Raphael Stevens

When prices began to rise unusually quickly two years ago, one group was fastest to react: emerging-market central bankers. They realised inflation had arrived for the long haul well before their peers in rich countries, and kept raising interest rates as prices soared. In policymaking environments as difficult as Brazil and Russia officials have resisted pressure from politicians to cut rates. This follows two decades in which emerging-market central bankers pulled off the impressive feat of bringing down inflation in places where it had seemed intractable. The whole period has been a triumph not just for the officials involved, but for the economists who insisted on the need for independent central banks in emerging economies—and for them to focus on keeping prices stable, just like policymakers in rich countries.Yet even as the inflation monster remains untamed, emerging-market central banks are engaging in experiments that put this progress at risk. Some of the new measures are in response to changes beyond their control, such as Vladimir Putin’s invasion of Ukraine. Others are attempts to overcome painfully familiar problems, like currency depreciation. All threaten to undermine recent advances, which are ultimately based on central-bank credibility. Over the past few decades, the better policymakers managed to anchor inflation, the more their targets were believed and the more prices were constrained. In 1995 median inflation in emerging economies was 10%; by 2017 it had fallen to 3%. This was the pinnacle of a slow, miraculous transformation. The most expensive recent experiments are those which seek to prevent currencies falling in value. Central bankers once used to make their currencies more attractive by ratcheting up interest rates and selling off foreign-exchange reserves. They are now less keen on raising rates to protect exchange rates, preferring to do so only to tackle inflation, and some lack reserves after sales at the start of the covid-19 pandemic. Thus officials are trying new ways to seduce depositors into keeping funds in local currencies, rather than dollars. At the end of 2021, during a months-long collapse in the lira, Turkey’s central bank offered to compensate anyone still willing to deposit the currency for however much they ended up losing against the dollar. Shortly before Sri Lanka’s government defaulted in April, it offered a similar guarantee to citizens overseas. In October Hungary’s central bank opened one-day windows in which depositors could earn bumper interest rates. The problem is not that these measures are ineffective. By mid-2022 the lira had stabilised even though Turkish interest rates stayed ultra-low. But by the end of the year, the Turkish government, which covers the central bank’s expenses, had to find an extra 92bn lira ($5bn, or 0.5% of gdp) to cover the cost of the deposit scheme. Russia’s central bank is another enthusiastic experimenter. It had stocked up on gold and currencies from China and other friendly countries, which helped when sanctions cut off $300bn in reserves held by banks in America and Europe. Early in the war, officials also steadied the ship by doubling interest rates, helping to calm the rouble. Since then, however, things have got harder. As the country has run bigger than expected fiscal deficits, an obscure budget rule has forced the central bank to buy back lost reserves with roubles. This has pushed policymakers to experiment with measures that make Russia uncomfortably reliant on China. When officials replenish reserves, they will do so by buying a lot more yuan, with plans for 60% of the country’s total cushion to be issued by Beijing, up from less than 20% before the war. Work on a digital currency has been accelerated; a pilot is scheduled for April. It will be carried out with Chinese banks. Other experiments involve playing around with central banks’ balance-sheets. The treasuries of advanced economies rarely run budgets on a hand-to-mouth basis, since they are equipped with plenty of capital and have the option of issuing more debt. By contrast, emerging-market governments, such as those in India and the United Arab Emirates, increasingly plug gaps by dipping into a “ways-and-means” account at the central bank. This is a risky move. If tax revenues do not come in above expectations, to even out the gap, the government ends up in an overdraft. As long as the overdraft is small, and interest rates high enough to encourage politicians to borrow elsewhere when possible, it is hard to go too wrong. But in recent years governments have used these accounts—which are counted as borrowing by the imf and World Bank, though not by the countries involved—to get around debt limits set by domestic lawmakers. Nigeria’s overdraft is now roughly equal to its entire stack of official domestic debt.Boom!Central bankers in countries including Ghana and Nigeria have come up with what at first glance appears a clever fix: converting the overdrafts into bonds, which have lower interest rates and are easier to restructure. There is, however, a catch. Emptying the accounts by issuing bonds allows governments to build up their overdrafts once again, in the process relying on central banks for yet another lifeline. Ultimately, this is tantamount to financing government borrowing through the back-door—something that tends to end up with markets pricing in runaway inflation. There are already plenty of threats to emerging-market central banks. Chief among them is the fact it will be harder to get policy right as inflation falls than it was while it rose. As emerging-market central bankers quickly spotted, global shocks sent prices soaring everywhere. But economies cool in very different ways, based on the reactions of consumers, industries and politicians. Central bankers in emerging economies lack the granular data at the disposal of those in advanced economies to track these changes. They would be well-advised to spend their time scrutinising the limited information available to them rather than dreaming up innovations that may undermine hard-won credibility. ■Read more from Free Exchange, our column on economics:The case against Google hinges on an antitrust “mistake” (Mar 2nd)What would the perfect climate-change lender look like? (Feb 23rd)The case for globalisation optimism (Feb 16th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Watching Jerome Powell testify before Congress on March 7th brought on an irrepressible sense of déjà vu. “The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” warned the Federal Reserve’s chairman. Recent economic data suggest that “the ultimate level of interest rates is likely to be higher than previously anticipated.” It is a message that Mr Powell and his colleagues have been repeating, in various forms, since the Fed started raising rates a year ago. As so many times before, markets that had lulled themselves into a sense of complacency took fright and sold off.Investors are serially reluctant to take Mr Powell at his word because its implications are unpleasant for them. An ideal portfolio would contain a mix of asset