1. Animal spirits contribute to inflation
One recent academic paper argued that animal spirits or bubbles in markets can themselves be responsible for as much as an additional 0.8 percentage points on US inflation rates.
2. Apple joins the list of Google, Amazon, and Meta which are currently under various stages of anti-trust actions by US competition regulators. Apple with a net income in 2023 of $97 bn, more than the GDP of over 100 countries, and with a services revenue of $85 billion, has been accused of using its market power in the smartphone market to quash competition and limit consumer choice. The lawsuit has been brought by a bipartisan group of 16 state and district attorneys and accuses the company of imposing contractual limitations on developers and making it difficult for users to switch developers.
The DoJ’s antitrust chief Jonathan Kanter described Apple’s response to competition over the years as “a series of ‘Whac-A-Mole’ contractual rules and restrictions” that had allowed it to crush competition. The complaint accuses the company of abusing its market power in a variety of ways: to squash the growth of innovative apps and messaging services, reduce the appeal of rival smartwatches, keep rival tap-and-pay apps from its devices and block the development of game streaming apps.
The lawsuit is centred on Apple's services business, which the company sees as its next frontier as its iPhone sales have plateaued.
The US has portrayed the alleged scheme as stretching all the way back to Steve Jobs, the company’s iconic founder who died in 2011. It was Jobs’ vision to maintain an oppressive monopoly, identifying at an early stage the power the iPhone could wield over the online economy — and going so far as to direct executives to “force” developers to use only its own payment system to keep them locked into its ecosystem, the US alleged. The core of the claim is that Apple uses its market-leading device to draw a growing share of services revenue from users, excluding competitors from access. Services revenue — which includes its App Store, Apple Pay, and TV and music streaming — has been a continuing success story and an increasingly important source of growth for the company as its hardware sales face challenges.
3. Highlighting the lengths companies can go to avoid regulatory oversight, Microsoft has found a creative way to avoid sharing information on its acquisitions. Instead of buying a startup firm wholesale, it has decided to hire the co-founders and staff of the startup, in an acqui-hire model!
Microsoft’s decision to hire co-founders and staff of artificial intelligence start-up Inflection is not an acquisition, according to the companies... On the surface, the plan appears to skirt the Hart-Scott-Rodino Antitrust Improvements Act that requires companies to report pre-merger notifications for acquisitions. In addition to hiring staff, Microsoft is reported to be paying to license Inflection AI software but the deal is not exclusive. Inflection will remain an independent business, albeit a hollowed-out one. It can keep licensing its technology and can even be acquired. The curious set-up is still likely to attract regulator interest. If agencies are concerned that it will reduce competition in a potentially transformative area of technology, they can investigate.
4. Exactly a hundred years after their launch, mutual funds are facing rising competition from ETFs and others.
Mutual funds manage nearly $20tn in US assets and about $63tn worldwide, including everything from stakes in fledgling tech start-ups to government bonds. More than half of all American households and 116mn of the country’s 333mn residents hold shares in at least one mutual fund... US mutual funds suffered more than $1tn in net outflows from January 2021 to December 2023. While they gathered about $13bn in net inflows in February, it was the first time they had a positive month in two years, according to Morningstar, a data group. The active stockpicking funds that have been the industry’s bread and butter have suffered the biggest decline as a newer option, exchange traded funds, amassed more than $2tn in inflows in the US since January 2021, including more than $575bn last year alone... the alternatives to mutual funds have fundamentally reshaped the investment marketplace, as customers opt not just for ETFs but also separately managed accounts and collective investment trusts.
For investors, ETFs are like mutual funds on speed. Instead of pricing the pooled assets once a day, as mutual funds do, ETFs trade continuously on exchanges as stocks do. They can keep up this frenetic pace because shares are sold through online trading platforms, and financial firms create and redeem shares with in-kind baskets of securities, rather than having to buy and sell the underlying assets. That structure attracts frequent traders who want to bet on market movements or the price of specific assets such as gold or bitcoin and also gives ETFs distinct advantages in the competition for long-term investors. ETF sponsors do not have to invest in the same level of back office customer service, so their costs can be lower than traditional mutual funds. And due to a quirk of the US code, ETFs avoid the annual capital gain tax charges that buy-and-hold mutual fund investors incur when they invest outside a retirement plan...Between 2014 and today, US ETF assets quadrupled from $2tn to $8tn, according to the Investment Company Institute. While that total is still well shy of the $19.6tn in mutual funds, ETFs are closing the gap... There are also secondary challenges brewing from other pooled accounts that cater to very wealthy people and institutional investors. Separately managed accounts grew from about $856bn at the end of 2014 to $1.7tn by 2022, while collective investment trusts nearly doubled from almost $2.4tn to more than $4.6tn in that time, according to Cerulli data... Nearly 2,000 ETFs launched in the US between 2019 and 2023, nearly double the 1,100 new mutual funds, according to Morningstar.
