The investment drought of the past two decades is catching up with us

Martin Sandbu in The FT

In all the talk of “building back better” and making economies “match fit”, “strategically autonomous” and “resilient”, there is an unstated but tragic premise. For decades, most advanced economies did not build their future but languished in an investment drought, the scandal of which is greater for being unacknowledged. 

Between 1970 and 1989, the share of gross domestic product devoted to investment by six of the world’s seven biggest economies averaged from 22.6 per cent for the US to 24.8 per cent for Germany. The seventh, Japan, was an outlier with 35 per cent. 

Of the G7, only Canada has sustained this level of investment: its 22.5 per cent in this millennium is barely down from 22.8 back then. All the others have only managed to match their 1970-89 investment levels in four instances: the US in the boom years of 2000 and 2005-06, and France in 2021. 

Yet these past 20 years have been the era of lower-than-ever financing costs, first because of market exuberance, then thanks to central banks’ ultra-lax monetary policy. And what do we have to show for all that cheap credit? Two lost decades for investment. As economics writer Annie Lowrey concisely puts it, “we blew it”. 

France and the US have invested nearly two percentage points of GDP less this century than they did in the 1970s and 1980s; Germany and Italy about 4.5 points less; the UK and Japan 6 and 10 percentage points less respectively. These are enormous numbers. The G7 account for about $45tn in annual GDP. Restoring their investment ratios could fill nearly half the global shortfall to the $4tn the International Energy Agency calls for in annual clean technology investment if we are to meet net zero by 2050. 

Those are total investment numbers, but a similar story holds for the public sector on its own. In the US, net government investment (after accounting for depreciation of the existing public capital stock) fell by almost two-thirds in the decade to 2014, when it dropped to 0.5 per cent of GDP. 

In the eurozone, net public investment went negative in the same year, thanks to extreme fiscal austerity in the eurozone periphery and chronic under-investment in Germany. 

Some will be tempted by claims that we need not worry. It is normal to invest less as you get richer — so one argument goes — because adding to an already large capital stock is increasingly useless. The cost of capital goods has fallen, so the same money buys you more real investment, goes another. A third is that the current economy needs intangible, not physical capital, and while this is harder to measure, countries seem to be doing better on that front. 

Yet such reassurances, even if factually true, are no use. No one who takes a close look at most western countries’ physical infrastructure can think it fit for purpose — not when that purpose expands to include decarbonising our industries and energy and transport systems. 

Why have we lived for so long off past investments and failed to make enough new ones? Financing costs have clearly not been the problem, with interest rates at record lows. (Crisis-hit eurozone countries in the sovereign debt crisis were the exception, but even Spain and Italy have out-invested Britain for decades.) 

More likely culprits are a lack of demand and cheap labour. Businesses that don’t expect enough demand to absorb expanded output have no reason to invest. And when they are permitted to treat workers as cheap and disposable, they may choose that over irreversible capital investments. This is why faster wage growth and the so-called “labour shortages” (really competition for workers) are something we should embrace if we are to prod businesses into productive investments. 

Something similar may have been true for cheap energy in Europe. The 2010s were a time of unusually low-cost natural gas and hence electricity. This may have undermined the urgency of investing in both greater renewable generation and geopolitically safe natural gas developments. Oil prices, too, were low for much of the decade. 

But underneath these economic factors, I think our failure to invest is profoundly political. Raising the investment-to-GDP ratio, whether through boosts to private or public investment, or both, means that a smaller ratio of GDP is left over for consumption. Even if this prepares a better future, it can feel like a measlier existence today. And that is something a generation of politicians across the rich world have been afraid to inflict on their voters. 

That is true in good times, when transfer payments, tax cuts and immediate public goods are all politically more attractive than capital investment. (Something equivalent is at work in the private sector: witness companies’ choice to return cash to owners through share buybacks rather than invest in their own growth.) It has also been true in bad times, when investment is the easiest expenditure for belt-tightening governments and companies to cut. 

European countries have come to rue how they used the “peace dividend” of 1989 to cut defence spending. The same moment pushed the west as a whole to forget the broader idea of short-term sacrifice for a more prosperous future. But this is not inevitable, as exceptions such as Canada and the Nordics’ sustained investment show. Western voters and governments have both unlearned the virtue of delayed gratification. They have to relearn it, and fast.

The Fed Chair must acknowledge that free money has made asset prices unsustainably high

Gillian Tett in The FT 

This week financiers’ eyes have been firmly fixed on the Federal Reserve. No wonder. On Wednesday the US central bank raised rates at the most aggressive pace for 22 years, as Jay Powell, Fed chair, finally acknowledged the obvious: inflation is “much too high”. 

But as investors parse Powell’s words, they should spare a thought for a central bank on the other side of the world: the Reserve Bank of New Zealand. 

In recent years, this tiddler has often been an unlikely harbinger of bigger global trends. In the late 20th century, for instance, the RBNZ pioneered inflation targeting. More recently, it embraced climate reporting ahead of most peers. 

Last year, it started tightening policy before most counterparts. And this week it went further: its latest financial stability report warns of a “plausible” chance of a “disorderly” decline in house prices, as the era of free money ends. 

Unsurprisingly, the RBNZ also said it hopes to avoid a destabilising crash. But the key point is this: the Kiwi central bankers know they have an asset bubble on their hands, since property prices have jumped 45 per cent higher in the last two years and “are still estimated to be above sustainable levels”. This reflects both ultra-low rates and dismally bad domestic housing policies. 

And it is now telling the public and politicians that this bubble needs to deflate, hopefully smoothly. There is no longer a Kiwi “put” — or a central bank safety net to avoid price falls. 

If only the Fed would be as honest and direct. On Wednesday Powell tried to engage in some plain speaking, by telling the American people that inflation was creating “significant hardship” and that rates would need to rise “expeditiously” to crush this. He also declared “tremendous admiration” for his predecessor Paul Volcker, who hiked rates to tackle inflation five decades ago, even at the cost of a recession. 

However, what Powell did not do was discuss asset prices — let alone admit that these have recently been so inflated by cheap money that they are likely to fall as policy shifts. 

