Aurelia Butler

TORONTO (Reuters) – The Bank of Canada is expected to take in stride surprising recent economic strength and leave interest rates unchanged at its meeting on Wednesday, pinning its hopes on activity cooling as higher borrowing costs sink in, analysts said.Last month, the Bank of Canada became the first major global central bank to pause its rate-hiking campaign, after lifting its benchmark rate to a 15-year high of 4.50%. It said no further tightening would be needed if the economy slows, or even moves into a slight recession, as it expects.While inflation has cooled in recent months, other economic indicators are pointing to an economy that is picking up pace from a sluggish fourth quarter.Preliminary data last week showed that gross domestic product (GDP) rose by 0.3% month-over-month in February, building on a stronger-than-expected 0.5% gain in January. Employment data for March showed a seventh consecutive job gain. “The economy is showing renewed momentum, with more people working and seeing their incomes rise,” said James Orlando, a senior economist at TD Economics. “They are out spending again. This will carry through to higher economic growth.” That is welcome news for most, but not for Bank of Canada (BoC) Governor Tiff Macklem, as it could call into question his decision to announce a conditional rate pause in January.Macklem is seeking to rebuild public trust after facing criticism for acting too slowly to tame inflation, which spiked after pandemic restrictions were lifted. The central bank has admitted to having initially misjudged the price pressures.That effort could be complicated by Prime Minister Justin Trudeau’s recent budget, which has outlined billions of dollars in new spending.CONCERNED BUT HOPEFUL February’s surprisingly strong figures have led economists to revise up their GDP estimates, with the median forecast of six economists surveyed by Reuters pegging first-quarter growth at 2.5%, far higher than the BoC’s projection of 0.5%.”For the BoC, we still expect a hold,” Orlando said. “They will likely be concerned about the rebound in economic activity, but we think they are still hopeful of a deceleration over the remainder of 2023.”All 33 economists polled by Reuters agree that the BoC will hold its key overnight rate steady on Wednesday when it makes its next policy announcement. Money markets are betting that the central bank’s next move will be a cut.Investors reason that the full impact of higher borrowing costs has yet to be felt, and recent stress in the global banking system has fueled concern of a credit crunch, including in the United States. Canada sends 75% of its exports to its southern neighbor.”We see growth being driven largely by an easing of prior supply constraints … rather than a significant strengthening in domestic demand,” said Andrew Grantham, a senior economist at CIBC Capital Markets.”We suspect that the Bank of Canada will view the apparent strength in Q1 GDP similarly, and increase its estimate of potential growth.”Potential growth is the rate at which activity in the economy can increase without causing inflation, so a rise in the estimated level could reduce the need for a hawkish shift from the central bank.Economists say that rapid population growth as well as easing supply chain disruptions could add to Canada’s potential growth, which was last estimated by the BoC to be 2.25% on average over 2023 and 2024.       Canada’s economy faces headwinds from higher borrowing costs and financial stability concerns, while inflation has cooled more than in the United States, said Nathan Janzen, assistant chief economist at Royal Bank of Canada.    “So still good reasons on both sides for the BoC to stick with a wait-and-see approach for now,” Janzen said. More

(Reuters) – As First Republic Bank (NYSE:FRC)’s share price fell by double-digits in the aftermath of the collapse of Silicon Valley Bank last month, some people close to the San Francisco-based lender were worried short sellers were exacerbating its travails, according to a source familiar with the situation.Investors who wager shares in a company will fall were increasing bets on First Republic’s stock when it was already taking a beating, making it difficult for the bank to recover its value, according to the source. Short interest in First Republic indeed increased as turmoil in the banking sector intensified, although measures vary. The percent of shares borrowed — the basic mechanism of a short bet — was minimal to start the month but increased to between 7% and 37% by March 31, according to various data provider calculations, versus averages between 3% and 5% across all stocks. Two of the banks that shut down last month, Silicon Valley Bank (SVB) and Signature Bank (OTC:SBNY), showed a similar pattern: short interest increased as their stock started to fall, at varying degrees of intensity. Problems at U.S. regional banks grew last year, as rapidly rising interest rates slashed the value of some banks’ holdings in long-term assets such as home loans and government bonds. Some lenders were also challenged by exposure to cryptocurrency and technology companies. The underlying issues exploded last month when depositor flight spiraled out of control and regional lenders across the board