Finance

Berkshire Hathaway Vice Chairman Charlie Munger pushed back against a report that alleged his partner Warren Buffett at times traded stocks in his personal account before the conglomerate made moves in the same securities.
Munger, 99, told CNBC’s Becky Quick in an interview that the idea that Buffett was front-running Berkshire’s own trades doesn’t make sense, pointing toward his charitable giving and the fact that most of his wealth is tied up in Berkshire stock.

“I don’t think there’s the slightest chance that Warren Buffett is doing something that is deeply evil to make money for himself. He cares more about what happens to Berkshire than he cares what happens to his own money. He gave all his own money away. He doesn’t even have it anymore,” Munger said.
In a Nov. 9 article, ProPublica reported that Buffett on at least three occasions made personal trades in a stock shortly before or in the same quarter that Berkshire did. ProPublica cited leaked IRS data as the source of the information. CNBC has not independently confirmed the timing of these trades.
The ProPublica report said Buffett made at least $466 million in personal stock sales between 2000 and 2019. That would account for a very small percentage of Buffett’s overall net worth. A securities filing from August showed Buffett owns more than 200,000 Berkshire Hathaway A shares, a position worth more than $100 billion.
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Chinese President Xi Jinping told U.S. business executives Wednesday the two countries have to choose between being adversaries or partners.
Xi was speaking at a dinner in San Francisco following his meeting with U.S. President Joe Biden a few hours earlier, on the sidelines of the Asia-Pacific Economic Cooperation conference.
He also said China would send its giant pandas to the San Diego Zoo.

U.S. President Joe Biden waves as he walks with Chinese President Xi Jinping at Filoli estate on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit, in Woodside, California, U.S., November 15, 2023. REUTERS/Kevin Lamarque
Kevin Lamarque | Reuters

BEIJING — The U.S. and China have to choose between being adversaries or partners, Chinese President Xi Jinping told American business executives late Wednesday in San Francisco.
His remarks contrast with the Biden administration’s approach of pursuing strategic competition with Beijing — restricting exports of advanced U.S. tech to China, while looking for areas of cooperation.

Xi was speaking at a dinner in San Francisco following his meeting with U.S. President Joe Biden a few hours earlier, on the sidelines of the Asia-Pacific Economic Cooperation conference.
“I have always had one question on my mind: How to steer the giant ship of China-U.S. relations clear of hidden rocks and shoals, navigate it through storms and waves without getting disoriented, losing speed or even having a collision?” Xi said, according to an English-language readout of his Mandarin-language speech.

China is ready to be a partner and friend of the United States.

Xi Jinping
President of China

“In this respect, the number one question for us is: are we adversaries, or partners? This is the fundamental and overarching issue,” he said.
“The logic is quite simple. If one sees the other side as a primary competitor, the most consequential geopolitical challenge and a pacing threat, it will only lead to misinformed policy making, misguided actions, and unwanted results,” Xi said.
“China is ready to be a partner and friend of the United States,” he said. “The fundamental principles that we follow in handling China-U.S. relations are mutual respect, peaceful coexistence and win-win cooperation.”

Nearly 400 business leaders — including Apple CEO Tim Cook and Qualcomm CEO Cristiano Amon — government officials, U.S. citizens and academics attended the dinner, hosted by the U.S.-China Business Council and the National Committee on U.S.-China Relations.
U.S Secretary of Commerce Gina Raimondo delivered remarks ahead of Xi’s address.
In a roughly 30-minute speech, Xi said China-led international initiatives such as the Belt and Road are open to U.S. participation, while Beijing is ready to join U.S.-proposed multilateral cooperation initiatives.
“No matter how the global landscape evolves, the historical trend of peaceful coexistence between China and the United States will not change,” Xi said.

Pandas returning to the U.S.

Regarding earlier conversations with Biden, Xi said “we agreed to make the cooperation list longer and the pie of cooperation bigger.”
Xi said China is ready to invite 50,000 young Americans to study in the Asian country over the next five years.
He also said China would send its giant pandas to the San Diego Zoo. He did not specify a time.
Last week, the remaining three pandas in the U.S. on loan from Beijing returned to China due to an expiring contract. China has lent pandas to countries around the world as a diplomatic tool.

China never bets against the United States, and never interferes in its internal affairs.

