Finance

The history of inflation in Russia is long and painful. Following the revolution of 1917 the country dealt with years of soaring prices, and then faced sustained price pressure in the early period of Josef Stalin’s rule. The end of the Soviet Union, the global financial crisis of 2007-09 and then Vladimir Putin’s first invasion of Ukraine in 2014 also brought trouble. Fast forward to late 2023, as the war in Ukraine nears its second anniversary, and Russian prices are once again accelerating—even as inflation eases elsewhere (see chart).image: The EconomistAccording to figures published on December 8th, inflation in November was 7.5%, year on year, up from 6.7% the month before. The central bank dealt with a spike in early 2022, soon after Russia invaded Ukraine for a second time. Now, though, officials worry that they may be losing control. At the bank’s last meeting they raised interest rates by two percentage points, twice what had been expected. At their next one on December 15th a similar increase is on the cards. Most forecasters nonetheless expect inflation to keep rising.Russia’s inflation of 2022 was caused by a weaker rouble. After Mr Putin began his invasion the currency fell by 25% against the dollar, raising the cost of imports. This time currency movements are playing a small role. In recent months the rouble has actually appreciated, in part because officials introduced capital controls. Inflation in prices of non-food consumer goods, many of which are imported, is in line with the pre-war average.Look closer at Mr Putin’s wartime economy, however, and it becomes clear that it is dangerously overheating. Inflation in the services sector, which includes everything from legal advice to restaurant meals, is exceptionally high. The cost of a night’s stay at Moscow’s Ritz-Carlton, now called the Carlton after its Western backers pulled out, has risen from around $225 before the invasion to $500. This suggests that the cause of inflation is home-grown.Many economists blame government outlays, which are soaring as Mr Putin tries to defeat Ukraine. In 2024 defence spending will almost double, to 6% of GDP—its highest since the collapse of the Soviet Union. Mindful of a forthcoming election, the government is also boosting welfare payments. Some families of soldiers killed in action are receiving payouts equivalent to three decades of average pay. Figures from Russia’s finance ministry suggest that fiscal stimulus is currently worth about 5% of GDP, a bigger boost than that implemented during the covid-19 pandemic.This, in turn, is raising the country’s growth rate. Real-time economic data published by Goldman Sachs, a bank, point to solid growth. JPMorgan Chase, another bank, has lifted its GDP forecast for 2023, from a 1% decline at the start of the year, to 1.8% in June and more recently to 3.3%. “Now we confidently say: it will be over 3%,” Mr Putin recently boasted. Predictions of a Russian economic collapse—made almost uniformly by Western economists and politicians at the start of the war in Ukraine—have proven thumpingly wrong.The problem is that the Russian economy cannot take such rapid growth. Since the beginning of 2022 its supply side has drastically shrunk. Thousands of workers, often highly educated, have fled the country. Foreign investors have withdrawn around $250bn-worth of direct investment, nearly half the pre-war stock.Red-hot demand is running up against this reduced supply, resulting in higher prices for raw materials, capital and labour. Unemployment, at less than 3%, is at its lowest on record, which is emboldening workers to ask for much higher wages. Nominal pay is growing by about 15% year on year. Companies are then passing on these higher costs to customers.Higher interest rates might eventually take a bite out of this demand, stopping inflation from rising more. An oil-price recovery and extra capital controls could boost the rouble, cutting the cost of imports. Yet all this is working against an immovable force: Mr Putin’s desire to win in Ukraine. With plenty of financial firepower, he has the potential to spend even bigger in future, portending faster inflation still. As on so many previous occasions, in Russia there are more important things than economic stability. ■ More

EU institutions have been hashing out proposals this week in an effort to come up with an agreement on how to regulate products like ChatGPT.
Germany, France and Italy have opposed directly regulating generative AI models, known as “foundation models.”

