Economy

DUBAI (Reuters) – The United Arab Emirates’ plans for a corporate tax risk eroding one of its main attractions as the Gulf’s premier destination for foreign firms, at a time when Saudi Arabia is opening up and pressuring multinationals to shift regional headquarters there.As the UAE aligns itself more with the global economy, Saudi Arabia is using its clout as the world’s top oil exporter and biggest Arab economy to vie for capital, giving firms until 2024 to set up regional bases in Riyadh or lose out on lucrative contracts.The standard UAE corporate tax rate of 9%, to be imposed from mid-2023, is below the 20% Saudi levy on foreign-owned firms. But tax experts said large multinationals are likely to pay 15%, in accordance with an OECD agreement on global minimum tax to which the UAE is a signatory.”There will be a different rate for large multinational organisations. We expect this to be 15%,” Tatyana Rahmonova, international tax senior manager at accounting and consulting firm PwC Middle East, said in a presentation this month.Freewheeling UAE, the region’s commercial hub and a magnet for the global ultra-rich, is taking tax cooperation and the tackling of illicit finance more seriously, but still retains much of its tax-free system, including within free zones.Saudi Arabia also imposes a 20% capital gains tax on non-residents on disposal of Saudi shares while the UAE has none, and Riyadh has tripled value-added tax to 15% versus 5% in the UAE.But other incentives offered by the two Arab economic powers to lure foreign firms and talent are also now a factor.The UAE advantage is narrowing in the face of opportunities offered by the opening up of Saudi Arabia, where the crown prince is pushing to wean the kingdom off oil revenues and challenging the UAE to be the region’s commercial, logistics and tourism centre with ambitious mega-projects.SAUDI RISINGAlex Nicholls of AstroLabs, which advises companies on setting up Saudi offices, said the tax differential between the two Gulf states would be less of a factor for foreign companies than the looming risk from the Saudi state to future contracts. “From last year the majority of our clients, who had clients in Saudi Arabia, have been told that ‘we will only work with you if you have a commercially registered company in Saudi Arabia’,” he said.As of last year, Saudi Arabia had licensed 44 international companies to set up regional headquarters in Riyadh and the city’s royal commission said last year it had identified 7,000 global companies that it wanted to target.”Saudi is being more assertive in terms of requiring corporations to hold appropriate licences to do business in the kingdom,” said corporate lawyer Rima Mrad of BSA Ahmad Bin Hezeem & Associates. “A lot of corporations used to do Saudi work remotely and this no longer is acceptable.”Shane Shin, founding partner of Abu Dhabi-based venture capital firm Shorooq Partners, told Reuters start-ups were increasingly looking at Saudi Arabia for access to funding and government support, talent, infrastructure and market size.”Once you have established yourself in Saudi Arabia, and have obtained the SAGIA licence, you will be able to take advantage of government assistance in many ways,” he said.FIRST MOVERThe UAE is counting on it remaining a first mover as it evolves an economy built on open-for-business credentials and glitzy expatriate lifestyles, by pushing in directions where it may take time for conservative Saudi Arabia to follow.Last month, the UAE adopted a Saturday-Sunday weekend instead of the traditional Muslim Friday-Saturday to move closer to global markets. It has also overhauled regulations, including decriminalising alcohol consumption and pre-marital cohabitation. To cushion the blow from the new tax, Dubai said it would reduce government fees on commercial activities, a move trade sources say some of the UAE’s other six emirates may mimic.And the UAE has said it would honour corporate tax incentives offered at its more than 40 free zones to firms that do not conduct business with the mainland.Industry sources say the free zone mechanism under the new UAE regime will likely involve all firms filing returns but with no tax applied to those doing business solely overseas.Saudi Arabia plans to offer incentives for more specialised zones focused on priority sectors, expanding the incentives for existing economic cities that enjoy exemptions from import duties, ownership of land and property, and taxation. More

