Gone missing

As the global economy picks up, inflation is oddly quiescent

But central banks are beginning to raise interest rates anyway

A FEW years ago, the news about the euro-zone economy was uniformly bad to the point of tedium.

These days, it is the humdrum diet of benign data that prompts a yawn. Figures this week show that GDP rose by 0.6% in the three months to the end of September (an annualised rate of 2.4%). The European Commission’s economic-sentiment index rose to its highest level in almost 17 years. Yet when the European Central Bank’s governing council gathered on October 26th, it decided to keep interest rates unchanged, at close to zero, and to extend its bond-buying programme (known as quantitative easing, or QE) for a further nine months.

The central bank said it would slow down the pace of bond purchases each month, to €30bn ($35bn) from January. But Mario Draghi, the bank’s boss, declined to set an end-date for QE.

A hefty dose of easy money will be necessary, he argued, until inflation durably converges on the ECB’s target of just below 2%. It shows few signs of doing so, despite the economy’s strength. Underlying, or core, inflation, which excludes the volatile prices of food and energy, fell from 1.1% to 0.9% in October, according to data published a few days after the ECB meeting. The euro zone’s miseries of 2010-12 were unique. But in its present, happier state of vigorous activity, low inflation and easy monetary policy, it is like many other big economies (see chart).

After a decade of interest rates at record lows, those central banks that are inclined to tighten policy naturally attract attention. The Bank of England’s monetary-policy committee raised its benchmark interest rate from 0.25% to 0.5% on November 2nd, the first increase since 2007.

On the same day, the Czech National Bank raised interest rates for the second time this year.

The Federal Reserve kept interest rates unchanged this week, having raised them in March and June, but a further increase is expected in December.

In Turkey, perhaps the only big economy that is obviously overheating, the central bank—which has been browbeaten by the president, Recep Tayyip Erdogan, who believes high interest rates cause inflation—opted on October 26th to keep interest rates on hold. Yet in most biggish economies, underlying inflation is below target (see chart) and monetary policy is being relaxed. Brazil’s central bank cut interest rates on October 25th from 8.25% to 7.5%. Two days later, Russia’s central bank trimmed its main interest rate, to 8.25%. This week the Bank of Japan voted to keep rates unchanged and to continue buying assets at a pace of around ¥80trn ($700bn) a year. These economies are gathering strength. It is a puzzle that, in such circumstances, global inflation is stubbornly low.

To figure out why, consider the model that modern central banks use to explain inflation. It has three elements: the price of imports; the public’s expectations; and capacity pressures (or “slack”) in the domestic economy. Start with imported inflation, which is determined by the balance of supply and demand in globally traded goods, such as commodities, as well as shifts in exchange rates. Commodity prices have picked up smartly from their nadir in early 2016. The oil price, which fell below $30 a barrel then, has risen above $60.

This has put upward pressure on headline inflation: in the euro zone it is 1.4%, half a percentage point higher than the core rate. Where inflation is noticeably high, it is generally in countries, such as Argentina (where it is 24%) or Egypt (32%), that have withdrawn costly price subsidies and whose currencies have fallen sharply in value, making imported goods dearer. In Britain, rising import prices linked to a weaker pound have added around 0.75 percentage points to inflation, which is 3%.

A second influence on inflation is the public’s expectations. Businesses will be more inclined to push up their prices and employees to bid for fatter pay packets if they believe inflation will rise. How these expectations are formed is not well understood. The measures that are available are broadly consistent with the central bank’s inflation target in most rich economies. Japan is something of an outlier. It has struggled to meet its 2% inflation target in large part because firms and employees have become conditioned to expect a lower rate of inflation. Japan’s prime minister, Shinzo Abe, recently called for companies to raise wages by 3% in next spring’s wage round to kick-start inflation.

Leave aside the transient effects of import prices, and inflation becomes a tug-of-war between expectations and a third big influence, the amount of slack in the economy. The unemployment rate, a measure of labour-market slack, is the most-used gauge. As the economy approaches full employment, the scarcity of workers ought to put upward pressure on wages, which companies then pass on in higher prices. On some measures, Japan’s labour market is as tight as it has been since the 1970s. America’s jobless rate, at 4.2%, is the lowest for over 16 years. Inflation has nevertheless been surprisingly weak.