A central bank purist might argue that this omission simply reflects the nature of Powell’s mandate, which is to “promote maximum employment and stable prices for the American people”, as he said on Wednesday. In any case, evidence about the short-term risk of asset price falls is mixed. 

Yes, the S&P 500 has dipped into correction territory twice this year, with notable declines in tech stocks. However, the American stock indices actually rallied 3 per cent on Wednesday, after Powell struck a more dovish tone than expected by ruling out a 75 basis point rise at the next meeting. 

And there is no sign of any fall in American property prices right now. On the contrary, the Case-Shiller index of home prices is 34 per cent higher than it was two years ago, according to the most recent (February) data. 

However, it beggars belief that Powell could crush consumer price inflation while leaving asset prices intact. After all, one key factor that has raised these prices to elevated levels is that the Federal Reserve’s $9tn balance sheet almost doubled during the COVID-19 pandemic (and has expanded it nine-fold since 2008.) 

And, arguably, the most significant aspect of the Fed’s decision on Wednesday is not that 50bp rise in rates, but the fact that it pledged to start trimming its holdings of mortgages and treasuries by $47.5bn each month, starting in June — and accelerate this to a $90bn monthly reduction from September. 

According to calculations by Bank of America, this implies a $3tn balance sheet shrinkage (quantitative tightening, in other words) over the next three years. And it is highly unlikely that the impact of this is priced in. 

After all, QT on this scale has never occurred before, which means that neither Fed officials nor market analysts really know what to expect in advance. Or as Matt King, an analyst at Citibank, observes: “The reality is that tightening hasn’t really started yet.” 

Of course, some economists might argue that there is no point in the Fed spelling out this risk to asset prices now, given how this might hurt confidence. That would not make Powell popular with a White House that is facing a difficult election, Nor would it help him achieve his stated goal of a “soft” (or “softish”) economic landing, given that consumer sentiment has wobbled in recent months. 

But the reason why plain speaking is needed is that a dozen years of ultra-loose policy has left many investors (and households) addicted to free money, and acting as if this is permanent. Moreover, since the Fed has repeatedly rescued investors from a rapid asset price correction in recent years — most recently in 2020 — many investors have an innate assumption that there is a Fed “put”. 

So if Powell truly wants to emulate his hero Volcker, and take tough measures for long-term economic health, he should take a leaf from the Kiwi book, and tell the American public and politicians that many asset prices have been pumped unsustainably high by free money. 

That might not win him fans in Congress. But nobody ever thought it would be easy to deflate a multitrillion dollar asset price bubble. And the Fed has a better chance of doing this smoothly if it starts gently and early. Wednesday’s rally shows the consequences of staying silent.

Hawala explained

By Shahid Mehmood in The Friday Times

Hawala and Hundi are two of the most familiar terms in Pakistan’s economic landscape. Put simply, these are synonymous with informal channels through which money flows in or out of the country. It has been on the policymakers’ radar for a long time but there has not been any significant success in terms of curbing its workings. These days, there is a new urgency to tackle it as Pakistan finds itself on the Financial Action Task Force’s (FATF) Grey List.

It is a good time to peek into the nature, history and workings of this system in order to understand its continued sway and why it became popular in the first place. Hawala basically denotes a system made up of money lenders and businessmen around the globe. What distinguishes it from the formal exchange channels (like banking) is that it works largely on repute and trust rather than formal contracts. It comes with its advantages, anonymity being the primary one. The other primary advantage comes in the form of avoiding expensive formal channels of finance and exchange. Anonymity, however, comes with a heavy price tag for countries like Pakistan as this particular characteristic has been mercilessly exploited by smugglers, drug peddlers and terrorism financiers. No wonder Pakistan finds itself on the FATF radar.

Transfer of financial resources using a Hawala type system, based on trust, is a very old practice. Robert Sobel, in his magisterial The Pursuit of Wealth, has traced the system back to the dawn of commerce and trade (he does not explicitly mention Hawala, though). Babylonian and Sumerian merchants, for example, relied heavily on people of reputation (including priests) for acting as clearing houses and money transfer intermediaries/channels providing a valuable service to citizens. Instead of taking the substantial risk of carrying money and valuables themselves, they were deposited with these individuals who in return would give them an acknowledgment receipt (with their particular stamp or insignia). When merchants would reach their destination, they would redeem the amount by presenting the receipt to the Hawala dealers of that particular place. Thus, a transaction was settled with minimum of fee and administrative requirements. Moreover, the existence of such a valuable service oiled the wheels of commerce as it took away the many risks that merchants faced while carrying money themselves.

If looked at in modern parlance, Hawala is a decentralised system based on competition. There is little requirement for meeting statutory obligations and cumbersome procedures that exist under a modern, centralised banking system. Historically, money lenders under Hawala have charged just a fraction of what formal transfer channels charge from consumers. A question may arise as to the profitability of such a service when the charged fees are low. But that aspect has, historically, been taken care of by realising economies of scale: lower charges on transfers have attracted enough customers to ensure a healthy return.

Since the dawn of commerce and trade, this system has persisted despite challenges. It was quite common in the Middle Ages, as has been documented extensively by the economist Avner Grief’s research. For example, 8th century China under the Tang dynasty had a similar system called fei-ch’ien (flying money). The need for such a system arose due to the dangers encountered in physically transferring tax money and valuables to the empire’s capital. The operation of that particular system ameliorated that risk to a large extent. Formidable challenges to this informal, decentralised authority rose with the rise of nation states, powerful central governments and central banking authority. Yet, the system refuses to vanish.

What, then, are we to make of global efforts to clamp down and curb Hawala type transactions? Specifically, one has to look at the social and economic benefits of doing away with such a system. In hindsight, this may seem odd since the official version foisted upon our imaginations is one of a system that causes substantial damage to the economy. This version stands vindicated if we were to limit the system’s workings to facilitating money borne out of drug peddling, terrorism financing and other such harmful activities.