(Reuters) – Amid a strong U.S. housing market, low interest rates and unnervingly high inflation, the Federal Reserve has been adding to its bond portfolio even to this day, prompting calls to not just let the securities expire over time but to lay plans to begin selling them outright. It’s unlikely that any sales would be included at the start of the balance sheet “normalization” plans officials are expected to approve in the coming months, a process that will run alongside interest rate hikes aimed at becalming inflation.But if the fight against inflation doesn’t succeed fast enough, some Fed officials want a “Plan B” that would venture into new territory and use sales of mortgage-backed securities (MBS) to raise home mortgage rates, one of the key channels that the U.S. central bank can use to lower inflation because it holds down home prices and leaves less room in household budgets for other spending.Fed officials discussed the possibility of MBS sales at their Jan. 25-26 policy meeting, with “many participants” saying it might be appropriate “at some point in the future,” minutes from the meeting showed on Wednesday.Home borrowing costs are already rising rapidly, with the average contract rate on a 30-year fixed-rate mortgage popping above 4% this month for the first time since 2019, according to the Mortgage Bankers Association. Even before the Fed’s first rate hike – expected to come next month – or the first bond matures from its portfolio without replacement, that key consumer interest rate has surged a full percentage point in less than six months. Mortgage rates are climbing fast – https://graphics.reuters.com/USA-FED/jnvwelnwdvw/chart.png Still, the Fed’s $2.7 trillion MBS stockpile acts as an anchor on interest rates in that market, preventing them from being even higher, and some officials argue the central bank’s footprint may need to shrink faster than it would through natural “runoff.” That process, of securities rolling off the balance sheet as they mature, is particularly slow and unpredictable for MBS and may take longer when rates are rising. “I still keep that option open in scenarios where inflation is not moderating in the way we hoped and we are going to have to get a little tougher,” St. Louis Fed President James Bullard told Reuters at the start of February. And speaking on CNBC this week, Bullard said he supports starting the balance sheet reduction in the second quarter of this year through the passive approach and then using asset sales as a “Plan B” if needed to “speed up the pace.” DECIDING EXIT STRATEGYInvestors are keen to know how the Fed is going to unwind more than $8 trillion of MBS and Treasury securities – a portfolio that doubled during the coronavirus pandemic as the central bank snapped up the assets to stabilize markets and the economy.Bond purchases have long been a controversial aspect of monetary policy in part because of lingering questions around the exit strategy, with some critics arguing that selling securities when interest rates are rising can cause the central bank to lose money. Bond prices fall when interest rates are rising and vice versa. The Fed avoided bond sales when it last reduced the balance sheet between 2017 and 2019. Policymakers want to rely primarily on the runoff strategy this time around too, according to principles released last month. The first “QT” – https://graphics.reuters.com/USA-FED/BALANCESHEET/jnvwelojbvw/chart.png But some Fed officials and analysts say that passive approach could fall short. Bullard and Kansas City Fed President Esther George are among those who have pointed to high inflation as a concern. Sales may also be needed to help the Fed meet its goal of moving to a portfolio that is made up mostly of Treasury securities in the long run, Cleveland Fed President Loretta Mester recently said.Part of the issue lies with the Fed’s mortgage holdings, which are expected to move off its balance sheet more slowly than its Treasury holdings once the shrinkage of the portfolio is initiated. For example, about $2.5 trillion of the Fed’s Treasury holdings have short maturities and would come due in the next three years, according to an analysis by the fixed income team at the Schwab Center for Financial Research. But it’s difficult to know exactly how long it will take for the Fed’s mortgage holdings to roll off the balance sheet, analysts say. Portions of the securities are prepaid early as people sell their homes or refinance their loans, which leads them to pay their mortgages off ahead of the initial due date. And it typically takes time for MBS to roll off the balance sheet naturally. Between October 2017 and September 2017, the Fed capped the monthly reductions at $50 billion, but the actual decline was typically much less than that. Policymakers want to move faster this time, but are concerned the Fed’s mortgage holdings will prove “sticky,” particularly when mortgage rates are rising.That’s because fewer people refinance their mortgages when rates are going up, which slows the rate of loan prepayments, said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. In fact, that may already be happening. MBA’s data shows that refinancing application volumes are at a two-year low and their share of all mortgage applications is the lowest since July 2019.Fed officials are currently running the numbers on how long it could take for the mortgage holdings to run off the portfolio and no decisions have been made, Mester said. But the Fed may want to address the possibility of asset sales early on when it starts to provide guidance on its plans for the balance sheet, Jones said. “They’ll want to address the question in one way or another,” Jones said. The MBS rundown – https://graphics.reuters.com/USA-FED/BALANCESHEET/mopanyrykva/chart.png More

