Finance

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.

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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

When moody’s, a research firm, cut Japan’s top-grade credit rating and warned of a “significant deterioration in the government’s fiscal position”, Nintendo’s first colour Game Boy was taking the world by storm and Japan’s net government debt ran to 54% of GDP. Twenty-five years later that figure stands at 159%. The growth has been cushioned by a fall in government bond yields, which means that Japan paid less interest to its creditors last year than it did three decades ago. But now Moody’s warning may finally come true.That is because refinancing is becoming more expensive. Ten-year government bond yields have risen from, in effect, zero three years ago to around 0.7% now. A rise in inflation has forced the Bank of Japan (boj) to all but abandon its policy of capping long-term bond yields. The next step may be to raise short-term interest rates for the first time since 2007. Central banks elsewhere are considering cutting rates; Japan is moving in the opposite direction.image: The EconomistPoliticians seem not to have realised. Kishida Fumio, Japan’s prime minister, plans to splurge. Defence spending is set to double as a share of gdp by 2027. As the population ages, welfare payments will grow. On November 29th parliament voted in favour of temporary tax cuts worth 1% of Japan’s gdp. The decision drew a rebuke from Shirakawa Masaaki, a former boj governor, who questioned the logic of cutting taxes when the country faces inflation.Japan’s finance ministry predicts that interest payments to bondholders will rise from ¥7.3trn ($54bn) in the last fiscal year to ¥8.5trn in the current one, the largest nominal increase since 1983. This is just the start, since payments go up only when bonds are refinanced. In 2024 ¥119trn in bonds will mature. Another ¥158trn will then mature over 2025 and 2026.The scale of the threat to Japan’s public finances depends on economic growth. Goldman Sachs, a bank, calculates that, with nominal growth of 2%, Japan’s persistent budget deficit will be sustainable if average interest rates on its debts stay at 1.1% or below. Since average interest rates were nearly 0.8% in the year to March, that leaves a modest buffer. A little additional growth would go a long way. With nominal growth of 3%, Goldman’s analysts think that interest rates could rise as high as 2.1% without threatening the public finances.Even if the public finances are not imperilled, the bill from greater interest payments will mount, putting policymakers under pressure. After a decade of bond-buying, the boj owns almost half the country’s government debt. To finance the bond purchases, it created a huge volume of central-bank reserves—a sort of deposit owed to the commercial banks that sold the bonds to the boj in the first place. These reserves have floating interest rates.When short-term rates were zero, this was hardly a problem. From April to September, the boj earned ¥807bn in interest on its holdings of government bonds, and paid out ¥92bn on its deposits. But if the boj were to pay even half a percentage point in total interest on its reserves, outgoings would run to ¥2.7trn, an amount equivalent to 40% of the defence budget.How should politicians respond? If the government slashes spending when monetary policy is tightening, it could ruin another opportunity for economic recovery. For now, ministers are more concerned with stimulating growth—as shown by Mr Kishida’s tax cuts. In time, though, rising interest payments may force their hand. Without the cushion of low interest rates, long-discussed risks to Japan’s finances will become uncomfortably real. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