A photo taken on November 23, 2023 shows the logo of the ChatGPT application developed by US artificial intelligence research organization OpenAI on a smartphone screen (left) and the letters AI on a laptop screen in Frankfurt am Main, western Germany.
Kirill Kudryavtsev | Afp | Getty Images

The European Union on Friday agreed to landmark rules for artificial intelligence, in what’s likely to become the first major regulation governing the emerging technology in the western world.
Major EU institutions spent the week hashing out proposals in an effort to reach an agreement. Sticking points included how to regulate generative AI models, used to create tools like ChatGPT, and use of biometric identification tools, such as facial recognition and fingerprint scanning.

Germany, France and Italy have opposed directly regulating generative AI models, known as “foundation models,” instead favoring self-regulation from the companies behind them through government-introduced codes of conduct.
Their concern is that excessive regulation could stifle Europe’s ability to compete with Chinese and American tech leaders. Germany and France are home to some of Europe’s most promising AI startups, including DeepL and Mistral AI.
The EU AI Act is the first of its kind specifically targeting AI and follows years of European efforts to regulate the technology. The law traces its origins to 2021, when the European Commission first proposed a common regulatory and legal framework for AI.
The law divides AI into categories of risk from “unacceptable” — meaning technologies that must be banned — to high, medium and low-risk forms of AI.
Generative AI became a mainstream topic late last year following the public release of OpenAI’s ChatGPT. That appeared after the initial 2021 EU proposals and pushed lawmakers to rethink their approach.

ChatGPT and other generative AI tools like Stable Diffusion, Google’s Bard and Anthropic’s Claude blindsided AI experts and regulators with their ability to generate sophisticated and humanlike output from simple queries using vast quantities of data. They’ve sparked criticism due to concerns over the potential to displace jobs, generate discriminative language and infringe privacy.
WATCH: Generative AI can help speed up the hiring process for health-care industry More

The two most significant events for gold demand in 2023 were the collapse of Silicon Valley Bank and the Hamas attack on Israel, the WGC said, estimating that geopolitics added between 3% and 6% to gold’s performance over the year.
The WGC estimated that central bank demand added 10% or more to gold’s performance in 2023, and said even if 2024 does not reach the same heights, above-trend buying should still offer an extra boost to gold prices.
The yellow metal broke through $2,100 per ounce on Monday before moderating slightly, and spot prices were hovering at around $2,030 per ounce early Friday.

An employee puts gold bullions into a safe deposit box at Degussa shop in Singapore
Edgar Su | Reuters

Gold prices hit another record high this week after a roaring 2023, and a combination of geopolitical tensions and continued central bank buying should see demand remain resilient next year, according to the World Gold Council.
The yellow metal broke through $2,100 per ounce on Monday before moderating slightly, and spot prices were hovering at around $2,030 per ounce early Friday.

In its Gold Outlook 2024 report published Thursday, the World Gold Council noted that many economists now anticipate a “soft landing” in the U.S. — the Federal Reserve bringing inflation back to target without triggering a recession — which would be positive for the global economy.
The industry body (which represents gold mining companies) noted that historically, soft landing environments have “not been particularly attractive for gold, resulting in flat to slightly negative average returns.”
“That said, every cycle is different. This time around, heightened geopolitical tensions in a key election year for many major economies, combined with continued central bank buying could provide additional support for gold,” the WGC added.

Its strategists also noted that the likelihood of a soft landing is “by no means certain,” while a global recession is still not off the table.
“This should encourage many investors to hold effective hedges, such as gold, in their portfolios,” the WGC added.

