Feb 3rd 2012, 16:11 by Buttonwood
AS this blog has been negative on the economic outlook, it is only right to admit that today's numbers look very good indeed. First the non-farm payrolls jumped 243,000 and the unemployment rate fell to 8.3%. I was half-expecting a disappointing number given the evidence that seasonal adjustment had boosted the December figures (BCA Research pointed out that 42,000 of the announced gains came from the couriers and messengers category). and there might still be distortions. Neil Dutta of Bank of America Merrill Lynch noted that
One interesting wrinkle in today's data is the fact that the number of employees reported "not at work due to bad weather" totaled 206,000. The average for January going back five years was roughly 420,000. That could make today's number look somewhat stronger than it otherwise would be.
Nevertheless, it seems less likely that the non-farm payrolls are out of kilter given the other data. The services ISM data showed a jump to 56.8, including a rise in the employment measure. There was also a rise in factory orders. Good news for equities (and for President Obama's re-election hopes).
To dampen the mood a little, the much-promised Greek debt deal has still not been finalised and Greek media are reporting that Lucas Papademos, the technocrat prime minister, is having make-or-break talks with the opposition leaders over wage cuts needed to appease the creditors. Vague talk is going round of a resignation threat but this may be a negotiating tactic.
My worry remains that central banks have kept the economy propped up via liquidity transfusions, such as the ECB's three year loans to banks, but the net effect of this is to create asset markets and banks that are dependent on long-term support from the authorities, an unhealthy development. But if any country can pull out of the debt trap, it is surely America with its better demography than Europe and the advantage of the global reserve currency and most liquid bond markets.
A trip to the US over the next two weeks should give me a more detailed view but it will mean blog posts may be less frequent. (Part of the visit is book-related and for those who might be interested, Bloomberg published an extract today.)
Feb 2nd 2012, 17:06 by Buttonwood
A SHARP point from the monthly note of the Bank Credit Analyst (always one of the best research reads). The writers agree that the ECB's LTRO loans have stopped the possibility of a dangerous bank run in the euro zone. To have confidence in money, citizens need to be reassured that the government stands behind the banks. But
such a backstop can only be credible if there are no doubts about the government's solvency. The problem in Europe is that deposit insurance schemes are administered at the national level. That is where the ECB comes in. While it would never admit it, through a rather circuitous route. the ECB has now assumed a role comparable to the US Federal Deposit Insurance Corporation (FDIC)
It's understandable in the circumstances but not what those who set up the ECB had in mind.
Feb 2nd 2012, 14:14 by Buttonwood
AN intriguing note from Simon Smith at fxpro deals with the position of the ECB regarding the Greek bonds it holds. As is well known, private sector creditors are negotiating a haircut of 65-70% but official creditors, including the ECB, are refusing to take a loss. Mr Smith summarises the ECB's position
Firstly, its purchases were made primarily for monetary policy purposes and as such should not be seen in the same light as private sector purchases based on credit considerations. Secondly, and more crucially, the ECB views taking a loss on its holdings as breaking the constraint under which it operates regarding the monetary financing of deficits.
If the ECB is successful in maintaining its position, then it will make a profit when the bonds are held to maturity, since they were bought well below face value. As Mr Smith writes
It all comes down to the fact that the ECB is sitting on around €40bln or so of Greek government bonds, bought since the start of its securities buying program (SMP) back in 2010. We don't know exactly how many it holds or their maturities. That said, some rough back-of-the-envelope calculations suggest that it could make somewhere between €20-25bln if all were held to maturity (and with no haircut).
When banks are planning to hold government bonds to maturity, they can put them on their books at face value, not the market price. So the ECB could recongise that profit and award its staff a bonus. There are around 1,500 staff and, assuming a bonus pool of 40% of profits, that's a bonus of €5m-€7m each. Frankfurt property prices will rocket.
It's not going to happen, of course; the ECB might well lose money elsewhere and any profits go to shareholders, not the staff. (Mind you, it will be embarassing if Germany makes a few billion out of a Greek default). But it's a nice illustration of the strange world we have entered; see our recent piece on how the Fed has made almost as much money as the rest of the US banking system.
Feb 1st 2012, 13:02 by Buttonwood
THE issue that intrigues me most at the moment is the effect of the financial crisis on the workings of democracy, neatly illustrated this week by the FT story about the idea of an EU commissioner to oversee Greek budget plans. This is quite a complex area. If you want to borrow money, you have to convince someone - a private sector creditor or an official creditor - to lend you money. They thus need to be confident you can pay it back. This amounts to an implicit, rather than an explicit, veto on budget policies.
More broadly, however, there is the issue of how good democracies are at making complex decisions. The British system has an (almost) independent judiciary, a system that works to limit the arbitrary power of government over the individual. "Be you ever so high, the law is above you" Lord Denning proclaimed. The American judiciary is the third branch of government, although some judges are elected and Supreme Court nominees have to run the Congressional gauntlet. There is an underlying idea that judges can protect the rights of minorities, even if the majority of voters might prefer a different outcome.
Over the last 30 years or so, there has been general acceptance that central banks should make interest rate decisions independently of the whims of politicians, who might be tempted to adjust interest rates in accordance with the electoral cycle. This consensus might be breaking down if the views of Republican party leaders in the US are anything to go by. But for the moment, the power of these banks is extraordinary, given the scale of their intervention in government bond markets.
The debt crisis shifts the focus to fiscal policy. It is possible to separate this field into two. At one level, a government might face a restriction on its overall deficit (that was the idea of the Stability and Growth pact), rather as individual US states have balanced budget rules. It is harder to swallow the idea that voters should not be allowed to set the composition of the tax and spending policies that make up the budget. But of course, it has been suggested; for example, there was a lot of pressure on Ireland to increase its corporation tax rate in return for EU aid.
This leads on to the question of whether voters are sufficiently well-informed about the decisions they are taking. In a previous post, I discussed Brian Caplan's book The myth of the rational voter. What was interesting about the book, in my view, was that voters who were generally ignorant of the basic political structure (how many senators per state, for example) tended to have different economic views from those who were well informed (Caplan did control this finding for voter income). But some might dismiss his view as a right-wing economist complaining that normal people don't think like right wing economists. (It is surely more complex than that. If voters think the budget deficit can be eliminated by scrapping foreign aid, they ought to know that such aid is a very small part of spending.)