classes that each prospers in different economic scenarios. But all the traditional classes—cash, bonds and stocks—do badly when inflation is high and rates are rising. Inflation erodes the value of both cash and the coupons paid by fixed-rate bonds. Rising rates push bond prices down to align their yields with those prevailing in the market, and knock share prices by making future earnings less valuable today.Elroy Dimson, Paul Marsh and Mike Staunton, three academics, demonstrate this in Credit Suisse’s Global Investment Returns Yearbook. They show that globally, between 1900 and 2022, both stocks and bonds beat inflation handily, posting annualised real returns of 5% and 1.7% respectively. But during years of high inflation, both performed poorly. On average, real bond returns flipped from positive to negative when inflation rose much above 4%. Stocks did the same at around 7.5%. In “stagflation” years, when high inflation coincided with low growth, things got much worse. Shares lost 4.7%, and bonds 9%. In other words, neither bonds nor stocks are short-term hedges against inflation, even if both outrun it in the long term. But this dismal conclusion is paired with a brighter one. Commodities, as a frequent source of inflation, offer an effective hedge. What is more, commodity futures—contracts offering exposure without requiring the purchase of actual barrels of oil or bushels of wheat—look like a diversified investor’s dream asset.To see why, start with their excess return over cash-like Treasury bills. In the long run, the Yearbook’s authors put this at an annualised 6.5% for dollar investors, beating even American stocks’ 5.9%. Better still, this return is achieved while being little correlated with shares, and moving inversely with bonds. Commodity futures can be mixed with other assets for a portfolio with a much better trade-off between risk and return. At historical rates, a portfolio that is evenly split between stocks and commodity futures would have a better return than a stock-only portfolio, and three-quarters of the volatility. Best of all for an investor fearing high inflation and low growth, commodity futures had an average excess return of 10% in stagflationary years.All this is appealing to the high-octane end of finance. aqr Capital Management, a hedge fund known for its mathematical sophistication, published a paper last April entitled: “Building a better commodities portfolio”. Citadel, an investment firm that last year broke the record for the largest annual gain in dollar terms, has been building up its commodities arm for years. This part of the business is reported to have made a hefty chunk of the $16bn in net profits Citadel made for clients.Yet commodity futures remain an esoteric asset class rather than a portfolio staple. Like any investment, they do not offer guaranteed returns, as history demonstrates. Gary Gorton and Geert Rouwenhorst, two academics, brought commodities’ merits to widespread attention with a paper published in 2006. That was just in time for a deep, lengthy crash, beginning in February 2008. From this point, a broad index of commodity prices lost 42% in real terms and did not regain its peak until September 2021. Investors were scared off.Another reason is that the market is tiny. Out of total global investible assets worth $230trn, commodity futures make up less than $500bn, or 0.2%. Physical supply, meanwhile, is constrained. Were the world’s biggest investors to plough capital into the futures market, they would be liable to distort prices enough to render the exercise futile. But for smaller outfits—and fast-money ones like Citadel—commodity futures offer a lot of advantages. That is true even if Mr Powell keeps up the bad news.Read more from Buttonwood, our columnist on financial markets:The anti-ESG industry is taking investors for a ride (Mar 2nd)Despite the bullish talk, Wall Street has China reservations (Feb 23rd)Investors expect the economy to avoid recession (Feb 15th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Senior staff at China’s largest investment banks have been flying economy, not first class, in recent months. They are cutting back on entertaining clients and drinking less, if at all, at banquets. A banker says he has been warning junior colleagues to avoid ostentatious displays of wealth. It is, he reports, for their own good. “Common prosperity”, a campaign for a more equal China, which was launched in 2021 by Xi Jinping, is coming to investment banking. A recent commentary by the official corruption watchdog, published on February 23rd, orders financiers to smash “financial elitism, worship of wealth and reverence for the West”. Meanwhile, the disappearance of Bao Fan, a high-profile banker, reportedly to take part in an investigation, has put the industry on edge.Just a few years ago a steady stream of Chinese-born, Wall Street-trained bankers was flowing from London and New York to Beijing, Hong Kong and Shanghai. The growing cohort was swapping mostly mid-level (but sometimes senior) jobs at elite Western financial firms for better-paid positions at Chinese investment banks. The trend was about more than just pay, however. Many bankers wanted to return to a richer, more vibrant homeland after years spent overseas. Foreign financial firms were, and still are, expanding their local offices. Nightlife, restaurants and luxury-car dealerships exerted a pull all of their own. In short, Chinese cities were ready to cater to a class of young bankers with cash to burn.Now the party is winding down. Even before the focus on Chinese finance’s culture, the industry had been subject to a years-long corruption crackdown targeting bosses. The country’s zero-covid policy stopped high-flying bankers travelling abroad for several years—forcing those who had recently returned to consider whether their future really did lie in China.And it is has become clear that the Communist Party has taken an extremely grim view of finance. The watchdog’s critical commentary instructs bankers to cast out any notions they may have of “exceptionalism, distinctiveness and superiority”. At times the document talks about finance as if it were a virus with “hidden variants” that must be battled in an effort which “one cannot grow too tired to fight”.The detention of Mr Bao, founder of China Renaissance, a boutique investment bank focused on technology, has also shocked local executives. His company has been unable to reach him since he disappeared in mid-February, but has said it has been informed he is co-operating with an investigation. According to the Wall Street Journal, Mr Bao has been detained by the same corruption watchdog that published the recent attack on the financial industry. The Communist Party has already claimed success in avoiding the rise of a “crypto-bro” culture, which it did by banning cryptocurrency trading. Some of the talent that would otherwise have gone into developing related products has been channelled elsewhere. Perhaps Mr Xi thinks he can do the same to a generation of West-loving, hedonistic bankers. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