In other words, the trade-off between unemployment and inflation, known as the Phillips curve, has become less steep. A paper last year by Olivier Blanchard, of the Peterson Institute for International Economics, found that a drop in the unemployment rate in America has less than a third as much power to raise inflation as it did in the mid-1970s.

The central banks that see a need for tighter monetary policy are worried about diminishing slack. There are tentative signs of stronger pay pressures in Britain and America, and firm evidence of them in the Czech Republic, where wage growth is above 7%. Even so, with inflation expectations so steady, the flatter Phillips curve suggests that the cost for central banks in higher inflation of delaying interest-rate rises is rather low. The ECB is quite a way from such considerations. The unemployment rate is falling quickly, but remains high, at 8.9%.

There is still room for the euro-zone economy to grow quickly without stoking inflation. The dull routine of good news is likely to continue.

China’s soft power comes with a very hard edge

Even ‘panda diplomacy’ is not nearly as warm and cuddly as it seems

No animal in the world is more adored than the giant panda. There is a reason: the panda’s proportions — short fat limbs, oversized heads and big eyepatches — trigger the same neural reaction in us as the sight of human babies.

Anyone who has worked closely with these animals will, however, tell you they can be vicious.

Almost every year there are reports of panda attacks in the small area of south-west China where they still exist in the wild.

The panda has become a symbol of China, abetted by the ruling Communist Party’s practice of “panda diplomacy”. Since the 1950s, China has sent scores of the bears to dozens of countries.

From North Korea and the Soviet Union, to Nixon’s America and Angela Merkel’s Germany, China has gifted or loaned the animals to governments it wants to befriend or reward.

The pandas come with hidden costs. China charges countries $1m a year for a pair of pandas and reserves the right to repatriate any offspring if it is displeased by the host country.

President Xi Jinping signs off on every panda loan, but not until recipient countries have jumped through hoops and endured years of negotiations. China-based foreign diplomats complain about how skilful Beijing has become at manipulating governments and constituents in their home countries to increase demand for panda loans.

The Chinese government’s focus on breeding captive pandas to show in zoos and loan to foreign countries has come at the expense of efforts to protect the fragile forests in south-west China, where some 2,000 bears still survive in the wild. The recent success of panda breeding has even led some in China to question the value of protecting the species in the wild.

A tragedy looms if the Chinese government does not redouble its efforts to protect the panda’s habitat, home to numerous other rare species as well.Soft power is about the organic cultivation of mutual advantage and trust.

All of this, of course, has the marking of a rather obvious — but nonetheless very apt — metaphor. China’s efforts to build soft power outside its borders goes far beyond pandas — and in these areas, too, the People’s Republic needs to tread more lightly, and take a more reciprocal and less authoritarian approach.

China is entitled, as is any significant power, to bolster its soft power around the world. That Beijing should do so is particularly understandable. It is not part of the western club of nations.

Its history, ideology, and economic system are all very different and so it needs to work hard to win acceptance from the group of countries that have held sway since the second world war.

But what China should realise is that while western powers — and indeed the world — may well be prepared to accept its rising influence, they will not be amenable to outright interference.

There are many examples of intrusive uses of soft power by China. The forcing of publishers to censor their publications, the use of the United Front Work Department to infiltrate overseas Chinese groups in countries around the world, and the co-opting of Chinese student groups in Australia and elsewhere to protest against free speech are just a few. Companies are caught up, too. When South Korea’s government got on Beijing’s bad side for deploying a missile-defence shield, the South Korean chain Lotte saw its stores in China hit with fire-code violations. A government-backed boycott kept Chinese tourists out of South Korea, too.

Soft power is about the organic cultivation of mutual advantage and trust. In too many cases, China prefers to bully instead. There are not enough pandas left in China to obscure the difference between the two.

Big Tech Meets Big Government


Facebook, Google and Twitter executives testify before congress

SINGAPORE – Impressive quarterly results from the biggest technology companies show that they are nowhere near saturating their consumer markets, exhausting their innovation cycles, or reaching growth maturation. Dig a little deeper, and those reports also illustrate the sector’s substantial and growing systemic importance. Yet, for the tech sector, there is a distinct downside to this development.