So it was interesting to read Democracy under attack; how the media distort policy and politics by Malcolm Dean who, as a former Guardian writer, would have little sympathy with Mr Caplan. His main worry is that the British papers tend to distort the facts and thus mislead voters on social policy. On crime rates he cites a survey that shows
people who were the best informed had the least anxiety about crime; those who were most ill informed were the most anxious.
On social spending, a 2002/03 British survey found that
the public believed 44% of social security spending went on the unemployed when it was, in fact, only 6% and 13% on one-parent families when it was less than 1%. Few recognised the biggest beneficiaries were pensioners, accounting for over 50%.
In another field, the public attitude towards asylum seekers has been affected by the hostility of a large section of the press, which have combined the ludicrous (asylum seekers eat the Queen's swans) to the plain nasty ("Shut out this scum" was one News of the World headline).
Again, the reason why this issue is so difficult is that, at a time of austerity, the public may support the slashing of benefits to minority groups, even though the effect on the deficit may be small and the hardship caused may be great. The answer is not, I hasten to add, to pass decision-making to EU commissioners in Brussels. The tough part is to try and make sure that voters, many of whom are uninterested in politics, are as well informed as possible about the issues being decided.
Jan 30th 2012, 12:04 by Buttonwood
THE battle over RBS CEO Stephen Hester's pay has absorbed an awful lot of weekend press and media in Britain - one might call it a bout of Hesteria. Mr Hester has sensibly backed away from his bonus, since the position of "banking public enemy" is not one to be relished - ask Sir Fred Goodwin.
There is a defence to be made of the bonus. Mr Hester did not create the mess at RBS; he is clearing it up. If he can remodel RBS and return it to the private sector, he will have delivered value to the taxpayer that could be in billions - in other words, more than a thousand times his bonus. If he walks away from the job, the public might lose a lot more than the £1m (in shares, not cash) that he was due to receive. By all accounts, he is a good manager and has made a decent fist of shrinking RBS's giant balance sheet.
Politically, however, the problem is that Mr Hester is working for a (largely) state-owned company at a time when other public sector employees are suffering a wage freeze, benefits are being cut and so on. It is very difficult to argue that "we are all in the same boat" if one state employee is being handed a luxury yacht. Doubtless, there are many teachers, doctors and nurses who are doing a fantastic job but they won't get a bonus either.
Many of us might feel that, if Mr Hester struggles to make ends meet on his £1.2m basic salary (plus £420,000 pension contribution), that we would be willing to do the job for say £1.1 million. This is not quite as ridiculous an idea as it sounds; clearly, if the average person were employed as a brain surgeon, electrical engineer or a footballer, their inadequacy would be quickly exposed.
But a bank CEO's worth is rather harder to judge. Clearly we can see examples of executives that have got it wrong, by overpaying for acquisitions or by recklessly leveraging the bank's balance sheet. A previous post highlighted an excellent speech from Andrew Haldane at the Bank of England; he pointed out that bank CEO pay correlated very well with return on equity, but very poorly with return on capital. Gearing up the company proved very lucrative for them in the boom, but disastrous for everyone else in the bust.
Take another example; market share. We all appreciated Steve Jobs' genius in creating new products and increasing Apple's share of spend on electronic devices. But if a bank increases market share, that may simply be a sign it is taking too many risks; that was the case of New Century in the US subprime market and Northern Rock in UK mortgages.
Perhaps, then, the best bank CEO would be someone who says No to the expansion plans of his subordinates and who has a decent amount of respect for the economic cycle. That same person would not be motivated by getting rich quick. So it's quite possible there might be a few people around who could do the job for £1.1m.
UPDATE: I should have added a point (featured in this week's column) that relates to executives being rewarded with stock. The more stock an executive owns (and thus the wealthier he is) the more likely he is to gear up the group's balance sheet and overpay for acquisitions. The finding seems counter-intuitive but wealth seems to breed overconfidence.
Jan 27th 2012, 15:54 by Buttonwood
PATRICK Artus, the chief economist at Natixis, was telling me how Spanish exports were booming so I thought it was worth looking up the data. With austerity on the menu in many countries, the hope is that export growth can compensate for sluggish domestic demand. Of course, since the biggest export market for many European nations is other EU nations, this might seem a lost cause. But at least, there was a general export increase last year.
Top marks to Estonia. The performance of Greece may seem surprising given that it has a huge current account deficit. My colleague who is just back from the country tells me Greek tourism has been doing well, in part because of the political turmoil in Egypt, a rival destination and in part because Israelis are heading for Greece rather than Turkey. Malta and Cyprus may be benefiting from similar effects.
Spain is doing very well on this score and a lot better than France. Ireland's bottom ranking is misleading; it had an export boom rather earlier than the rest and has recorded current account surpluses in three of the last five quarters.
Jan 27th 2012, 9:13 by Buttonwood
WHILE Italy and Spain are enjoying a welcome breather from debt pressures, Portugal is still under the cosh. Two-year yields were 16.1% yesterday and five-year yields were 20.8%. It all looks like an ominous replay of Greece's problems. The strategists at Rabobank comment this morning that
Portugal’s ongoing weakness, however, acts as a reminder that contagion is spreading and that aggressive liquidity provisioning serves to obscure its symptoms rather than address the illness itself.
The ever-thoughtful Jim Reid at Deutsche Bank comments that
There are more market concerns that Portugal could be the next Greece and the original EU78bn loan package may not be enough given the economic and fiscal slippage. At a very high level we do see certain parallels between the two. DB European economists expect the Portuguese economy to contract 2.9% this year in real terms which is not far off the -3% real GDP contraction estimated in Greece. Portugal's budget deficit is estimated to be 6.4% of GDP in 2012 versus 6.6% in Greece.
Meanwhile, the latest row in Greece concerns whether official creditors should take a write-down. This is a classic problem of form over substance. Clearly, Greece won't be able to service its debts over the long run, even after it defaults to the private sector (whatever the deal is called, failing to repay 65-70% of what you owe is a default). Other countries could send transfer payments to Greece over an extended period, or the debts could be written down. Since the other EU nations stand behind the ECB and the EFSF, this amounts to the same thing in the end. It would be plain silly if a deal broke down because of an argument about how, not whether, Greece gets subsidized.