But one has to be careful in limiting their imagination to only these activities. The fact of the matter is that a Hawala like system offers many socially beneficial incentives that tend to get lost in the fog of official versions. It tends to discount the benefits accrued to consumers. I have already narrated its extremely beneficial role in facilitating trade and commerce in the earliest known civilizations. Aside from this facilitation, there are other advantages that such a system confers upon the society. Specifically, its presence ensures lower transaction costs to its subscribers.
Banks illustrate this point. They charge various types of fees from customers under the garb of different heads and make a healthy profit based on the deposits of customers. On net, the benefits accrued to customers are either cancelled or are inferior to what they are charged for the service. But when these kinds of institutions fail (largely based on their actions), they are usually bailed out using taxpayer money (the ‘too big to fail’ phenomenon). If you think about it, it is akin to a heist! And the only remedy available against such excesses are courts, which again exact a heavy cost from society due to the time, duration and financials involved. In a country like Pakistan, given the state of affairs of courts, it is advisable to stay away from them and save time plus money.

Consumers are usually saved that predicament in an informal, decentralised system like Hawala. Once a reputation of operator is tarred, its curtains for that business and no amount of running around can recoup the lost repute. More importantly, there is little possibility of ‘too big to fail’ phenomenon, to be bailed out using taxpayer money. Thus society not only benefits in terms of saving money (very low transaction fees), but also in terms of a decentralised system that weeds out inefficient, unproductive and corrupt operators without the need for a central authority or courts.

The lesson from all of this discussion, at least for policymakers, is that efforts to curb hawala type system needs an understanding of the nature and forces that propel it. If informal systems of financial transactions have endured for centuries, there are good reasons for that, some of them outlined above. A society and its inhabitants have the capacity to compare transaction costs of having a formal system against an informal system. If the former confers a lower cost, the latter would disappear without the need for state intervention (and vice versa). If this point can be grasped, then it is clear that Pakistan’s policymakers should first review the predatory nature of its functioning (specifically its taxation) plus that of its financial system, and what cost it inflicts upon the society. It also does not help that the government strongly incentivised use of such channels when it was in its interest (to finance Afghan Jihadi groups, for example), helped entrench it, and now wants to get rid of it when faced with external pressure.

Historical evidence, though, suggests that such administrative exercises are usually futile in the end since an alternative tends to rise. The rise of crypto-currencies, like Bitcoin, is an apt reflection of this fact. At its core, crypto currencies reflect the working of a decentralised exchange with meagre transaction costs, just like Hawala. How would the world curb this system? Ban computers? I don’t think so.

'This scheme is a lifesaver': India's drive to provide cheap drugs

Amrit Dhillon in The Guardian


 

Pharmacy stalls do a brisk trade opposite Delhi’s All India Institute of Medical Sciences. The Jan Aushadi scheme has provided a lifeline for many poor people. Photograph: Michael Safi


A taciturn, heavy-set man, Khawar Khan is not given to smiling. Only when he recalls the relief flooding the faces of customers after he has sold medicines at a twentieth of the cost in other chemists does he smile broadly.

“An autorickshaw wallah broke down here. Medicines for his wife used to cost him a catastrophic 10,000 (£111) rupees a month, his entire monthly salary. I gave him a month’s supply for 2,200 rupees. His relief was something to see,” says Khan.

Had the autorickshaw wallah not learned of Khan’s special pharmacy, stocked only with low-cost, generic medicines supplied by the government, he would have become one of the 55 million Indians pushed into poverty each year because of the cost of treating an illness.

The figure was provided by experts at the Public Health Foundation of India and published in the British Medical Journal. Of the 55 million, 38 million fell below the poverty line due to spending on medicines alone.

Khan’s little store is in the crowded and scruffy neighbourhood of Jamia Nagar in New Delhi. The floor is clean. Medicines are neatly stocked on the white shelves. The store is part of the Jan Aushadhi government project to provide generic medicines (identical to branded drugs but, since they don’t include research and development costs, substantially cheaper) to poor people in India so that the potentially ruinous medical costs of an illness can be managed.

Narendra Modi has injected fresh life into the Jan Aushadi scheme since his election as Indian prime minster in 2014. Photograph: Harish Tyagi/EPA

Started in 2008 by a previous government, the scheme foundered, mainly because pharmacies stocked so few drugs that hardly anyone bothered going to them. When the Narendra Modi government came to power in 2014, it gave the project a push, setting a target of 3,000 stores. From 97 pharmacies in 2014, there are now more than 3,000 countrywide.

This is a tiny figure for a country the size of India – some people have to travel long distances to find one – but it’s something. The only problem is providing the pharmacies with enough drugs.

“Most Jan Aushadhi stores have barely 100-150 formulations instead of the promised 600-plus medicines and their numbers are too small compared to the 550,000 pharmacies in India,” says the Public Health Foundation report.

Speak to the owners and they say even basic items, such as calcium supplements or oral rehydration salts, are often in short supply.

“I used to get only 30% of my orders from the government distributor. I hated sending patients away empty-handed, sometimes elderly people who had travelled 20 kilometres. Because I never had sufficient sales volume to make a profit, I was making a loss for a year. So I closed down last month,” says Shivdan Singh, whose shop was in Chhatarpur.

Khan is likewise failing to make a profit, but says he will give it another year before deciding what to do.

Advesh Kumar, deputy marketing manager of the Bureau of Pharma PSUs of India, the government agency that supplies the drugs, admits the stores lacked the full range of drugs. He says the bureau was not geared up to meet the demand generated by the sharp rise in the number of pharmacies.

“There is an undoubted shortage. Demand is higher than we anticipated. It’s also hard to predict which drugs will be needed. But we have got new software that will enable us to handle the issue better and we will plug the gap within two months,’ says Kumar.

As he sits in Khan’s store, Shazad Choudhury looks tense. Judging by the long list of prescriptions he has handed over to Khan, his entire extended family is ill with hypertension, diabetes, heart problems, kidney infections, uterus infections, and depression. Choudhury himself is recovering from a slipped disc.

“Look at all these medicines!” says Choudhury. “I’d be on the streets if I had to get these from a normal pharmacy. This scheme is a lifesaver. But it is tedious for me to keep waiting. There are two drugs I have been waiting for for a fortnight. The government must ensure the shops are fully stocked,” he says.

