Aurelia Butler

If you want to intimidate everyone, forget being reincarnated as the US bond market. Come back as the Federal Reserve instead. Some might argue that’s because the Fed is the US bond market right now. But it’s the fear that it’s not going to be for much longer that’s got investors scared out of their wits.The Federal Open Market Committee is set to publish its latest monetary policy decision later on today, at 2pm local time (or 7pm in London). That will be followed by a press conference with Committee chair and Fed head Jay Powell.There are plenty of other reasons investors have been on edge ahead of the vote — the recent market volatility isn’t all about the Fed. But the suspicion that the US’s central bank will announce a sudden stop to its asset purchases, currently running at least $40bn a month for Treasury securities and $20bn for mortgage-backed‑securities, has not exactly soothed tensions. A sudden stop would, of course, imply that the Fed would begin shrinking its balance sheet by selling those assets more quickly than expected too.Scary times for investors in the US and, indeed, beyond.The other main element of the Fed’s policy — tightening interest rates — is a matter of great import too. Few expect the Fed to raise rates before its next meeting in March, but some have begun betting that this first move will be a 50 basis point hike. Investors are on the lookout for a hint from Grandmaster Jay that the committee would prefer a more moderate a 25 basis point rise instead. By historical standards, neither magnitude is that unusual. But these are not normal times. We don’t think there’s that much risk of a hawkish surprise at this meeting. Some argue that if you look in the rear-view mirror and observe the US economy’s performance in 2021, then the Fed should have turned off the taps quicker. That’s probably right. The recent economic data, however, has been poor. Retail sales in the US were worse than expected. While spending may pick up as the Omicron wave passes, US consumers will feel the pinch from fiscal retrenchment this year. While it’s true that this follows a period where government spending was at war economy levels, it may be another factor that stops the Fed wanting to do anything other than expected. Today, at least. Later this year, however, we do think that the Fed could end up having to tighten more than officials are currently letting on. Investors might fear the Fed, but increasingly Powell and his boss Joe Biden look a lot more concerned about public opprobrium over inflation that, at 7 per cent, is at a multi-decade high and outstripping wage growth. We still think that a wage-price spiral is unlikely and that inflation will abate once supply chain pressures ease and demand for consumer goods falls. We suspect there will be a lot more companies in the position of Peloton, with their warehouses stacked full of inventory, as the year rolls on. Never mind inflation, that build-up of inventories could even prompt prices of consumer durables to fall. But — and it’s a big but — thinking that price pressure might abate at some point doesn’t lessen the pain of poorer Americans, who are having to deal with the consequences of a cost of living crisis in the here and now. While the Fed might not be able to do much about that in the short-term, Powell does have to show that he is aware that people are suffering and deliver on the promise that, if prices keep on going up, policymakers will prioritise doing what they can to aid Americans facing a cost of living crisis over shoring up asset prices. The danger for investors is that, if we are wrong about inflation ebbing and right about Powell prioritising people over markets, policymakers will have to raise rates faster and higher than almost anyone is positioned for. It is decades since investors have had to deal with a Fed actively combating consumer price inflation.The Greenspan put — 35 this year — is emblematic of an era in which the lack of any real inflationary headwinds enabled monetary policymakers to provide the sort of cheap and plentiful supplies of credit that has kept asset prices high. Since 2008, policymakers could (and indeed did) justify monetary easing by saying that it was not only good for Wall Street, but Main Street too, helping to spur demand and job creation. If high consumer price inflation remains a feature of the US economy through the second half of this year, the interests of markets and the real economy will not be so closely aligned. We’re at a loss to how to position for a shift this momentous. If you’ve any suggestions for what to buy, stick them below. (Not bitcoin please. Or gold.) More