LONDON (Reuters) – More than seven out of 10 British exporters have found no benefit from the trade deal that Britain agreed with the European Union after Brexit, the British Chambers of Commerce said on Thursday.New trade rules took effect on Jan. 1, 2021, 11 months after Britain formally left the EU after almost 50 years of membership. British trade with the EU does not face tariffs, but there is extra paperwork for customs declarations and many services exports are restricted.Out of more than 1,000 businesses surveyed within the past month – which mostly had 250 staff or fewer – just 12% of exporters agreed that the new arrangements had helped them increase sales, while 71% disagreed.”Many of these companies have neither the time, staff or money to deal with the additional paperwork and rising costs involved with EU trade, nor can they afford to set up a new base in Europe or pay for intermediaries to represent them,” the BCC’s head of trade policy, William Bain, said.Britain’s official data shows that after a slump in exports to the EU in January 2021 when there were widespread delays at ports, exports are back around their previous level, while imports from the EU are some way below.Many economists say this is still a poor outcome, as global demand has boomed over the past year, with British exporters losing market share, and the overall reduction in trade with the EU will hamper Britain’s productivity in the long term.The BCC said key areas where it wanted changes included export health certificates for British-produced food, value-added tax registration for smaller online retailers and upcoming restrictions on electrical safety certification for imports. More

The last time UK inflation was as high as it is now the British pound was linked to the now-defunct Deutschmark. In the US, the rate of price growth is the highest since 1982, which economic historians see as roughly the end of the 1970s “Great Inflation”. Eurozone inflation, meanwhile, is the highest it has been in the currency bloc’s history — unsurprising, perhaps, given soaring natural gas prices and the spectre of an inflationary war in Europe. Only Asia seems immune from the pressures.It is clear that emergency stimulus is no longer required for economies with tight labour markets and high inflation. Yet central banks face hard choices over how fast and far to raise rates. Move too early and they risk choking off growth, while doing nothing to counter cost pressures that are more to do with Covid-related bottlenecks and geopolitical tensions. Move too late and an even more aggressive approach may be required to tame inflation. The worry for central bankers is a “wage-price spiral” as workers attempt to shield their take-home pay from the effects of higher prices. A tight labour market, fuelled by cheap money, could cause rising inflation to feed off itself. Workers, aware that vacancies are at a record high in many advanced economies, might sensibly try to ensure their pay packets keep pace with prices (though there are some questions about whether workers in modern, deregulated labour markets have the clout to negotiate wage rises that keep up with inflation). Any wage gains, however, would be illusory and quickly fade as they, in turn, sparked higher inflation.Combating a wage-price spiral moves central banks into controversial territory. Andrew Bailey, the governor of the Bank of England, attracted a widespread backlash for comments that workers should exercise pay restraint. One tabloid went so far as to label him the “Plank of England” on its front page along with a reference to his high salary. But while Bailey’s words were clumsy, it is the job of a central banker to play “bad cop” when required. Unelected technocrats do not need to be liked. A bigger concern than the public relations issue is that tightening too fast will bring about the very situation central bankers wish to combat. Since the 1980s, some economists have argued that, in the long run, monetary stimulus can only lead to inflation, not real income growth — necessitating that central bankers should be conservative and, in the interests of workers as well as everyone else, overly sensitive to the inflationary risks from rising labour costs. A growing contingent of economists, however, argue it is precisely this conservatism that has led to multiple decades of meagre wage growth. Focusing excessively on inflation can lead to a permanent loss of economic output and productivity, scarring the economy. In the US, the pattern of higher nominal wage growth — especially for lower income households — could end. Not only could this be bad for workers, it would also cut off the demand necessary to convince businesses to invest more. To top it off, the supply problems that led to inflation in the first place may remain.These are the most difficult monetary policy decisions central bankers have faced since the early 1980s. That makes effective communication, and avoiding Bailey’s “foot-in-mouth” comments, vital. Workers, just as much as companies, are right to act in their own interests and pursue the best deals they can. Central bankers, however, must make it clear that monetary policy will tighten and they will always pursue a 2 per cent norm for inflation; workers should similarly expect central banks to do their best too. More

(Reuters) – U.S. President Joe Biden will visit Ohio on Thursday to tout $1 billion in funding from the bipartisan infrastructure bill signed last November aimed at cleaning up and restoring environmentally damaged areas in the Great Lakes region.The trip is part of the White House’s efforts to showcase the benefits of the infrastructure bill ahead of crucial midterm elections where the Democrats hope a results-oriented message will allow them to retain power in Washington. Biden is expected to visit the Ohio cities of Cleveland and Lorain. In Lorain, which sits on Lake Erie, Biden will provide more details on how the funding will help remove toxic sediment and restore habitats in the Great Lakes region, a senior administration official said. The $1 billion is the single largest federal investment in Great Lakes restoration efforts.”This level of progress would have been inconceivable just a few years ago,” the official said. The administration believes the funding will help accelerate completion of clean ups in federally-designated “Areas of Concern,” or AOCs, which were damaged by decades of manufacturing and agricultural interests. It now expects 22 of the remaining 25 AOCs to come off the federal list by 2030.The infrastructure package will also provide $10 billion in highway funding for Ohio, plus more than $33 billion in competitive grant funding for highway and other transportation projects. It also provides $60 billion for state and local governments to fund major projects.This will be Biden’s second trip to northeast Ohio in less than a year. The state is home to several important elections this year, including a governor’s race and a closely-watched U.S. Senate race to fill the seat of retiring Republican Rob Portman. More

Patrick Gelsinger was 18 years old and four months into an entry-level job at Intel when he heard a pivotal sermon at a Silicon Valley church in February 1980. There, a minister quoted Jesus from the Book of Revelation.“I know your deeds, that you are neither cold nor hot. I wish you were either one or the other!” the minister said. “So, because you are lukewarm — neither hot nor cold — I am about to spit you out of my mouth.”The words jolted Mr. Gelsinger, reshaping his philosophy. He realized he had been a lukewarm believer, one who practiced his faith just once a week. He vowed never to be neither hot nor cold again.Now, at age 60, Mr. Gelsinger is hot about one thing in particular: Revitalizing Intel, a Silicon Valley icon that lost its leading position in chip manufacturing.The 120,000-person company was a household name in the 1990s, celebrated as a fount of innovation as its microprocessors became the electronic brains in the vast majority of computers. But Intel failed to place its chips into smartphones, which became the device of choice for most people. Apple and Google instead grew into the trillion-dollar emblems of Silicon Valley.Rejuvenating Intel is partly about Mr. Gelsinger’s own ambitions. As a young engineer, he once wrote down a goal of leading Intel one day. But in 2009, after spending his entire career at the company, he was forced out. A year ago, he was wooed back for a surprise second chance.His mission is also about America’s place in the world. Mr. Gelsinger wants to return the United States to a leading role in semiconductor production, reducing the country’s dependence on manufacturers in Asia and easing a global chip shortage. Intel, he believes, can spearhead the charge. If he succeeds, the impact could extend far beyond computers to just about every device with an on-off switch.The quest faces many obstacles. Steering a $200 billion company while chasing a goal of raising U.S. chip production to 30 percent globally from about 12 percent today requires tens of billions of dollars, political maneuvering with governments and years of patience.