It is hard to overstate the impact of America’s fentanyl epidemic. The synthetic opioid and its close chemical relatives were involved in about 70% of the country’s 110,000 overdose deaths in 2022. They are now almost certainly the biggest killer of Americans between the ages of 18 and 49. Every 14 months or so America loses more people to fentanyl than it has lost in all of its wars combined since the second world war, from Korea to Afghanistan.Perhaps it seems odd to look to economics for insights about how to manage a crisis which is more naturally the domain of public health, but economists’ research methods are well-suited to examining the problem. It is thus regrettable that the discipline has had little to say about fentanyl. A review of 150 economic studies in 2022 included just two that were focused on the drug.Such inattention can be explained by the research time lag. From identifying questions to writing up findings to—most painful of all—peer review, it can easily take a decade to go from inchoate idea to published paper. Given that fentanyl overtook heroin as the biggest drug killer in America in 2016, economic research on its spread is only just beginning to arrive.This delay has led to a backward-looking bias in discussions of the crisis. Research has concentrated on earlier waves of America’s opioid addictions, notably prescription pills in the early 2000s and the shift to heroin and other alternatives in the 2010s.The best-known explanation is the “deaths of despair” hypothesis, advanced by Anne Case and Angus Deaton of Princeton University. They examined a sharp rise in mortality for white Americans, driven by opioids and, to a lesser extent, suicide and alcohol. This suffering, they argued, was related to economic insecurity. Yet their analysis had major defects, such as a failure to adjust for ageing populations. The arrival of fentanyl has highlighted a more fundamental flaw: it now kills black people at a higher rate than white people, the group supposedly gripped by anguish. An ill-defined notion of “despair” that leaps between different segments of the population does not carry much explanatory heft.Some economists have homed in on the financial roots of the crisis. Justin Pierce of the Federal Reserve and Peter Schott of Yale University documented how areas most exposed to trade liberalisation suffered most. They found that counties exposed to import competition from China after 2000 had higher unemployment rates and more overdose deaths. Their analysis, however, ended in 2013, when the effects of this trade-related affliction were wearing off—and just before the fentanyl storm erupted.Others have traced America’s addiction to the original sin of pharmaceutical firms pushing painkillers. In a paper published in 2019 Abby Alpert of the University of Pennsylvania and colleagues showed that states with looser prescription rules were targeted by Purdue Pharma in the late 1990s when it started selling OxyContin, its notorious opioid, and that they had nearly twice as many deaths from opioid overdoses as states with stricter rules over the following two decades. But recent years have been horrific everywhere: in California, a state with stricter rules, the opioid-overdose death rate roughly tripled between 2017 and 2021.At last, economists are catching up with the awful turn in the opioid crisis. A new working paper by Timothy Moore of Purdue University, William Olney of Williams College and Benjamin Hansen of the University of Oregon offers a novel way of examining the spread of fentanyl. Rather than trying to account for demand for opioids, the focus of most research, they look squarely at the supply side of the equation, finding a strong correlation between aggregate import levels and opioid use. In states that import more than the national median, overdose deaths are roughly 40% higher. Put another way, 10% more imports per resident are associated with an 8.1% increase in fentanyl deaths from 2017 to 2020.This is not because of some kind of trade-induced economic malaise. Many big importing states are wealthy, such as New Jersey and Maryland. Rather, the essential point is that these states bring in more stuff from abroad, and fentanyl is often part of the mix. It may ultimately travel around America, but much of it remains, and kills, in the states where it first arrived. None of the previous hypotheses—deaths of despair, competition from China or opioid marketing—have an impact on the relationship between trade flows and fentanyl deaths.Policy responses often centre on the roles of China as a producer of fentanyl-related chemicals and Mexican drug gangs as distributors. America’s drug enforcers are especially active on its southern border; its diplomats want China to crack down on makers of synthetic opioid feedstocks. But Mr Moore and his colleagues conclude that more trade with pretty much anywhere is associated with fentanyl deaths. The probable explanation is that gangs are nimble and shift their smuggling routes.Slow it downThis makes intuitive sense. Fentanyl’s danger stems from its potency: it is up to 50 times stronger than heroin. Criminals can sneak in tiny volumes, with devastating effects. And drug users can get one hell of a high for next to nothing: a single $5 pill contains a lethal dose. In business terms the overall picture is that of a classic positive supply shock—of a most negative product.The forensic accounting of fentanyl’s spread by Mr Moore and his colleagues is important. It suggests that targeting China and Mexico risks a game of whack-a-mole. Any country at any given moment may be the trouble spot, so it is better to spread out enforcement resources more evenly. It also shows that legal trade is probably the main conduit for fentanyl smuggling, meaning that more sophisticated screening operations at all ports of entry would be wise. Last, it reveals that despite all the attention paid to the disadvantaged and the despairing, the core problem is at once simpler and more depressing: fentanyl is just too easy to get. ■Read more from Free exchange, our column on economics:Why economists are at war over inequality (Nov 30th)How to save China’s economy (Nov 23rd)The false promise of green jobs (Oct 14th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