Xi Jinping
President of China

Xi’s speech was titled “Galvanizing Our Peoples into a Strong Force For the Cause of China-U.S. Friendship.”
“It is wrong to view China, which is committed to peaceful development, as a threat and thus play a zero-sum game against it,” Xi said. “China never bets against the United States, and never interferes in its internal affairs.”
“China has no intention to challenge the United States or to unseat it. Instead, we will be glad to see a confident, open, ever-growing and prosperous United States,” he said. “Likewise, the United States should not bet against China, or interfere in China’s internal affairs. It should instead welcome a peaceful, stable and prosperous China.”
— CNBC’s Christina Wilkie and Eamon Javers contributed to this report.
Correction: The summary and key points have been updated to accurately reflect that Xi’s dinner with U.S. business executives took place on Wednesday night in San Francisco. More

U.S. regulators on Tuesday defended their plans for a sweeping set of proposed changes to banks’ capital requirements, speaking in front of the U.S. Senate Banking Committee.
These proposed changes in the U.S. seek to incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
Regulators say the changes in the proposals are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements.

James Gorman, chairman and chief executive of Morgan Stanley, speaks during the Global Financial Leader’s Investment Summit in Hong Kong, China, on Tuesday, Nov. 7, 2023. The de-facto central bank of the Chinese territory is this week holding its global finance summit for a second year in a row. Photographer: Lam Yik/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images

SINGAPORE — Morgan Stanley Chairman and CEO James Gorman said his firm will be able to cope with “any form” that new banking regulations end up taking, but added he expects some watering down before the final rules are confirmed.
U.S. regulators on Tuesday defended their plans for a sweeping set of proposed changes to banks’ capital requirements, speaking in front of the U.S. Senate Banking Committee. They are aimed at tightening regulation of the industry after two of its biggest crises in recent memory — the 2008 financial crisis, and the March upheaval in regional lenders.

These proposed changes in the U.S. seek to incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
Regulators say the changes in the proposals are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements — which is a measure of an institution’s presumed financial strength and is seen as a buffer against recessions or trading blowups.
“I think it will come out differently from the way it’s been proposed,” Gorman told CNBC Thursday in an exclusive interview on the sidelines of Morgan Stanley’s annual Asia-Pacific conference in Singapore.
“It’s important to point out it’s a proposal. It’s not a rule, and it’s not done.”
“I think [the U.S. banking regulators] are listening,” Gorman added. “I’ve spent many years with the Federal Reserve. I was on the Fed board in New York for six years and I just think they are trying to find the right answer.”

“I’m not sure the banks need more capital,” Morgan Stanley’s outgoing CEO said. “In fact, the Fed’s own stress test says they don’t. So there’s that … sort of purity of purpose and in pursuit of perfection that can be the enemy of good.”
Whatever the outcome though, Gorman said his New York-based bank will be able to manage.
“We have been conservative with our capital. We run a CET1 ratio, which is among the highest in the world, significantly in excess of our requirements, so we’re ready for any outcome. But I don’t think it will be as dire as most of the investment committee believes it will be,” Gorman said.
The bank said in its latest earnings report that its standardized CET1 ratio was 15.5%, approximately 260 basis points above the requirement.

Wealth management and inflation

In late October, Morgan Stanley announced that Ted Pick will succeed James Gorman as chief executive at the start of 2024, though Gorman will stay as executive chairman for an undisclosed period.
Led by Gorman since 2010, Morgan Stanley has managed to avoid the turbulence afflicting some of its competitors.
While Goldman Sachs was forced to pivot after a foray into retail banking, the main question at Morgan Stanley is about an orderly CEO succession.
There will likely be some continuity with the bank’s focus on building out its wealth management business in Asia.
“We think there’s going to be tremendous growth,” Gorman said Thursday.
“So we would like to do more. We have. If I was staying several years, we would very aggressively be pushing our wealth management in this region. And I’m sure my successor would do the same.”
On the issue of inflation, Gorman said central bankers have brought surging inflation under control.
“Give the central banks credit. They moved aggressively with rates,” Gorman said. “I think they were late —that’s my personal view — but it doesn’t matter. When they got there, they really got going. Took rates from zero to five and a half percent. The Fed did five, five and a half percent in almost record time, fastest rate increase in 40 years. And it’s had the impact.”
U.S. Federal Reserve Chairperson Jerome Powell said last Thursday that he and his fellow policymakers are encouraged by the slowing pace of inflation, but more work could be ahead in the battle against high prices as the central bank seeks to bring inflation down closer to its stated 2% target.
The U.S. consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% in October from a year ago despite being unchanged for the month, according to seasonally adjusted numbers from the Labor Department on Tuesday. 
“Are we done? We’re not done,” Gorman said.
“Is 2% absolutely necessary? My personal view is no, but directionally to be heading in that to around 2, 3% — I think is a very acceptable outcome given the cards that they were dealt with.”
— CNBC’s Hugh Son and Jeff Cox contributed to this story. More