When Li Keqiang, China’s prime minister, gave his final speech at the National People’s Congress on March 5th, it was already clear who would succeed him. But a successor has yet to be found for the “Li Keqiang index”. This unofficial proxy for China’s economic growth was inspired by a leaked conversation between Mr Li, when he was party secretary for the province of Liaoning, and an American diplomat. Mr Li confessed that the province’s gdp figures were “unreliable”. Instead, he focused on electricity consumption, rail cargo and bank lending. Taking our cue from Mr Li, this newspaper thought it would be fun to see what the three indicators, bundled into a single index, revealed about China’s economy at a national level.The index has had a good run since its introduction in 2010. A version has its own “ticker” on Bloomberg. It inspired a similar index for India. Teams of researchers at the Federal Reserve Bank of San Francisco and separately at the New York Fed have tested the usefulness of Mr Li’s preferred indicators. A paper published in 2017 by Hunter Clark and Maxim Pinkovskiy of the New York Fed, together with Xavier Sala-i-Martin of Columbia University, calculated that the best combination of the three indicators gave roughly 60% weight to loans, 30% to electricity and 10% to rail cargo. In a subsequent paper, Mr Clark, Mr Pinkovskiy and Jeff Dawson of the New York Fed suggested replacing lending with m2, a measure of the money supply, because bank-credit figures failed to capture a government crackdown on shadow lending.Critics argue that the declining energy intensity of China’s economy undermines the index. But that is not quite true. As long as electricity follows an identifiable trend, deviations from the trend are revealing about economic upturns and downturns. What really broke the Li Keqiang index was the covid-19 pandemic. The decline in retail sales, air travel and the property market was far more dramatic than the slowdown in industry, electricity use or rail freight. Meanwhile, m2 grew quickly at the end of last year as people hoarded cash. What are the alternatives? Those sceptical of China’s data yearn to escape its statistical system altogether. Perhaps the brightness of lights at night, recorded by satellites, could offer a truly independent guide to growth? But this measure has its own problems. The newer satellites do not have a long track record and the older ones struggled to distinguish between the bright and very bright lights of cities. Coverage is also patchy from month to month.Mr Pinkovskiy and his co-authors have instead used night-time lights not as a direct measure of growth, but as a way to adjudicate between other potential proxies. If the contenders are good at tracking night-time lights, they should be good at tracking growth, too. The authors’ investigations suggest that in addition to lending (or m2), electricity and (to a lesser degree) rail freight, retail sales are a useful indicator. Adding them would certainly have made a difference during the pandemic.No diplomatic cable has yet come to light revealing the indicators favoured by China’s probable new prime minister, Li Qiang. He was previously party chief of Shanghai, where services account for about three-quarters of gdp. The equivalent figure in rust-belt Liaoning was only 40% when Li Keqiang first revealed the ingredients of the index named after him. Safe to say, then, any “Li Qiang index” will not neglect the services sector of China’s vastly altered economy. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Jamie Fiore Higgins’ book is a condensed and anonymized retelling of her 18-year career at Goldman Sachs.
She alleges she experienced demeaning and sexist comments from colleagues, and was once physically assaulted.
A Goldman Sachs spokesperson said the company “strongly disagrees” with the characterization of its culture described in the book, and what it called “anonymized allegations.”