Outside the pharmacy, Kishore Dutt, a construction worker, is leaving, with medicines for his grandmother. He says some of his relatives told him to let his 82-year-old grandmother die because the medicines were too expensive. Poor families often have to make inhuman choices of this kind. Treat an elderly person, who may not even get better, and let the children go hungry? Or let that person die so that the children can eat and live?

Dutt heard about the Jan Aushadhi scheme and located Khan’s pharmacy. “I’m rushing back to my nani (grandmother). I hope these [drugs] will cure her,” he says.

Dutt was lucky that his grandmother’s doctor prescribed the generic name of the drugs. Many doctors in India, despite the Medical Council of India’s order to prescribe generic medicines, fail to do so. The perception that generic means no good and branded means good persists, even among doctors.

“The doctor down the road told a patient that generic drugs were ineffective. They need to be educated because they are doing a great disservice to the poor,” says Khan.

The end of an era of cheap money?

Nicole Bullock, Eric Platt and Alexandra Scaggs in The Financial Time


For more than a decade, Mike Schmanske made a living trading “volatility” — betting on the size and speed of moves in the US stock market. After 2014, the market was calm for so long that he spent much of his time sailing a Swan yacht. He got his adrenalin flowing in a different way: on his first trip from Bermuda to Newport, Rhode Island, he raced a hurricane back to port and made it with 12 hours to spare. 

Now, a new bout of turbulence is pulling him back to Wall Street. A sharp outbreak of volatility has written more than $5tn off the value of global stocks in less than two weeks and Mr Schmanske is talking to his old trading buddies about getting back into the market. 

“This is the most calls I’ve taken in years,” says Mr Schmanske*, a pioneer of some of the first volatility trading products while at Barclays and now a consultant. “Things were slow. I was literally on a boat a few weeks back.” 

The catalyst for the volatility surge came at 8:30am last Friday when the US government employment report showed a surprisingly strong rise in wages, prompting bond yields to shoot upwards and the price of those bonds to fall. Within hours, the losses in the $14tn Treasury market had spread to stocks, setting the stage for Wall Street’s worst week in two years.** By Thursday, US equities had entered what is known as a correction — a fall of at least 10 per cent. Many investors who had piled into esoteric instruments that enable them to bet on continued calm in the market had been wiped out. 

The ructions over the past week have attracted so much attention because they strike at the question that has haunted markets for the past two years — what happens when the economy returns to normal? Since the financial crisis, markets have been boosted by an unprecedented mixture of ultra-low interest rates and asset-buying by central banks in a bid to fend off the threat of deflation. But with global growth robust and inflation beginning to re-appear, central banks are pulling back. 

The question investors are trying to answer is how much of the sharp drop in share prices is due to a technical reaction driven by a much-hyped niche in the market that bets on volatility, versus part of a broader adjustment to a different economic reality. 

“The system has changed,” says Jean Ergas, head strategist at Tigress Partners, who said the market had made more of a “rethink” than a correction. “This is the unwinding of a massive carry trade, in which people borrowed at zero per cent and put money into stocks for a yield of 2 per cent.” 

The year began on a euphoric note as a large cut in US corporate tax prompted investors to mark up their expectations for earnings growth. The economy was already humming around the world for the first time since the financial crisis. 

At its peak on January 26, the market values of S&P 500 companies had surged by $5tn from a year earlier, while global stocks were up by nearly $14tn. The gains lured small investors into the market, with more than $350bn pumped into equity funds in the year, according to fund tracker EPFR Global. 

But cracks had already appeared in the bond market. Investors were starting to make noise and demand higher yields. Bill Gross and Jeffrey Gundlach — two well-known money managers in fixed-income markets — both declared last month a new era after a 36-year “bull market” in bonds, which had seen yields driven steadily lower. 

It was against that backdrop that markets reacted to last Friday’s news of a 2.9 per cent rise in US wages — not dramatic in a different era but still the largest year-on-year rise since the financial crisis. Inflation fears rose. Investors began marking up the odds that the Federal Reserve could tighten policy by a full percentage point this year, more aggressively than previously thought. Robust growth in Europe and Japan also raised the question of when the European Central Bank and Bank of Japan would begin to remove crisis-era stimulus. 

“Inflation fears running back into the market and hitting basically all assets in a market that had run up significantly is a pretty plausible, simple story,” says Clifford Asness, co-founder of AQR Capital Management. “You do not have to go looking for Alger Hiss in this pumpkin.” 

By the end of last Friday, yields on benchmark 10-year US Treasuries had hurdled above 2.8 per cent for the first time in nearly four years. For the year, yields had risen more than 40 basis points, increasing the appeal of bonds relative to stocks. The Dow Jones Industrial Average lost 666 points — an unsettling omen for religiously minded traders. 

“Optimism over synchronised global growth and supportive macro conditions led to outsized gains in equity markets to start the year,” says Craig Burelle, macro strategies research analyst at Loomis Sayles. “But more recently, some investors worried the economic momentum was too much of a good thing, and optimism gave way to concerns about the future path of inflation and interest rates.” 

Before long, the anxiety had gone global. On Sunday evening, many Americans were watching the Philadelphia Eagles upset the New England Patriots in the Super Bowl: at the same time, Asian markets were opening on Monday with a spike in bond yields. 

“On any other Sunday night you might have been more anxious about what you were seeing,” says Matt Cheslock, a trader at Virtu and a 25-year veteran of the New York Stock Exchange. “The game provided a nice distraction.” 

Monday morning in the US added a new source of uncertainty with the swearing in of Jay Powell as the chairman of the Federal Reserve, bringing a relatively little-known face to lead the central bank. For much of the day, Wall Street avoided serious losses. Then, a big drop seemed to come out of nowhere. About an hour before the closing bell, the Dow slumped more than 800 points in 10 minutes. 

“The adrenalin kicks in,” says Mr Cheslock. “Everyone gets sharper. The complacency is long gone.” 

Customers rushed to log into their accounts at Vanguard, TD Ameritrade, T Rowe Price and Charles Schwab, straining websites. Some were unable to place orders. 

“As the volatility picks up and the indices plummet the rumours start to swell,” says Michael Arone, chief investment strategist at State Street Global Advisors. “Folks are wondering the classic Warren Buffett line about when the tide goes out, you see who is not wearing swimming trunks.” 