TOKYO (Reuters) – Two years after Japan locked down its borders to block the coronavirus, some 150,000 foreign students still aren’t able to enter the country, left in limbo by a policy that has disrupted lives and caused headaches for universities and businesses. The absence of the foreign students and researchers is being felt from big laboratories to small, private universities, highlighting the importance of overseas talent – and their tuition fees – as Japan grapples with a shrinking population.While the policy to stop the virus has proved popular for Prime Minister Fumio Kishida, some business leaders have warned about the economic impact, particularly as the labour market is tight. What is less clear is the longer-term hit on Japan’s “soft power” – in particular its academic reputation around the world.At research institute Riken, geneticist Piero Carninci says he sees the impact first-hand. Japan has a shortage of bioinformatic researchers critical for genomic studies but he has not been able to fill the gap with foreign talent over the past two years.”My lab, for sure, is slowing down and our centre for this type of analysis. We are struggling,” Carninci, a deputy director at Riken, whose prize-winning research in genetics has been cited in 60,000 papers.”Internationalisation in science is definitely critical, because you don’t have all the expertise in the same country.”Many countries sealed borders to keep the coronavirus at bay.The United States saw international student enrolment drop 43% in the fall of 2020 from the previous year, while some 80,000 immigrant worker visas expired unused last year.But Japan stands out with the strictest borders among Group of Seven countries, effectively banning all new non-residents since March 2020. Only China, with its zero COVID-19 target, has been more closed off among major economies.The stakes are high. A government-affiliated study showed Japan last year fell to 10th place globally in publication of noteworthy scientific papers, just behind India. Twenty years ago, it was number four.’OWN-GOAL’Nearly half of Japan’s four-year private universities failed to fill all places for first-year students in 2021, up 15 percentage points from the previous year, according to an official at the Promotion and Mutual Aid Corporation for Private Schools of Japan, which represents private educators.While the biggest reason was a drop-off in the number of Japanese students, the decline in foreign students was also felt, the official said.More than 100 academics and international relations experts signed a letter asking Kishida to reopen borders last week. People shut out have protested outside Japanese embassies and an online petition calling for students and workers to be let in has more than 33,000 signatures. The government said last week it would make an exception and allow 87 state-sponsored students in.”It’s a giant own-goal for Japan after decades of masterful use of soft power,” said Wesley Cheek, a sociologist who recently left Japan for a research post in Britain.”People like me, who’d usually be applying for grants to continue our research in Japan, just have to take a pass for the foreseeable future.”International students can work part-time in Japan and have traditionally provided a pool of what Japanese refer to as “odd-job” workers in places like convenience stores, in a country long wary of letting foreign workers in.Even before the coronavirus, there were not enough foreign students to meet labour demand, said Yohei Shibasaki, an international hiring adviser to service and tech companies He estimated there were about 170,000 students from trade and language schools in Japan before the pandemic, most of whom worked part time.Hiroshi Mikitani, chief executive of e-commerce group Rakuten, which hires foreign engineers, has said the curbs should be reconsidered as they were not practically effective and were “only a minus for the economy”.The plight of international students, some dreaming for years of study, can be heart-wrenching.On social media and in interviews, they described paying tuition for classes they took online in the middle of the night, losing scholarships, and months of stress waiting for change. Some have exhausted savings. Some have given up and gone elsewhere.Japan is no longer the main destination for study and research in East Asia, with more students now going to South Korea, said Davide Rossi, who runs an agency promoting study abroad.Sujin Song, 20, a science major from South Korea, has lost her scholarship but tries to do lab work for her classes online. She was blocked again from entering Japan in November.”I really liked Japan but now I feel betrayed,” Song said. More