Jamie Fiore Higgins interviewed on TV on Wednesday, August 31, 2022. Her book, Bully Market, exposed shocking behavior by some Goldman Sachs employees.
Nbc | Nbcuniversal | Getty Images

Jamie Fiore Higgins didn’t leave her job at Goldman Sachs planning to reveal the most personal, demeaning and, at times, outright scary moments from her 18 years at the investment bank.
But after resigning in 2016, having risen through the ranks to become a managing director — the second-highest role behind partner — conversations with people from outside of that world made her realize how shocking some of the things she’d experienced were.

And so in the book “Bully Market: My Story of Money and Misogyny at Goldman Sachs,” published last summer, she chronicled them.
Some anecdotes, from her early days in the late 1990s but also later, were sexist comments and inappropriate actions she characterizes as the “white noise of Wall Street.” She says a colleague created a spreadsheet ranking the body parts of female recruits. She recalls being told she had only been promoted “because of [her] vagina,” and a series of junior male colleagues making clear they would not respect her authority.
She also says she witnessed sex and drug-taking in the office, and work socials being held in strip clubs (she notes at the start of the book that some of the people featured in it, who are all given pseudonyms, are composites of various people she knew and the timing of some events has been compressed).
A Goldman Sachs spokesperson said the company “strongly disagrees” with the characterization of its culture described in the book, and what it called “anonymized allegations.”
“Had Ms. Higgins raised these allegations with our Human Resources department at the time we would have investigated them thoroughly and addressed them seriously,” the spokesperson told CNBC. CNBC could not independently verify any of the accounts made in the book.

Fiore Higgins also says that, despite the company offering rooms for breastfeeding, she was once told that using them would hold back her career. And that when she did use them after having a child, colleagues made “mooing” noises at her, performed crude gestures, and left a stuffed cow on her desk.
In another story, she recounts removing a colleague (who was having an affair with his client) from an account. She says he responded by pinning her against a wall and shouting into her face, spraying her with spit as he threatened her.

The response

“I received hundreds and hundreds of messages from people, even now six months out, every day I get one or two saying thank you for telling this story, there’s so much of what you have experienced that resonates with me,” she told CNBC.
Fiore Higgins is also up front about the fact that she was there for so many years, in a senior role reached by far fewer women than men, writing that she was “tolerating and perpetuating harassment and abuse” and being “complicit in a broken system.”
“For those 18 years, I cared more about Goldman Sachs than I did my husband, my kids, my parents,” she told CNBC.
Staying for so long despite being pushed near breaking point multiple times came down to a variety of factors, she said. Contributing to her working-class family’s finances, and making her immigrant parents, who had faced their own struggles and placed pressure on her to succeed, proud.
In the book, when she first tells them about her six-figure salary in their New Jersey living room, her grandma drops her knitting needles in shock. Within a few years Fiore Higgins is on a million-dollar salary (though this, she says, was just one dollar more than a man working below her was earning at the time).
On top of that was the dangling carrot of a mammoth bonus, common across the financial industry.
Then there was the fear of recrimination; the normalization in the office of things that would appal an outsider; and addiction to the prestige of being “Jamie from Goldman.”
“What I realized that Goldman was so good at was really making you feel you were nothing without them, nothing without their name, nothing without their money,” she said.