Around a decade ago Carl Benedikt Frey and Michael Osborne, two economists, published a paper that went viral. It argued that 47% of American jobs were at risk of automation. A deluge of research followed, which suggested the poorest and least-educated workers were most vulnerable to the coming revolution. Such fears have intensified as artificial-intelligence (ai) capabilities have leapt ahead. On November 2nd, speaking after Britain’s ai summit, Elon Musk predicted: “There will come a point where no job is needed.”image: The EconomistYet at the same time, economists have become more optimistic. Recent studies have found that fewer workers are exposed to automation than Messrs Frey and Osborne supposed (see chart 1). In 2019 Michael Webb, then of Stanford University, showed that ai patents are more targeted at skilled jobs than those for software and robots. New ai seems better at coding and creativity than anything in the physical world, suggesting low-skilled jobs may be insulated. In March Shakked Noy and Whitney Zhang, both of the Massachusetts Institute of Technology (mit), published an experiment showing that Chatgpt boosted the productivity when writing of lower-ability workers more than that of higher-ability workers.Although ai is still in its infancy, some industries have been eager adopters. A close look at three of these—translation, customer service and sales—is broadly supportive of the optimistic shift among economists, though not without complications. In translation, perhaps the first industry to be heavily affected by language modelling, workers have become copy editors, tidying a first draft undertaken by ai, which eases the path of newbies into the industry. In customer service, ai has helped raise the performance of stragglers. But in sales, top performers use the tech to find leads and take notes, pulling away from their peers. Will ai boost the incomes of superstars more than those of stragglers, much as the internet revolution did? Or will it be a “great equaliser”, raising the incomes of the worst off but not those of high flyers? The answer may depend on the type of employment in question.Roll the diceRoland Hall has been translating board games and marketing material from French to English for 27 years. He recalls that even in the 1990s software was used to render specific words from one language to another. Today the tools are more advanced, meaning the types of job available have split in two. One type includes texts where fluency is less important. An example might be a several-thousand-page manual for an aircraft, says Mr Hall, where readers simply need to know “what part to look for” and “do you turn it left or right”. The other type includes literary translations, where the finest details matter.The first type has been most affected by ai. Many workers now edit translations that have gone through a machine similar to that underlying Google’s translation service. They are paid at a steep discount per word, but more work is available. Lucia Ratikova, a Slovakian who specialises in construction and legal translations, reckons that such work now makes up more than half of listings on job sites, up from a tenth a few years ago. A larger pool of businesses, many eager to expand into global markets, are taking advantage of the drop in price.image: The EconomistIf machines are able to do what humans do more cheaply, employers will turn to computers. But as prices fall, overall demand for a service may rise, and possibly by enough to offset the increased use of machines. There is no law to determine which effect will dominate. So far in America the number of translators has grown, yet their real wages have fallen slightly (see chart 2)—probably because the profession now requires rather less skill.Customer service offers more difficult terrain for ai. Firms have been trying to automate it for years. Thus far they have mostly just annoyed customers. Who doesn’t try to game the chatbot in order to speak to an actual human? The American Customer Satisfaction Index has been falling since 2018, and workers also appear fed up. Turnover in American “contact centres” hit a record high of 38% last year.But there may be consolation: the workforce is becoming more welcoming to the low-skilled. Erik Brynjolfsson of Stanford, as well as Danielle Li and Lindsey Raymond of mit, studied the roll-out of an ai assistant to more than 5,000 customer-support agents earlier this year. The assistant offered real-time suggestions to workers. This lifted the productivity of the least-skilled agents by 35%, while the most-skilled ones saw little change.It would be reasonable to assume that the impact on salespeople would be fairly similar to the one on customer-service workers. But that is not the case. Marc Bernstein of Balto, a firm that creates ai software for both sales teams and call centres, notes that “style points” (ie, charisma and the ability to develop a relationship) matter much more in sales than in customer service, where the important thing is getting the right answer quickly.ai might even create sales superstars. Skylar Werneth has been in the industry for eight years and is now at Nooks, a startup that automates sales. Software analyses his calls, identifying which tactics work best. It also helps him call many people at once. Most customers do not pick up; dialling in parallel ensures Mr Werneth is talking more and listening to dial-tones less. He reckons the tools Nooks offers makes him three times more productive, earning him a solid amount more than before.What does this mean for labour markets? Sales representatives are given bonuses based on the number of clients they bring in over a threshold. When productivity grows across a firm, bosses tend to raise the threshold. Because not everyone is able to meet it, low performers are pushed out of the workforce, since demand for products does not grow in parallel with sales performance, as would be necessary to justify retaining them. The result is a shrinking set of highly productive salespeople. At least, given high turnover in the industry, the shift to this state of affairs might mean hiring fewer people, not mass firings.AI carambaIf ai eventually becomes superhuman, as many attendees