Finance

From some angles it seems as if thermal coal, the world’s dirtiest fuel, is having a tough year. Prices are down a bit. China, which gobbles up over half the world’s supply, is in economic trouble; a surge in hydropower generation there is squeezing out the fuel. In May G7 members agreed to phase out coal plants, where emissions are not captured, by 2035. Mining stocks are trading at a huge discount.Chart: The Economist More

Queues of idle trucks trying to enter America are standard fare at Mexico’s border. Recently, however, vehicles at the Otay Mesa crossing, which separates California and the city of Tijuana, have been lining up to get into Mexico. The trucks do not travel far—they offload their shipping containers in newly built warehouses just 15km south of the border. The goods are then separated into thousands of small packages and driven back to America. Although such imports are made in China and purchased in America, no tariffs are paid. Call it the Tijuana two-step.Chart: The Economist More

Sixteen years ago American stockmarkets reached their modern nadir. During the early 2000s European and emerging-market equities went on a bull run. By March 2008 America had entered recession and its financial crisis was under way. The country’s stocks accounted for less than 40% of the world’s total stockmarket capitalisation.Fast-forward to today and things look rather different. America’s share of the world’s stockmarket capitalisation has climbed pretty consistently over the past decade and a half, and sharply this year. It now stands at 61%. That is astonishing dominance for a country which accounts for just over a quarter of global GDP. The extent of market concentration is all the more extreme given what is happening within the American stockmarket itself. Just three companies—Apple, Microsoft and Nvidia—make up a tenth of the market value of global stocks. More

The Federal Reserve said Wednesday that the biggest banks operating in the U.S. would be able to withstand a severe recession scenario.
Each of the 31 banks in this year’s regulatory exercise cleared the hurdle of being able to absorb losses while maintaining more than the minimum required capital levels, the Fed said in a statement.
This year’s stress test included giants such as JPMorgan Chase and Goldman Sachs, credit card companies including American Express and regional lenders such as Truist.

Federal Reserve Board Vice Chair for Supervision Michael Barr testifies before a House Financial Services Committee hearing on the response to the bank failures of Silicon Valley Bank and Signature Bank, on Capitol Hill in Washington, D.C., on March 29, 2023.
Kevin Lamarque | Reuters

The Federal Reserve said Wednesday that the biggest banks operating in the U.S. would be able to withstand a severe recession scenario while maintaining their ability to lend to consumers and corporations.
Each of the 31 banks in this year’s regulatory exercise cleared the hurdle of being able to absorb losses while maintaining more than the minimum required capital levels, the Fed said in a statement.

The stress test assumed that unemployment surges to 10%, commercial real estate values plunge 40% and housing prices fall 36%.
“This year’s results show that under our stress scenario, large banks would take nearly $685 billion in total hypothetical losses, yet still have considerably more capital than their minimum common equity requirements,” said Michael Barr, the Fed’s vice chair for supervision. “This is good news and underscores the usefulness of the extra capital that banks have built in recent years.”
The Fed’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends. This year’s version included giants such as JPMorgan Chase and Goldman Sachs, credit card companies including American Express and regional lenders such as Truist.
While no bank appeared to get badly tripped up by this year’s exercise, which had roughly the same assumptions as the 2023 test, the group’s aggregate capital levels fell 2.8 percentage points, which was worse than last year’s decline.
That is because the industry is holding more consumer credit card loans and more corporate bonds that have been downgraded. Lending margins have also been squeezed compared to last year, according to the Fed.

“While banks are well-positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch,” Barr said. “The financial system and its risks are always evolving, and we learned in the Great Recession the cost of failing to acknowledge shifting risks.” 
The Fed also performed what it called an “exploratory analysis” of funding stresses and a trading meltdown that applied to only the eight biggest banks.
In this exercise, the companies appeared to avoid disaster, despite a sudden surge in the cost of deposits combined with a recession. In a scenario where five large hedge funds implode, the big banks would lose between $70 billion and $85 billion.
“The results demonstrated that these banks have material exposure to hedge funds but that they can withstand different types of trading book shocks,” the Fed said.
Banks are expected to begin announcing their latest share repurchase plans on Friday.