“You’re going to have to spend a lot of money and you’re going to have to spend it for a long period of time,” said Simon Segars, who recently stepped down as chief executive of Arm, a British company whose chip designs power most smartphones. “Whether governments have the stomach for that over the long term remains to be seen.”In four interviews, Mr. Gelsinger acknowledged the difficulties. But the father of four and grandfather of eight has pursued the goals with intensity.In March, he unveiled a $20 billion project to add two chip factories to Intel’s complex near Phoenix. Last month, he joined President Biden to showcase a $20 billion investment in a new chip manufacturing site near Columbus, Ohio. On Tuesday, he announced a $5.4 billion deal to buy Tower Semiconductor, which operates chip production services from factories in four countries.To drum up government support for his investments, Mr. Gelsinger has attended three virtual White House gatherings, spoken with two dozen members of Congress and four governors. He became a key ally to President Biden over a $52 billion package that would provide grants to companies willing to set up new U.S. chip factories. And in Europe, Mr. Gelsinger met with President Emmanuel Macron of France, President Mario Draghi of Italy, their counterparts in other countries, and the pope.Mr. Gelsinger with President Emmanuel Macron of France last June.Pool photo by Stephane De SakutinIt has been a tough slog. Intel’s stock has dropped as Mr. Gelsinger committed huge sums to chip manufacturing. The $52 billion funding package stalled for months in the House of Representatives, finally passing this month as part of broader legislation that must now be reconciled with a Senate version. Criticism of the chief executive from Wall Street analysts has ramped up.“Every day the job is way bigger than me,” Mr. Gelsinger said. But “it’s OK,” he added, because he believes he has help. “God, I need you showing up with me today because this job is way more than I could possibly do myself.”Faith and WorkIf his father had managed to buy a farm, Mr. Gelsinger would almost certainly have inherited it and become a farmer. That was expected in Robesonia, a borough in Pennsylvania Dutch country where he was raised and worked on his uncles’ farms.But there was no farm to inherit. So at age 16, Mr. Gelsinger passed a scholarship exam that took him to the Lincoln Technical Institute, a for-profit vocational school, where he earned an associate degree.Mr. Gelsinger tells this and other stories self-deprecatingly in a 2003 book of advice that he wrote for Christians titled “Balancing Your Family, Faith & Work,” which was expanded in 2008 and titled, “The Juggling Act: Bringing Balance to Your Faith, Family, and Work.”In 1979, he was interviewed at the technical institute by a manager from Intel. Unlike most of the other students there, Mr. Gelsinger had heard of the company. He breezed through questions related to his studies and predicted he could earn bachelor’s, master’s and Ph.D. degrees while holding down a full-time job, said Ronald Smith, the former Intel executive who conducted the interview.“He is very smart, very ambitious and arrogant,” Mr. Smith said he wrote in a summary of the conversation. “He’ll fit right in.”Mr. Gelsinger took his first plane ride to interview at Intel in California, where he started in October 1979 as a technician. He worked on improving the reliability of microprocessors while studying for a bachelor’s degree at Santa Clara University.He soon started hanging out with the engineers who designed the chips, coming up with ideas to test the chips more efficiently. In 1982, he became the fourth engineer on the team that introduced the groundbreaking 80386 microprocessor.During a 1985 presentation near the completion of the chip, Mr. Gelsinger chided Intel’s leaders Robert Noyce, Gordon Moore and Andy Grove about balky company computers that were slowing the process.A few days later, he got a surprise call from Mr. Grove. The Hungarian-born executive, then Intel’s president who later wrote the management book “Only the Paranoid Survive,” had built a culture where lower-level employees were encouraged to challenge superiors if they could back up their positions. Mr. Grove began mentoring Mr. Gelsinger, a relationship that lasted three decades.By 1986, Mr. Grove had convinced Mr. Gelsinger not to pursue a doctorate at Stanford University and instead made him, at age 24, the leader of a 100-person team designing Intel’s 80486 microprocessor. Mr. Gelsinger eventually earned eight patents, became Intel’s youngest vice president in 1992 and the first person with the title of chief technology officer in 2001.His climb up Intel’s ladder was shaped by another priority: his faith.Though raised in the mainstream United Church of Christ, Mr. Gelsinger said he didn’t really become a Christian until he attended the nondenominational church in Silicon Valley where he met Linda Fortune, who later became his wife. It was at that church in 1980 that he heard the minister quote Revelations.After Mr. Gelsinger became a born-again Christian, he wrestled privately with whether to join the clergy. In a 2019 oral history conducted by the Computer History Museum in Mountain View, Calif., he