saw their shares hit. How much short sellers contributed to the downward spiral reprises the debate about whether so-called shorts are market watchdogs or opportunistic investors who profit from others’ misery. In the case of the banking crisis, a review of data and interviews with short sellers and their critics show, the answer may be both.”The shorts in the months before the collapse were accurately warning the markets…that the bank (SVB) was being dangerously mismanaged,” Dennis Kelleher, President and CEO of Better Markets, a nonprofit industry group in Washington, DC, said in an email. “The problem is once that collapse happened, shorts with various motives started targeting other banks.”Some short sellers have been public about their negative views on banks but reject suggestions that they are to blame for the problems. Short-seller Jim Chanos wrote in a March 13 client letter seen by Reuters that investors had known about the underlying balance sheet problems that brought down SVB since last summer. But it was only when the bank, which his fund was short, “abruptly tried, and failed, to raise capital … that anyone cared.” First Republic and Chanos declined to comment. Signature and SVB did not respond to requests for comment. GRAPHIC: Don’t blame the shorts https://www.reuters.com/graphics/GLOBAL-BANKS/SHORTSELLERS/gdpzqnyagvw/chart.png CONTROVERSIAL PRACTICE Short selling is a controversial practice, blamed in the financial crisis of 2008 for adding to the pain; it was temporarily banned, albeit with little impact. Some high profile short sellers were later celebrated as making prophetic calls about the U.S. housing market. The crisis of confidence in U.S. regional banks started when shares of SVB plunged and depositors fled after it announced plans on March 8 to raise capital to fill a nearly $2 billion hole from the sale of securities. The Santa Clara, California-based lender was taken over by regulators on March 10, in turn dragging down the shares of other regional lenders. New York’s Signature failed on March 12, and First Republic lost more than 80% of its market value by mid-March.As the crisis accelerated, JPMorgan Chase & Co (NYSE:JPM) equity analysts wrote on March 17 that short-sellers were “working collectively to drive runs on banks,” and venture capitalist David Sacks asked on Twitter whether “scurrilous short sellers” had used social media to exacerbate depositor flight from SVB. JPMorgan and Sacks did not respond to requests for comment. Even so, interviews and public postings show at least some short sellers had placed bets against regional banks well before the crisis hit. These included: William C. Martin, who shorted SVB in January 2023; Nate Koppikar of Orso Partners, who shorted SVB in early 2021; Barry Norris of Argonaut Capital Partners, who shorted SVB in late 2022; John Hempton of Bronte Capital Management, who shorted Signature in late 2021; and Marc Cohodes, who shorted Silvergate Bank in November 2022, according to interviews with Reuters.Porter Collins, co-founder of hedge fund manager Seawolf Capital, said he saw how rising interest rates would likely hit banks and, in early 2022, shorted SVB, Signature, First Republic, Silvergate and Charles Schwab (NYSE:SCHW) Corp..”There were warning signs,” he said, “that were pretty easy to see for those who looked.”Schwab and Silvergate did not respond to requests for comment. SHORT POSITIONSSuch early short sellers, however, were in the small minority. Shorts represented only about 5% of SVB’s stock float as of March 1, according to data tracker S3 Partners, with First Republic at around 3% and Signature at 6%. That compares to an average of about 4.65% across all stocks, per S3. Data from S&P Global (NYSE:SPGI) Market Intelligence and ORTEX, who use different methodologies, have similar numbers showing SVB, First Republic and Signature with relatively low overall short levels before the crisis.Short positions increased over March, although the measures vary, per the three data providers. On First Republic, the percentage of shares on loan peaked at between 7% and 39% last month, while SVB peaked at between 11% and 19%, and Signature peaked between 6% and 11%.Regardless, short positions in most regional banks were nowhere near some highly shorted stocks like electric carmaker Tesla (NASDAQ:TSLA) Inc, which hit around 25% as recently as 2019, and GameStop Corp (NYSE:GME), which surged past 100% of shares in 2020, according to Refinitiv data.An exception was Silvergate, a cryptocurrency-focused lender, which for months faced an unusually high level of short interest compared to other banks – above 75% by the time it said it would wind down operations on March 8.S3’s Ihor Dusaniwsky said the overall increase in shorts on U.S. regional banks during March was an “extraordinarily small” part of overall sector trading; the declines were driven by regular stock holders selling their shares.”The shorts are not driving the stock price,” Dusaniwsky said. “People are saying that the tail is wagging the dog. It’s certainly not the case in most of these names.”Short-sellers scored regardless: overall short bets in U.S. regional banks gained $4.76 billion in March, up 35% on an average short interest of $13.4 billion, according to S3. GRAPHIC: Shorts score in US bank crisis https://www.reuters.com/graphics/GLOBAL-BANKS/SHORTSELLERS/jnvwyjmgevw/chart.png More