With increased systemic importance often comes greater scrutiny. And, indeed, today’s prosperous and innovative tech giants now face the prospect of redoubled efforts to regulate and tax their activities. The longer it takes for these companies to recognize their systemic importance, the greater the likelihood of a more powerful backlash by governments and the public, hurting the companies and undermining their ability to continue producing innovations that genuinely boost consumers’ wellbeing.

When the tech sector began its evolution toward systemic importance, it comprised a collection of hungry start-ups possessing breakthrough technologies. Beyond disrupting existing economic sectors and activities, these technologies ended up producing new demand for the altogether new goods and services that they enabled.

Tech companies’ track record – time and again proving their capacity for exceptional growth – enables them to attract massive investment. They are thus able not only to strengthen their market position in their core activities, but also to develop innovative capabilities in new areas, by taking over smaller competitors, whether actual or prospective. And some are even able to self-disrupt repeatedly – and thus consistently to remain at the technological frontier.

Fueling Big Tech’s remarkable growth further, many of these companies’ services are ostensibly free, facilitating quick adoption by consumers. It helps that these services often can be provided as seamlessly abroad as they are within their country of origin, to the point that the very concept of “abroad” has become rather elastic.

Over time, the major tech companies’ rapid accumulation of market power has led to the rise of oligopolies in some sectors, and monopoly players in a few. Their social, economic, and even political influence has soared in some cases. Facebook and Twitter, for example, played a pivotal role in galvanizing protesters during the Arab Spring uprisings of 2011.

This raises serious risks: as beneficial as Big Tech’s innovations are, they can also serve as important channels for state or non-state actors to bring about their own disruptions. In the run-up to last year’s presidential election in the United States, some social media platforms inadvertently enabled the spread of disinformation. More menacing, extremists like the Islamic State have relied on social media for recruitment and propaganda purposes.

It should come as no surprise that Big Tech firms tend to move much faster than governments and regulators. As such, what began as a laissez-faire attitude of benign neglect– largely a result of ignorance and inattention – is evolving into something more forceful. As tech firms reach systemic importance, attitudes toward them change markedly.

This shift has become increasingly apparent in recent years, as major tech firms have faced intensifying scrutiny of their competitive practices, tax behavior, data uses, and privacy policies. Broader questions about their contributions to labor displacement and effects on wage growth have also arisen, even as societies increasingly recognize that technological disruption implies the need for education reform and improvements in skills acquisition and retraining.

Yet the tech sector itself still seems to underestimate its growing systemic importance. As a result, firms can lag in recognizing the need to update their operations, resources, and mindsets to reflect their shift from small disruptor to powerful incumbent. That means building more comprehensive and integrated business models, informed by experienced talent with expertise in a broader array of areas, in order to move beyond these companies’ laser focus on innovation.

The longer this process takes, the greater the risk that tech firms will lose control of the narrative.

Beyond fueling a rise in outside monitoring, regulation, and supervision, there is the risk of a consumer backlash – or even the further exploitation of innovations by malicious actors.

In an ideal world, major tech companies would recognize and adjust to their changing role in step with external actors, including governments and consumers, thereby striking the right balance between innovation, consumer benefits and protection, and national security. But this is not an ideal world. And, so far, internal and external forces have been out of sync, in terms of perceptions, capabilities, and actions. Add to that conscious and unconscious biases and considerable temptation for political manipulation, and the risks become only more profound.

Big Tech can and should play a larger role in helping the entire economy to evolve in an orderly and mutually beneficial manner. This will require, first and foremost, that they internalize their own systemic importance, and adjust their perspectives and behaviors accordingly. But it will also demand far better communication, with firms’ objectives and operations becoming much more transparent.

And, finally, it will call for a commitment to enhanced monitoring both of themselves and of their peers, together with more effective collective action, as appropriate.

If the tech sector fails to make such changes, government oversight and regulation will inevitably intensify. And it is far from certain that the net result will be positive for society, much less for business.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Doug Casey: How I Learned to Love Bitcoin, Part II

by Doug Casey

In all of Africa, most of South America, and a great part of Asia, fiat currencies issued by governments are a joke. They’re extremely unreliable within those countries. And they’re totally worthless outside the physical borders of the country. That’s why those people now want dollars. But those are physical paper dollars. And governments everywhere are trying to eliminate physical currency.