OTTAWA (Reuters) – Odds are split on whether or not the Bank of Canada will hike rates for the first time since 2018 on Wednesday, with Omicron’s wrath seen potentially delaying the start of an aggressive tightening campaign geared at taming red-hot inflation.Canada’s central bank will make its first major policy decision of 2022 at a time when consumer prices are rising at their fastest clip in 30 years and a harsh Omicron-fueled wave of coronavirus infections is just beginning to ebb.Money markets see a roughly 65% chance the Bank will boost the overnight rate to 0.5% from the current record low 0.25%. Analysts surveyed by Reuters are less certain, with 77% seeing the central bank holding until at least March. [BOCWATCH]”It’s a toss up really,” said Stephen Brown, senior Canada economist at Capital Economics. “I mean, (the BoC) was clear it was getting more concerned about inflation. But in terms of the type of hints that a central bank might normally send when it’s about to hike, we haven’t quite had them.”Regardless of when the first increase comes, it is nearly certain to be the first of many this year. Brown sees four hikes in 2022, up to 1.25%. Money markets, meanwhile, are pricing in six to 1.75% to quell spiraling price gains on everything from housing to new appliances. [BOCWATCH]Canada’s inflation rate hit 4.8% in December, the highest since September 1991 and the ninth month in a row above the Bank of Canada’s 1-3% control range. Inflation has not been this high for this long since the central bank set its 2% target in 1991.The BoC renewed that target in December. Two days later, Governor Tiff Macklem said the slack in Canada’s economy was “substantially diminished” and the Bank was “not comfortable” with the current path of inflation.That was a clear signal a tightening was imminent, said Derek Holt, head of capital markets economics at Scotiabank, further bolstered by new survey data showing inflation expectations continue to mount for consumers and businesses.”At this point in the cycle, the risks to choosing the wrong fork in the road are exceptionally high,” said Holt, who expects multiple hikes this year to get the benchmark to 2%. “Tighten too much and the curve inverts and the economy tanks. Don’t tighten enough and the economy eventually tanks on rising imbalances anyway given the dangerous combination of runaway inflation and house prices,” he said.But the potential wrinkle is the Omicron variant. Canada has seen a huge surge in daily cases, outstripping testing capacity and forcing provinces to reimpose restrictions, which is set to weigh on January job data.Still, for some Bank watchers the risk is overblown.”Omicron is the obvious get out of jail free card for monetary policymakers,” said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.”Near-term growth risks don’t offset the need to combat rising inflationary pressures, especially if they’re accompanied with downside risks to potential growth.”The U.S. Federal Reserve also meets on Wednesday and investors expect it to signal a first rate hike in March. More

WASHINGTON (Reuters) – U.S. President Joe Biden has threatened to impose devastating sanctions on Russia if leader Vladimir Putin invades Ukraine, but some big companies and business groups are pushing the White House and lawmakers to be cautious. A trade group representing Chevron (NYSE:CVX), General Electric (NYSE:GE) and other big U.S. corporations that do business in Russia is asking the White House to consider allowing companies to fulfill commitments and to weigh exempting products as it crafts any sanctions. At the same time, big energy companies are pushing Congress to limit their scope and time frame. The Biden administration and Congress need to “get the details right in case they must follow through on the threat of sanctions,” Jake Colvin, president of The National Foreign Trade Council, told Reuters Monday. “Those details should include consideration of safe harbors or wind-down periods to enable companies to fulfill existing contracts and obligations, as well as carve-outs for lifesaving medicines and other humanitarian considerations consistent with longstanding U.S. policy,” Colvin said. Energy companies have also reached out directly to U.S. lawmakers to press for a “cool down” or “wind down” period so their assets are not seized if they are unable to fulfill business agreements in Russia, a congressional aide told Reuters. The American Petroleum Institute, the largest U.S. lobbying organization for oil and gas drillers, has discussed sanctions on Russia with congressional offices. “Sanctions should be as targeted as possible in order to limit potential harm to the competitiveness of U.S. companies,” an API spokesperson said. Export sanctions are typically phased in, giving companies time to wind down their existing business, or ensure delivery arrivals, said William Reinsch, a former senior U.S. Commerce Department official. But in this case, the sanctions are likely to be applied suddenly, in the middle of a crisis, making a “wind down” period more difficult to secure, he said.The U.S. Treasury in the past has provided some mitigation measures on financial sanctions, such as granting licenses https://www.reuters.com/world/asia-pacific/us-formalizes-guidance-allowing-personal-remittances-flow-afghanistan-2021-12-10 protecting senders of humanitarian aid and personal remittance flows to Afghanistan despite sanctions against the ruling Taliban.A U.S. Treasury official declined to comment on any such measures regarding potential sanctions against Russia, but added: “We are prepared to deliver severe costs to the Russian economy while minimizing unwanted spillover.” CRIMEA SANCTIONS LEGACY Oil companies felt the aftermath of the U.S. sanctions on some