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In the cartoon “SpongeBob SquarePants”, Mr Krabs, purveyor of krabby patty hamburgers, is a frequent and ruthless price-gouger. He can get away with it since he has no competition, save for the unappetising Chum Bucket. McDonald’s, a fast-food chain that flips real-world hamburgers, can only dream of Mr Krabs’s pricing power. It has been forced into a fast-food price war.Since June 25th Americans hungry for a deal have been able to get a sandwich, fries, chicken nuggets and soft drink under the golden arches for just $5. Burger King, a rival fast-food chain, is matching the offer with a $5 meal deal of its own. The two are following in the footsteps of Wendy’s, which is temporarily adding an ice cream to its long-standing Biggie Bag combo. Starbucks, seemingly determined to protect its reputation for high mark-ups, is pricing a sandwich and a coffee at $6. McDonald’s calls this the “summer of value”; economists call it deflation. However labelled, the development is heartening for both consumers and Federal Reserve officials, who hope to reduce interest rates before the year is out. More

Morgan Stanley is pushing further into its adoption of artificial intelligence with a new assistant that is expected to take over thousands of hours of labor for the bank’s financial advisors.
The assistant, called Debrief, keeps detailed logs of advisors’ meetings and automatically creates draft emails and summaries of the discussions, bank executives told CNBC.
The program, built using OpenAI’s GPT4, essentially sits in on client Zoom meetings, replacing the note-taking that advisors or junior employees have been doing by hand, according to Jeff McMillan, Morgan Stanley’s head of firmwide artificial intelligence.

Bing Guan | Bloomberg | Getty Images

Morgan Stanley is pushing further into its adoption of artificial intelligence with a new assistant that is expected to take over thousands of hours of labor for the bank’s financial advisors.
The assistant, called Debrief, keeps detailed logs of advisors’ meetings and automatically creates draft emails and summaries of the discussions, bank executives told CNBC. Morgan Stanley plans to release the program to the firm’s roughly 15,000 advisors by early July, one of the most significant steps yet for the use of generative AI at a major Wall Street bank.

While the company’s earlier efforts involved creating a ChatGPT-like service to help advisors navigate the firm’s reams of research, Debrief brings AI into direct contact with advisors’ most-prized resource: their relationships with rich clients.
The program, built using OpenAI’s GPT-4, essentially sits in on client Zoom meetings, replacing the note-taking that advisors or junior employees have been doing by hand, according to Jeff McMillan, Morgan Stanley’s head of firmwide artificial intelligence.
“What we’re finding is that the quality and depth of the notes are just significantly better,” McMillan told CNBC. “The truth is, this does a better job of taking notes than the average human.”

Consent required

Importantly, clients have to consent to being recorded each time Debrief is used. Future versions will allow advisors to use the program on corporate devices during in-person meetings, said McMillan.
The rollout will serve as a real-world test for the vaunted productivity gains of generative AI, which took Wall Street by storm in recent months and has bolstered the value of chipmakers, tech giants and the broader U.S. stock market.

Morgan Stanley’s wealth management division hosts about 1 million Zoom calls a year, the bank told CNBC. While estimates vary, one Morgan Stanley advisor involved in the Debrief pilot said the program saves 30 minutes of work per meeting; advisors typically spend time after meetings creating notes and action plans to address client needs.

Arrows pointing outwards

Morgan Stanley’s new Debrief program, a new AI tool for wealth management advisors based on OpenAI’s GPT-4.
Courtesy: Morgan Stanley

“As a financial adviser I’m doing four, five or six meetings a day,” said Don Whitehead, a Houston-based advisor who’s been testing the software. By “having the note-taking service built in through AI, you can really be invested in the meeting, you’re actually a lot more present.”
It remains to be seen what advisors will do with the hours reclaimed from essential grunt work. In a sense, Morgan Stanley’s projects in generative AI amount to a “grand experiment in productivity,” said McMillan.
If, as McMillan and others believe, advisors will spend more time serving clients and prospecting for new ones, the technology should boost Morgan Stanley’s growth in assets under management, as well as retention of clients and advisors.
Morgan Stanley’s wealth management division is one of the world’s largest with $5.5 trillion in client assets as of March; the firm wants to reach $10 trillion.
It will take at least a year to determine whether the technology is boosting advisor productivity, McMillan said.
“I’m the analytics guy, but the advisors will tell you that they’re at their best when they’re engaging” with clients, said McMillan. “None of them will tell you they love taking notes or looking at research reports, right? That’s not why they got into this business.”