Jan 26th 2012, 10:07 by Buttonwood
SO THE Federal Reserve has indicated that it will need to keep interest rates low until late 2014 (rather than 2013). Should that really be the cause for an equity market rebound, as occurred last night?
Otherwise intelligent people tend to reason as follows. The price of a stock should equal the discounted value of future cashflows. If the discount rate is lower, then the present value is higher (one heard this argument a lot during the dotcom bubble). This is true if other things are equal. But other things aren't equal. Why is the Fed keeping rates low for so long? Clearly, it is worried about the economic outlook and has lowered its expectation from "moderate" to "modest" growth. These crisis levels of interest rates are needed for a very extended period, just like Japan. Given that background, it makes sense for future profits expectations to be reduced, leaving the present value of equities unchanged.
There are other explanations for the rally. The Fed did for the first time set an inflation target. While this was an unremarkable 2% (which most people figured was the Fed's aim), the actual measure was for the deflator of personal consumption expenditure, not for the consumer price index. Since the PCE deflator has tended to rise more slowly than CPI (thanks to house prices), the effect could be to increase inflation expectations. To the extent that markets were worried about deflation, that might be a reason for equities to rally.
However, there is not a lot of evidence that markets are worried about deflation. The breakeven inflation rates on index-linked bonds over the next 10 and 20 years are 2.1-2.2%, pretty much the Goldilocks rate - not too high or low.
Then there is the obverse of the argument in the second paragraph. Perhaps investors were worried about a double dip recession in the US and believe the Fed action will avoid such an outcome. But that is not what economists are forecasting and the S&P 500 has rallied around 20% from its October low, in part because the US economy appears to be strengthening.
What about more subtle arguments? The Fed could just be wrong about the economic outlook, and could be committing itself to keeping monetary policy too lax in an expanding economy. Well there was no sign of concern from the bond market; Treasury bond yields fell after the statement. In any case, if the Fed were to drop the ball on inflation, investors should demand a higher dividend yield in compensation implying a fall in share prices, not a rise.
My suspicion is that the key part of the statement was the Fed's hint at a further round of quantitative easing. Like junkies needing a further hit, investors are desperate for central banks to buy more assets. Just like junkies, however, they may find that they need bigger and bigger doses to achieve relief.
UPATE: A small aside on this issue. What is the future for money market funds under this scenario? With yields this low, investors can hardly be offered a decent return after fees. Surely many funds will be wound up before 2014.
Jan 25th 2012, 18:25 by Buttonwood
PUT aside your worries about the financial markets and the euro-zone economy for a moment. Consider what Steven Pinker, in his magnificent new book The Better Angels of Our Nature, describes as "the most significant and least appreciated development in the history of our species" - the decline of violence.
It may be that, when you first consider the idea, you experience a visceral rejection of the concept (that was my instant reaction). Wasn't the 20th century incredibly violent? What about the Holocaust or Mao's famine? But Mr Pinker builds his case, logically and convincingly, over 700 pages.
Jan 25th 2012, 12:34 by Buttonwood
FIGURES released today show that the UK economy contracted 0.2% in the fourth quarter of 2011, with many people predicting a further decline in the current three months. That would meet the technical definition of a recession and would not be good news for the government's austerity strategy.
So what's to blame? The temptation will be to look at Europe so it's unfortunate that Germany's Ifo survey, also released today, shows the third consecutive rise. Britain may export a lot to Europe but so does Germany, which is performing a lot better.
So is it all down to cuts? The public finance numbers were published on Tuesday and showed that current expenditure in the first eight months of this year was £6.7 billion higher than in the previous financial year. Admittedly, that was down to higher interest spending and benefits; other spending was down. But, of course, in Keynesian terms, people who receive social benefits are likely to spend most of their income and thus bolster demand. In terms of closing the deficit, tax revenue seems to have contributed more; in the first eight months of the financial year, revenues were £18.1 billion higher than in the previous year, a tightening of more than 1% of GDP. It was the VAT rise that did it.
Jan 24th 2012, 11:38 by Buttonwood
THE equity markets have stated the year in fairly buoyant mood, with the S&P 500 now up almost 20% from the October lows. A better trend in US economic data has undoubtedly helped. But talking to investors in recent days, it seems the crucial factor has been Europe.
That might seem odd, given that many countries were downgraded by S&P and that the Greek restructuring deal has yet to reach agreement. But the ECB's willingness to lend money for three years to European banks has done two things. First, it has seemingly eliminated the prospects of a banking collapse, at least in the near term. Second, it may well have encouraged those banks to earn a turn by investing in government bonds, bringing down yields in Italy and Spain.
In turn, this may have encouraged US money market funds back into the region. According to Gerry Fowler at BNP Paribas,
Last week, US money market funds bought significant amounts of French and Spanish commercial paper. The value of notes issued by US banks with foreign parent companies increased by $6bn to $152bn. Notes issued by foreign domiciled banks rose $3bn to nearly £133bn.
It must also have helped that the European economic news has not been as bad as was feared; today's purchasing managers indices showed a rise above the 50 level. As I suggested in the New Year column, a New Year rally was very likely given the gloom that pervaded investors in late 2011. The question is how long it can last. the euro-zone deal that is being cooked - help for indebted countries in return for pledges of fiscal austerity - still seems likely to choke growth in the short term.
The problem with past examples of successful austerity programmes, such as Canada in the 1990s, is that they occurred in single countries (or in relatively small groups of countries). It is much harder when everyone is cutting at once. As Keith Wade, the chief economist at Schroders, puts it
The effects of co-ordinated fiscal consolidation by countries generating the majority of global GDP is likely to place a limit on world growth, absent a major technological innovation or policy transformation in the developed world.
The problem with reform programmes like those proposed by Italy's Mario Monti, necessary as they are in the long run, is that they don't do much for growth in the short term. It's another "I wouldn't start from here" issue. Just as we have accumulated debts, western economies tend to accumulate a whole lot of vested interests over the years, a problem well outlined in Mancur Olsen's The Rise and Decline of Nations, another book I've been reading. These vested interests - guilds, unions, producer cartels - can organise themselves to restrict entry to markets and inflate prices; the gains to cartel members are high, but the losses to non-members are small, since they are spread over a much larger population. Over time, however, the economy becomes like a barnacle-encrusted ship.
In short, these problems are greater than can be solved by the simple injection of liquidity into the banking systerm. Right now, however, investors are enjoying the sugar rush.