Over the past week, the investors who have been left most exposed are those who had made bets on subdued volatility. As share prices slumped, Wall Street’s “fear gauge” — the widely watched Cboe Vix volatility index — spiked. 

Trading strategies that profited from the calm in markets during 2017 quickly unravelled. Two exchange-traded products that enabled investors to bet on low volatility lost nearly all their value on Monday. 

After the bell on Monday, the Vix continued to rise and shares in vehicles related to Vix also fell. 

On Tuesday morning, Nomura, the Japanese bank, said in Tokyo that it would pull a product that was pegged to S&P 500 volatility. Within half an hour, the Nikkei 225 had fallen 2.5 per cent, which, in turn, prompted a bout of selling in bitcoin. The digital currency — worth more than $19,000 as recently as December — dropped below $6,000 just after 2:45am in New York, as traders in London and Frankfurt were getting to their desks. Stock markets in both countries would open 3.5 per cent lower. 

As US investors slept, the turbulence continued. At 4am in New York, a number of exchange traded products related to volatility were halted. By 7:11am, more than two hours before the US open, the Vix volatility index shot above 50 — only the second time it has done so since 2010. The turbulence forced bankers to postpone a number of bond sales planned for the day. Then Credit Suisse said it would close an exchange traded note, known by the ticker XIV — which is designed to move in the exact opposite direction to the Vix each day, and had thus collapsed as volatility rose. 

“People had forgotten that stocks don’t just go up,” says Adam Sender, head of Sender Company and Partners, a hedge fund. “Corrections are a normal process. This was inevitable. Interest rates rising was the trigger, but short-volatility was the fuel.” 

The volatility subsided amid a Tuesday afternoon rally in New York, and world stock markets survived much of the next day without incident. But then at 1pm on Wednesday in New York, signs of nervousness re-emerged. Demand at the auction of US Treasury bonds was weak, a signal that investors were worried about inflation and a rising budget deficit, and would therefore only buy at higher yields. Stocks ended the day in the red, and when investors in Tokyo returned on Thursday, prices dropped quickly. Heavier selling ensued on Wall Street. By Friday morning, the main indices in the US, Germany and Japan were all down more than 10 per cent from their January highs. When trading finally closed for the week after another rollercoaster day, US losses were shaved to about 9 per cent. 

For some, the shock created by the collapse of the volatility products has been salutary. “It’s always good to be reminded of these things with accidents that aren’t of systemic importance to the entire economy,” says Victor Haghani, founder of London’s Elm Partners and an alumnus of Long-Term Capital Management. “It’s a gentle reminder from the market.” 

However, many investors believe the questions raised over the past week go well beyond the products connected to the Vix index. “We’ve gone from a market used to playing checkers — rising earnings, low rates equals higher prices — to being forced to compete in grandmaster three-dimensional chess: worries over growth versus rates, equity valuations, and the strength of the dollar, and now market structure concerns,” says Nicholas Colas, cofounder of DataTrek, a New York research group. 

While some investors talked of a buying opportunity, believing that faster economic growth and a modest uptick in inflation represent a positive backdrop for equities, many headed for the exits. Investors pulled more than $30bn from stock funds in the week to Wednesday, the largest week of withdrawals since EPFR began tracking the data at the turn of the century. 

The slump in share prices put the White House on the defensive, given that President Donald Trump has taken pride in the stock gains under his administration. “In the ‘old days,’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down,” he tweeted on Wednesday. “Big mistake, and we have so much good (great) news about the economy!” 

Others were less confident. “This is not yet a major earthquake,” said Lawrence Summers, US Treasury secretary under President Bill Clinton. “Whether it’s an early tremor or a random fluctuation remains to be seen. I’m nervous and will stay nervous. [It is] far from clear that good growth and stable finance are compatible.” 

Some strategists expect the recent declines to lead to further selling, as computer-driven funds that target volatility are forced to shed more equities. Analysts put the amount of automatic selling from the recent turmoil at about $200bn, and more could be on the way unless markets simmer down. 

Jonathan Lavine, co-managing partner of Bain Capital, says a drop in share prices was not a surprise in itself. “It was the ferocity of the move, not triggered by any material news and propelled by a small corner of financial markets,” he says. “You have to ask yourself what would happen in the event of real bad news.”

Uber ruling is a massive boost for a fairer jobs market

Aditya Chakrabortty in The Guardian

Yaseen Aslam. James Farrar. Remember those two names, because they are giant-killers. This summer the men took on not just one £50bn multinational, but an entire business model. On Friday, they won.

As minicab drivers for Uber, Aslam and Farrar were deemed to be self-employed. The status meant they were denied the most basic rights that other workers take: no minimum wage, no sick pay, no paid holiday. But as an employment tribunal judge heard over several days in July, that classification was both wrong and unfair. And he agreed.

The obvious thing to say about Anthony Snelson’s ruling is that it is huge. It poses an existential threat to Uber in Britain. It will also send shockwaves through a string of companies using the same business model to do everything from delivering takeaways to providing cleaners to couriering court documents.

Most of all, it is a massive boost for all of us who want a fairer jobs market – and a big slap in the face for the government. For most of the past six years, ministers have turned a blind eye to the growth in bogus self-employment, zero-hours contracts and Sports Direct-style agency work. They have preferred instead to celebrate the record employment numbers as proof that austerity is doing the trick. Just before the last election, Nick Clegg claimed: “If you want a glimpse of the sort of worker that will thrive in the new economy, you need look no further than the growing numbers of self-employed people.”

On this subject too, the hapless Lib Dem was wrong. The idea that the swelling army of self-employed Britons are all budding SurAlans and Bransons, swigging lattes and toting MacBooks, is for the birds. Serious labour-market analysts agree that a large number of those now in self-employment are there as a last resort. And many believe a big chunk should not even be classed as self-employed. As with much else in our insecure labour market, firm numbers are hard to come by. But the Citizens Advice Bureaux believe that the reserve army of bogus self-employed may number around half a million.

For some Britons, self-employment doubtless means freedom. But for others, it means the freedom to be exploited, deprived of rights – and to be underpaid. According to recent research from the Resolution Foundation, the typical self employed Brit is now earning less than when John Major was prime minister.

