Raphael Stevens

Investors differ in their approach to elections. Some see politics as an edge to exploit; others as noise to block out. Even for those without a financial interest, markets offer a brutally frank perspective on the economic stakes. As elections approach in America and Britain, as well as plenty of other countries, that is especially valuable.Take what happened before and after America’s presidential election in 2020. Green-energy and cannabis stocks briefly became market darlings as the odds of a victory for Joe Biden rose, since investors expected his administration to enact policies favourable to both. Exchange-traded funds covering the sectors rallied by over 100% from two months before the election to Mr Biden’s inauguration, before later dropping as investors scaled back their optimism.What are markets saying about the current race for the White House? The candidates’ agendas are similar in places. Both tilt protectionist (though Mr Trump’s plans are more radical); both would oversee hefty deficits (though with different beneficiaries). But there are also big differences. Mr Trump has vowed to end Europe’s freeriding on America’s defence budget; Mr Biden is unlikely to renew tax cuts from Mr Trump’s first term that expire in 2025. Mr Trump would gut Mr Biden’s Inflation Reduction Act (IRA), redirecting green spending to fossil fuels. Mr Biden sees Mexico as somewhere to “friendshore”; Mr Trump sees it as a bogeyman.This means that some listed firms stand to win, while others look likely to lose out. Higher European military spending would boost the continent’s defence firms. If Mr Trump were to roll back the IRA, solar-power providers and electric-car makers would be hurt, while owners of coal plants would be rather happier. If the vote is close, and supporters of the losing candidate riot, shares in architectural-glass firms should do well.Speculators can bet on the outcome of the election by investing money accordingly. Indeed, a portfolio of company stocks that ought to benefit if Mr Trump wins, as well as short positions on companies that ought to lose out in such a scenario, tracks Mr Trump’s odds of winning the election in betting markets. The chart below shows one such basket, assembled by Citrini Research, a research firm.image: The EconomistWhat about the consequences for broader asset classes? Investors who would prefer to avoid politics used to be able to shield themselves by simply holding a diversified portfolio. After all, in well-functioning democracies, politics rarely affected overall stockmarket returns, sovereign bonds or currencies. When assessing past American presidential elections, JPMorgan Chase, a bank, finds there is no clear relationship between the outcome and subsequent overall stockmarket performance.Avoiding politics is becoming more difficult, however. Pity anyone trading British markets while ignoring Brexit negotiations or the policies of Liz Truss, who was prime minister for the life of a lettuce in 2022. Elections also drive moves in emerging markets, which is why Brexit prompted half-joking concerns that Britain had become one. Until the run-up to the referendum there was virtually no relationship between gauges of political risk and the implied volatility of sterling as measured by options, which captures how much hedging currency moves costs. Since then, the two have tracked one another closely.Yet rather than being an outlier, Britain’s experience may presage a global trend. Enthusiasm for state spending is now widespread, and fiscal excess can have large and unforeseeable consequences. The Democrats’ knife-edge win in the Georgia US senate election in 2021 unlocked a bevy of stimulus, for instance. Treasury yields rose by 0.1 percentage points that day—a big move but not an unusual one. With hindsight, it is clear that fiscal largesse amplified inflation, meaning an even larger move would have been justified.Moreover, politics does not only matter more for markets; its effects are also becoming less predictable. Take a scenario troubling many investors today: that Mr Trump carries out his threat to replace Jerome Powell, the Federal Reserve chairman. Would bond yields fall on expectations of looser monetary policy, or rise as a Ms-Truss-style “moron risk premium” became baked in? The answer is far from obvious. Its importance could not be any clearer.■Read more from Buttonwood, our columnist on financial markets: The private-equity industry has a cash problem (Mar 14th)How investors get risk wrong (Mar 7th)Uranium prices are soaring. Investors should be careful (Feb 28th)Also: How the Buttonwood column got its name More