Jan 23rd 2012, 14:00 by Buttonwood
HAVING posted before on the seemingly inevitable nomination of Mitt Romney, I thought I'd better check up on the betting on Iowa's electronic markets. In the wake of the Gingrich resurgence in South Carolina, there has been a slight fall in confidence about the Romney candidacy but at a price of 73.4, he is still the overwhelming favourite. As you can see, only Gingrich of the other candidates has a real price. There is no sign that a "white knight" candidate, like Jeb Bush, will emerge.
Incidentally, the markets also seem more confident than they were in September that President Obama will be re-elected, perhaps because of the Republican in-fighting. At the moment, it's about a 57%-43% split (that's not a forecast of the vote shares, it;s a winner take all market. a bet on Obama means staking $57 to get $100.)
Jan 20th 2012, 17:04 by Buttonwood
THERE is an interesting debate among the analysts about the extent to which the ECB's programme of three year loans to European banks is being funnelled back into the government bond market. Whatever the truth of the matter (or the intentions of the ECB), the funding costs of Italy and Spain have fallen this year from the panicky levels of late 2011, and that can only be a good thing.
But the good news hasn't spread to Portugal, where the 10-year bond yield has gone above 14%. Remember that the official position is that the Greece private sector write-off will be a one-off; clearly the markets don't believe that. the lesson of Greece is that, the more official creditors get involved, the more the claims of privcate investors get subordinated, and the bigger their potential loss becomes.
Portugal's credit rating was downgraded two notches by S&P to BB, or junk bond status, which may mean that some investors aren't allowed to touch it. Of course, to the extent that cautious investors like insurance companies might be forced out of Portugal's debt, they might be replaced by risk-seeking investors (such as hedge funds) who would be attracted by the higher yield. However, such funds would want to insure themselves with a credit default swap (which currently indicate a 65% probability of default within the next five years, according to the FT).
But is it worth buying a CDS. After all, the EU authorities are going out of their way to make such swaps worthless, by engineering a Greek default that doesn't count as such under the terms of the CDS (because the deal is voluntary). By denying investors the ability to insuire themselves, the effect may be to cut off a potential source of bond demand.
The Portuguese government is pushing through labour market reforms but any boost to growth that such measures bring will take years to come though, time the country may not have. The EU could pass off one default as an aberration, but could it say the same about two?
Jan 19th 2012, 14:15 by Buttonwood
ONE of the joys of reading widely is that you can come across interesting ideas that make you think again. (I've been reading Steven Pinker's brilliant new book on violence which I want to blog about when I've finished it.) But another book I've come across is The Myth of the Rational Voter: Why Democracies Choose Bad Policies by Brian Caplan which was written back in 2007.
The idea is not original, although it is far from universally accepted. It takes time and effort to become informed about public policies. The chances of any individual's vote influencing an election outcome is virtually zero. Therefore it's not worth voters taking the time to make a judgment; they are "rationally irrational". As Mr Caplan points out, for most people a belief system that denies the theory of evolution or postulates that the world was created 6000 years ago, has little negative consequences on their daily lives; they can still function as a motor mechanic or shop for groceries. As a Republican Presidential candidate, indeed, such beliefs are positively beneficial. So people believe what they want to believe unless forced to change their minds by some event in their lives (not likely when it comes to evolution*).
Now economists don't like the idea of people being irrational, although it seems self-evident to mere history graduates. And even if they are irrational, wouldn't their irrationalities cancel each other out? Efficient market theorists take a similar line; stupid investors are just random noise, smart investors bring prices in line with fundamentals. But Mr Caplan shows that voters have systematic biases in one direction.
Indeed, there are some interesting polls which show the problem. About half of Americans do not know that each state has two senators and three-quarters do not know the length of their terms. Around 40% cannot name either of their senators. More importantly these "ignorant" voters have different opinions than informed voters (ie. those who do know the political basics). The ignorant voters have a series of biases - anti-market, anti-foreigners, an inclination to pessimism and what Caplan calls a make-work bias, being against economic changes that boost prosperity but threaten jobs in the short-term. (Some may struggle with this last one, but without efficiency gains in the economy, we'd all still be working on the farm.)
Now one could say this is an economist's bias; members of the profession like people who think like them. But it's not just stuff like free trade, A poll by the Kaiser Family Foundation in the mid-1990s showed that 41% of Americans thought that foreign aid was one of the two biggest items of federal expenditure; its actual share of the budget was just 1.2%. The biggest single item of expenditure was actually social security (pensions). But only 14% of Americans placed it in the top two.
There is no reason to suppose that Americans are any different from anyone else in this respect; they just have more opinion surveys. But it does show the difficulty for democracies in coping with the aftermath of the credit boom. Public policy decisions were difficult enough when economies were booming; it is even harder when we are sharing out the pain. It helps explain why Greece and Italy have turned to technocrats.
* Except for MRSA patients, perhaps. How did the staphylococcus aureus become methicillin resistant? Ah yes, they must have been intelligently designed as a kind of afterthought; a product relaunch of creation.
Jan 18th 2012, 14:04 by Buttonwood
ON Monday, your blogger took part in a BBC radio discussion involving Detlev Schlichter, the author of Paper Money Collapse: the Folly of Elastic Money and the Coming Monetary Breakdown. Mr Schlichter's argument will be familiar to fans of Ron Paul, although they are less often aired on this side of the Atlantic.
He writes that
It is simply a historic fact that commodity money has always provided a reasonably stable medium of exchange, while the entire history of state paper money has been an unmitigated disaster when judged on the basis of price level stability. Replacing inelastic commodity money with state-issued paper money has, affter some time, always resulted in rising inflation.
I am not entirely unsympathetic to this line of argument. The Chinese used paper money before abandoning it (just as the west was discovering the printing press). Monetary experiments in France under John Law and the Jacobins ended very badly (and very quickly). But one can easily flip the argument around. Nearly all societies did use metallic money but none now do. So one could say that all metallic money systems have been abandoned. The reason can be found in Mr Schlichter's argument; metallic money worked well in terms of delivering price stability but that is only one goal. What about growth and employment?
Fix the value of money and the burden of adjustment falls on other parts of the economy. Countries abandoned the gold standard in the 1930s because democratically-elected politicians found themselves unable to impose the kind of austerity required to maintain their gold reserves (the 1931 British Labour government balked at a 20% cut in unemployment benefit, for example). The economic historian, Barry Eichengreen, found that the earlier a country left the gold standard, the quicker its economy recovered. He also suggests, very plausibly, that it was easier to stick to the gold standard in the 19th century because many workers did not have the vote.