I think, therefore, that the Third World will adopt Bitcoin in a huge way.

That’s not just because people who own cryptocurrencies are currently making money. They’re saving an appreciating asset rather than a depreciating asset. You’re on a Sisyphean treadmill if you try to save a Third World currency—but three-fourths of humanity has no alternative.

Nobody in these backward places wants to save the worthless local currency—but, by law, that’s typically their only option. Billions will try to get into Bitcoin.

These coins are also private. They can transfer wealth outside of the country, which is very helpful. Kwachas, pulas, pesos, and such are worthless outside of the countries that issue them.

Of course, governments hate that, and this will present a big problem down the road. Governments hate Bitcoin. It gives their subjects a huge measure of extra freedom.

The whole Third World is going to go to these cryptocurrencies. They all have smartphones in these countries. A phone is the first thing they buy after food, shelter, and clothing. Bitcoin will become their savings vehicle.

Sure, it’s a bubbly market. But soon billions more people will be participating in it. So, it’s going to get more bubbly. That’s my argument for the bubble getting bigger, and the prices of quality cryptos going higher.

But like I’ve said, cryptocurrencies are just the first application of blockchain technology. I think they have staying power simply because government fiat currencies are bad, and will be getting worse. They’re not going away. But I view them mainly as a speculative opportunity right now.

How high is Bitcoin going to go? Bitcoin is kind of the numeraire. It’s the gold standard, as it were, of cryptocurrencies. John McAfee, who founded the cyber security giant McAfee, Inc., thinks it’s headed much higher. He thinks Bitcoin’s going to $50,000.

That sounds outrageous, but it’s entirely possible. Another 10-1 in a manic market is possible—although it brings up thoughts of tulip bulbs, of course.

Remember, Central Banks all over the world are printing up fiat currencies by the trillions, desperately trying to put off a collapse of the world economy. Many will issue their own cryptos—they’re trying to totally abolish paper cash as we speak. And they won’t want competition from private currencies like Bitcoin. Governments may well try to outlaw peer-to-peer cryptos.

That’s a topic worth exploring. Governments are going to get into these currencies in a big way. But only their own versions, probably making private cryptos like Bitcoin illegal. With paper cash no longer available, they’ll then be able to track absolutely everything that’s bought and sold.

At that stage—which is in the near future—the blockchain tech will have gone from one of the biggest pro-freedom innovations to one of the most repressive. Like gunpowder—first a liberator for the average man, then a means to suppress him. That said, technology, in the long run, is eventually always a liberating force.

And there’s one more factor that few are considering in the crypto revolution. They’re very good for gold. That’s because they’re drawing attention to the nature of the monetary system. Something few people think about. At all.

When people buy these cryptocurrencies, even if they know nothing about hard money, economics, or monetary theory, they implicitly ask themselves, “Hmm, Bitcoin or the dollar?” They’re both currencies. Then they naturally start asking questions about the nature of the dollar… the nature of inflation… and whether the dollar has any real value, and what’s going to happen to it, and why.

Figuring out the differences between currencies—as opposed to just accepting the dollar and central banking as if they were constants in the firmament, which almost everyone does now—is part of a monetary revolution.

People are going to start asking themselves these questions—which wouldn’t have otherwise occurred to them. They’re going to see that only a certain number of Bitcoin will ever be issued, while dollars can be created by the trillions, by the hundreds of trillions.

That’s going to make them very suspicious of the dollar. It’s going to get a lot of people thinking about money and economics in a way that they never thought about it before. And this is inevitably going to lead them to gold.

So, the Bitcoin and cryptocurrency revolution will prove extremely positive for gold. It’s going to draw the attention of millions, or hundreds of millions of people, to gold as the real alternative to the dollar and other currencies, after Bitcoin.

Plus, I suspect future versions of Bitcoin, or Bitcoin 2.0, will be easily redeemable in gold grams.

This is actually a big deal that most people aren’t looking at.


