Tag Archives: Finance

Germany’s New Power of the Purse

By Mark Leonard – Germany’s changing global posture predates Sigmar Gabriel, who is a relative newcomer at the foreign ministry. During the euro crisis, Germany deployed economic means for economic ends within Europe. But in its policies toward Russia, Turkey, China, and the United States, Germany has increasingly been using its economic strength to advance larger strategic goals.

After Putin annexed Crimea in March 2014, the West’s response was led not by the US, but by Germany, which spearheaded diplomacy with Russia and Ukraine to de-escalate the conflict. Germany then persuaded the rest of the European Union to agree to unprecedentedly tough sanctions against Russia to deter further aggression.

Germany has maintained that united European front for three years, defying all expectations.

So far, the rupture in German-US relations has been mostly rhetorical. But Angela Merkel is also shoring up Germany’s geopolitical position by diversifying its global partnerships, especially with China. According to Volker Stanzel, who previously served as Germany’s ambassador in Beijing, “Merkel has no illusions about China, but she sees it as a partner on climate, trade, and the politics of order.” more> https://goo.gl/1v98XP

Updates from Chicago Booth

How to split equity without drawing blood
By Mike Moyer – We live in a world where entrepreneurs and early-stage company participants get taken advantage of so frequently that we hardly notice. Bad equity deals are the rule, not the exception. Fairness is rare.

The intent for fairness is there in the way equity is split among business partners, but the practice of fairness is not. This is a correctable problem.

When a person contributes to a start-up company and does not get paid for her contribution, she is putting her contribution at risk with the hopes of getting a future reward. And, while the timing and the amount of the future reward is unknowable, the amount of the contributions at risk is knowable. It is equal to the fair market value of the contributions.

Because it’s impossible to know when or even if the rewards will ever come, we can never know how much people must put at risk to get the rewards. Every contribution, therefore, is essentially a bet on the future of the company, and nobody knows when the betting will end. more> https://goo.gl/F3ELyY


What Economics Models Really Say


Economics Rules: The Rights and Wrongs of the Dismal Science, Author: Dani Rodrik.

Why is there such an enormous gulf between what economists know and what they say in public?
By Peter Turchin – Rodrik notes early in the book, “economics is by and large the only social science that remains almost entirely impenetrable to those who have not undertaken the requisite apprenticeship in graduate school.”

And economics is “impenetrable” not because of mathematical models, at least not to someone trained in mathematical natural sciences (the math is universal), but because economists have developed an entirely distinct jargon that sets them apart from other disciplines and creates artificial barriers to understanding the many truly worthwhile insights from economics models.

In popular press, comparative advantage is always used as a justification for advocating free trade. Rodrik does an admirable job explaining why, under many conditions, free trade can lead to really negative consequences for economies and populations of countries that open themselves to international competition.

For example, there is strategic behavior. A country may choose to protect its domestic industry with high tariffs and subsidize its exports in order to gain market share.

Perhaps its leaders don’t understand the Principle of Comparative Advantage, not having the benefit of apprenticeship in economics. Or perhaps they care more about their country’s long-term survival in an anarchic international environment than about making immediate profit.

As Rodrik correctly stresses, these cases do not prove that standard economics is wrong. In short, “someone who advocates free trade because it will benefit everyone probably does not understand how comparative advantage really works.” more> https://goo.gl/mQr9tV

How to Manage $2 Trillion If You’re New at It

By Barry Ritholtz – Before the Saudis start putting that enormous pile of money to work, they may want to take a moment to consider a few items related to costs and performance of the new fund. Given the size of that portfolio, likely to be the world’s largest, a few basis points lost here or there may not seem like something to be too concerned about.

But those small crumbs might add up over time to many billions of dollars.

All of the academic data overwhelmingly demonstrates that costs are the single biggest drag on returns. They are also the item over which investors have the greatest control. It is tempting to ignore them. That would be a huge mistake. It is precisely why watching costs very closely from the very beginning is so important.

Look at how Vanguard Group manages its own operations for a good example of what to do.