One can fix the value of your money internally, via a gold standard, or externally, via a fixed exchange rate. The Greeks chose the latter option by joining the euro. But now their voters are being asked to pay the price in terms of substantial austerity; in the old days, the Greeks would simply have devalued. Now, of course, over the long run a perpetual programme of devaluation will make a currency worthless. The point is that, neither fixing nor floating the currency is a panacea; countries still need to keep themselves competitive.
Not would a gold standard necessarily be fixed. The international version lasted from 1871 (when the newly-united Germany joined) only until 1914. Countries rejoined and dropped out in the 1920s and 1930s. The Bretton Woods system, devised in 1944, fixed exchange rates to the dollar and the dollar to gold. But countries could (and did) devalue, notably Britain in 1949 and 1967. If the US government declared that the future value of a dollar would be, say, one thousandth of a gold ounce, there would be nothing to stop a future government declaring the dollar to be worth one two-thousandth of an ounce. Ancient monarchs achieved the same feat by clipping coins or diluting the amount of gold and silver with copper or some other metal.
Now Mr Schlichter accepts this. He writes that
I don't think we should wish for the resurrection of the classical gold standard that collapsed in 1914. Although this system was the relatively best international monetary system we have had since the Industrial Revolution, it was still a government-managed, gold-anchored system. My hope is rather that from the ashes of the collapsed paper money system a monetary order arises that is, once again, based on the market's choice of a monetary medium and that is regulated entirely by market forces, by the free, voluntary and spontaneous interaction of the trading public and not by government dictate.
adding that
The state has to exit, once and for all, , the sphere of money and banking.
But a lot flows from this. What do do about the money that has already been created? Perhaps only reserve money and physical cash would be backed by gold or some other commodity, he suggests.
Some bank deposits from previous periods could still be allowed to remain uncovered while banks would be prohibited from issuing new uncovered deposits. If such a restriction on fractional-reserve banking were not to be enacted, then the state should in any case abandon all measures by which it supports and encourages these banking practices and socializes these risks.
The practical implications of this would surely be a severe restriction of credit (at a time when the economy is already weak) and that failed banks would be allowed to go bust. Now some might cheer at the latter prospect but would they really want it? The state intervenes to rescue banks because politicians worry what will happen to confidence if banks fail. It is easy to say that consumers should assess the financial strength of their banks but will Aunt Agathas in Worthing (or Wichita) really be able to do so. The mid-19th century was something of a free-for-all in US banking and was marked by a lot of failures and frauds.
So going back to a gold standard is far from a simple act and would involve a whole lot of changes that might be far from palatable in a democratic society.
UPDATE: Sorry to add to a very long post but another thought occurred to me. Of all paper money systems ever devised, the vast majority are still in existence and haven't collapsed yet. One could argue that "all previous bipedal apes have become extinct" on the grounds that Neanderthals and australopithecus are no longer around. But that would ignore the 7 billion humans still walking around.
Jan 17th 2012, 10:29 by Buttonwood
THE European Union is still talking about a financial transactions tax. Now I'm not in favour of it since it would simply drive a lot of business offshore (and it seems, at heart, an intrinsically anti-British move since the UK has the largest financial sector).
But the consultancy Oliver Wyman has produced a report on the issue and its arguments cause a certain degree of reflection - although not in the way that the authors intended. The report says that the tax will
directly increase transaction cost for all transactions by 3-7 times and by up to 18 times for the most liquid part of the market
adding that
Prior studies have shown that as much as 90% of the additional tax burden on financial institutions is generally passed on to end users. Non-bank financial institutions such as pension funds, insurers and asset managers will be particularly hit
It is a fair point that hedge funds can move to avoid the tax but pension funds and insurance companies can't. But Wyman adds a bit that sticks in the craw somewhat. The levy will
inefficiently tax the economy, as raising €1 of tax will likely cost the economy more than €1 given the indirect costs associated with reduced volume and more fragmented liquidity.
What bothers me about all this is that it seems to consider the financial transactions tax in isolation. Many EU countries are in deficit; the alternative to a financial transactions tax might be taxes on income (reducing incentives to work harder), taxes on sales (distorting spending decisions and bearing more heavily on the poor), taxes on business (which will also get passed through to consumers) and so on. One should look at the tax from the point of the view of the beneficiary of the pension fund; they may prefer to see a tax on transactions rather than a rise in VAT. A test of the "economic efficiency" of a transactions tax needs to be a bit broader.
A second issue is that much evidence shows that active managers underperform the indices; the trading costs that those managers incur are passed on to clients. So if a transactions tax prompts fund managers to trade less, or prompts clients to switch to lower cost index funds, investors may not suffer that much.
A third issue is that liquidity is a means to an end, not an end in itself. The purpose of the stock market is to allow companies to raise money so they can invest in new plant etc, and for savers to be able to allocate capital efficiently (i.e. to the companies with the best prospects). It is not clear that trading every millisecond serves that purpose. The function of the foreign exchange market is to make it easier for companies to trade and for capital to flow to the best international destinations; again it is not clear that the average currency holding period of 31 seconds (according to Andrew Lapthorne of SocGen) serves that purpose.
Now all of the above objections are trumped by the territoriality issue; the financial transactions tax should be simply renamed the Let's give a present to Wall Street and Singapore levy. But if we could devise a global tax system, it is not clear that financial transactions should enjoy their current privileged position.
Jan 16th 2012, 13:55 by Buttonwood
WHILE the big headlines over the weekend were about S&P's downgrades of European countries, the more worrying news came from Greece, where talks on a debt deal broke up. While I am not as negative as some on the agencies (their record on rating sovereign debt is pretty good), the market had already anticipated a downgrade of France, which has been paying a higher rate on its debt than Germany.
Greece's debt is a complex issue. Clearly, it must default to get its debt-to-GDP ratio down. But it also has a competitiveness problem that requires either a devaluation (not possible within the euro) or a fall in its costs (lower wages and thus a lower standard of living). Some of the pain of the latter option can be cushioned by subsidies from its fellow EU nations but they demand reforms in return. Many of those reforms are opposed by Greeks; it remains to be seen whether the technocratic government can push them though.