of Russia’s more expensive drilling operations for years after Putin invaded Crimea in 2014. The measures forced Exxon Mobil (NYSE:XOM) out of Russia’s Arctic and ended the company’s collaboration with Russian state oil company Rosneft, with which it signed a $3.2 billion deal in 2011 to develop the region. Exxon’s argued the sanctions, which slowed work on a major discovery in the Kara Sea above the Arctic Circle, unfairly penalized U.S. companies while allowing foreign companies to operate in the country, one of the world’s largest oil producers. The 2014 sanctions hit the easiest targets in Russia’s high-tech exploration oil and gas projects in the Arctic, Siberian shale and deep sea. New sanctions could be broader, but also tricky to pull off without damage to Western companies. One possible “safe harbor” measure could protect companies from legal liability for sanctions violations if certain conditions were met, said Reinsch, such as showing that a shipment went to the sanctioned country without permission, perhaps from a third country. Exxon did not immediately respond to a request for comment about any lobbying it is doing on the potential Russia sanctions.A spokesman for the U.S. Chamber of Commerce, the largest lobbying group for American business, declined to comment on the topic. U.S. goods and services trade with Russia totaled an estimated $34.9 billion in 2019, according to the U.S. Trade Representative’s office. More

The writer is a philanthropist, investor and economistThe stock market has been jolted from its record highs in recent weeks, as investors who rely on low interest rates to “justify” steep valuations have been confronted with the prospect of tighter monetary policy. This might be a prelude to more turmoil. The US Federal Reserve appears to be walking a tightrope, with the potential for a policy error at each side.On one side, US consumer price inflation reached an annual rate of 7.1 per cent in December, and the central bank appears behind the curve to contain it as it continues to expand its balance sheet, keeping its benchmark fed funds rate near zero. On the other side, the inflation spike has emerged at the same time as supply disruptions, a gradual narrowing of pandemic-related fiscal deficits and indications of weaker business activity. This leaves the Fed at risk of tightening policy into a slowing economy.Yet these risks may be minor compared with the policy error the Fed has already made, by abandoning a systematic policy framework for more than a decade, in favour of a purely discretionary one. “Systematic,” in this context, means a framework where policy tools such as the level of the fed funds rate maintain a reasonably stable and predictable relationship with observable economic data such as inflation, employment, and the “output gap” between real gross domestic product and its estimated full-employment potential. Systematic policy allows individuals and financial markets to anticipate the general stance of monetary policy based on observable data. In contrast, purely discretionary policy is like inconsistent parenting; having set no boundaries, any failure to appease is met with wails of surprise, crisis and tantrum.In 1993, Stanford economist John Taylor proposed a systematic framework for assessing what the fed funds rate should be based on the level of inflation and the output gap. The Taylor Rule and related guidelines mirror the actual fed funds rate reasonably well from 1950 until 2003. The similarity weakens after 2003, and particularly after 2009 owing to shifts in the Fed’s monetary policy. Yet the deviation of the actual fed funds rate from systematic guidelines has little beneficial impact on subsequent economic outcomes. This does not imply that monetary policy is irrelevant. Rather, the benefit of monetary policy mirrors the extent to which it systematically responds to non-monetary variables.To describe a small change in the fed funds rate as a grave policy error vastly overestimates the correlation between monetary policy and economic outcomes. Information about the stance of monetary policy offers surprisingly little improvement or meaningful impact on forecasts for GDP growth, employment growth and inflation. Likewise, the relationship between unemployment and general price inflation better resembles a scatter of birdshot than a well-defined “curve” or a manageable policy framework. Ultimately, the Fed’s central policy error may have little to do with the speed at which it tapers its asset purchases, or the timing of the next few rate increases. Instead, the critical policy error may prove to be the consequences of discretionary policy on the financial markets. The Fed has encouraged a decade of yield-seeking speculation, as investors try to avoid being among the holders of $6tn in zero-interest hot potatoes. By relentlessly depriving investors of risk-free return, the Fed has spawned an all-asset speculative bubble that may now leave investors with little but return-free risk. Valuations still stand near record extremes.