said he eventually decided to become a “workplace minister,” where “you really view yourself as working for God as your C.E.O., even though you’re working for Intel.”Intel SlipsIn the mid-2000s, Mr. Gelsinger’s footing within Intel shifted. Mr. Grove retired as board chairman in 2004. Another executive, Paul Otellini, was appointed chief executive in 2005. Mr. Gelsinger said he was a “dissonant voice” on Intel’s senior executive team.Mr. Otellini pushed him to leave, Mr. Gelsinger said. (Mr. Otellini died in 2017.) In 2009, Mr. Gelsinger accepted an offer to become president and chief operating officer of EMC, a maker of data storage gear.Departing Intel after 30 years as a company man hurt badly. “I was just so angry and emotional about the departure,” Mr. Gelsinger said.In 2012, he became chief executive of VMware, a software company that EMC controlled. He weathered challenges there, including an aborted effort to compete in cloud computing services with Amazon, but broadened the company’s business and nearly tripled revenues.During those years, Intel slipped. For decades, the company had led the industry in delivering regular factory advances that pack more processing power into chips. But delays in perfecting new production processes allowed rivals such as Taiwan Semiconductor Manufacturing Company and Samsung Electronics to grab the lead in manufacturing technology between 2015 and 2019.Mr. Gelsinger in 2006, when he was senior vice president of Intel’s digital enterprise group, with the company’s dual core next generation chip.Justin Sullivan/Getty ImagesToday, T.S.M.C. makes chips designed by hundreds of other companies. It supplies the world with more than 90 percent of the chips made with the most advanced production technology. Because it is headquartered in Taiwan, which China has laid territorial claim to, its location has made it a political and supply chain chokepoint should conflict erupt over the island nation.Intel was also suffering from its missteps in the mobile market, which consumes billions of processors compared with the hundreds of millions sold for computers.After convincing Apple to use its chips in Macintosh computers in 2005, Intel had a chance to win a place in the iPhone, which debuted in 2007. But Mr. Otellini said in a 2013 interview in The Atlantic that he turned down the opportunity because the price that Apple was willing to pay for chips was too low to make a profit.The decision, which Mr. Otellini said he regretted, led Apple to use rival Arm technology for smartphones and, later, tablets. So did Samsung and other companies that make devices using Google’s Android software. More recently, Apple started using Arm chips in many new Macs.Mr. Otellini and his successors prioritized Intel’s profit margins while failing to take risks to move into new markets and outflank rivals, former company insiders now acknowledge. If boiled down to a book, “it could be called ‘the insufficiently paranoid don’t survive,’” said Reed Hundt, a former Federal Communications Commission chairman who served on Intel’s board from 2001 to 2020, in a nod to Mr. Grove’s “Only the Paranoid Survive.”As questions swirled about Intel’s future, Mr. Gelsinger was viewed as a possible savior. But he insisted he was committed to VMware, a point he seemed to underscore by adding a temporary tattoo with the company’s name on his arm during a 2018 conference in Las Vegas.Then, just before Thanksgiving 2020, an Intel director asked Mr. Gelsinger to join the company’s board. Mr. Gelsinger asked for permission from Michael Dell, the founder of Dell Technologies, which then controlled VMware.“I knew Intel needed some help and Pat was somebody who could help a lot, so I said ‘sure,’” Mr. Dell said.Understand the Global Chip ShortageCard 1 of 7In short supply. More

Governments worldwide are spending at least $1.8tn a year on subsidies in support of heavily polluting industries led by coal, oil, gas and agriculture, according to new research, despite their commitment to climate change targets. About 2 per cent of global gross domestic product was spent annually on subsidies that encourage unsustainable production or consumption, deplete natural resources and degrade ecosystems, the independent researchers Doug Koplow and Ronald Steenblik concluded.Koplow, who has advised governments on subsidies, and Steenblik, who worked at the OECD on the issue, identified subsidies that they assessed had a negative impact across eight sectors, including building, transport and fishing. The biggest beneficiary of the handouts was the fossil fuel industry, which enjoyed $640bn a year, while the agricultural and forestry sectors received $520bn and $155bn, respectively, the research found. Those estimates were likely to be conservative, it noted, since the existence and size of government support was not always reported.The subsidies persisted in part because of “the power of vested interests”, said the