Of course, Greece has already had loans from the rest of the EU and this complicates matters further. The authorities are unwilling to see take any write-downs on their money. That puts all the burden on the private sector. Indeed, the more money lent by official bodies, the greater the write-down the private sector is forced to absorb if the Greek debt-to-GDP ratio is to fall significantly.
Throw in another twist. The authorities are obsessed (rather perversely in my view) with making the agreement voluntary so that the Greek deal is not classed as a default in terms of credit default swap market. That gives the creditors a bit more bargaining power. The banks appear likely to go along with whatever they're offered but the hedge funds are putting up more of a stink.
Talks between Greece and its private sector creditors are due to resume on Wednesday, January 18. Whereas a tentative deal was reached in October to write the debt down by 50%, a lot depends on the interest rate on the new debt. The lower the rate, the better for Greece but the bigger the hit (in present value terms) to the creditors. And then there are the knock-on effects. The EU has said that the Greek deal won't set a precedent for other nations. But, pull the other one. The EU has said a lot of stuff during this crisis and has backtracked many times. The bigger the write-off for Greece and the more aid (in terms of cheap finance), the more other nations will be encouraged to default and the greater the worries of creditors of other nations. That's why the Greek deal (or lack of it) is so crucial.
UPDATE: On the issue of the agencies being behind the curve, here is the result of an analysis by Gabriel Sterne at Exotix
We too have been repeatedly critical of troubled European sovereign ratings as the crisis has grown; we think they have been much too lenient! Our views are based on a simple but systematic assessment of the statistical relationship between sovereign ratings and spreads in EM and EA sovereigns. The analysis suggests the agencies rated troubled EA sovereigns 5-6 notches more favourably than do markets [as of 20 December]. Hence we continue to think that EA ratings are way behind the curve in terms of speed and size of downgrades.
Jan 11th 2012, 17:37 by Buttonwood
JUST back from Societe Generale's annual strategy seminar, held in the west end. As usual it was packed; as usual it was a jolly affair (considering the gloomy message) with Albert Edwards wearing a floral shirt that he may well have acquired in the 1970s.
As always, it was a thought-provoking event, and not confined to Albert's normal pro-bonds, anti-equities message. Indeed, Albert accepts that bonds are a poor medium-to-long term investment but thinks we have another deflationary shock to go first. "2012: The Final Year of Pain and Disappointment" was the title of the event. His general case, which he has manfully maintained for around 15 years, is that we are in an "ice age" in which equities get de-rated and bonds do well, as has been the case in Japan.
The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example). The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable. He cites the views of other forecasters such as the Economic Cycle Research Institute and John Hussman that a recession is on the way, and points to other confirming data such as the recent weakness in commodity prices.
Dylan Grice took a more philosophical view, pointing out the limits of our knowledge. Historians have had 1600 years to work out the reasons for the fall of the Roman empire and still don't agree; economists still debate the causes of the Great Depression. He produced two lovely quotes, the first from Lao Tzu
Those who have knowledge don't predict. Those who predict don't have knowledge.
And the second from J K Galbraith
There are two types of forecasters; those who don't know and those who don't know they don't know
From this standpoint, the confidence of central bankers in their ability to forecast is quite astonishing. He cites Ben Bernanke who, when asked what degree of confidence he had in his ability to control inflation said "100 per cent". This was the same man who asked about the chances of a US house price decline in 2005 said
It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis.
and then, when house prices were falling, said in 2007 that
the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained
Dylan thinks that 30-year inflation breakevens at 2% are significantly underpriced.
Andrew Lapthorne is the quant guy on the team. he had a number of interesting graphs, including one that showed the combined yield of a global balanced portfolio (50% equity, 40% government bonds, 5% cash and 5% corporate bonds) was now 3%. With total expense ratios on many mutual funds around 2% (and hedge funds charging 2 and 20), that doesn't leave much left for clients. Another graph was on pensions. If you look at the numbers, S&P 500 companies are expecting 10% returns from equities (after costs!). But a poll by Duke University found that chief financial officers median forecast for equity returns was just 6%; in effect, they didn't believe their own accounts.
As for share buy-backs, companies are hopeless about timing. At what moment in the last 15 years did S&P 500 companies devote the maximum proportion of their cashflow to share buybacks? The answer is early 2008 just before the market tanked. In 2009, when valuations were depressed, they used only a small proportion of their cashflow on buying back shares.
On a more encouraging note, Andrew found that more and more stocks were passing valuation tests at the moment. The only other time since 1989 whan such bargains were around was in early 2009.
The final speaker was Edward Chancellor from GMO, and a noted historian of financial crises. He pointed out that many of the signs of bubbles - an uncritically assumed growth story, overconfidence in the authorities, rapid credit expansion, an investment boom - are currently present in China.
Jan 11th 2012, 13:53 by Buttonwood
JOHN Ralfe, the pensions consultant, made a good point in Monday's FT, when commenting about the closure of Shell's final salary pension scheme to new members. He wrote that
Defined benefit pensions face the fundamental problem that the perceived benefit to employees is always likely to be less than the real cost to
the employer, making them economically inefficient.
Given the choice of a £40,000 salary, with no pension, and a £30,000 salary with a £10,000 pension contribution, employees will almost always choose the former. Indeed the implication of Mr Ralfe's view is that they would take a £38,000 salary over the same package. It is as if the employer had arranged for the sink to deliver Evian, when employees would have been happy with plain old tap water.
This may be because employees underestimate the level of savings needed to generate a decent retirement income. And that underestimation may well be down to pension accounting which, for years, allowed employers to account for future investment returns, without accounting for the accompanying risk. This is still the case in the US. There is no evidence, for example, that employees react accordingly when they are switched into defined contribution schemes, where the employer pays in much less. What they should do is ramp up their personal contributions but they don't.
All this will only sink home when employees reach their 60s, want to retire, and realise there is little in their pension pot. As John Lennon sang "You don't know what you got until you lose it".
Jan 10th 2012, 16:34 by Buttonwood
FOR those who haven't read the excellent This Time is Different, Carmen Reinhart has produced a succinct view of her thinking in a new paper, A Series of Unfortunate Events (alas, you may have to pay if you're not a member for the Centre for Economic Policy Research).