“Economics is a study of mankind in the ordinary business of life.” So starts Alfred Marshall’s “Principles of Economics”, a 19th-century textbook that helped create the common language economists still use today. Marshall’s contention that economics studies the “ordinary” was not a dig, but a statement of intent. The discipline was to take seriously some of the most urgent questions in human life. How do I pay my bills? What do I do for a living? What happens if I get sick? Will I ever be able to retire?In 2003 the New York Times published a profile of Steven Levitt, an economist at the University of Chicago, in which he expressed a very different perspective: “In Levitt’s view,” the article read, “economics is a science with excellent tools for gaining answers but a serious shortage of interesting questions.” Mr Levitt and the article’s author, Stephen Dubner, would go on to write “Freakonomics” together. In their book there was little about the ordinary business of life. Through vignettes featuring cheating sumo wrestlers, minimum-wage-earning crack dealers and the Ku Klux Klan, a white-supremacist organisation, the authors explored how people respond to incentives and how the use of novel data can uncover what is really driving their behaviour.Freakonomics was a hit. It ranked just below Harry Potter in the bestseller lists. Much like Marvel comics, it spawned an expanded universe: New York Times columns, podcasts and sequels, as well as imitators and critics, determined to tear down its arguments. It was at the apex of a wave of books that promised a quirky—yet rigorous—analysis of things that the conventional wisdom had missed. On March 7th Mr Levitt, who for many people became the image of an economist, announced his retirement from academia. “It’s the wrong place for me to be,” he said.During his academic career, Mr Levitt wrote papers in applied microeconomics. He was, in his own self-effacing words, “a footnote to the ‘credibility revolution’”. This refers to the use of statistical tricks, such as instrumental-variable analysis, natural experiments and regression discontinuity, which are designed to tease out causal relationships from data. He popularised the techniques of economists including David Card, Guido Imbens and Joshua Angrist, who together won the economics Nobel prize in 2021. The idea was to exploit quirks in the data to simulate the randomness that actual scientists find in controlled experiments. Arbitrary start dates for school terms could, for instance, be employed to estimate the effect of an extra year of education on wages.Where the Freakonomics approach differed was to apply these techniques to “the hidden side of everything”, as the book’s tagline put it. Mr Levitt’s work focused on crime, education and racial discrimination. The book’s most controversial chapter argued that America’s nationwide legalisation of abortion in 1973 had led to a fall in crime in the 1990s, because more unwanted babies were aborted before they could grow into delinquent teenagers. It was a classic of the clever-dick genre: an unflinching social scientist using data to come to a counterintuitive conclusion, and not shying away from offence. It was, however, wrong. Later researchers found a coding error and pointed out that Mr Levitt had used the total number of arrests, which depends on the size of a population, and not the arrest rate, which does not. Others pointed out that the fall in homicide started among women. No-fault divorce, rather than legalised abortion, may have played a bigger role.Other economists, including James Heckman, Mr Levitt’s colleague in Chicago and another Nobel prizewinner, worried about trivialisation. “Cute”, was how he described the approach in one interview. Take a paper on discrimination in the “The Weakest Link”, a game show in which contestants vote to remove other contestants depending on whether they think they are costing them money by getting questions wrong (in the early portion of the game) or are competition for the prize pool by getting them right (later on). That provided a setting in which Mr Levitt could look at how observations of others’ competence interacted with racism and sexism. A cunning design—but perhaps of limited relevance in understanding broader economic outcomes.At the heart of Mr Heckman’s critique was the idea that practitioners of such studies were focusing on “internal validity” (ensuring estimates of the effect of some change were correctly estimated) over “external validity” (whether the estimates would apply more generally). Mr Heckman instead thought that economists should create structural models of decision-making and use data to estimate the parameters that explained behaviour within them. The debate turned toxic. According to Mr Levitt, Mr Heckman went so far as to assign graduate students the task of tearing apart the Freakonomics author’s work for their final exam.Did you know…Neither man won. The credibility revolution ate its own children: subsequent papers often overturned results, even if, as in the case of those popularised by Freakonomics, they had an afterlife as cocktail-party anecdotes. The problem has spread to the rest of the profession, too. A recent study by economists at the Federal Reserve found that less than half of the published papers they examined could be replicated, even when given help from the original authors. Mr Levitt’s counterintuitive results have fallen out of fashion and economists in general have become more sceptical.Yet Mr Heckman’s favoured approaches have problems of their own. Structural models require assumptions that can be as implausible as any quirky quasi-experiment. Sadly, much contemporary research uses vast amounts of data and the techniques of the “credibility revolution” to come to obvious conclusions. The centuries-old questions of economics are as interesting as they always were. The tools to investigate them remain a work in progress. ■Read more from Free exchange, our column on economics:How NIMBYs increase carbon emissions (Mar 14th)An economist’s guide to the luxury-handbag market (Mar 7th)What do you do with 191bn frozen euros owned by Russia? (Feb 28th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