at Britain’s recent summit believed possible, all bets are off. Even if ai advances in a less epochal fashion, labour markets will see profound change. A study by Xiang Hui and Oren Reshef of Washington University in St Louis and Luofeng Zhou of New York University, published in August, found that earnings for writing, proofreading and copy-editing on Upwork, a freelancing platform, fell by 5% after Chatgpt was launched last November, compared with roles less affected by ai. A survey of 400 call-centre managers by Balto found that the share using at least some ai grew from 59% in April to 90% by October. Mr Bernstein thinks that although “today ai is not capable of replacing a human [in call centres]…in ten years, quite possibly five, it will be there.”The flipside of ai disruption is new jobs elsewhere. Modelling in 2019 by Daron Acemoglu of mit and Pascual Restrepo of Boston University suggests that the impact of automation is worst for workers when productivity gains are small. Such “so-so” automation creates little surplus wealth to increase the demand for workers in other parts of the economy. Our investigation of industries at the front line of ai change suggests that the new tech has a shot at leading to much greater efficiency. The picture on inequality remains murkier. Better to be a superstar than a straggler, then, even if only to be safe. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The tome opens with Ray Dalio laying into an employee he apparently knew to be pregnant. He calls her an “idiot” over and over, until she runs from the room sobbing. The founder of Bridgewater Associates, the world’s largest hedge fund, was supposedly “delighted”. His “probing” of this woman was evidence of his commitment to “truth-seeking” at any cost. The meltdown, which had been recorded, was uploaded to a library of firm meetings. He had it edited into a clip to be shown to future employees.This is just the first of many damaging titbits in “The Fund”, a new book about Mr Dalio by Rob Copeland, a reporter at the New York Times. The book’s narrative builds to two points. One is that Mr Dalio’s “principles”, a philosophy he described as being centred on “radical transparency”, are really little more than time-wasting tools which he uses to bully employees. The system requires meetings to be recorded, for employees to rank one another and for them to upload complaints onto a platform. This is supposed to foster an “ideas meritocracy” but instead leads, at best, to petty gripes about how the peas in the cafeteria are too “wrinkled” and, at worst, to a culture of fear. Mr Dalio is supposed to have manipulated this system so that his opinion always mattered most.The second is that there is “no secret” to Bridgewater’s success. Mr Dalio’s hundreds of research staff write reports he does not even read. Mr Copeland claims Mr Dalio made all the investing decisions himself, or with some input from lieutenants. Far from having a codified set of rules, as he tells clients, he uses hunches and simple “if then” statements such as: if interest rates fall in a country then you should sell its currency. These worked, the story goes, for a while, but the rise of high-frequency traders and quantitative funds, which often follow market “momentum”, eroded his edge. Returns for Bridgewater’s flagship “Pure Alpha” fund have been pretty paltry for the past 10 or 15 years.The conclusions of the two intertwine: the cult of Bridgewater is pointless. Bridgewater’s employees have time to waste on nonsense because the investing process is simple, really. Mr Dalio might have been a gifted investor—since 1991 he has earned $58bn for those who have bought into his funds—but his efforts to codify investment rules and culture were a waste of time. His legacy will fade.Mr Copeland’s deep reporting unearthed damning tales, but they seem to have been told so as to place Mr Dalio in the worst possible light. Take, for example, a passage where Mr Dalio invites Niall Ferguson, a celebrated historian, to Bridgewater. Mr Dalio supplied Mr Ferguson with a copy of his book, which offers a sweeping theory of economic history and a model of “the economic machine”—only for Mr Ferguson to tell the assembled staff that there was no way of modelling history since models could not account for the “caprices of decision-makers”. Mr Dalio began shouting at Mr Ferguson, who soon left. Mr Copeland writes that Mr Dalio then sent round a poll asking who won the debate (Mr Dalio triumphed).It is one of many anecdotes that are supposed to reveal that Mr Dalio is unprincipled. Far from listening to unfiltered criticism he uses his power to silence others. But apparently Mr Dalio later solicited advice asking whether he had behaved inappropriately. His employees implored him not to invite people to Bridgewater just to shout at them—advice to which he is said to have listened. Mr Dalio’s radical transparency might be strange and misguided, but perhaps he is not a hypocrite.The book’s arguments about Mr Dalio’s investment process are harder still to swallow. Macro funds that follow trends are a dime a dozen, and few come close to touching Bridgewater’s record. As for the erosion of his edge, the earliest momentum funds were established in the 1980s, before Bridgewater set up its first funds. They grew in the 1990s and 2000s, when his edge was as sharp as ever. How Mr Dalio achieved what he did is something of a mystery. Perhaps some of the magic could have been codified or captured. It was worth trying, anyway.Mr Dalio dismisses Mr Copeland’s book out of hand. He has written that it is “another one of those sensational and inaccurate tabloid books written to sell books to people who like gossip”. The hagiography of Mr Dalio already exists: he penned his own tale in 2017. Mr Copeland seems to have written its foil, which can find only the ill in Bridgewater’s founder. The book is worth a read—but only with that in mind.■Read more from Buttonwood, our columnist on financial markets: Forget the S&P 500. Pay attention to the S&P 493 (Nov 8th)What a third world war would mean for investors (Oct 30th)Investors are returning to hedge funds. That may be unwise (Oct 26th)Also: How the Buttonwood column got its name More