The two most significant events for gold demand in 2023 were the collapse of Silicon Valley Bank and the Hamas attack on Israel, the WGC said, estimating that geopolitical events added between 3% and 6% to gold’s price over the year.
“And in a year with major elections taking place globally, including in the U.S., the EU, India, and Taiwan, investors’ need for portfolio hedges will likely be higher than normal,” the report said, looking ahead to 2024.
All eyes on the Fed
WGC Chief Market Strategist John Reade told CNBC on Thursday that gold prices would likely remain range-bound but choppy next year. He expects them to react to individual economic data points that inform the likely trajectory of Fed policy until the first interest rate cut is in the bag.
Markets are currently pricing the first 25-basis-point cut to the Fed funds rate as early as March next year, according to CME Group’s FedWatch tool.
However, although rate cuts are usually seen as good news for gold (as cash returns fall and savers look elsewhere for high-yielding investments), Reade highlighted that two factors could mean that “expected policy rate easing may be less sanguine for gold than it appears on the surface.”
Firstly, if inflation cools more quickly than rates — as it is largely expected to do — then real interest rates remain elevated. And secondly, lower-than-expected growth could hit gold consumer demand.

“I’m not saying interest rates have to go back to 0 to reignite the demand, but that combination I think of the first cut in the States and cuts elsewhere in other important economies, will I think change a bit of the sentiment towards gold,” Reade said.

Central bank buying to continue

One other supporting factor for the yellow metal looking ahead is further central-bank buying, according to the World Gold Council.
Central banks have been a major source of demand in the global gold market over the last couple of years and 2023 is likely to be a record year. The WGC expects this to continue in 2024.
Reade said the organization was surprised by the significant increase in central bank purchases in 2022 and that the pace of buying continued this year.

In its report, the WGC estimated that central bank demand added 10% or more to gold’s performance in 2023, and noted that even if 2024 does not reach the same heights, above-trend buying should still offer an extra boost to gold prices.
“Our expectations are that central bank purchases will continue next year on a net basis, and that’s pretty much the case since the global financial crisis,” Reade said.
“My own expectation is that central banks are very much going to be again, the sort of prominent story in the gold market in 2024, but I think that it would be optimistic of us to say that it’s going to be another record year or a record-matching year.” More