It is true that low interest rates encourage elevated stock market valuations. But it is less appreciated that once valuations are elevated, low interest rates do nothing to mitigate the poor long-term market returns that typically follow. In 1873, the economist and journalist Walter Bagehot wrote of savers’ aversion to low rates: “John Bull can stand many things, but he cannot stand interest rates of 2 per cent”. Forgetting this, in 2003, the Fed sent investors on a yield-seeking quest for alternatives to short-term interest rates of 1 per cent. Investors found that alternative in mortgage securities, with ultimately devastating consequences.The Fed has now encouraged an even broader and more extended speculative episode. It can be prolonged only by making its consequences worse. The way forward is to embark on a well-announced return to systematic policy, never forgetting to ask whether the weak effects of monetary discretion on real economic outcomes are worth the risk of malinvestment and speculative distortion.  More

SHENZHEN, China (Reuters) – China’s Realme will enter Europe’s high-end handset market next month with its priciest ever device, its CEO told Reuters, as it looks to expand beyond its budget offerings and sell 50% more smartphones globally this year.The Shenzhen-based company is among several Chinese handset firms that have been making aggressive moves to seize global market share from Huawei Technologies, after stepped-up U.S. sanctions hobbled the former top smartphone maker’s supply chains and forced it to retreat. Realme plans to start selling its premium GT 2 Pro phone across Europe in February for 700-800 euros ($792-$905), founder and CEO Sky Li said. This is roughly double the $349 suggested price of the GT Master Edition it currently sells through Amazon (NASDAQ:AMZN) and in line with the prices of other high-end phones from market leaders Apple (NASDAQ:AAPL) and Samsung (KS:005930). “We think it’s a very important, market, and a big market for high-end phones,” Li said.With the pandemic affecting economic conditions, demand for smartphones is sluggish and consumers are waiting longer to upgrade, but as the world’s fastest growing smartphone company, Realme can buck that trend, Li added.Counterpoint Research estimates Europe’s smartphone market generated revenues of $80.65 billion in the first 11 months of 2021, of which high-end devices accounted for $55.56 billion.”Almost all of the growth is driven by the high-end, which can be attributed mainly to the successful premium models of Apple and Samsung,” Counterpoint senior analyst Yang Wang said.Apple, whose prices for its iPhone 13 start at around $850, was Europe’s best-selling manufacturer last quarter, followed by Samsung and Xiaomi (OTC:XIACF), whose phones are priced at around $900 and $700 respectively, according to Counterpoint.Data from consultancy IDC shows the European market was comparable to the United States in the first three quarters of 2021 in terms of smartphone revenues, but lagged behind China.’NO DISTRACTIONS’Spun off from fellow Chinese smartphone maker Oppo in 2018, Realme was the world’s sixth-biggest smartphone seller as of end-September, according to Counterpoint, with strong sales in India, Southeast Asia and Eastern Europe. Realme, Oppo and other rivals Vivo and Oneplus trace their origins back to BBK Electronics, a Shenzhen-based conglomerate.Li said he expects the G2 Pro phone to appeal to European customers because it is one of the first phones to launch with Qualcomm (NASDAQ:QCOM)’s new flagship Snapdragon 8gen1 processor, which promises higher speed and power efficiency.Realme sold 60 million handsets in 2021 globally and aims to sell 90 million this year and over 100 million in 2023, Li said. The company, like its peers, has been hit by semiconductor shortages over the last year, but Li said the constraints could ease by the second half of 2022.While peers including Oppo, Vivo, Xiaomi are making forays into processors and electric cars, Realme will stay focused on phones, “with no other thoughts or distractions”, Li said.”It’s not easy to survive in an industry so full of experts, so we mustn’t do things beyond our ability,” he said.($1 = 0.8837 euros) More