There is a useful list of the factors that tend to precede financial crises: large capital inflows, sharp run-ups in equity prices, sharp run-ups in house prices, inverted V-Shaped growth trajectory and a marked rise in indebtedness. What is striking is that the Alan Greenspan school might not have worried about anything on that list, bar the growth trajectory. Many cited the capital inflows into the US (the obverse of the current account deficit) as a sign of confidence in the American model; similar reasoning applied to higher asset prices, while the increase in debt was being driven by a more "sophisticated" economy.
A further point relates to the response of the central bank when things go wrong. Ms Reinhart writes that
If the exchange rate is heavily managed (it does not need to be explicitly pegged), a policy inconsistency arises between supporting the exchange rate and acting as lender of last resort to troubled institutions.... more often than not, the exchange rate objective is subjugated to the lender of last resort role.
I would add that the same problem crops up even with floating currencies, as the central bank faces a conflict between its role as lender of last resort and its inflation target. In Britain, the inflation target has been repeatedly missed while rates have been held at 0.5% because the Bank of England has decided (probably correctly) that the economy and financial system are too fragile to withstand higher rates.
The big issue is how we get out of this. Ms Reinhart raises again the prospect of financial repression, as used after the Second World War; making the rate on government debt negative in real terms. Of course, that raid on creditors was made easier by capital controls, whereas today money flows freely across borders.
But as Ms Reinhart points out, that has barely mattered. Real rates have been negative in the US, UK and Germany (occasionally they have been negative in nominal terms as well) and investors have proved gluttons for punishment. Macroprudential regulation ( a new enthusiasm for central banks) could be code for financial repression; by insisting that banks, pension funds, insurance companies etc own more government bonds as a means of "protecting clients". In addition, QE, by driving bond yields down, makes it easier for government to finance themselves or as Ms Reinhart more tactfully puts it
A large role for non-market forces in interest rate determination is a key feature of financial repression.
The other big issue is the willingness of emerging market central banks to keep financing western governments. This issue is also raised by Maurice Obstfeld in a piece for the forthcoming book "In the Wake of the Crisis". He points to a similarity with the Triffin paradox that emerged in the 1960s. The Bretton Woods system was built on the dollar and needed a growing supply of dollars to keep the system oiled. but the more dollars that were supplied, the less confidence that investors had in the ability of the Federal Reserve to redeem dollars for gold. Eventually, the system broke down.
Currently Asian central banks have an appetite for government bonds. As Mr Obstfeld writes
If (they) prefer safe government debt, then governments have to issue more debt. If these countries keep accumulating reserves at the rate they have been, and if present growth trends continue as we expect, how will this demand for reserves possibly be satisfied?
My thesis has been that some kind of grand bargain might eventually be reached, in which China trades a steady rise in its exchange rate for a limit on the size of the US deficit. This system would require restrictions on capital movements, such as the Chinese favour. It is good to see Ms Reinhart has similar thoughts arguing that
While emerging markets may increasingly look to financial regulatory measures to keep international capital out, advanced economies have incentives to keep capital in and create a domestic captive audience to facilitate the financing of the high existing levels of public debt.
Jan 10th 2012, 10:28 by Buttonwood
FURTHER to the latest column on hedge fund returns, Michael Edesess of Fair Advisors draws my attention to a fairly damning paper on the subject by Adam Aiken, Christopher Clifford and Jesse Ellis, three US academics. The paper tackles the problem of self-selection bias that can mark hedge fund indices (only the best funds choose to report) by looking at funds that have registered with the SEC (which requires them to report performance data). They can then compare the returns of those funds that report their numbers to the index providers.
Broadly speaking, there are two effects; first among funds that remain in commercial databases and second, in those that drop out. The authors look at the so-called alpha of funds (jargon for skill) that voluntarily report their numbers. This is a complex calculation since one has to know the portfolio allocation of managers; much of their return may be down to exposure to the S&P 500 or to corporate bonds and so would be classed as beta (simple market exposure that can be obtained at much lower costs elsewhere). Whereas, the managers that report to an index seem to show alpha of 3.5 percentage points, that is because they are the best performers. According to the authors
95% of a typical fund manager's measured skill can be explained by whether they report to a database
When things go wrong for a hedge fund, they tend to stop reporting their numbers to the commercial providers but they still have to report to the SEC. Almost half of all such funds still operate for two years after they stop reporting to the indices. Such funds produce returns that are more than 7 percentage points a year below those that continue to report to commercial providers. The authors conclude that
Our results indicate that when we exclude self-selected database funds, the average excess returns of hedge funds does not differ markedly from zero.
Jan 6th 2012, 16:16 by Buttonwood
THERE has been a lot of attention paid to the effect of greying populations on economic growth (and of course on pension entitlements). But what about the housing market? We tend to buy our first house in our late 20s or early 30s, buy bigger houses as we have children, downsize as we retire and and sometimes sell all our property in our late 70s and early 80s as we move into nursing homes.
So it makes a certain sense that demographics and house prices should be related. An analysis by Ajay Kapur of Deutsche Bank shows this relationship is pretty robust. He finds a positive relationship between changes in the working age population ratio (15-64 year olds relative to the rest of the population) and residential property prices, real prices almost always rise when the working age ratio is improving. In contrast, real property prices fell in one in three years when the working age proportion was falling. This ratio is declining in many countries; indeed in some the absolute number of workers is set to fall.
To make things worse, consumers are already indebted, making them more reluctant to borrow money and buy houses. Kapur found that when the working age proportion was falling and the loan/GDP ratio was high, prices almost always fell. Furthermore, many housing markets are overvalued, relative to both incomes and rents.
Kapur combines all this in a league table to see where most countries rank. The US looks best, given that house prices have already fallen and its population is relatively young. Japan is losing workers but has already seen a huge fall in prices. The worst scores are in France, Belgium, Sweden and Denmark, which rank badly on every count. Britain's sole saving grace is that its absolute number of workers is still rising (time for the Daily Mail to sing the praises of immigration).
Jan 5th 2012, 16:57 by Buttonwood
THE provision of three-year liquidity to European banks late in 2011 was seen as a vital means of support, given that the interbank market seemed to be freezing up again. But it was another signal of how central banks are taking a bigger and bigger role in the economy; as well as providing liquidity to banks, they are a source of demand for government bonds and the key providers of confidence to the equity market.