Wells Fargo (WFC) had to make some tough calls to stay on course with its turnaround plan. It’s one of three industry developments that impact Wells and our other bank name, Morgan Stanley (MS). Wells Fargo said this week that more layoffs are on the horizon for 2024, as the bank doubles down on efficiency and cost cuts. Elsewhere, Morgan Stanley’s asset management division raised over $1 billion for growth investing , The Wall Street Journal reported Thursday, in the latest sign its long-dormant deal-making business could start to show signs of life. At the same time, the banking industry is facing the prospect of fresh regulations that threaten to chip away at profits for both firms. Banks are wading through decades-high interest rates and higher funding costs as economic uncertainty grips the sector. The KBW Bank Index, which tracks the performance of the biggest U.S. bank stocks, is down 13.85% year-to-date, compared to the S & P 500 ‘s 19.91% gains since the start of 2023. While Jim Cramer recently described the sector as the laggard of the stock market, he maintains that the stocks of both firms are still a buy. With Morgan Stanley, in particular, Jim said shares should be purchased “aggressively” because of its great dividend yield and cheap valuation. Still, recent headlines shed light on how our financial names are pushing forward amid a tough operating environment. Cost cuts The news: During a Goldman Sachs conference Tuesday, Wells Fargo CEO Charlie Scharf warned of large severance costs for the bank’s fourth quarter. “We’re looking at something like $750 million to a little less than a billion dollars of severance in the fourth quarter that we weren’t anticipating, just because we want to continue to focus on efficiency,” Scharf said. He added that the firm needs to get even “more aggressive” on managing headcount and is “not even close” to where it should be on efficiency. Wells Fargo has already laid off more than 227,000 staffers — roughly 4.7% of its workforce — this year, as of September. The chief executive also noted that the bank wants to continue allocating funds to build out the money-making areas of its business like capital markets. The Club’s take: Although layoffs are never an easy decision, management’s focus on cost cutting is necessary to improve Wells Fargo’s efficiency ratio – a gauge of the bank’s expenses relative to its revenue. Wells Fargo’s efficiency ratio has consistently improved in recent years, helped by various initiatives like significantly scaling back its U.S. mortgage business . Overall, Wells Fargo is a multi-year play for the Club as the bank continues to show further progress around its turnaround plan, which was implemented after financial regulators imposed a $1.95 trillion asset cap on the bank back in 2018. However, we maintain that lifting the cap is a “when, not if” scenario — one that should increase the bank’s balance sheet, allowing the firm to rake in more profits. WFC YTD mountain Wells Fargo year-to-date performance. Fundraising The news: Morgan Stanley Investment Management has raised almost $1.2 billion in funding for late-stage growth investing, news that the bank confirmed after The Journal originally broke the story. The bank’s asset management arm closed two different private-equity vehicles, surpassing its fundraising goal by approximately 40%, the bank said. The Club’s take: Although the investment may seem like a drop in the bucket for one of the nation’s largest banks – it manages around $1.4 trillion in assets – the move signals a more positive trajectory for the broader fundraising environment. Raising capital has been significantly more difficult since the Federal Reserve began hiking interest rates in March 2022 and the blow up of SVB earlier this year, so any indication of a pick-up in investments could be beneficial for the overall deal-making environment. This would benefit Morgan Stanley’s languishing investment-banking business, which has slowed in recent quarters due to a muted initial-public-offering market and weak mergers-and-acquisitions activity. MS YTD mountain Morgan Stanley year-to-date performance. Regulation The news: On Wednesday, the heads of eight of the largest U.S. banks, including Wells Fargo and Morgan Stanley, tried to convince lawmakers that proposed regulations, known as the Basel 3 endgame, will hurt not only their firms but everyday Americans, too. During an annual senate oversight hearing, the CEOs pushed back on new proposed rules — designed for U.S. banks with at least $100 billion in assets — that would raise the level of capital firms must hold to mitigate against future risk. “The rule would have predictable and harmful outcomes to the economy, markets, business of all sizes and American households,” JPMorgan CEO Jamie Dimon said. The Club’s take: We’re optimistic that Wells Fargo and Morgan Stanley would be able to adapt to any new rules because both are well capitalized, as indicated in the Federal Reserve’s annual stress tests earlier this year. Although the Basel 3 endgame could hit net interest income for Morgan Stanley, any weakness should be offset by a more profitable investment-banking division. Additionally, Morgan Stanley’s outgoing CEO, James Gorman, told CNBC last month that the bank can handle “any form” of new rules regulators might implement. (Jim Cramer’s Charitable Trust is long WFC, MS . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.

Wells Fargo (WFC) had to make some tough calls to stay on course with its turnaround plan. It’s one of three industry developments that impact Wells and our other bank name, Morgan Stanley (MS). More

QR codes have become popular but pose risks for the unwary, the Federal Trade Commission warned in a consumer alert.
Thieves have been using the digital codes to steal people’s personal information.
In those cases, fraudulent codes may link to a phony but legitimate looking website to perpetuate scams.

Westend61 | Westend61 | Getty Images

You may want to think twice before scanning that QR code.
The codes — a digital jumble of black and white squares, often used for storing URLs — have become seemingly ubiquitous, found on restaurant menus and in retail stores, for example. However, they can pose risks for the unwary, the Federal Trade Commission warned Thursday.

About 94 million U.S. consumers will use smartphone QR scanners this year, according to a projection by eMarketer. That number that will grow to 102.6 million by 2026, it said.
There are countless ways to use them, which explains their popularity, according to Alvaro Puig, an FTC consumer education specialist, in a consumer alert.
“Unfortunately, scammers hide harmful links in QR codes to steal personal information,” Puig said.
More from Personal Finance:IRS rejects more than 20,000 refund claims for pandemic-related tax creditCredit card debt is biggest threat to building wealth, poll findsNot saving in your 401(k)? Your employer may re-enroll you

Why stolen personal data is a big deal

Here’s why that matters: Identity thieves can use victims’ personal data to drain their bank account, make charges on their credit cards, open new utility accounts, get medical treatment on their health insurance and file a tax return in a victim’s name to claim a tax refund, the FTC wrote in a separate report.