For the likes of Uber, self-employment is hugely profitable. The giant company has 40,000 drivers working for it in Britain – and as long as they are self-employed they are almost cost-free. On that basis, Uber can keep on adding to its fleet of drivers for next to nothing, and thus rack up ever more passengers and squeeze out competitors.

But as the judge found on Friday, Uber drivers are not self-employed at all. They have little of the liberty you might expect, but are instead interviewed, recruited and controlled by the firm. Uber sets their default driving routes. Uber fixes the fares. Uber instructs them on how to do their job and runs a disciplinary procedure. The drivers work for Uber – not the other way round.
As the ruling observes, the company and its highly-paid boosters do their best to cloak this relationship in the language of chummy marketing and hi-tech piety. They use the term “gig economy”, when what they mean is casualised labour. They claim to be “disrupters”, when what they’re really disrupting are our labour laws. And Uber still markets itself like a plucky underdog when it is now worth $62.5bn – more than Tesco and Barclays put together – and numbers among its public affairs and public relations people the former advisers to Ed Balls and Michael Howard. Pretending to be the future, it is really the past: a cab company that relies on its drivers being cheap and available. Except your local cab firm doesn’t have the lobbying muscle or the Westminster contacts.

Uber confirmed that it will appeal against the decision, and you can expect this case to keep the courts busy for a few months. Other businesses that have copied the Uber model will be watching anxiously. And so will their workers.

A few months back, I interviewed a courier called Mags Dewhurst, whose job is biking urgent medical supplies to hospitals around London. Like most other cycle couriers and drivers, she’s also classified as self-employed; she’s also fighting to change her status. Next month she will be battling her company, CitySprint, in court.

Dewhurst has a strong case. She wears a uniform with a logo, clocks in with a controller each morning. And then: “For 50 hours each week, I’m told what to do.” She’s been impatient for the Uber verdict, knowing that it will be of huge symbolic importance for her own case. On Friday afternoon, I texted her: How pleased are you?

Her reply: “On a scale of 1-10? A GAZZILLLLION.”

Why we need a Truth on the Clothes Label Act

We know more about the conditions of our battery hens than of our battery textile workers. A year after Rana Plaza, it's time we were given the facts

• 
• • Aditya Chakrabortty
  • The Guardian, Tuesday 1 July 2014

'Forcing businesses to admit exactly who is responsible for their economic success, and who reaps the profits, is a good start'. Illustration: Daniel Pudles

Somewhere in Swansea is a woman whose hand I want to shake. My guess is that she's the one responsible for giving Primark such a stonking headache over the past few days. You probably know her handiwork – at least, you will if you saw the stories about how two Swansea shoppers came back from the local Primark with bargain dresses mysteriously bearing extra labels. One read "'Degrading' sweatshop conditions"; another "Forced to work exhausting hours".

How did they get there? "Cries for help" from a production line in deepest Dhaka, claim the merchants of journalese. But surely no machinist could bunk off their punishing workload to script these complaints in pristine English, stitch them in and whisk them past a pin-sharp inspector. The much-more-likely scenario is an activist, holed up in a south Wales fitting room, hastily darning her protests.

In which case: well-needled, that woman. Not only has she gummed up the Primark publicity machine for days on end and brought back into discussion the costs of cheap fashion, she's also given pause to two shoppers. In the words of one: "I've never really thought much about how the clothes are made … I dread to think that my summer top may be made by some exhausted person toiling away for hours in some sweatshop."

In a mall, such thinking counts as disruptive activity. The lexicon for most retailers runs from impulse buy to splurge to treat; they prefer us to wander the aisles with our eyes wide open and our minds shut tight. The whole point of a shopping environment is to drown out those inconvenient headlines about dead textile workers in Rana Plaza with a bit of Ellie Goulding and a lot of advertising. Which is what makes the Primark protests, or the Tesco shelfie campaign, or the UK Uncut rallies so splendidly aggravating – because they undercut the multimillion-pound marketing with point of sale information about poverty pay for shop staff or high-street tax dodging.

They also underline how little we're told about what we're paying for. Look at the label sewn into your top: the only thing it must tell you under law is which fibres it's made out of – whether it's cotton or acrylic or whatever. Which country your shirt came from, or the accuracy of the sizing – such essentials are in the gift of the retailer. A similarly light-touch regime holds for food: after years of fighting between consumer groups and the (now eviscerated) Food Standards Agency, and big-spending food manufacturers, a new set of traffic-light labels will be introduced. Thanks to heavy industrial lobbying, it will still be completely voluntary.

How much sugar is in your bowl of Frosties: this is a basic fact, yet it remains up to the seller how they present it to you. By law you are entitled to more information about the production of your eggs than your underwear. Under current regulations, we know more about our battery hens than we do about our battery textile workers.

 A ‘cry for help' label in a top from Primark in Swansea. ‘Big retailers can also display ­prominently how much tax they pay, and what they pay both top staff and shopfloor employees.' Photograph: Matthew Horwood/Wales News Service

Consider: just over a year has passed since the collapse of the Rana Plaza factory, which saw more than 1,100 staff crushed to death and another 2,500 injured, many permanently disabled. Those people and the thousands of others working in similarly precarious and punishing conditions make the garments we wear and the electronic goods we fiddle about with. Yet they rate barely a mention. Outsourcing and globalisation may have brought down the price of our shopping, but it has also enabled retailers to engage in a facade of blame-shifting and plausible deniability: for Apple to pass the buck for suicidal Chinese workers on to Foxconn and duck the questions about how much of a margin it pays suppliers.

So here's a modest proposal: a new law that mandates more, and more relevant information, on the products we buy. Call it the Truth on the Label Act, which will require shops to display where their goods are made, which chemicals were used in production, and whether the factory is unionised. Stick it on the shelves, print it on the clothes tags. Big retailers can also display prominently in each branch how much tax they pay, and what they pay both top staff and shopfloor employees.

That's because while queuing up for the self-service checkout, hungry commuters might want to know that the boss of Tesco's, Philip Clarke, is paid 135 times what his lowest-paid member of staff is. Or that George Weston, chief executive of Primark's parent company, received over £5m last year, while the young women who sew his firm's T-shirts get less than £30 a month.