5. After 17 years, the Bank of Japan increased interest rates in response to rising inflation in the country.
With this, the country also exited the negative interest rate regime, the last major economy to do so.
6. The Basel III rules on banking regulation that have been announced in recent months have generated strong pushback from large US banks. The rules are proposed for implementation in EU and UK from January 2025 and in US from July 2025.
The roots of the current battle stretch back to an agreement reached by the committee in 2017 in response to concerns that Basel III, the package of reforms implemented in the aftermath of the 2007-08 financial crisis, had failed to close all potential loopholes in the rules designed to safeguard the banking system. In particular, they wanted to revisit risk-weighted assets, or RWA. These are calculated by applying a risk weighting to banks’ businesses, including loans they have made to their customers. They are the denominator in the capital ratios that show how well positioned banks are to withstand losses; lower RWAs make banks look healthier. A set of rules dating back to 2004 allowed banks to use their own models to calculate RWA rather than standard measures of risk laid down by supervisors — and a string of studies had shown vast discrepancies in the ways that banks did that...
The committee argues that a “wide range of stakeholders lost faith in banks’ reported risk-weighted capital ratios” and that its proposed revisions, which greatly restrict the use of in-house models, “will help restore credibility in the calculation of RWA”... US regulators issued rules that would increase system-wide capital requirements by 16 per cent. In a nod to last year’s regional banking crisis, the package also proposed that banks with $100bn to $250bn of assets would have to follow most of the Basel rules for the first time. That brought the number of banks covered by the measures to 99, but still left the vast majority of US banks unaffected by the new rules...There are several reasons why the impact of the package has been greater in the US. But the main one is that regulators there chose to exceed the global standards, particularly in “operational risk” — such as cyber crime — where the US has gone for a more conservative approach that means banks with lower historical losses cannot use that to reduce their current capital requirement. Banks say the changes to RWA calculations will lead to significant hikes in capital requirements for mortgages, corporate loans and loans to other financial institutions. More capital will also be needed for the less risky sectors such as wealth management that banks were encouraged to pivot towards in the aftermath of the crash. JPMorgan said it was facing a 25 per cent jump in capital requirements, while analysts at Autonomous predicted American Express might need 40 per cent more capital... Bank executives argue that the rules are not needed because banks are already financially strong. According to the Financial Services Forum, which lobbies for the eight largest US banks, its members had $940bn of capital at the end of 2023, up from just under $297bn in 2009... They also say higher capital requirements for trading businesses will have real-world consequences — threatening activities such as hedging contracts for airlines’ fuel bills or retailers’ foreign-exchange exposure — while rules on credit risk threaten lending to ordinary Americans and small businesses.
Michael Hsu, the current Comptroller of the Currency, points out that if lending becomes more expensive, banks could spend less of their multi-billion-dollar profits on dividends and stock repurchases, rather than rationing loans. “There’s a choice to be made with capital,” he told the FT in January. The regulators’ proposals note that based on end-2021 calculations, five large banks were short between 16 and 105 basis points of capital to meet the new requirements. But they also state that “the largest US bank holding companies annually earned an average of 180 basis points of capital ratio between 2015 and 2022” — implying they should have no difficulty covering any shortfall.
Getting the proportionality of the capital ratio increase right is clearly a difficult problem to solve and involves reconciling conflicting objectives. The challenge is to ensure that the risk weights are not increased beyond what's required. But getting this requirement right is the problem. It's important to ensure that the rules don't end up significantly increasing the cost of capital for the real economy. It's also important to ensure that banks don't end up palming off the increases to their borrowers while retaining their current margins.
See also this.7. Excellent graphical feature in FT on the semiconductor chip making process.