For five years homeowners have been waging war. They have railed against the extortionate fees charged by estate agents, known as “realtors” in America, which are enforced by anticompetitive practices. They have filed lawsuits against brokers; fought cases against the National Association of Realtors (nar), an industry body; and sued the keepers of databases of homes for sale, known as “multiple-listing services”. Juries and judges across the country have found merit in their claims, deciding that homeowners have been ripped off, manipulated and duped into overpaying. In recent months they have awarded billions of dollars to plaintiffs and sent the two sides into negotiations over the rules that control realtors’ practices.How wonderful it would be to believe that a settlement reached on March 15th, between the plaintiffs in several class-action lawsuits and the NAR, was about to usher in a fairer, cheaper era. That is how the agreement was described by the New York Times, which plastered the headline “Powerful realtor group agrees to slash commissions to settle lawsuits” across its scoop revealing that the agreement had been reached. CNN wrote that the settlement would “effectively destroy” the industry’s anticompetitive rules. The notion that victory is now assured has even been seized upon by the White House, which is desperate for any kernel of good news about housing affordability ahead of the presidential election in November. On March 19th President Joe Biden declared that the settlement was “an important step toward boosting competition in the housing market”, adding that it could reduce transaction costs by “as much as $10,000 on the median home sale.”It is not at all clear, however, that this settlement will actually bring about a Utopia of greater competition and lower commissions. And the stakes are too high to accept such a settlement, which also protects brokers and agents from future lawsuits that might seek more reform. Under the existing system Americans pay 5-6% commission on almost every sale, triple the level in other rich countries. Since they trade homes collectively worth $2.8trn each year, if commissions fell to just 2% Americans would save $110bn in fees annually.image: The EconomistThe problem boils down to a tactic called “steering”. In America it is both legal and expected that a home seller will make a blanket offer of compensation to any realtor who brings them a buyer. Often this is a proposal to split commission equally: if the total compensation is 6%, the seller’s agent and the agent of the buyer will each receive 3%. The problem is that although sellers can negotiate with their own agent and drive down that side of the bargain, if they attempt to offer a low commission to a buyer’s agent they will be told—correctly—that their home will get less interest and no decent offers.It is not necessary to believe that realtors are morally bankrupt in order to see how this system perpetuates itself. The risk that even, say, 10% of agents might steer buyers away from a low-commission listing is enough to ensure that all the honourable ones benefit, since sellers offer 3% to ensure they do not lose out. This enforces a floor in total commissions.Keep fightingThe settlement, which needs to be approved by a judge before being implemented in July, does little to tackle this underlying problem. One of its main provisions is that offers of buyer-agent compensation can no longer be published on a multiple-listing service, the databases used in the industry. But they can still be made, and can be published on websites or explained via text or a phone call. In Facebook groups and Reddit threads, realtors are already discussing such workarounds.Another provision is that, before employing an agent’s services, buyers must sign an agreement outlining how the agent will be paid. At present buyers almost never discuss, and often do not even know, how much money their agent is making. They just know it is not their problem, since the fee is covered by the seller.It is just about possible to see how this provision could erode the floor in buyer-agent compensation. If agents are required to tell buyers they intend to collect 3% of the sale price, and that—in the unlikely event a seller is not offering compensation—the buyer will be on the hook for it, cash-strapped buyers might seek a cheaper option instead. They might also reject the idea that their agent is worth 3%, and could argue for any compensation above a certain level, perhaps 1%, to be kicked back to them after the purchase.Yet this probably assumes too much savvy on the behalf of buyers, and too little ingenuity from agents. Realtors might simply agree to add a clause to any contract reassuring buyers that they will not go after them for cash in the event a seller offers low commission, before steering them away from such properties, notes Rob Hahn, an industry analyst.The Department of Justice (DoJ) could intervene. It did so in a case in Massachusetts, arguing that the agreement would not fix the problem of steering and was therefore insufficient. Officials appointed by the Biden administration have been constrained by a letter sent by those in the Trump one, which agreed to close a probe into the industry. When the current DoJ attempted to reopen it, the department was sued by the NAR, which argued it should not renege on the earlier promise. But an appeals court in the District of Columbia hearing this case sounded sceptical of the NAR’s arguments. That could pave the way for the DoJ to make a move.Whether by killing the current settlement or opening its own probe, the doj would be wise to act. Homebuyers and sellers in America do not stand a chance of paying a fair price for commissions under the current approach. And the settlement as agreed offers no guarantee that they will have such a chance in the future. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Time served on Wall Street has long smoothed the path to the top job at America’s Treasury. Before he was the first treasury secretary Alexander Hamilton could boast, among other things, a role in establishing the Bank of New York, which is still in business. More recently, and somewhat less heroically, Robert Rubin and Hank Paulson both ran Goldman Sachs, a bank, before taking office. As its name suggests, the “revolving door” sends people in the other direction, too. Mr Rubin went on to hold senior positions at Citigroup, another bank. Cerberus Capital Management and Warburg Pincus, two investment firms, are chaired by John Snow and Timothy Geithner respectively.Now Steven Mnuchin, a former partner at Goldman Sachs who served as treasury secretary throughout the presidency of Donald Trump, has leapt back into the limelight. In 2021 he set up Liberty Strategic Capital, an investment firm. That much of the cash raised by Liberty came from sovereign-wealth funds in the Middle East raised some eyebrows. Until recently, the firm’s investments did not. But this month Liberty led the capital raise by New York Community Bank (NYCB) after losses relating to the bank’s property loans caused its shares to tank. That deal closed on March 11th. Three days later Mr Mnuchin told CNBC that he was trying to buy TikTok after America’s House of Representatives passed a bill that would force its Chinese owner, ByteDance, to sell the social-media app or face a ban in America.Before this flurry of high-profile dealmaking, the firm mainly invested in privately held cyber-security firms. Some of its bets look like duds. In 2021 Liberty invested $200m in Cybereason, valuing the firm at $2.7bn. After plans to list its shares were shelved, Cybereason’s next capital raise in 2023 implied a valuation of just $575m, according to PitchBook, a data provider. At the beginning of 2022 Liberty invested $150m in Satellogic when the firm merged with a special-purpose acquisition company to list its shares. Today shares in Satellogic are worth less than a quarter of what Mr Mnuchin’s firm paid for them.Mr Mnuchin has experience of investing in banking. In 2009 he led a group of investors that purchased IndyMac, a casualty of the global financial crisis, before offloading it in 2015. As part of nycb’s $1bn capital raise, Joseph Otting, who served as a senior Treasury official responsible for bank supervision during the Trump administration, has been appointed as the firm’s chief executive. Meanwhile, Liberty stumped up $450m of the cash. Although the deal bolsters NYCB’s capital, cleaning up its loan portfolio will take longer. The extent to which investors’ confidence holds up while this happens remains to be seen—indeed, this week the bank’s shares fell by 7% after analysts at Raymond James, yet another bank, expressed doubts about the speed of NYCB’s turnaround.But managing a struggling regional bank is light work compared with engineering a buy-out of TikTok. Mr Mnuchin has not said who would feature in his consortium, only that it would be controlled by American businesses, and that no single investor should own more than 10%. Finding the money would surely be the most straightforward part of executing the deal. Democrats may balk at the involvement of private-equity funds. Any role for technology firms could raise antitrust concerns. Even an intentionally inoffensive squad—perhaps including Walmart, a supermarket, and Oracle, a software firm, which came close to striking a deal in 2020—would probably find the Chinese government standing in the way of a sale.Mr Mnuchin’s background could also become a source of discomfort. As treasury secretary, he chaired the Committee on Foreign Investment in the United States, the country’s watchdog screening inbound investment, playing a crucial role in an earlier attempt by Mr Trump to force the divestment of TikTok. To some his acquisition of the social-media app would represent everything wrong with the revolving door. Others, especially those happy to keep using TikTok, would see it as mere swings and roundabouts. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Greater Congressional scrutiny on U.S. investments into China means any new rules or restrictions may outlast presidential terms and become part of U.S. law.
“I do think Congress needs to step up and legislate an enduring solution to this problem,” Mike Gallagher, chairman of the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, said in a statement to CNBC this week.
So far it’s been difficult for the U.S. government to pass sweeping restrictions on investments in China, although being tough on Beijing has been touted as a rare area of bipartisan agreement.