Investors call the end of the government-bond bull market (again)

It is the corporate-bond market they should worry about

FOR the umpteenth time in the past decade, a great turning-point has been declared in the government-bond market. Bond yields have risen across the world, including in China, where the yield on the ten-year bond has come close to 4% for the first time since 2014. The ten-year Treasury-bond yield, the most important benchmark, has risen from 2.05% in early September to 2.37%, though that is still below its level of early March (see chart).

Investors have been expecting bond yields to rise for a while. A survey by JPMorgan Chase found that a record 70% of its clients with speculative accounts had “short” positions in Treasury bonds—ie, betting that prices would fall and that yields would rise. Meanwhile a poll of global fund managers by Bank of America Merrill Lynch (BAML) in October found that a net 85% thought bonds overvalued. In addition, 82% of the managers expected short-term interest rates to rise over the next 12 months—something that tends to push bond yields higher.

In part, this reflects greater optimism about the global economy. For the first time since 2014, America has managed two consecutive quarters of annualised growth of 3% or more. Forecasts for European growth have also been revised higher. Commodity prices, including oil, have been rising since June, which may be a sign of improving demand.

The BAML survey found that, for the first time in six years, more managers believe in a “Goldilocks” economy (in which growth is strong and inflation is low) than in a “secular stagnation” outlook (in which both growth and inflation are below trend). If those views turn out to be correct, then it might be expected that bond yields would move a bit closer to more “normal” levels. Until the crisis of 2008, the ten-year Treasury-bond yield had been above 5% for most of the previous four decades.

Investors also expect that, eventually, some kind of fiscal stimulus will be passed in Washington, DC. Of the fund managers polled by BAML, 61% expect tax cuts in the first quarter of next year. Such a package may increase the deficit and induce more economic growth; both factors would push bond yields higher.

Another factor behind the upturn in yields is a shift in central-bank policy. The Federal Reserve has started to wind down its balance-sheet, by not reinvesting the proceeds when bonds mature. The European Central Bank will soon cut the amount of bonds it buys every month by half, to €30bn ($35bn). The private sector will have to absorb the bonds that central banks are no longer purchasing.

Whether this will trigger the long-prophesied collapse of the bull market in bonds is another matter. Globally, there are no signs of a sustained surge in inflation (see previous article).
PIMCO, a fund-management group, thinks that global economic conditions may now be “as good as it gets”. The momentum of growth may already have reached its peak.

Central banks also know that higher bond yields can act as a brake on economic growth. In G20 advanced economies, the combined debt of households, governments and the non-financial corporate sector has been rising steadily and stands at 260% of GDP. Every debt is also a creditor’s asset, but higher borrowing costs can create awkward adjustments; in America, for example, 30-year mortgage rates are around half a percentage point higher than they were a year ago. So the pace of tightening will be very slow. And if the economy shows any sign of wobbling, central banks will probably relent.

Perhaps the real area of worry should be the corporate-bond market. Low government-bond yields have pushed investors in search of a higher income into taking more risk. American mutual funds now own 30% of the high-yield bond market, up from less than 20% in 2008. The spread (extra interest rate over government bonds) on these riskier securities is close to its lowest level since before the financial crisis. BlackRock, another fund-management group, says there is “a more favourable environment for issuers at the expense of lenders”, especially as the quality of the covenants protecting lenders has been deteriorating.

With the rate of bond defaults falling, and the global economy doing well, investors probably feel there is little to worry about. But there is a problem: the corporate-bond market is less liquid than it was before 2007, as banks have pulled back from their market-making roles.

Investors have found it easy to get into the market in search of higher yields. When the time comes, they will find it much more difficult to get out.

China’s central bank injects $47bn into financial system

Largest intervention in almost a year sends bond yields down from 3-year high

Don Weinland in Hong Kong and Yuan Yang in Beijing

China’s central bank injected $47bn into its financial system, its largest intervention in nearly a year, in an effort to calm investor fears that Beijing’s crackdown on debt-fuelled growth would put a brake on the country’s rapid expansion.

Yields on China’s benchmark 10-year sovereign bond had risen above 4 per cent this week, a level not seen since 2014, following a sell-off that began following last month’s Communist party Congress, where the outgoing People’s Bank of China chief warned of the risks from excessive debt and speculative investment.

Although Thursday’s Rmb310bn injection saw the yield eased to 3.98 per cent from an intraday day peak of 4.015 per cent, analysts warned the PBoC had no clear target and that yields could rise beyond 4 per cent again without further easing.