The broader vision

Ultimately, Morgan Stanley’s vision for AI is creating a layer of technology that seamlessly helps advisors perform all of their tasks — sending proposals, balancing portfolios, creating reports — with simple prompts, Morgan Stanley wealth management head Jed Finn told investors in February.
Many of the core tasks set to be automated, like parsing contracts and opening accounts, are universal throughout Morgan Stanley, including at trading and banking divisions, McMillan noted.
Finance jobs are among the most prone to displacement by AI, according to a recent Citigroup report. AI adoption could boost the industry’s profit by $170 billion by 2028, Citigroup said.
While the process is still in its infancy, McMillan acknowledged that business models will likely change in ways that are hard to predict.
“I think that there will be disruption in some areas,” he said. “We look back on all the things that we think we’re going to lose, but we don’t see what’s ahead.”
What’s ahead is the need for millions of prompt engineers to train AI to create the desired outcomes for companies, McMillan said; it took Morgan Stanley months to fine-tune prompts for Debrief, he noted.
McMillan said he even told his teenage children to consider careers as prompt engineers.
“They’re going to learn how to talk to machines, and tell those machines what to do, and engage with people and collaborate,” he said. “It’s a whole different game than how we’ve been doing work.” More

China’s Ministry of Commerce said over the weekend it was launching consultations with the EU over the bloc’s probe into the role of subsidies in Chinese electric cars.
“I believe the governments [of China and the EU] are now considering how through negotiations they can combine investment together with commodity trade,” said Wan Gang, now president of the China Association for Science and Technology.
Wan became China’s minister of Science and Technology around 2007 and is known for spearheading the country’s early push into electric cars.

Wan Gang is widely credited for spearheading China’s electric car strategy many years ago.
Bloomberg | Bloomberg | Getty Images

HEFEI, China — The man who spearheaded China’s electric car strategy on Wednesday said that Chinese investment in the European electric vehicles industry could be a way forward for both sides amid trade tensions.
“I believe the governments [of China and the EU] are now considering how, through negotiations, they can combine investment together with commodity trade,” said Wan Gang, now president of the China Association for Science and Technology.

Wan was speaking via an official English translation during a livestream of a panel at the World Economic Forum’s “Summer Davos” meeting in Dalian, China. Spokespersons for China’s foreign ministry and the European Commission were not immediately available when contacted by CNBC.
China’s Ministry of Commerce said over the weekend that it was launching consultations with the EU over the bloc’s probe into the role of subsidies in Chinese electric cars. The EU said earlier this month that it would increase tariffs on imports of the vehicles.
“Even though we are not exporting a large number of EVs, perhaps the Chinese companies can try investing in Europe,” Wan said, noting that such funding could create local jobs.

Wan became China’s minister of Science and Technology around 2007 and is known for spearheading the country’s early push into electric cars.
He said that, when China joined the World Trade Organization in 2001, he had already worked in Germany for about 15 years, including at Audi — and he experienced several periods of oil price volatility.

Wan added that 2001 was also the year when the Chinese government set a goal of developing a “moderately prosperous society,” which would mean every family would soon have their own car.
But fuel-powered vehicles would put pressure on Beijing to ensure a stable supply of gas for consumers, while pollution would increase, Wan estimated at the time.
He claimed that China wasn’t thinking about competing with anyone when developing its electric car strategy, but rather considering its own survival.
The U.S. this year also raised tariffs on Chinese electric car imports amid growing criticism of how Beijing’s policy has overly favored domestic players over foreign companies.
Wan said China asked him to return from Germany and start researching electric cars more than 20 years ago. By around 2010, he said Chinese cities faced extreme air pollution problems, which incentivized a local effort to go electric, starting with buses and taxis.
This year, new energy vehicles — a category that includes battery and hybrid-powered cars — have reached more than a third of new passenger cars sold in China, according to local passenger association data.
However, Wan said that electric car makers still need to do more to reduce drivers’ range anxiety — such as enabling vehicles to know when and where to be charged automatically — and improve safety on the road through driver-assist technology.
He said that electric car development was an “irreversible trend” for the world, noting that “we must be fully determined to move on despite the vicissitudes.” More

Halfpoint Images | Moment | Getty Images

How’s your 401(k) looking? A new report shows Americans are saving more, but probably need to do even more. 
Vanguard has released its annual report, How America Saves 2024. Vanguard and Fidelity are the two biggest sponsors of 401(k) plans, and this is a snapshot of what nearly five million participants are doing with their money. 

The good news: stock market returns are up and, thanks largely to automatic enrollment plans, investors are saving more than they did in the past. 
The bad news: account balances for the median 401(k) of a person approaching retirement (65+) remains very low. 
The takeaway: Americans are still very reliant on Social Security for a large chunk of their retirement. 
Higher returns, participation rates, savings rates 
Why do we care so much about 401(k) plans? Because it’s the main private savings vehicle Americans have for retirement. More than 100 million Americans are covered by these “defined contribution” plans, with more than $10 trillion in assets. 
First, 2023 was a good year to be an investor.  The average total return rate for participants was 18.1%, the best year since 2019. 