Business for Nature and B Team groups that commissioned the study, a coalition of more than 70 business, industry and non-profit groups.The findings come just months after global negotiators from almost 200 countries agreed to the “phaseout of inefficient fossil fuel subsidies” at the COP26 UN climate summit, although this pledge did not include a deadline.Iran, China and India gave out the most in fossil fuel consumption subsidies in 2019, to the tune of $87.9bn, $34bn and $33bn, respectively, according to data from the International Energy Agency. Meanwhile, Mexico, China and Argentina provided the most direct support to fossil fuel producers, excluding tax breaks, of $11.3bn, $3.9bn and $2.5bn, respectively, according to OECD data. The OECD analysis did not include the support provided by some of the biggest oil and gas producing nations, such as Saudi Arabia, because of issues with data transparency. Despite pledges by governments to build back “greener” from the pandemic, support packages have continued to assist polluting industries.Delta Merner, who leads the Union of Concerned Scientists’ Science Hub for Climate Litigation, which connects researchers with lawyers, said fossil fuel subsidies could face legal challenges, on the grounds that they were inconsistent with a country’s net zero target, for example.“In the last six months there’s been a lot more . . . interest in understanding why we’re subsidising this industry,” she said. “I do expect that to be an area where litigation starts to move forward.” Since the genesis of subsidies could sometimes be well intentioned, such as protecting consumers from high prices, the overhaul of the schemes would need to ensure that vulnerable societies were not caught out by the reforms, the backers of the study acknowledged.Paul Polman, the former chief executive of Unilever who has become a campaigner, said the time had come to “stop the self-serving, short-sighted lobbying that perpetuates damaging subsidies”.More than a decade ago, in 2010, more than 190 nations committed to phasing out or reforming subsidies harmful to biodiversity by 2020. Humanity had “never lived on a planet with so little biodiversity,” said Christiana Figueres, former executive secretary of the United Nations Framework Convention on Climate Change, who is also founding partner of the B Team. “Harmful subsidies must be redirected towards protecting the climate and nature, rather than financing our own extinction.” More

Good morning. The Federal Reserve minutes on Wednesday were boring, and hardly moved the bond market. But we are talking about inflation anyway. That, plus planes and cruise ships. Email us: [email protected] and [email protected] different kind of inflation debateToday’s inflation is weird. It is high, which is bad. But it is coming with fast growth, which is good. Weirder still, it stems from pandemic disruptions to supply (bad) as well as surprisingly strong demand (good). It’s a mixed bag.There are two popular takes on this. One is that central banks should damp demand to slow inflation, even at a cost to growth and employment. A second, espoused by Team Transitory, is that inflation is a function of temporary pandemic dislocations, so price growth will soon moderate and central banks should back off. But there is a third option. From a January paper published by BlackRock’s in-house think-tank:Central banks should live with supply-driven inflation, rather than destroy demand and economic activity — provided inflation expectations remain anchored. When inflation is the result of sectoral reallocation, accommodating it yields better outcomes.Jean Boivin, one of the paper’s authors and a former Canadian central banker, told Unhedged many investors are getting inflation wrong by relying only on a macro lens. He emphasises a sectoral view. Two points stood out:Covid is fuelling a long-term resource reallocation, creating inflationary bottlenecks in some sectors and slack in others;Rising prices are how markets handle such a reallocation, and trying to crush them with rate rises will only prolong a painful but necessary process.Unlike Team Transitory, Boivin expects pandemic dislocations will persist for years — so inflation will not subside soon. But unlike inflation hawks, he thinks the cost of curbing inflation is too high, so long as inflation expectations stay anchored. Central banks should accept elevated inflation as the least-worst alternative.Rendering a verdict here is above our paygrade. But it’s not above that of Martin Wolf, the Financial Times’ chief economics commentator, who offered this bit of scepticism (emphasis Martin’s):At some point, relative prices will peak. The question is when this happens — this year, next year or five years from now and what central banks should do in the meantime? What [central bankers] have to do is prevent a wage-price spiral, which would certainly destabilise inflation expectations. Monetary policy