A diminishing number of companies have been able to keep pace in the race to build the most advanced smartphone chips in recent years. The design and manufacturing processes have become extremely long, complex and costly, requiring ever more specialist equipment and knowledge. Advances take years of experimentation and require staggering levels of R&D spending. Working at nanoscale is also full of jeopardy. Precision, repeatability and cleanliness are some of the biggest challenges, says Sell, explaining that any particle, even those smaller than a bacterium, could “kill” a chip on contact. Inside chip fabrication plants, more than a thousand precisely controlled steps create each integrated circuit, layer by layer. Every time a new generation of chips is developed, these stages all need to be reviewed... A new chip generation also requires new tools and processes, says TSMC’s Cao. The transistor advances in the next 2nm chips mean some elements need to be built laterally, rather than vertically, bringing extra challenges, he adds...Creating the tiny components for a chip’s circuits requires cutting-edge equipment: machines that can transfer microscopic patterns on to each wafer using a process called photolithography. For the smallest chips, multi-million-dollar machines made by a single Dutch company, ASML, use extreme ultraviolet light to create these fine stencils. The machines are the size of a bus, but so accurate they could direct a laser to hit a golf ball as far away as the Moon... While leading manufacturers are hoping the 2nm chip will solve many of the 3nm generation’s problems, the limits of scaling mean engineers are already developing alternative ways of getting more power and efficiency out of the same space. Building on current 3D designs, engineers plan to stack transistors on top of each other, rather than cramming them in side-by-side...Packaging developments have paved the way for another shift in semiconductor architecture: “chiplets”. Engineers are moving away from building an entire microprocessor on a single piece of silicon — the monolithic “system on a chip” — and towards multi-chip modules (MCMs). These MCMs see groups of chips with different functions built on separate pieces of silicon and then bundled together to work like a single electronic brain... Many believe chiplet manufacturing is the only way to keep Moore’s Law alive in the longer term. Intel, AMD and Apple have already launched products, while others, like Nvidia, have indicated they have them in development. AMD’s latest MI300 employs modular architecture. The companies investing in MCMs say one of their key advantages is flexibility — they can be adapted for different customers because makers can swap in chiplets depending on requirements. They also offer manufacturers the option of mixing older and newer designs and upgrading elements incrementally, rather than overhauling a chip’s entire system at once.
This graphic captures the increasing cost associated with smaller chip manufacturing.
8. Marginal Revolution points to this far-reaching set of urban planning reforms in Wellington, New Zealand.
The first is the inner-city character areas, which have been reduced from 306 hectares to 85 hectares. This is huge. This is the most desirable, most density-friendly land in the city. The reason these suburbs have “character” is because they are old. They’re old because they’re the closest places to the city, so they were the first places anyone built houses. The character protections effectively prevented any development whatsoever from occurring in these suburbs. Thanks to Thursday’s votes, this land will be able to become apartments for thousands of new residents (which will also mean huge value uplift for current homeowners, whose land has suddenly become more developer-friendly).The second huge win is for the northern suburbs. By defining the Johnsonville rail line as “rapid transit”, the council has enabled thousands of new homes to be built along the train line. Anything within a walking catchment of a rapid transit station must automatically be zoned for six-storey apartments. A successful amendment by Nīkau Wi Neera took it even further, expanding the rapid transit walking catchment from five minutes to 10 minutes. Multiplied across nine train stations on the Johnsonville and Kāpiti lines, this adds up to enormous potential for new housing.There are countless smaller wins. The Gordon Wilson flats will no longer be a heritage-protected blight, staring over The Terrace menacingly like a diseased predator. Finally, (finally!), Victoria University of Wellington will be free to demolish the building and do something better with that land... Rebecca Matthews successfully passed an amendment to remove front and side yard setbacks. This goes much further than the National Policy Statement on Urban Development, or the Medium Density Residential Standards. Put simply, it means people building new townhouses or apartments don’t have to leave a gap between the house and the front or side of a section (as is common with UK-style terraced housing). That means more of the land can be used for housing. In many cases, it actually means larger backyards, because you don’t have to leave an ugly, weird dark alleyway along the side of the flat. It’s a small difference on every individual property, but it will add up enormously across the scale of the city. It will mean larger townhouses, or more townhouses per section, both of which are a win for density.
As can be seen, there are a lot of details here. It means that cities must have the capability to figure out which areas need to be applied with which set of urban planning instruments.
9. For every convincing argument, there's an even more convincing counter-argument. From David Andolfato.
You could also add globalisation, the emergence of China, technological advances etc to the mix of factors that has contributed to the stabilisation of the economy.
10. Finally, we worry needlessly about what has not happened in a thousand years. Hyperinflation edition.
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