Such information is not hard for the big retailers to provide. Long before Google was an algorithm in a programmer's eye, Tesco was in the data-collection business. This information in itself won't change an entire economic system. But forcing businesses to admit exactly who is responsible for their economic success, and who reaps the profits, is a good start. Otherwise, we're entirely dependent on activists in changing rooms.

A Great Welfare Measure by Tamil Nadu government

Amma Unavagam: Rs.5 lakh a day feeds 1.5 lakh

T. RAMAKRISHNAN in the hindu

  

The HinduAccording to a conservative estimate of a Chennai Corporation official, the 200 restaurants serve two lakh persons every day.

Amma Unavagam restaurants have become a hit with in Chennai, offering affordable and hygienic food

Pandian, a painter, was at the Amma Unavagam in Velachery for the first time. It was a holiday and Pandian wanted to check out the breakfast of Idli (Re. 1/plate) and Pongal (Rs. 5/plate).

Pandian was satisfied after his breakfast. The taste was good. “Nalla irukku,” he said. And he would have had to shell out at least Rs. 30 in a restaurant for the same food – an amount that burns quite a hole in his earnings.

Located opposite the 1400-year-0ld Dhandeeswaranathar temple, the Velachery Amma Unavagam run by the Chennai Corporation is one of some 200 low-cost restaurants run by the Chennai Corporation. These restaurants have been a big hit with the masses, offering the itinerant workers, daily-wage earners and many others an affordable, hygienic restaurant.

Many of them have become regular Anna Unavagam patrons. Kishen, a migrant labourer who works at an upmarket restaurant on Velachery Main Road, is one. His verdict on the food: “Achcha hai.” 

Pandian too will become a regular like Kishen.

Inaugurated on Feb. 19 of this year, the number of these outlets had, by early April, climbed to 200 in Chennai. The Velachery Unavagam is one among those which were inaugurated on April 2. Two months later, the concept was extended to nine other municipal corporations in the State and each corporation has 10 such restaurants.

The restaurants offer idli between 7 a.m. and 10 a.m. Sambar rice is served at Rs.5 a plate and curd rice at Rs. 3 a plate between noon and 3 p.m. In Chennai, the eateries provide pongal at Rs. 5 a plate in the morning and lemon rice or karuveppilai rice at Rs. 5 a plate in the afternoon.    

According to a conservative estimate of a Corporation official, the 200 restaurants serve two lakh persons every day. If one were to take into account the possibility of one person coming to the restaurants more than once, the net figure is around 1.5 lakh, representing the economically weaker sections.  This means the Amma Unavagams are already covering some 20 per cent of the Below Poverty Line population in Chennai – estimated at 6.5 lakh, or 10 per cent of the total city population. The nine other corporations across the State benefit another 50,000 persons.

The government’s initiative seems to have acted as a price deflator. Some leading restaurants across the State have reduced prices of certain items such as coffee and meals, though they do not attribute their move to the Unavagams.   

The government’s plan to scale up and increase the number of Amma Unavagams five-fold in Chennai may face challenges, however. Officials admit that the availability of buildings will be a problem as the local body has virtually exhausted its unutilised lands and buildings for the existing Unavagams. Finding places to house the future restaurants would increase the capital costs.

Another challenge would be in procuring the additional quantities of rice that would be required – as many of the items are rice-related. [Of course, chapathi, a wheat-based offering, is likely to be introduced soon in Chennai.] The Union government, seeing the relevance of the programme, should make an exclusive allotment of rice for the State, officials say.

Big pharma is cut out by India's plan to bring medicine to masses

Ambitious $5bn push deals blow to global firms with focus on generic alternatives above branded drugs

NIKHIL KUMAR 

 

 

FRIDAY 06 JULY 2012

India is planning a multibillion-dollar push to bring free medicines to the hundreds of millions of its citizens who, despite the country's economic revival, still languish without access to the very basics of health care.

The $5bn initiative, which is slated to be rolled out by the end of this year, will offer 348 essential drugs to patients across the country. In a blow to the West's big pharmaceutical firms, the planned scheme will largely cut out branded drugs, opting instead for cheaper generic alternatives.

News of the plan comes as the Congress-led administration in Delhi attempts to shore up public support after a raft of corruption scandals and crushing electoral losses in state polls. A recent report confirming a slowdown in economic growth has only served to sharpen criticism of the government.

Now, Delhi is plotting a multi-billion dollar health-care drive, using its network of government-funded hospitals and clinics to deliver free drugs across a country where, despite the much-vaunted boom of recent years, more than two million young children die every year from preventable infections, according to Unicef.

Infant mortality stands at 63 per 1,000 live births, while a recent paper in the Lancet medical journal said that of the nearly five million children under five who succumbed to preventable diseases such as pneumonia, diarrhoea and malaria in 2010, almost half had come from five countries: Nigeria, the Democratic Republic of Congo, Pakistan and, notably, China and India.

All the while, the Indian state spends so little on health care as a proportion of GDP that only a handful of countries fare worse, according to the OECD.

The bulk of the cash for the free medicine plan will come from central coffers, while state governments will be asked to shell out an additional third of the required funds. The Ministry of Health and Family Welfare said it had put forward proposals worth around $3.64bn. The additional funding – from the states – will boost the investment to around $4.9bn, signalling, if approved, "a giant step in vastly expanding the access to medicines", the Ministry said. A template already exists in the western state of Rajasthan and Tamil Nadu in the south, where health schemes are reported to have been successful.

The focus on generic medicines chimes both with the need for affordability and the dynamics of India's pharmaceutical market. Generics – or cheaper copies of expensive branded medicines whose patents have run out – accounted for around 90 per cent of the total drug sales in the country in 2010, according to Reuters data.

The gulf between the cost of branded drugs and generic alternatives is often vast. The Rajasthan state government, for instance, buys the generic version of a popular cholesterol drug for just over 6 rupees (7p) for a strip of 10 tablets, according to official figures quoted by India's Economic Times newspaper. In contrast, consumers opting for a branded alternative face costs of 103 rupees.