“They don’t want the market to panic but I don’t think they have a set target,” said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore.

Emerging markets have been suffering a rough patch as investors have retrenched following Venezuela’s recent bond default, Saudi Arabia’s threatening war against Iran and continued political turbulence in Turkey. The jitters have also resulted in price swings for commodities such as metals and oil.

But China has come under particular scrutiny after recent remarks by policymakers that they are determined to crack down on easy credit, which many analysts believe has created bubbles and oversupply throughout the economy.

Loose monetary policy in China has helped keep bond yields artificially low as central bank liquidity — often in the form of stimulus intended to support the economy — has flowed into financial markets.

But policymakers are concerned the easy credit has masked concerns over the build-up of bad debt and a slowdown in China’s economy. The PBoC’s recent decision to hold off on adding liquidity to the system has led to a correction in Chinese markets as those fears are priced in.

“There should be a credit-risk premium but yields have been distorted by all the liquidity,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets in Hong Kong. “This year they have stopped the liquidity and the bond market is only now catching up with reality.”

Yields remained steady during the party congress in October as banks, mutual funds and other state-backed institutions — often referred to as the “national team” for their role in stabilising the market — continued to buy sovereign debt.

But the buying has recently slowed amid signs the government planned to rein in credit growth.

“Investors, in particular mutual funds which have become the second-largest buyer of China’s government bonds, had previously bought sovereign debt because they had assumed the government would loosen [credit] in the fourth quarter in order to achieve the GDP growth target,” said Jonas Short, Beijing head of Sun Kai Hung Financial, an investment bank. “But the realisation that in fact there will be no loosening whatsoever has triggered the sell-off.”

Industrial commodities hitch a ride on global growth hopes

Metals are rising sharply, but this is not a repeat of the commodity ‘supercycle’

by David Sheppard and Neil Hume in London

© Bloomberg

Industrial commodities are on a tear. Oil, copper and niche metals such as cobalt all shot to multiyear highs in recent weeks, buoyed partly by the strongest and most widespread global growth since the financial crisis.

The move, which has seen Brent crude top $60 for the first time in two years and copper pass $7,000 last month, has been accompanied by renewed interest from investors and hedge funds who had largely abandoned the sector during a brutal slump over the past three years.

Now, with growth picking up and commodity markets tightening due to under-investment and producers’ attempts to rein in output, some industry executives and analysts say funds are again treating commodities as the go-to assets to profit from global growth.

They caution, however, that while the commodity cycle appears to be turning, this is not a repeat of the so-called “supercycles” that propelled oil and metals to record highs last decade, as China’s rapid industrialisation caught the industry napping.

“We are in the upswing of a classic commodity cycle but this time — while demand is strong — it is being driven by supply constraints rather than a sudden surge in consumption that the industry just wasn’t ready for,” said Julian Kettle, vice-chairman of metals and mining at Wood Mackenzie.

“The last five years there has been under-investment in metals and to a certain degree energy and, while supplies are relatively comfortable, investors are starting to see that producers are risking storing up problems for the future.”

The issue, analysts say, is that miners and oil producers were so badly burnt by the commodity crash that they have pulled investment from new projects during the downturn.

While demand is not soaring at the rate it was last decade, it is now expanding quickly enough to provoke concerns about future supplies, drawing in investors who want to tap into global growth and to have a possible hedge against rising inflation.

“The herd-like behaviour from investors is certainly reminiscent of what we saw a decade ago,” said Caroline Bain, chief commodities economist at Capital Economics in London.

“But a lot of this optimism we’re seeing is about future demand. The crash in prices has caused much lower investment.”

Take oil, for example. Swiss commodity house Trafigura was one of the first to sound the alarm in September when it warned demand could exceed supply by as much as 4m barrels a day by the end of this decade, after energy companies halted $1tn of spending on new production during the oil crash.

While the market is currently being propped up by Opec supply cuts, doubts are growing that the US shale industry will be able to meet future demand growth wholly on its own, which is forecast to keep expanding even as electric cars become a bigger part of the market.

Hedge funds have amassed a near-record bet on higher Brent crude oil prices in recent weeks.