Some criminals cover up the QR codes on parking meters with a code of their own, while others send codes by text message or email and entice victims to scan them, the FTC said in its consumer alert.

The scammers often try to create a sense of urgency — for example, by saying a package couldn’t be delivered and you need to reschedule, or that you need to change an account password due to suspicious activity — to push victims to scan the QR code, which may open a compromised URL.
“A scammer’s QR code could take you to a spoofed site that looks real but isn’t,” Puig wrote. “And if you log in to the spoofed site, the scammers could steal any information you enter. Or the QR code could install malware that steals your information before you realize it.”

How to protect yourself

Here’s how to protect yourself from these scams, according to the FTC:

Inspect URLs before clicking. Even if it looks like a URL you recognize, check for misspellings or a switched letter to ensure it’s not spoofed.
Don’t scan a QR code in a message you weren’t expecting. This is especially true when the email or text urges fast action. If you think it’s a legitimate message, contact the company via a trusted method like a real phone number or website.
Protect your phone and online accounts. Use strong passwords and multifactor authentication. Keep your phone’s OS up to date.

Don’t miss these stories from CNBC PRO: More

After the global financial crisis of 2007-09, economists quickly understood that the world economy would never be the same again. Although it would get past the disaster, it would recover to a “new normal”, rather than the pre-crisis status quo. A few years later the phrase was also adopted by China’s leaders. They used it to describe the country’s shift away from breakneck growth, cheap labour and monstrous trade surpluses. These changes represented a necessary evolution in China’s economy, they argued, which should be accepted, not resisted too strenuously.After China’s long campaign against covid-19 and its disappointing reopening this year, the sentiment is popping up again. China’s growth prospects seem “structurally” weaker—one reason why Moody’s, a rating agency, said this week that it might have to cut the country’s credit rating in the medium term. Several economists have declared a new normal in China’s unruly property market. Some commentators hope for a new equilibrium in China’s relations with America following the recent meeting between the two countries’ leaders. In September Cai Fang of the Chinese Academy of Social Sciences identified a “new” new normal, brought about by a mixture of China’s shrinking population, greying consumers and picky employers.Calibrating the new normal is a matter of some urgency. China’s leaders will soon gather in Beijing for the Communist Party’s Central Economic Work Conference. Their deliberations will help set a growth target for 2024, which will be announced in March. Most forecasters expect China’s economy to grow by less than 5%. Moody’s forecasts 4%. Officials must thus decide how strenuously to resist this slowdown.If they think it represents a new equilibrium, they may accept it and lower their growth target accordingly. If they think China has room to grow faster, they may stick with the 5% target they set for 2023. Meeting such a goal will be more difficult in 2024 than it was this year, because the economy will not benefit from another reopening boost. However, an ambitious target could also serve a purpose, underlining the government’s commitment to growth, and reassuring investors that more fiscal help is on its way if required.It is impossible to think about how the economy will grow without first considering how China’s property slump will end. Although most economists agree that the market “cannot return to its past glory”, as Liu Yuanchun of the Shanghai University of Finance and Economics has put it, there is less agreement on how inglorious its future must be. In the past, sales were buoyed by speculative demand for flats from buyers who assumed they would rise in price. In the future, the market will have to cater chiefly to fundamental demand from buyers who want a new or better home.How much fundamental demand remains? China now enjoys a living area of 42 square metres per person, according to the census of 2020; an amount comparable to many European countries. On the face of it, this suggests that the market is already saturated. But the European figures typically count only the useable area of a property, as Rosealea Yao of Gavekal Dragonomics, a research firm, has pointed out. The Chinese number, on the other hand, refers to everything that is built, including common areas shared by several households.Ms Yao has estimated that China might eventually reach a living space per person of about 45-50 square metres when common areas are included. The country’s property sales might therefore have room to grow from their depressed levels of 2023, even if they never return to the glories of earlier years. Ms Yao believes that sales needed to fall by about 25% from their levels in 2019. Yet in recent months the drop has been closer to 40%.Property developers could also benefit from the government’s new efforts to renovate “urban villages”. As China’s cities