Young investors, as well as everyone starting to save, have no shortage of lessons to learn. The main ones are classics. Begin early to give the magic of compounding time to work. Cut costs to stop that magic from being undone. Diversify. Do not try to time the market unless it is your job to do so. Stick to your strategy even when prices plummet and the sky seems to be falling in. Do not ruin it by chasing hot assets when the market is soaring, others are getting rich and you are getting jealous.To this time-worn list, add an altogether more dispiriting lesson specific to today’s youngsters: you will not enjoy anything like the returns your parents made. Even accounting for the global financial crisis of 2007-09, the four decades to 2021 were a golden age for investors. A broad index of global shares posted an annualised real return of 7.4%. Not only was this well above the figure of 4.3% for the preceding eight decades, but it was accompanied by a blistering run in the bond market. Over the same period, global bonds posted annualised real returns of 6.3%—a vastly better result than the 0% of the preceding 80 years.That golden age is now almost certainly over. It was brought about in the first place by globalisation, quiescent inflation and, most of all, a long decline in interest rates. Each of these trends has now kicked into reverse. As a consequence, youngsters must confront a more difficult set of investment choices—on how much to save, how to make the most out of markets that offer less and how to square their moral values with the search for returns. So far, many are choosing badly.The constant refrain of the asset-management industry—that past performance is no guarantee of future returns—has rarely been more apt. Should market returns revert to longer-run averages, the difference for today’s young investors (defined as under-40s) would be huge. Including both the lacklustre years before the 1980s and the bumper ones thereafter, these long-run averages are 5% and 1.7% a year for stocks and bonds respectively. After 40 years of such returns, the real value of $1 invested in stocks would be $7.04, and in bonds $1.96. For those investing across the 40 years to 2021, the equivalent figures were $17.38 and $11.52.This creates two sources of danger for investors now starting out. The first is that they look at recent history and conclude markets are likely to contribute far more to their wealth than a longer view would suggest. A corollary is that they end up saving too little for retirement, assuming that investment returns will make up the rest. The second is even more demoralising: that years of unusually juicy returns have not merely given investors unrealistically high hopes, but have made it more likely that low returns lie ahead.Antti Ilmanen of AQR, a hedge fund, sets out this case in “Investing Amid Low Expected Returns”, a book published last year. It is most easily understood by considering the long decline in bond yields that began in the 1980s. Since prices move inversely to yields, this decline led to large capital gains for bondholders—the source of the high returns they enjoyed over this period. Yet the closer yields came to zero, the less scope there was for capital gains in the future. In recent years, and especially recent months, yields have climbed sharply, with the nominal ten-year American Treasury yield rising from 0.5% in 2020 to 4.5% today. This still leaves nowhere near as much room for future capital gains as the close-to-16% yield of the early 1980s.The same logic applies to stocks, where dividend and earnings yields (the main sources of equity returns) fell alongside interest rates. Again, one result was the windfall valuation gains enjoyed by shareholders. Also again, these gains came, in essence, from bringing forward future returns—raising prices and thereby lowering the yields later investors could expect from dividend payouts and corporate profits. The cost was therefore more modest prospects for the next generation.As the prices of virtually every asset class fell last year, one silver lining appeared to be that the resulting rise in yields would improve these prospects. This is true for the swathe of government bonds where real yields moved from negative to positive. It is also true for investors in corporate bonds and other forms of debt, subject to the caveat that rising borrowing costs raise the risk of companies defaulting. “If you can earn 12%, maybe 13%, on a really good day in senior secured bank debt, what else do you want to do in life?” Steve Schwarzman, boss of Blackstone, a private-investment firm, recently asked.image: The EconomistEven so, the long-term outlook for stocks, which have historically been the main source of investors’ returns, remains dim. Although prices dropped last year, they have spent most of this one staging a strong recovery. The result is a renewed squeeze on earnings yields, and hence on expected returns. For America’s S&P 500 index of large stocks, this squeeze is painfully tight. The equity risk premium, or the expected reward for investing in risky stocks over “safe” government bonds, has fallen to its lowest level in decades (see chart 1). Without improbably high and sustained earnings growth, the only possible outcomes are a significant crash in prices or years of disappointing returns.All this makes it unusually important for young savers to make sensible investment decisions. Faced with an unenviable set of market conditions, they have a stronger imperative than ever to make the most of what little is on offer. The good news is that today’s youngsters have better access to financial information, easy-to-use investment platforms and low-cost index funds than any generation before them. The bad news is that too many are falling victim to traps that will crimp their already meagre expected returns.A little flushThe first trap—holding too much cash—is an old one. Yet youngsters are particularly vulnerable. Analysis of 7m retail accounts by Vanguard, an asset-management giant, at the end of 2022 found that younger generations allocate more to cash than older ones (see chart 2). The average portfolio for Generation Z (born after 1996) was 29% cash, compared with baby-boomers’ 19%.image: The EconomistIt could be that, at the end