must be tight enough to achieve this. In other words, it must create/preserve some slack in the labour market. What degree of policy tightness is needed to achieve this we don’t know. And it is certainly possible that headline and most measures of core inflation will continue to be high even if a degree of labour market slack does exist. But there is no point in permitting a level of aggregate demand that aggregate supply, given the pattern of demand, cannot meet. Central banks must tighten accordingly.Responding to the italicised bit, Boivin reiterated why a sectoral view matters:This is about a persistent reallocation, playing out over many years. This reallocation will create bouts of inflation, whether or not at full employment or if the aggregate output gap is closed. These bouts of inflation will be driven by sectors where supply is lagging demand (as it is now in goods sectors). Rising prices in these sectors are part of the mechanism that gets supply and demand in the same place. They reduce demand in areas with shortages and encourage supply capacity to move.The price adjustments will, in fact, incentivise a quicker transition and central banks insisting on preventing these price adjustments will end up slowing the transition.It strikes us that there are different risk assessments at play. Martin is worried about a wage-price spiral that hits inflation expectations. Boivin thinks that perception is itself the problem. From his paper:The primary risk we see is that central banks hit the brakes if constraints persist and they perceive that higher inflation could feed into inflation expectations. There is much more to say here, and readers are invited to send in thoughts. If inflation doesn’t subside this year, expect more of this debate. (Ethan Wu)Is there value in the airline/cruise line junk pile? Are we there yet? As a veteran of long car trips with children, I know there is only one answer to this question: we’ll get there when we get there, so quit asking. So it is with Covid. There is little value in speculating about when the economy will have recovered fully from the virus. It will happen when it happens.That said, it feels like we are closer to the destination that we were even a month ago. Anthony Fauci, the chief medical adviser to US president Joe Biden, who is not known for his glib optimism, has said that the “full blown” stage of the pandemic is drawing to a close. The end of mask mandates is being debated. And most fundamentally, it is clear that the Omicron wave has crested. Here are new deaths and cases in the US:

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And here are US Transportation Security Administration airport checkpoint volumes. People are flying: People may be acting like the pandemic is coming to an end. Shares in airlines and cruise lines are not. Here is the performance of the S&P 500 index against the airline and hotel/resort/cruise line sub-indices: Hotel stocks have actually done fine. The drag is all cruise lines and airlines. Is there too much pessimism baked into those share prices? Consider the table below. For the big cruise line and airlines stocks, it shows both revenue and earnings per share for pre-pandemic 2019 and consensus estimates for this year. The declines in each show the damage the pandemic continues to inflict on these companies. The second-to-last column expresses this year’s expected revenues as a percentage of 2019’s, a measure of how much demand has returned. It mostly has, but earnings are not bouncing back, likely reflecting reopening costs. The final column shows the current price divided by 2019 earnings, a measure of how much you are paying for the stock if earnings can return to pre-pandemic levels.

Is it really this bad?CompanyRev 2019, mnRev 2022, estEPS 2019, $EPS 2022, est2022 rev/ 2019 revPrice/2019 earningsUnited Airlines 43,259  40,550  11.6  (0.58) 94% 4 American Airlines 45,768  42,306  3.79  2.04 92% 5 Norwegian Cruises 6,462  5,166  4.3  (0.08) 80% 5 Carnival Corporation 20,825  16,197  4.32  (0.82) 78%Delta Air Lines 47,007  42,581  7.3  1.87 91% 6 Royal Caribbean 10,951  9,294  8.95  (2.50) 85% 10 Alaska Air 8,781  8,887  6.19  2.68 101% 10 Southwest Airlines 22,428  21,437  4.27  1.11 96% 11 Data from S&P Capital IQ and Bloomberg

On the current price/2019 earnings metric, the stocks look very cheap — mid-single digit P/E multiples are low even by the standards of these two capital intensive, cyclical industries. What the prices seem to be saying is that the cruise business and the airline business are never returning to their old selves, or not for a very long time. Is that true? Some of these companies (Delta, Carnival, Royal Caribbean, United) took on a lot of debt to make it though the pandemic, which will depress their valuations. But that is unlikely to be the whole story here. One good readA lovely literary appraisal of PJ O’Rourke, who died on Tuesday, in The New York Times. More