In metals, the industry has been awash with projections that the same growth in electric cars will transform corners of the market, with nickel — long a laggard on the base metals complex — set to see demand soar as battery use grows, while copper is also seen benefiting due to its use in charging points.

Cobalt, essential to modern battery technology, has also become the industry’s new darling, with supply dominated by challenging jurisdictions such as the Democratic Republic of Congo, where 50 per cent of the metal is mined. The price has soared by 200 per cent over the past 18 months.

Ivan Arriagada, chief executive of Chile-focused copper producer Antofagasta, said this week that the talk around electric vehicles meant that investors were looking at metals and mining with different eyes.

“We have generally been seen as an industry at the periphery of the modern economy and all this [the electric vehicle narrative] is showing that metals are very important,” Mr Arriagada said.

Ian Roper, general manager of Chinese metals data company SMM, highlighted, however, that it is still supply issues rather than demand that has provided the main impetus for the recovery in industrial metals. China has prioritised cutting pollution, leading it to place restrictions on mines and smelters for many key metals and minerals, including steel and coal.

“Given we’ve seen all the clampdowns from the supply side and the lack of investment in new mines globally that could put commodities on a very firm footing on the next three to five year cycle,” Mr Roper said.

Not all commodities are benefiting, however. Agricultural commodities, from grains to pulses, remain weighed down by bumper crops. Gold, which tends to act as a hedge against weak economic growth, is likely to face headwinds.

Paul Horsnell, head of commodities research at Standard Chartered, said the key message was investors still need to pick and choose commodities and the companies that produce them carefully.

“This probably isn’t a rising tide that is going to raise all ships,” Mr Horsnell said.

“Each of the commodities that has rallied has its own unique story and fundamentals, so investors need to be cautious. In a lot of them we’re going up simply because prices have been too low.”

Additional reporting by Henry Sanderson

The Trouble With Spanish Nationalism


Spain is at once very young and very old. For most historians, modern Spain was born in 1469, though some argue that something resembling Spain existed as far back as fifth century B.C. Yet the political structure that governs Spain today has been in place for just 40 years.

Spain is, moreover, at once very strong and very weak. Few countries in the world have governed empires as vast as Spain’s was in the 16th and 17th centuries. The Spanish language attests to its legacy: The only language in the world with more native speakers than Spanish is Mandarin. Yet in the past 200 years, few countries in the Western world have had as turbulent and violent a history as Spain.

In the 1960s, Spain was a backwater, politically isolated from much of the world and economically stunted compared with its European neighbors. By 1981, its fortunes had changed, and it has been making up for lost time. Spain is now the fourth-largest economy in the European Union and the 13th-largest economy in the world, with a gross domestic product of roughly $1.2 trillion. It is also the fifth-most populous country in the eurozone, accounting for just under 10 percent of its total population.

Now Spain’s political foundations are shaking once more. Catalonia, a wealthy autonomous region in the northeast, has declared independence, as it has been inclined to do in the past. But the prospect of a new nation-state is not in question. Catalonia will not secede from Spain. The government in Madrid will not allow itself to preside over the dissolution of the country. But Catalonia’s independence referendum raises a difficult question: What happens when two peoples claim the same land for different nations?

Spain’s peculiar history explains how Madrid and Catalonia have come to ask themselves this very question again in 2017. Theirs is a story shared by nearly every nation-state – and every would-be nation-state – in the world. And though the outcome is all but certain, a better understanding of why this is so can teach us much about the geopolitics of nations.

Lower Stakes

Geography affects the development of all nations in profound ways, but rarely has it done so more strikingly than in Spain. Today the country is renowned for its beaches, but its defining geographic feature is its mountains. On the European Peninsula only Switzerland boasts a higher mean altitude. It is the existence – and more important, the location – of these mountains that has fostered the distinct, regional communities that make Spain so difficult to govern.

The Iberian Mountains have peaks as high as 7,500 feet (2,300 meters) and have always isolated northeastern Spain from the center of the country. In the northwest are the valleys and low mountains of Basque Country, another of Spain’s autonomous communities and, aside from Catalonia, the one with the most well-defined national consciousness. Farther west, the Cantabrian Mountains separate the coast of northwestern Spain from the interior of the country. The region of Galicia in the northwest corner of Spain has had serious independence desires of its own at various points in Spanish history.