of a year during which asset prices dropped across the board, young investors were more likely to have taken shelter in cash. They may also have been tempted by months of headlines about central bankers raising interest rates—which, for those with longer memories, were less of a novelty. Andy Reed of Vanguard offers another possibility: that youngsters changing jobs and rolling their pension savings into a new account tend to have their portfolios switched into cash as a default option. Then, through inertia or forgetfulness, the vast majority never end up switching back to investments likely to earn them more in the long run.Whatever its motivation, young investors’ preference for cash leaves them exposed to inflation and the opportunity cost of missing out on returns elsewhere. The months following Vanguard’s survey at the end of 2022 provide a case in point. Share prices surged, making gains that those who had sold up would have missed. More broadly, the long-run real return on Treasury bills (short-term government debt yielding similar rates to cash) since 1900 has been only 0.4% per year. In spite of central banks’ rate rises, for cash held on modern investment platforms the typical return is even lower than that on bills. Cash will struggle to maintain investors’ purchasing power, let alone increase it.The second trap is the mirror image of the first: a reluctance to own bonds, the other “safe” asset class after cash. They make up just 5% of the typical Gen Z portfolio, compared with 20% for baby-boomers, and each generation is less likely to invest in them than the previous one. Combined with young investors’ cash holdings, this gives rise to a striking difference in the ratio between the two asset classes in generations’ portfolios. Whereas baby-boomers hold more bonds than cash, the ratio between the two in the typical millennial’s portfolio is 1:4. For Gen Z it is 1:6.Given the markets with which younger investors grew up, this may not be surprising. For years after the global financial crisis, government bonds across much of the rich world yielded little or even less than nothing. Then, as interest rates shot up last year, they took losses far too great to be considered properly “safe” assets.But even if disdain for bonds is understandable, it is not wise. They now offer higher yields than in the 2010s. More important, they have a tendency to outpace inflation that cash does not. The long-run real return on American bonds since 1900 has been 1.7% a year—not much compared with equities, but a lot more than cash.The name of the third trap depends on who is describing it. To the asset-management industry, it is “thematic investing”. Less politely, it is the practice of drumming up business by selling customised products in order to capture the latest market fad and flatter investors that they are canny enough to beat the market.Today’s specialised bets are largely placed via exchange-traded funds (ETFs), which have seen their assets under management soar to more than $10trn globally. There are ETFs betting on volatility, cannabis stocks and against the positions taken by Jim Cramer, an American television personality. More respectably, there are those seeking to profit from mega-themes that might actually drive returns, such as ageing populations and artificial intelligence. An enormous subcategory comprises strategies investing according to environmental, social and governance (ESG) factors.Niche strategies are nothing new, and nor are their deficiencies. Investors who use them face more volatility, less liquidity and chunky fees. Compared with those focused on the overall market, they take a greater risk that fashions will change. Even those who pick sensible themes are competing with professional money managers.However the ease with which ETFs can be customised, advertised and sold with a few taps on a phone screen is something that previous generations of investors did not have to reckon with. So is the appeal to morality accompanying their marketing. ESG vehicles are presented to youngsters as the ethically neutral option. If there are investments that will save society and the planet while growing your savings at the same time, what kind of monster would buy the ordinary, dirty kind?This both overstates the difference between ESG and “normal” funds, and papers over their impact on costs and returns. According to a recent study by the Harvard Business School, funds investing along ESG criteria charged substantially higher fees than the non-ESG kind. Moreover, the ESG funds had 68% of their assets invested in exactly the same holdings as the non-ESG ones, despite charging higher fees across their portfolios. Such funds also shun “dirty” assets, including fossil-fuel miners, whose profits are likely to generate higher investment yields if this shunning forces down their prices.Next to the vast difference between the investment prospects of today’s youngsters and those of their parents, the benefits to be gained by avoiding these traps may seem small. In fact, it is precisely because markets look so unappealing that young investors must harvest returns. Meanwhile, the investment habits they are forming may well last for some time. Vanguard’s Mr Reed points to evidence that investors’ early experiences of markets shape their allocations over many years.image: The EconomistOrdering the portfolios of Vanguard’s retail investors by the year their accounts were opened, his team has calculated the median equity allocation for each vintage (see chart 3). The results show that investors who opened accounts during a boom retain significantly higher equity allocations even decades later. The median investor who started out in 1999, as the dotcom bubble swelled, still held 86% of their portfolio in stocks in 2022. For those who began in 2004, when memories of the bubble bursting were still fresh, the equivalent figure was just 72%.Therefore it is very possible today’s young investors are choosing strategies they will follow for decades to come. Mr Ilmanen’s treatise on low expected returns opens with the “serenity prayer”, which asks for “the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference”. It might be the best investment advice out there. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