This blog has worried in the past about how central banks will ever exit from these positions. Few people seem to have agreed with me on this, although their reasons can seem spurious. For example, I have wonderd what will happen to bond markets when central banks sell the bond holdings acquired under QE. Some have responded that central banks will simply let the bonds mature. But this isn't an answer.
In any given year, some proportion of the existing bond stock matures and must be refinanced. The private sector must be willing to absorb the new supply and refinance the existing stock. To the extent the central bank doesn't roll it over, the private sector must add to its bond holdings. The cash effect is exactly the same as if the central bank had sold an equivalent amount of bonds.
Anyway, the IMF held a conference on post-crisis policy last year. Looking through the papers (which will shortly be published in book form by MIT Press as In the Wake of the Crisis: Leading Economists Reassess Economic Policy), I was pleased to see that Joseph Stiglitz had focused on this point. He wrote that
If the government's purchase of bonds leads to higher prices for stocks and bonds, its later sales should lead to a lower price. If markets anticipate this, then knowing that in the future prices will be lower limits the rise of the prices today.
He adds that there are two significant adverse effects.
First, there will be large potential losses by the central bank. The fact that the central bank does not use mark-to-mark accounting does not make these losses any less real. Second, the attempt to hide these losses (to ensure that they are not recognized) may impede the conduct of monetary policy.
Mr Stiglitz points out that QE may have had further questionable effects. Money may have flowed to where the opportunities look most exciting, such as emerging markets, creating potential bubbles there. Secondly, QE seems to have been used as a means of competitive devaluation (of course, other people can play that game). And QE seems to have destroyed the private mortgage market and ensured that mortgage lending is now largely a government affair, via Fannie Mae and Freddie Mac.
Jan 5th 2012, 12:09 by Buttonwood
2011 was not a good year for the pension fund industry. In the US, Mercer calculates that corporate sector deficits widened for the second straight year. For companies in the broadly-based S&P 1500, the deficit rose from $315 billion to $484 billion, even though companies chucked in $50 billion in the form of contributions. The industry isn't even running fast to stand still; it is going backwards. The funding ratio is down from 81% to 75%.
In Britain, Mercer estimates that the deficit of FT350 companies widened from £64 billion to £84 billion last year. (For the narrower FTSE 100, Towers Watson estimates a widening from £40 billion to £48 billion.) In terms of funding ratios, British pension funds are at 85% (against 88% at end 2010). The better funded nature of British fund may reflect a higher bond allocation, reflecting the greater focus on liability-driven investing on this side of the pond. (Actuarial thinking was changed by this Exley, Mehta, Smith paper in 1997 which doesn't seem to have caught on in the US.)
The bond call was a good one in 2011 since conventional gilts returned 16% and index-linked gilts 23%, That pushed up the bond exposure to 39% of portfolios to 39% while equities are now down to 44%. Even with that boost, however, State Street reckons that British pension fund returns were just 3% last year (emerging market equities weighed down portfolios).
Such figures only increase the dilemma for pension fund sponsors. Do they hope to close the gap by making a bigger bet on equities? Or do they match liabilities by investing in bonds, at the cost of making much larger upfront cash contributions? Many are trying to square the cycle by investing in alternative assets, such as hedge funds. As this week's column shows, that could be an expensive mistake.
Exactly the same funding pressures apply to public sector pension fund schemes as to private ones, but they are far less transparent about the costs. But a rough calculation during the year by Josh Rauh of the Kellogg school at Northwestern indicated that the state pension deficit was $4.4 trillion.
Jan 4th 2012, 17:33 by Buttonwood
PERHAPS the most controversial issue in international economics/politics at the moment is the effect of fiscal policy. Are governments that are pursuing austerity mindlessly driving their economies into recession, especially when the markets appear to be applying no pressure on them in the form of higher yields (case study: Britain)? What about governments with little choice to cut given the demands of markets and/or foreign creditors? And what about countries like America which has no difficulty financing itself but has long-term fiscal challenges?
The debate is brought into sharp relief by Spain. In an eerie echo of Greece, a new government has taken office, only to announce that the current deficit is much wider than expected (8% of GDP as opposed to 6%). The new government has unveiled an austerity programme, including a public sector pay freeze, cuts in transport subsidies and increased income tax rates.
For Jamie Dannhauser at Lombard Street Research, these measures amount to
fiscal masochism. They will increase the economic pain and make it less, not more, likely that Spain returns to financial health in coming years.
The problem foreseen by Mr Dannhauser is a "down the plughole" issue. Fiscal austerity will cause demand, and thus GDP, to slump. The result will be lower tax revenues, little improvement in the deficit and a higher debt-to-GDP ratio than before.
Mr Dannhauser makes the common sense point that any fall in the government deficit must, by definition, be offset by a fall in the surplus of one of the other sectors of the economy - corporations, households and foreigners. The corporate sector has a weak balance sheet and will need to hoard cash, so it seems out. Spanish unemployment is high, house prices are under pressure and the savings rate is at its long-term average, so it is hard to see consumers going on a spending spree. Nor is it easy to see foreigners snapping up Spanish exports, given the state of the European economy.
These are very tricky issues, and there tends to be a high ideological content to the debate. Conservatives who dislike big government tend to deny that fiscal stimulus, in the form of higher spending, can work while attributing miraculous powers to tax cuts. Social democrats resist spending cuts as falling disproportionately on the poor, while suspecting that tax cuts benefit the rich.
A more pragmatic view is to assume that the effect of fiscal policy depends on the circumstances. A 2010 paper from academics at the LSE and the University of Maryland found that
the output effect of an increase in government consumption is larger in industrial than developing countries
the fiscal multiplier is relatively large in economies operating under predetermined (i.e. fixed) exchange rates but zero in economies operating under flexible exchange rates
fiscal multipliers in open economies are lower than in closed economies
fiscal multipliers in high-debt economies are also zero
Spain has an industrialised economy, operates under a fixed exchange rate and has a lower government debt-to-GDP ratio than many of its European partners (the private sector is another matter). That implies Spain's deficit might be propping up its economy (and thus fiscal contraction will do more damage). In contrast, Britain has a more open economy than Spain, a floating exchange rate and a higher debt-to-GDP ratio (although not excessively so). That implies austerity makes more sense in Britain since the fiscal multiplier should be lower.
Alas, the political debate never seems to get framed in these more nuanced terms.
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them. The blog is named after the 1792 agreement that regulated the informal brokerage conducted under a buttonwood tree on Wall Street.
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