have expanded, they have encompassed towns and villages that were once classified as rural—the cities move to the people not the other way around. This “in-situ urbanisation” accounted for about 55% of the 175m rural folk who became city-dwellers over the ten years from 2011 to 2020, according to Golden Credit Rating International, a Chinese rating agency. By some estimates, the government’s “urban villages” project could span as many as 40m people in 35 cities over the next few years.China’s property slump has also revealed the need for a “new normal” in the country’s fiscal arrangements. The downturn has hurt land sales, cutting off a vital source of revenue for local governments. That has made it more difficult for them to sustain the debts of the enterprises they own and the “financing vehicles” they sponsor. These contingent liabilities are “crystallising”, as Moody’s puts it.The central government would like to prevent an outright default on any of the publicly traded bonds issued by local-government financing vehicles. But it is also keen to avoid a broader bail-out, which would encourage reckless lending to such vehicles in the future. Although any assistance that the central government grudgingly provides will weaken the public finances, a refusal to help could prove fiscally expensive, too, if defaults undermine confidence in the state-owned financial system. For now, the relationship between China’s central government, its local governments and local-government financing vehicles remains a work in progress.image: The EconomistWhatever happens, property seems destined to shrink in the medium term. What will take its place? Officials have begun to talk about the “new three”, a trio of industries including electric cars, lithium-ion batteries and renewable energy, especially wind and solar power. But despite their dynamism, such industries are relatively small, accounting for 3.5% of China’s gdp, according to Maggie Wei of Goldman Sachs, a bank. In contrast, property still accounts for almost 23% of gdp, once its connections to upstream suppliers, consumer demand and local-government finances are taken into account. Even if the “new three” together were to expand by 20% a year, they cannot add as much to growth in the next few years as the property downturn will subtract from it (see chart 1).Under the hammerThe new three as a group are also not as labour-intensive as property, which generates a useful mixture of blue-collar jobs (builders) and white-collar careers (estate agents and bankers). A period of transition from one set of industries to another can make jobs and career paths less predictable. Mr Cai worries that this labour-market uncertainty will inhibit spending by Chinese consumers, who will anyway become more conservative as they age.image: The EconomistDuring erratic pandemic lockdowns, consumer confidence collapsed and household saving jumped (see chart 2). Many commentators believe that the experience has left lasting scars. Consumers still say they are gloomy in surveys. Yet they seem less stingy in the shops. Their spending is now growing faster than their incomes. They have, for example, snapped up Huawei’s new Mate 60 smartphone, with its surprisingly fast Chinese chips.One question, then, is whether China’s new normal will feature a permanently higher saving rate. Some economists fear that further declines in house prices will inhibit consumption by damaging people’s wealth. On the other hand, if people no longer feel obliged to save for ever-more expensive flats, then they might spend more on consumer items. Hui Shan of Goldman Sachs argues that retail sales, excluding cars and “moving-in items”, such as furniture, are, if anything, negatively correlated with house prices. When homes become cheaper, retail sales grow a little faster. She believes the saving rate will continue to edge down, albeit gradually.What do these shifts add up to for the economy as a whole? The consensus forecast for Chinese growth next year is of about 4.5%. China’s policymakers might accept this as the new normal for the economy, just as they accepted the slowdown after 2012. But should they?image: The EconomistAccording to economic textbooks, policymakers can tell when an economy is surpassing its speed limit when it starts to overheat. The traditional sign of overheating is inflation. By that measure, China can grow faster than its present pace. Consumer prices fell in the year to October. And the gdp deflator, a broad measure of prices, is forecast to decline this year (see chart 3), raising the spectre of deflation.Another potential sign of overheating is excessive lending. The Bank for International Settlements, a club of central bankers, calculates a country’s “credit gap”, which compares the stock of credit to companies and households with its trend. From 2012 to 2018 and again in mid-2020, China’s credit gap surpassed the safe threshold of 10% of gdp. Yet the gap has since disappeared. China’s problem now is not excessive credit supply to companies and households. It is weak loan demand.Therefore neither test suggests that China’s economy is growing too fast. And growing too slowly poses its own dangers. If China’s policymakers do not do more to lift demand, they might fail to dispel deflation, which will erode the profitability of companies, increase the burden of debt and entrench the gloominess of consumers. After the global financial crisis, many economies “muddled along with subpar growth”, as Christine Lagarde, then head of the imf, put it. They resigned themselves to a “new normal”, only to instead lapse into a “new mediocre”. China could find itself making the same mistake. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Who would want to own shares in a bank? Rising interest rates should have been a blessing, lifting the income they can earn on assets. But a few banks that had lent and invested freely at rock-bottom rates faced runs, which pushed up funding costs for the rest. More may yet fail. And new regulations, ominously named Basel 3 “endgame” rules, could raise the capital requirements on some American banks by as much as a quarter if they are introduced in their current form in 2025. This would scupper any chance that shareholders can be paid much out of profits, perhaps for years.Nasty stuff. Indeed, the KBW index of large American bank stocks has shed 15% this year, even as American stocks have risen by 19%. This underperformance, after a decade of mediocrity, means that banks now make up less than 5% of the S&P 500 index of large American firms. Blackstone, a private-markets giant, has a market capitalisation 20% bigger than that of Goldman Sachs. Just about any measure of valuation shows banks to be at or near an all-time low.Yet being cheap is not the same as being a bargain. Banks are not startups selling a growth story. Nor are they tech firms building innovative new products. Banking is a mature business; its fortunes are closely tied to the macroeconomic environment. Investors therefore look for institutions where profits or earnings might grow in the near future and where those profits may be returned to investors via dividends or buy-backs.On neither front do American banks look appealing. Net interest income, a measure of the difference between the interest banks earn on loans and that which they pay out on deposits, seems to have peaked. Although rising rates boost income, the climb in funding costs has eaten into this. Customers fled regional banks following collapses earlier in the year and have moved away from all banks in favour of money-market funds, which offer higher low-risk returns. Even in the best-case scenario for America’s banks—a “soft landing” or “no landing” at all, in which there is no recession, few loan defaults and interest rates do not come down much—earnings would probably remain only around their present levels.Then there are the capital rules. If bankers have to hoard capital in order to boost buffers there will not be much left to pay dividends or do buy-backs. Bankers are concerned that the rules could even spell the end game for their business. Jamie Dimon, boss of JPMorgan Chase, America’s biggest bank, has remarked that less regulated competitors, such as growing private-credit firms, should be “dancing in the streets”. Marianne Lake, JPMorgan’s head of consumer banking, has described the situation as “a little bit like being a hostage”. The requirement was so shocking at first that “even if it changes a bit, you sort of are grateful for that,” she has admitted, despite the pain it will nevertheless cause your company.The fight over the proposed changes has become ugly. Although bankers typically lobby behind closed doors, the new requirements have pushed them into open warfare. They have pointed out that the proposals would quadruple the risk-weighting given to “tax equity” investments, a crucial source of financing for green-energy projects under President Joe Biden’s Inflation Reduction Act. Some lobbyists reportedly may sue the Federal Reserve for failing to follow due process and argue that the regulator should give people more time to comment once it has been followed.These tactics could work. The Fed might water down its plans, or a back-and-forth might push the proposals into a grey zone ahead of America’s presidential election. The rules are subject to review by Congress, and it will have few days in session next year owing to the primaries, summer recess and the election itself. As the odds of a Republican presidency rise, so do the chances that a later review would result in much smaller increases in capital requirements.Still, an investor might feel queasy at making that bet. So one looking at banks might turn his attention to Europe instead. Unlike in America, funding costs have not climbed much, in part owing to weaker competition. The result has been a steady stream of earnings upgrades. After nine years of negative rates the return to positive ones has been “like rain in the desert”, says Huw van Steenis of Oliver Wyman, a consultancy. Extra capital requirements from Basel 3 are more modest in Europe. An investor might want to buy shares in a bank, then. But for the first time in a long time, perhaps he should consider a European one. ■Read more from Buttonwood, our columnist on financial markets: Short-sellers are endangered. That is bad news for markets (Nov 30th)Investors are going loco for CoCos (Nov 23rd)Ray Dalio is a monster, suggests a new book. Is it fair? (Nov 16th)Also: How the Buttonwood column got its name More