In its fiscal second-quarter earnings report Thursday, Burberry reported that comparable store sales growth slowed to just 1%, down from 18% in the previous quarter, as momentum in China fizzled out.
Softer demand for luxury goods is weighing on companies around the world, as economic uncertainty and higher inflation curtail consumer spending on luxury items.

Pedestrians walk past a Burberry Group Plc store, left, in the Causeway Bay shopping district of Hong Kong, China.
Xaume Olleros | Bloomberg | Getty Images

LONDON — Burberry shares plunged 9% on Thursday after the British luxury fashion retailer warned that full-year operating profit will come in at the low end of forecasts amid a global slowdown in luxury spending.
The company also cautioned that it may miss its annual revenue projections for low double-digit growth.

In its fiscal second-quarter earnings report Thursday, Burberry reported that comparable store sales growth slowed to just 1%, down from 18% in the previous quarter, as momentum in China fizzled out.
The company recorded a half-year operating profit of £223 million ($276.64 million), down 15% from last year, but CEO Jonathan Akeroyd said Burberry was making “good progress” on its strategic aims.
“We continued to build momentum around our new creative vision with the launch of our Winter 23 collection in September, the first designed by Daniel Lee,” Akeroyd said in a statement.
“While the macroeconomic environment has become more challenging recently, we are confident in our strategy to realise our potential as the modern British luxury brand, and we remain committed to achieving our medium and long-term targets.”

Softer demand for luxury goods is weighing on companies around the world, as economic uncertainty and higher inflation curtail consumer spending on luxury items.

The world’s largest luxury group, LVMH, also reported a quarterly sales slowdown last month, while Cartier-owner Richemont has warned of weaker growth.
“The slowdown in luxury demand globally is having an impact on current trading. If the weaker demand continues, we are unlikely to achieve our previously stated revenue guidance for FY24*,” Burberry said in its earnings report.
“In this context, adjusted operating profit would be towards the lower end of the current consensus range (£552m-£668m)*.”
Along with the global issues facing the industry, Burberry has been vocal about the idiosyncratic challenge it is currently facing in the U.K. due to the government axing VAT-free shopping for international visitors.
Many British retailers, including Burberry, have called on Prime Minister Rishi Sunak and Finance Minister Jeremy Hunt to reconsider the decision on what critics call a “tourism tax.”

The Americas was also a particular problem for Burberry this quarter, with comparable store sales falling by 10%.
“The Americas is Burberry’s worst performer and sorting this out will be top of the agenda for CEO Jonathan Akeroyd,” said Russ Mould, investment director at stockbroker AJ Bell. 
“In one sense Burberry shareholders will be reassured to see other luxury peers struggling as it suggests the company is not facing problems of its own making. All it can do right now is protect and invest in its brand and wait for an improvement in the backdrop.” More

U.S. President Joe Biden and Chinese President Xi Jinping have agreed to resume high-level military communication, according to both countries.
U.S. Secretary of Defense Lloyd Austin will meet with his Chinese counterpart when that person is selected, a senior Biden administration official told reporters after the Biden-Xi summit.
China has yet to name a defense minister after dismissing Gen. Li Shangfu from the position without explanation in late October.