Although reports indicate that doctors participating in the planned scheme will be able to use 5 per cent of the sanctioned funds to buy medicines absent from the approved list of 348 generic drugs, the initiative presents a fresh challenge for global pharmaceutical giants such as GlaxoSmithKline and Pfizer.

Big pharma, as that end of the industry is known, is already struggling to forge new avenues for growth. Being locked out of a major initiative in a key emerging market won't help.

"Without a doubt, it is a considerable blow to an already beleaguered industry, recently the subject of several disadvantageous decisions in India," KPMG's European head of chemicals and pharmaceuticals, Chris Stirling, told Reuters.

"Pharmaceutical firms are likely to rethink their emerging markets strategies carefully to take account of this development, and any similar copycat moves across other geographies."

India's patent ruling on cancer may open door for cheaper HIV drugs

It is only the second time a nation has issued a compulsory license for a cancer drug after Thailand did so on four drugs between 2006 and 2008, also on affordability grounds. (Reuters photo)

Reuters | Mar 13, 2012, 08.04PM IST

India's move to strip German drugmaker Bayer of its exclusive rights to a cancer drug has set a precedent that could extend to other treatments, including modern HIV/AIDS drugs, in a major blow to global pharmaceutical firms, experts say.

On Monday, the Indian Patent Office effectively ended Bayer's monopoly for its Nexavar drug and issued its first-ever compulsory license allowing local generic maker Natco Pharma to make and sell the drug cheaply in India.

It is only the second time a nation has issued a compulsory license for a cancer drug after Thailand did so on four drugs between 2006 and 2008, also on affordability grounds. Thailand also issued licenses for HIV/AIDS and heart disease treatments.

"This could well be the first of many compulsory rulings here," said Gopakumar G Nair, head of patent law firm Gopakumar Nair Associates and former president of the Indian Drug Manufacturers' Association.

"Global pharmaceutical manufacturers are likely to be worried as a result ... given that the wording in India's Patent Act that had been amended from 'reasonably priced' to 'reasonably affordable priced' has come into play now."

The new wording is seen as a lower threshold for compulsory licenses, which can be issued under world trade rules by nations that deem major life-saving drugs to be too costly. The licenses allow them to authorise the local manufacture or importation of much cheaper, generic versions.

Global drugmakers see emerging markets such as India as key growth opportunities, but remain concerned over intellectual property protection. Nair said HIV-related medicines were likely to be the most at risk by compulsory licenses in the future.

India has one of the world's fastest-growing rates of HIV and heart disease is also the country's biggest killer, but widespread poverty in Asia's third-largest economy makes many non-generic drugs unaffordable for millions.

Currently, Pfizer and GlaxoSmithKline sell a modern HIV/AIDS drug known as Selzentry through their joint venture firm ViiV Healthcare. The treatment costs more than 60,000 rupees for one month's dosage in India.

Bayer's Nexavar cancer drug costs around $5,500 a month in India, making it "not available to the public at a reasonably affordable price", the patent office ruled. About 40 percent of Indians live below the poverty line, government data shows.

A provision of the Indian Patents Act allows for a compulsory license to be awarded after three years of the grant of patent on drugs that are deemed to be too costly.

MORE TO COME?

Other patent rulings are imminent. A long-running case involving the granting of an Indian patent for Swiss drugmaker Novartis' cancer drug Glivec is expected to be heard in the country's Supreme Court this month.

The case does not involve the issue of compulsory license, but it has also pitted advocates of free trade and intellectual property rights against pro-generics campaigners who say a ruling in favour of Novartis could see other drugs in India priced outside of the reach of most of the population.

"This (Bayer) case might become a trend-setter, wherein generic players can make copies of patented products," said Siddhant Khandekar, analyst at ICICI Direct.

"While global giants might not like this, generic companies will benefit along with common people," he said, adding that the cancer treatment market in India was worth up to 30 billion rupees.

The Bayer case underscores the still fractious relationship between global pharmaceutical firms and India. Companies like Pfizer, GlaxoSmithKline and Novartis are eyeing India and other emerging markets, notably China, as a growth opportunity but worry about property protection in a country that is also a leading source of cheap copycat medicines.

"Big Pharma" has recently struck some alliances with Indian drugmakers to tap into their generics expertise, but these have also not always run smoothly, with Pfizer on Tuesday scrapping a partnership with India's Biocon Ltd.

In cancer treatments, India's Cipla Ltd, which has the second largest share of the local drugs market, may also benefit from the Bayer case. Cipla is fighting a Bayer suit for patent infringement after the Indian drugmaker launched a generic version of Nexavar in India in April 2010.

BAYER CONSIDERS OPTIONS

Natco's finance chief, Baskara Narayana, told Reuters that sales of the generic version of Nexavar, whose chemical name is sorafenib, were expected to be about 250 million to 300 million rupees a year once it is launched.

Bayer, which developed Nexavar with US biotech firm Onyx Pharmaceuticals, said it was evaluating its options.

"We are disappointed by the decision of the Patent Controller in India to grant a compulsory license for Nexavar," Bayer said in a statement.

Tapan Ray, director general of the Organisation of Pharmaceutical Producers of India, an industry group of multi-national drugmakers, said the Bayer ruling was disappointing.

"The solution to helping patients with innovative medicines does not lie in breaking patents or denying patent rights to the innovators," Ray said.

Pfizer has questioned the issue of affordability, saying many Indians are well off and can afford Western medicines.

"There is huge wealth in India," Pfizer CEO Ian Read told Reuters in London on Monday. "There are maybe 100 million people in India who have wealth equivalent to or greater than the average European or American, who don't pay for innovation. So this is going to have to be a discussion at some point."

But groups that campaign for cheap access to drugs in poor countries have welcomed the Bayer ruling.

Medecins Sans Frontieres said the ruling means that new medicines in India that are still under patent, including some of the latest treatments for HIV/AIDS, could potentially have generic versions produced for a fraction of the cost.

"It's a bold move by the government and it's a good judgment ... which will benefit people," said Dara Patel, secretary general of the Indian Drug Manufacturers' Association, an industry body of Indian companies.

"Drugs to treat heart-related diseases and HIV are costly," said Patel. "Compulsory licensing will make them available at one-fourth or one-fifth of the price, which is good."