A jogger runs by the U.S. Capitol as the deadline to avert a partial government shutdown approaches at the end of the day on Capitol Hill in Washington, U.S., September 30, 2023.
Ken Cedeno | Reuters

BEIJING — The U.S. Congress increasingly has its eye on American capital that’s allegedly funded China’s military development, indicating that greater scrutiny on U.S. investments into China may outlast presidential terms and become part of law.
After a few false starts in 2023 that never ended up blocking U.S. investments into certain Chinese industries, some in the House of Representatives are still pushing ahead.

“I do think Congress needs to step up and legislate an enduring solution to this problem, because otherwise, we’re going to ping pong back and forth between different administrations and different executive orders, or different regulators saying different things,” Mike Gallagher, chairman of the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, said in a statement to CNBC this week.
“I think, at least in advanced technology sectors, we need to cut off the flow of funds. We can’t afford to keep funding our own destruction,” said Gallagher, who is also chairman of the House Armed Services Subcommittee on Cyber, Information Technologies, and Innovation, and on the Permanent Select Committee on Intelligence.
The House Select Committee on the CCP, established in January last year, led the legislative act to essentially ban TikTok in the U.S. if its Chinese parent ByteDance doesn’t sell the popular social media app. The bill passed the House last week, and now must pass the Senate if it is to become law.

The House select committee in February also published a report alleging U.S. venture capital firms invested billions “into PRC companies fueling the CCP’s military, surveillance state and Uyghur genocide.”
It is unclear how aware U.S. firms were of such links, if any. Beijing has denied accusations of genocide.

Similar research detailing the links between U.S. capital, venture firms in China and Chinese tech startups has started making its rounds in major media outlets since late 2023.
The study was produced by “Future Union,” which describes itself as a “bipartisan advocacy organization designed to fuse private sector capitalism and forward thinking leaders to address a new wave of emerging technology and security challenges facing the U.S. and its allies.”
“In order to ensure that those competing and leading technologies have the opportunity to excel, capital is a critical element,” the report said. “As such, we need to return to a level of accountability and fidelity to the rule of law that made our capital markets and private sector the envy of the global system.”
Future Union also published a list of what it considers the top venture investors in technology and defense that are “advancing America’s interest through explicit action.”
Little else about the advocacy group’s background is publicly available, except for its executive director, Andrew King, who said in an interview with CNBC he solely funded the group.
“We have not taken money from any outside groups. It’s a bipartisan group. I’m the one that can be public, but there aren’t any vested interests,” he said. “Nobody is seeking to make money off this.”
“It’s just people … that have sort of seen the economics play out and the abuse and use exploitation of the of the private markets [that have] sort of cost us a generation of technology,” said King, who is also managing partner at venture capital firm Bastille Ventures in San Francisco.

Political hurdles

So far it’s been difficult for the U.S. government to pass sweeping restrictions on investments in China, although being tough on Beijing has been touted as a rare area of bipartisan agreement.
The Senate in July overwhelmingly passed a bill that would have required U.S. investors in advanced Chinese technology to notify the Treasury Department. While that was a toned-down version of earlier proposals that would have restricted such investments, the legislation did not pass the House.
The Biden administration in August issued an executive order aimed at restricting U.S. investments into semiconductor, quantum computing and artificial intelligence companies citing national security concerns. Treasury was tasked with implementation after a public comment period. No further details have yet been released.
But, building on the executive order, House Foreign Affairs Committee Chairman Michael McCaul and Ranking Member Gregory W. Meeks introduced the “Preventing Adversaries from Developing Critical Capabilities Act” to also restrict investments in hypersonics and high-performance computing.
It’s unclear whether or when those proposals will become law.
When Biden’s executive order was released, China’s Ministry of Commerce called upon the U.S. to “respect the market economy and the principles of fair competition” and to “refrain from artificially hindering global trade and creating obstacles that impede the recovery in the global economy.”
China’s National Financial Regulatory Administration did not immediately respond to a request for comment on this story.

What’s next?

King said he expects U.S. firms will need to notify Washington about investments into China related to quantum computing and artificial intelligence, but not much more.
“I think the transparency element is most definitely still on the horizon,” he said. “And I think that will happen. I would be surprised if that didn’t happen through before the middle of the year.”
“I don’t think there’s the appetite for getting enough of Congress on both sides to step up [in a] meaningful way to have hard restrictions because there’s a lot of entrenched interests,” he said, without elaborating. He noted that legislation is focused more on companies with military industrial ties, or connections to sanctions, entity lists or export controls.
In addition to putting specific Chinese companies on blacklists, the U.S. Department of Commerce has in the last two years announced sweeping restrictions aimed at blocking China’s access to advanced semiconductor technology.
While U.S. institutional investment into China has largely paused due to uncertainty about regulation and growth, King said that once China gets through its own economic cycle, “I fully expect that to be a lucrative market.”
“A lot of large asset managers and investment managers that are global in nature, or want to have a bigger footprint in China, [they] do not want to lose their optionality to be able to plan for [both] sides of that divide, regardless of how it works out,” he said. More