U.S. President Joe Biden and Chinese President Xi Jinping agreed to resume high-level military communication when they met in person Wednesday for the first time in a year in San Francisco on the sidelines of the Asia-Pacific Economic Cooperation conference.
Brendan Smialowski | Afp | Getty Images

BEIJING — U.S. President Joe Biden and Chinese President Xi Jinping have agreed to resume high-level military communication, according to both countries.
The two leaders met in person for the first time in a year Wednesday local time in San Francisco on the sidelines of the Asia-Pacific Economic Cooperation conference.

“We’re back to direct, open, clear communications,” Biden said at a press conference after the talks.
China has conducted military exercises around Taiwan, while its navy has been engaging in aggressive maneuvers in the South China Sea in a standoff with the Philippines as both countries stake their territorial claims.
The U.S. has wanted to revive the military communication, especially after some near-miss incidents where China’s ships almost collided with American forces.
“Vital miscalculations on either side can cause real trouble with a country like China or any other major country,” Biden said at the post-meeting press briefing.
China’s Defense Ministry declined a call with its U.S. counterpart in early February after the discovery of an alleged Chinese spy balloon over U.S. airspace. The balloon incident delayed U.S. Secretary of State Antony Blinken’s highly anticipated trip to China by more than four months.

In June, the defense chiefs from both countries attended an annual security summit in Singapore, but they did not have a formal meeting.

When Blinken finally visited China, he said he “repeatedly” raised the need for direct communication between the two countries’ militaries but failed to revive such talks.
China has yet to name a defense minister after dismissing Gen. Li Shangfu from the position without explanation in late October.
U.S. Secretary of Defense Lloyd Austin will meet with his Chinese counterpart when the Chinese defense chief is selected, a senior Biden administration official told reporters after the Biden-Xi summit.

Read more about China from CNBC Pro

As part of the agreement, senior U.S. military commanders including that of Pacific forces in Hawaii will engage with their Chinese counterparts, the official said.
The two countries also plan to establish ways for ship drivers and others to discuss incidents and, potentially, best practices, the official said.
A readout published by Chinese state media added the resumption of such military talks was “on the basis of equality and respect,” according to a CNBC translation.

Taiwan

At the presser, Biden reiterated the U.S. position that Taiwan maintains its sovereignty, despite China’s claims to the contrary.
“We maintain the agreement that there is a One-China policy and I’m not going to change that, that’s not going to change. That’s about the extent to which we discussed,” he said.

According to Chinese state media, Xi pointed out during the bilateral meeting that Taiwan has always been the “most important and sensitive” issue in China’s relations with the U.S.. He said in the report that China “takes seriously” positive statements the U.S. made during his meeting with Biden last year in Indonesia.
“The U.S. should use concrete actions to reflect its stance of not supporting ‘Taiwan independence,’ stop arming Taiwan and support China’s peaceful reunification,” state media reported. “China will ultimately be reunified and will inevitably be reunified.”
Beijing considers Taiwan part of its territory, with no right to independently conduct diplomatic relations. The U.S. recognizes Beijing as the sole government of China but maintains unofficial relations with Taiwan, a democratically self-governed island.

AI, fentanyl and more

Chinese state media also said the two sides agreed to establish an intergovernmental dialogue on artificial intelligence, set up a working group on drug control, “significantly” increase flights between the two countries next year and expand exchanges in areas such as education, business and culture.
The U.S. senior administration official said the Chinese were already taking action on nearly 24 companies that make precursors for fentanyl — an addictive drug that’s led to overdoses and deaths in the U.S.
Biden said at the post-meeting presser that the two leaders agreed that fentanyl production needs to be “curbed substantially.”
On artificial intelligence, however, the official said it was too early for a joint declaration by the two leaders, and noted the need to prevent the incorrect use of AI in military or nuclear operations.

Trade and sanctions

The Biden administration has announced export controls and sanctions on Chinese companies in an effort to limit U.S. companies’ contribution to technology that supports China’s military.
Xi noted the export controls, investment reviews and sanctions in the meeting, and called for the U.S. to lift the sanctions and provide a non-discriminatory environment for Chinese companies, Chinese state media said.
Biden also brought up difficulties around travel harassment of Americans in China, and a business environment that wasn’t as welcoming as it was in the past, the U.S. senior administration official said.
But overall the official described the meeting as more personal than the last time the two leaders met.
In a post on X, formerly known as Twitter, Biden called his day of meetings with Xi “some of the most constructive and productive discussions we’ve had.”
“We built on groundwork laid over the past several months of diplomacy between our countries and made important progress.”
— CNBC’s Christina Wilkie and Clement Tan contributed to this report. More