs flatter. OIL fell to new 3-week lows before recovering and GOLD ran to resistance before declining.
Jobless claims posted a near record low (back to mid-1960’s levels at 166K), tempered by a change in the maths which calculates seasonality – but still a very strong number and adding to the tight jobs market out look and pressure on wages and therefore inflation. There was also a record $1.8 bln jump in February consumer credit to a new $41.8 bln record & record spike 5 times the tepid $8.9 bln January increase. ECB Minutes were more Hawkish than expected adding to pressure on EUR.
More and heavier weapons being deployed from the West to Ukraine, Shanghai registered 20k new Covid cases as food runs short in lockdown and worries over new rise of the right as Le Penn narrows poll difference with Macron, again.
Overnight – AUD Fin. Stability Review “important borrowers are prepared for increase in interest rates” & “markets globally vulnerable to larger-than-expected rate increases” Japan’s Consumer Confidence missed (32.8 vs 35.3 prior) & Current Account surged to 0.52T (trillion) Yen from 0.18T.
- USD (USDIndex 99.46) – rallied to new high 99.87 since May 2020. 100 beckons.
- US Yields 10-yr closed higher again at 2.6520, up again now to 2.6584%.
- Equities – USA500 +19 (0.43%) at 4500. – Recovering key 200-day MA. US500 FUTS 4500. Technology stocks led the decline, Consumer Discretionary & Healthcare lead value stocks higher. HQ +14.8% (Buffet invested $4.2bln) TSLA +1%, COST +4%, BABA & FB both -3.17%.
- USOil – Trades at $96.70 following a dip to 93.78, Oil markets have lost over 3% this week due to the release of US reserves.
- Gold – gyrated from $1937 highs to $1922 lows yesterday, before holding at $1930.
- Bitcoin continued to decline from key 45k to trade at 43.4k now.
- FX markets – EURUSD back to 1.0915 now from 1.0875 yesterday. USDJPY holds at 123.70 now from at test of 124.00 yesterday and Cable back to 1.3085 now, form a test of 1.3050 yesterday.
European Open – The German 10-year Bund yield is down -0.9 bp at 0.668%. Stock futures are higher across Europe and the U.S. after a mixed session in Asia. A session without key data releases will leave markets to digest the accelerated tightening schedule in the US and the hawkish ECB minutes, although much has happened since then and the fallout from the Ukraine war will likely mean a more balanced ECB statement next week. Like his colleagues at the BoE, chief economist Lane is already worrying about the impact of waning confidence and if the war drags on and there is no relaxation on the energy front, the risk of a much sharp correction in growth is looming. The EUR continues to struggle in this environment.
Today – Canadian Labour Market Report, ECB’s Panetta.
Biggest FX Mover @ (07:30 GMT) GBPUSD (-0.29%) Spike lower on London open to under 1.3050 new lows this week. Next support 1.30250. MAs aligned lower, MACD signal line & histogram lower & under 0 line, RSI 35 & falling, H1 ATR 0.00098, Daily ATR 0.00825.
Click here to access our Economic Calendar
Stuart Cowell
Head Market Analyst
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distribution.
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