The financial industry has spent decades creating complexity in investment products, but this serves a purpose of little relevance to a giant sovereign fund. Simple, transparent and low cost are what will serve this fund the best.

It will be interesting to see if this huge new fund can avoid many of the errors that seem to trip up existing pensions and endowments. Based on its opening gambit — the Uber investment — I have some doubts. more> http://goo.gl/YpzJOz


Finding the Value in Finance

By Noah Smith – “Finance” is actually a lot of different things.

There’s retail banking, investment banking, money management, mortgage lending, consumer finance, venture capital, private equity and a whole host of other pieces of the finance industry.

Asking whether finance creates value is a little like asking whether people in Albuquerque, New Mexico, are nice. Some probably are, some probably aren’t.

There’s another big problem with the question, though. “Creating value” isn’t a well-defined concept. There are different notions of value. more> http://tinyurl.com/qfs78su

The Volcker Rule Makes Us Safer, But Not Safe

Share of financial sector in gross domestic pr...

Share of financial sector in gross domestic product 1860 to 2006 (Photo credit: Wikipedia)

By Steve Denning – Fundamentally, what’s happening is that the financial economy has become disconnected from the real economy. Back around 1970, the idea got going that the only purpose of a firm was to make money for itself and its shareholders. Four decades later, we can see that this widely shared idea has had disastrous consequences.

It has led to “bad profits” that have destroyed customer loyalty. It is responsible for massive offshoring of manufacturing, thereby destroying major segments of the US economy. It has undermined US capacity to compete in international markets. It is a key driver in the continuing growth of derivatives and the 2008 financial crisis. It lies behind the failure of companies to invest since 2008 and the lack of a self-sustaining recovery.

The financial sector is thus part of a much larger problem. more> http://tinyurl.com/ohtk78b

Bubbles in the Broth

Finance - Financial injection - Finance

Finance – Financial injection – Finance (Photo credit: @Doug88888)

By Nouriel RoubiniIncrease in money supply following QE has not led to credit creation to finance private consumption or investment. Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves.

As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. Near-zero policy rates encourage “carry trades” – debt-financed investment in higher-yielding risky assets such as longer-term government and private bonds, equities, commodities and currencies of countries with high interest rates. The result has been frothy financial markets that could eventually turn bubbly. more> http://tinyurl.com/od4kpom


Why There’s No Financial Advice for Most Americans

By Ben Steverman – America’s middle class needs a lot of help managing its finances. The financial industry isn’t providing much.

Most financial advice is really only available to people who have amassed over $250,000 in investable assets — a very small percentage of the population.

When people don’t understand the risks of investing, they invest money they ought to save. Our industry has a tendency to focus on producing the absolute biggest investment return. What middle class people need is predictable outcomes. more> http://tinyurl.com/olmbjmd


London to become center for trading in Chinese yuan

CBC News – London is now ahead of any other financial center in the race to become an important hub for yuan trading, after the Chinese central bank granted London-based institutional investors a quota of 80 billion yuan ($12.7 billion) to invest in Chinese stocks.

Osborne said China’s state-owned banks will be allowed to expand their operations in Britain by setting up wholesale branches.

Britain and China signed an agreement in June to have their central banks swap 200 billion yuan for £20 billion ($32 billion), giving U.K. financial institutions more access to large amounts of yuan than had been available in the past outside of China. more> http://tinyurl.com/mv3gt9m


Rapid U.S. Growth Is Missing, Not Gone Forever

By A. Gary Shilling – We are now about five years into the deleveraging, and the related slow global growth, that followed the 2008 financial crisis. My forecast is for another five years of unwinding the excess borrowing by banks worldwide, U.S. consumers and many other sectors.

The private sector deleveraging has been so severe that it overwhelms all the federal tax cuts and spending increases undertaken in response to the recession, as well as the central bank interest-rate cuts and quantitative easing that piled up immense excess member-bank reserves at the Federal Reserve. more> http://tinyurl.com/nmwmeda