Going against the family

A big part of what eventually pushed her to leave, using her meticulously-compiled “spreadsheet of freedom,” was when she claims she did report an incident. She reported to HR a colleague she had witnessed racially and homophobically abusing a bartender.
“Months later my review tanks,” she told CNBC. “I knew that they were going to make me pay for speaking out of turn, going against the family.”
A Goldman Sachs spokesperson told CNBC it has a zero tolerance policy for both discrimination and recriminations against employees for reporting incidents, and that any HR report is investigated thoroughly.
Fiore Higgins’ account represents one person’s experiences over a set period of time. But she notes others have spoken up; it is just that it remains rare, and “taboo,” in her words, to go into such detail.
Last November, it was reported that Goldman Sachs had paid more than $12 million to a former female partner to settle claims of senior executives creating a hostile environment for women. Top Goldman lawyer Kathy Ruemmler said in a statement to CNBC at the time that the firm disputed the original Bloomberg article.
The bank is also embroiled in a long-running class action lawsuit with around 1,800 plaintiffs alleging the bank paid women less than men and their performance reviews were held back. It is due to go to trial in June. Goldman has denied any wrongdoing.

Eyes wide open

Amid the #MeToo movement, wider societal forces and efforts from some senior managers, companies around the world have been making efforts, at least on paper, to promote diversity.
In Fiore Higgins’ view, things have improved in some areas, and there is a genuine desire among the C-suite to prevent systemic and casual discrimination. But institutions like Goldman could still apply the full force of their analytical and metric-setting skills to boost the number of women making it to partner level, she said, and create the kind of inclusive environment studies have shown can boost a company’s bottom line.
She’s also conscious of the importance of sending a message to some of her readers, including finding a trusted advisor well removed from the company.
“I’ve had the opportunity to talk at a couple of universities. I’ve spoken to people who were like, ‘I got a job offer, I read your book, I’m afraid to go’,” she said.
“It’s like, no, that’s not the answer. When I first started working at Goldman … their marketing thing was Minds Wide Open. I was lapping it up — and it was just a marketing pitch. It wasn’t what I saw in the lived experience.”
“So I say to these students that I’ve been talking to, men and women, you want to go in with your eyes wide open, you want to be very clear of what is possible. Be prepared with language around it, know how to respond and react when these things happen.” More

Pavlo Gonchar | Lightrocket | Getty Images

Check out the companies making headlines after the bell.
Uber — The ride-sharing platform’s shares gained 2.5% after Bloomberg reported that the company is weighing a potential spinoff of its freight logistics unit.

related investing news

2 months ago

Silvergate Capital — Shares slid 36% after the company announced it will wind down operations and liquidate Silvergate Bank. The news comes about a week after the bank warned it may not be able to continue operating and follows a series of financial challenges and government investigations in the aftermath of the collapse of FTX, which was a customer of the bank.
MongoDB — Shares of the database platform provider fell 8% after the bell. MongoDB offered weak guidance on revenue, but posted beats on the top and bottom lines for the fourth quarter.
SVB Financial — The financial services company’s stock fell 6% after SVB Financial said that it intends to offer $1.25 billion of its common stock and $500 million of depositary shares.
LoanDepot — The mortgage lender’s shares fell 2.6% after its fourth-quarter earnings report missed analysts’ expectations. The company reported a loss of 46 cents per share and revenue of $169.7 million. Analysts polled by FactSet had estimated an earnings loss of 27 cents per share and revenue of $190.9 million.
Fossil — The fashion accessories company’s shares rose 2%. Despite Fossil reporting a 17% drop in revenue for the fourth quarter, shares rose after CEO Kosta Kartsotis stated the company’s commitment to improving its financials through its Transform and Grow strategy.
— CNBC’s Darla Mercado and Tanaya Macheel contributed reporting

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