Robinhood on Thursday launched its crypto service in the European Union, allowing users to buy and sell a range of over 25 digital currencies.
The move marks Robinhood’s second big expansion outside the U.S. after the firm opened a waitlist for U.K. customers to join its stock-trading platform in early 2024.
Several major U.S. crypto firms are turning to the European Union for growth after facing a tough time from regulators stateside.

Robinhood logo displayed on a phone screen and representation of cryptocurrencies are seen in this illustration photo taken in Krakow, Poland on January 29, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Nurphoto | Nurphoto | Getty Images

Online brokerage giant Robinhood on Thursday said it’s launching a cryptocurrency trading feature in the European Union, pushing further outside the United States as the company looks to unlock growth from international markets.
Robinhood said its new crypto product would allow customers to buy, sell, and hold from a range of more than 25 tokens, including bitcoin, ether, ripple, cardano, solana, and polkadot. The company hopes to offer more tokens, as well as the ability to transfer and “stake,” or earn rewards from, crypto in 2024.

The move marks Robinhood’s second major expansion outside of the U.S., after it announced late last month that it plans to launch stock trades for U.K. customers by early 2024. The company opened a waitlist in the U.K. last week for the service, which will offer yields of up to 5% on customer deposits.
Robinhood is looking to tempt EU users into using its service with the ability to earn free bitcoin for users who trade lots and refer the app to their friends. The company will offer users up to one bitcoin, based on a a percentage of their monthly trading volume and the number of users they refer when they sign up.
It comes as several major U.S. crypto firms are turning to the European Union for growth after facing a tough time from regulators stateside. The U.S. Securities and Exchange Commission has targeted several crypto firms, including Coinbase and Binance, with lawsuits alleging they violated securities laws.
The EU, meanwhile, has proposed a comprehensive set of regulation, called the Markets in Crypto-Assets regulation, that would bring in stricter rules for crypto trading platforms and issuers of so-called stablecoins — tokens pegged to real-world assets like the U.S. dollar or euro.

Johann Kerbrat, general manager for Robinhood Crypto, said the firm chose the EU as the first international target market for its crypto product due to the region’s development of the world’s first comprehensive set of laws specifically tailored for the crypto industry.

“The EU has developed one of the world’s most comprehensive policies for crypto asset regulation, which is why we chose the region to anchor Robinhood Crypto’s international expansion plans,” Kerbrat said in a statement Thursday.
Robinhood also touted transparency and security features in its European crypto offering to convince users to trade with its service. The company said it would transparently display spreads on trades, including the rebate the firm receives from sell and trade orders.
Robinhood said it never commingles customer coins with business funds other than for operating purposes, such as payment of blockchain network fees, and stores all its customers’ coins in cold wallets disconnected from the internet.
Robinhood said it also has a crime insurance policy in place to ensure a portion of assets held across its storage systems are protected against losses from theft, including cybersecurity breaches. The policy is underwritten by underwriters at Lloyd’s, the insurance marketplace.
Theft of crypto has been a big problem for the industry over the past couple of years, with major hacks of blockchain networks resulting in millions’ worth of digital coins being drained from users’ wallets. Just last month, the HTX exchange and Heco bridge, two platforms linked to high-profile entrepreneur Justin Sun were hacked for an estimated $115 million.
The blurring of lines between trading venues and custodians became a big problem last year when FTX, the disgraced former $32 billion crypto exchange, collapsed after revelations that its sister market-making firm Alameda Research used customer funds to make risky bets on certain tokens. More