Environmentalists do not get on with free-traders. Suspicion is the norm, if not the outright hostility on display at the “Battle of Seattle” in 1999, which took place between riot police and activists outside a meeting of the World Trade Organisation (wto). When Ngozi Okonjo-Iweala, boss of the wto, went to the cop climate summit in Glasgow two years ago she was the first head of the trade club to attend the portion reserved for ministers and senior officials. She is once again at this year’s summit, which began in Dubai on November 30th, to explain how trade can save the planet.Past animosity may help explain why green policies in many countries are at odds with the principles of free trade. “Buy American” provisions in the Inflation Reduction Act (ira), Joe Biden’s flagship green policy, lock out European firms. Tariffs on European steelmakers, introduced by Donald Trump on national-security grounds, have been suspended to give negotiators time to reach a deal on “sustainable steel”, but talks have stalled. America has ratcheted up tariffs on Chinese solar panels and battery-powered cars, and the EU has announced a counter-subsidy investigation into China’s carmakers.The effect of these policies is to give a boost to polluters. The WTO reckons that renewable-energy equipment faces an average tariff of 3.2%, four times that on oil. Electric vehicles experience tariffs that are 1.6 to 3.9 percentage points higher than those on combustion engines. Non-tariff barriers such as domestic-content requirements, which mean a given proportion of the components of, say, a car must be made domestically, raise costs even further and slow the spread of clean technology.Free-traders are belatedly fighting back. This year’s COP featured the first ever “trade day”. The WTO marked the occasion with a ten-point plan laying out how free trade could speed the green transition. Points range from the uncontroversial (speeding up border checks so that container ships spend less time idling) to the tricky (co-ordinating carbon pricing to stop unilateral border taxes causing trade disputes).They will need more than the promise of efficiency to win over green types, however. Take the eu’s carbon border adjustment mechanism (cbam), which aims to charge the same carbon price on certain industrial commodities whether they are produced inside or outside the bloc. It is designed to be non-discriminatory: businesses in the eu pay the same price wherever they source their inputs from. Therefore it satisfies free-traders who think domestic and foreign producers should be treated the same. Nevertheless, despite its green credentials, many activists object to it on the grounds that the rich world should fund the green transition. The cbam will hit many poor countries hard, since their production is more polluting.One way to get the critics on board might be for rich countries to provide more climate finance to the developing world. During COP, Ursula von der Leyen, the European Commission’s president, Kristalina Georgieva, managing director of the IMF, and Ms Okonjo-Iweala together floated using revenues from carbon pricing to smooth things out. The eu pledged $145m, on top of $100m from Germany, towards compensating poor countries for climate change, as well as support for the un’s green climate fund, which helps countries decarbonise and adapt to a hotter world.The WTO will need to make changes as well, argues Daniel Esty, a professor at Yale University seconded to the organisation. A world of cross-border carbon taxes and green industrial policies will require a referee to set commonly agreed standards and measurements of emissions. The wto published a report that attempted to establish how to account for the embodied carbon in steel imports on December 1st, the second day of Cop. It could also start to distinguish between subsidies that distort trade but might be good for the planet, such as America’s ira, and those which are bad on both counts, suggests Mr Esty. That would represent a compromise between free-traders and environmentalists. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More