Technology is everywhere and always an unalloyed good. New technologies ultimately create better jobs and more broadly based prosperity. So goes the conventional economic wisdom. But what if it wasn’t true? What if technology had been used — in lieu of strong political and institutional restraints — to put more money in the hands of elites throughout history? That’s the starting point of Power and Progress, an upcoming book by MIT economists Daron Acemoglu and Simon Johnson, to be published next month. It explores several moments over the last millennium when technology led to the opposite of shared prosperity: agricultural improvements that created almost no benefits for peasants; advances in ship design that allowed the slave trade to grow; and industrial factories that took flexible craft work out of the home and put it under the control of managers who increased working hours and decreased pay. It also addresses more recent developments, such as automation used to micromanage labour — and the coming revolution in AI that may disrupt us all.These economists are hardly technophobes. It’s probably impossible to be one at MIT, a centre of American innovation. But the two academics take a different approach to the productivity gains of technology and how they get distributed compared with most of their peers. Neoclassical economic theory holds that technological progress always increases average wages. And even if it raises inequality, it ultimately lifts wages at the bottom of the income distribution. Acemoglu and Johnson refer to this idea as the “productivity bandwagon.” But the pair show that automation — perhaps the most important technological advance since the industrial era — isn’t about increasing labour productivity but rather replacing it. Automation doesn’t necessarily reduce wages if there are incentives or requirements (on the part of unions or government) that force the retraining of displaced workers and the creation of new jobs for them. But this isn’t always the case. If new jobs and tasks aren’t actively created, then automation can end up decreasing jobs and wages, even as it increases productivity and returns to capital. This is, of course, largely where we have been over the last several decades, as the economic pressures on managers to hoard capital and treat workers as a cost rather than an asset on the balance sheet have grown.Things didn’t always work that way. Consider the rise of electric power in the 19th century and the effect that this had on labour. Jobs for engineers and white collar managers increased, as they used the innovation to remake the shape of factories and create new and more efficient jobs for workers. This process continued for decades, helped along by New Deal legislation that encouraged collective bargaining and reduced corporate concentration (and thus political power), as well as by strong unions that made worker retraining part of the social compact. By the 1960s, the income share of the top 1 per cent of the population had fallen to 13 per cent, down from 22 per cent in the 1920s. Average wages grew as fast if not faster than productivity.From the 1970s onwards, that link started to break, in large part because of the decline of unions, shifts in antitrust policy, accounting changes that incentivised debt over productive capital expenditure in things like training, and a general dovetailing of technological disruption and outsourcing. All this meant that even as American workers were becoming more productive, they weren’t sharing in the fruits of that productivity growth. The result was the implementation of what the authors call “so-so automation,” such as worker-tracking software or call centre bots, which aren’t actually that much more productive than humans, if indeed they are at all (think about how long it takes software to solve a customer relations problem versus a human). Such “innovation” mainly just decreases costs for employers. We are now at a turning point in the story of technology. Even the titans of Silicon Valley — people like Elon Musk and Apple co-founder Steve Wozniak — are calling for a slowdown in the rollout of AI, so that its implications can be better studied. Google and Microsoft are telling us there’s nothing to worry about. All this reflects the power of persuasion by influential figures, something the authors explore in detail. Throughout history, major entrepreneurs in technological innovation, from Ferdinand de Lesseps (who was responsible for the Panama Canal building debacle) to the titans of so-called surveillance capitalism who pushed rules that allowed them to mine and profit from our personal data, have used power and influence to set the narrative around technology, which then takes on a life of its own.We cannot allow that to happen now. Technology has created shared prosperity only when appropriate democratic guardrails have been in place to make sure that it does so. AI poses threats to both democracy and to jobs across all income bands. The result may be quite dystopian. Unions and government alike must act to make sure that this latest ride on the productivity bandwagon doesn’t end in [email protected] More