But to be effective vehicles for retirement, these plans need to: 1) have high participation rates, and 2) hold high levels of savings. 
On those fronts, there is good news. John James, managing director of Vanguard’s Institutional Investor Group, called it “a year of progress.” 
Plan participation reached all-time highs. Thanks to a change in the law several years ago, a record-high 59% of plans offered automatic enrollment in 401(k) plans. This is a major improvement: ipreviously, enrollment in 401(k) plans were often short of expectations because investors had to “opt-in,” that is they had to choose to participate in the plan.  Because of indecision or simple ignorance, many did not. By switching to automatic enrollment, participants were automatically enrolled and had to “opt-out” if they did not want to participate. 
The result: enrollment rates have gone up. Plans with automatic enrollment had a 94% participation rate, compared with 67% for voluntary enrollment plans. 
Participant saving rates reached all time highs. The average participant deferred 7.4% of their savings. Including employee and employer contributions, the average total participant contribution rate was 11.7%. 
A few other observations about Vanguard’s 401(k) plan investors: 
They prefer equities and target date funds.  They love equities over bonds or any other investments. The average plan contribution to equities is 74%.  A record-high 64% of all 2023 contributions went into target-date funds, which automatically adjust stock and bond allocations as the participant ages. 
They don’t trade much. In 2023, only 5% of nonadvised participants traded within their accounts; 95% did no trading at all. “Over the past 15 years, we have generally observed a decline in participant trading,” Vanguard said, which it partially attributed to increased adoption of target-date funds. 
Despite gains in the market, account balances are still low
In 2023, the average account balance for Vanguard participants was $134,128, but the median balance (half had more, half had less) was only $35,286. 
Why such a big difference between the average and the median? Because a small group of investors with large balances pull up the averages. Forty percent of participants had less than $20,000 in their retirement accounts. 
Distribution of account balances

Less than $20,000     40%
$20,000-$99,999        30%
$100,000-$249,900  15%
$250,000 +                  15%

Source:  Vanguard 
Median balances for those near retirement are still low
A different way to look at the problem is to ask how much people who are retirement age have saved, because it’s an indication of how prepared they are for imminent retirement.
Investors 65 years or older had an average account balance of $272,588, but a median balance of only $88,488. 
A median balance of $88,488 is not much when you consider older participants have higher incomes and higher savings rates. That is not much money for a 65-year old nearing retirement.
Of course, these balances don’t necessarily reflect total lifetime savings. Some have more than one retirement plan because they had other plans with previous employers. Most do have other sources of retirement savings, typically Social Security. A shrinking number may also have a pension. Some may have money in checking accounts, or have stocks or bonds outside a retirement account. 
Regardless, the math does not look great
So let’s do some retirement math. 
A typical annual drawdown for a 401(k) account in retirement is about 4%. Drawing down 4% of $88,488 a year gets you $3,539 every 12 months. 
Next, Social Security. As of January 2023, the average Social Security benefit was almost $1,689 per month, or about $20,268 per year.
Finally, even though pensions are a vanishing benefit, let’s include them. 
According to the Pension Rights Center, the median annual pension benefit for a private pension is $9,262 (government employees have higher benefits). 
Here’s our yearly retirement budget:

Personal savings $3,539
Pension                 $9,262
Social Security   $20,264
Total:                   $33,065

It’s certainly possibly to live on $33,000 a year, but this would likely only work if you own your home, have low expenses and live in a low-cost part of the country. 
Even then, it would hardly be a robust retirement. 
And these are the lucky ones. Only 57% of retirees have a tax-deferred retirement account like a 401(k) or IRA. Only 56% reported receiving income from a pension. 
And that extra income largely determines whether a retiree feels good or bad about their retirement. 
In 2023, four out five retirees said they were doing at least okay financially, but this varied tremendously depending on whether retirees had sources of income outside of Social Security. Only 52% of retirees who did not have private income said they were doing at least okay financially. 
What can be done? 
To have a more robust retirement, Americans are just going to have to save more. 
One issue is investors still don’t contribute the maximum amount allowed. Only 14% of participants saved the statutory maximum amount of $22,500 per year ($30,000 for those age 50 or older). The likely reason: most felt they couldn’t afford to. 
However, only 53% of even those with income over $150,000 contributed the maximum allowed.  Given that the employee match is “free money,” one would think participants in that income bracket would rationally choose to max out their contribution. The fact that many still don’t suggests that more investor education is needed. 
Regardless, it’s very dangerous to assume that retirees are going to be bailed out by an ever-rising stock market. Another year anywhere near 2022, when the S&P 500 was down 20%, and investor confidence in their financial future will likely deteriorate. More