South of the Cantabrian Mountains is the Northern Meseta, or the northern plateau. The central mountains border the Northern Meseta to the south and separate it from the Southern Meseta, which is home to the capital, Madrid. Together, the Northern and Southern Mesetas account for almost 40 percent of the land of the entire Iberian Peninsula, yet they are sequestered by mountain ranges. South of the Southern Meseta are yet more mountains – the Sierra Morena – which separate the Southern Meseta from the Guadalquivir River Valley. This valley is bordered to the east by the Baetic Mountains and the Sierra Nevada range, with snow-capped peaks that reach almost 12,000 feet.

Last and most important are the Pyrenees, in northeast Spain, which separate France from the Iberian Peninsula. The region was named by the Greeks, and later the Romans stayed close to this moniker, calling it “Hiberia” after the Iber River, known now as the Ebro River.

It’s hard to overstate the geopolitical significance of the Ebro in the ancient world. The area between the Ebro and the Pyrenees was the de facto “demilitarized zone” between ancient Carthage and Rome. When Hannibal crossed the Ebro, he started the Second Punic War, a war that determined that it was to be Rome, and not Carthage, that would rule the Mediterranean.

The stakes are not nearly as high today, but the Ebro River Valley is where Spain’s current crisis is unfolding. Sandwiched between the Pyrenees and the Iberian Mountains, the Ebro River Valley flows through Aragon and Catalonia. It is the lifeblood of these regions.

Though mountains are Spain’s most conspicuous geographic feature, they are not the only one to impede government efforts to unify the country. The weather patterns in Spain differ profoundly from region to region. Northwestern Spain gets a great deal of rain each year – sometimes as much as 80 inches a year. Compare that to the Southern Meseta, which sometimes sees as little as 10 inches of rain per year. Central and southern Spain are much dryer, though the Guadalquivir River Valley is a notable exception. Northeastern Spain has comparatively less rainfall too, but Catalonia has the Ebro River (and Valencia the Turia River) for irrigation.

None of Spain’s major rivers, though, connect to one other. This is true of most European states, but it is especially pronounced in Spain because of the way the mountains and the climate serve to define the country’s regions. A unified Spain, where a strong central government can execute its authority, requires the expensive work of building the infrastructure necessary to stitch the country together. Spain’s geography challenges central rule because it creates resilient national and linguistic identities.

Geography has confounded every ruler from Isabella I to Mariano Rajoy. But it’s not that simple. If geography alone defined political power, Spain would never have unified as a country, let alone become one of the richest and most powerful empires in the modern world. Spain has never lost the legacy of its diversity, but in modern times it has always tried, and mostly succeeded, to consolidate that diversity under the idea of the Spanish nation. When Catalonia declared its independence, Spanish Prime Minister Mariano Rajoy said, “Spain is a serious country and a great nation.” He wasn’t wrong. Spain is a serious nation-state, and it is serious not because of its geography but despite it.

Most history books teach that modern Spain was the result of the marriage of Isabella I of Castile and Ferdinand II of Aragon. There is, of course, a slight problem with ascribing the birth of the Spanish nation to Isabella and Ferdinand’s nuptials – neither of them was, or became, “of Spain.” Both were rulers of separate kingdoms, and when Isabella passed away before Ferdinand, he simply returned to Aragon. The dynasties that ruled Spain in the centuries after Isabella and Ferdinand were family dynasties – first the Hapsburgs, then the Bourbons. Isabella and Ferdinand gained more power than any of their predecessors, but they did so by maintaining the laws and local constitutions of the various lands under their dominion.

Still, two important things happened during the reign of Isabella and Ferdinand: the Reconquista and the discovery of the New World. The Reconquista was the result of centuries of conflict. Muslim forces invaded the Iberian Peninsula in 711, and by 717 they had reached the Pyrenees. Muslim rule of the Iberian Peninsula would ebb and flow for almost 800 years. Sometimes the Muslims occupied nearly the entire peninsula, but mostly they controlled the southern half of what we now call Spain. They named this territory al-Andalus.

Medieval Spain, then, was diverse not just because of Spain’s geography. The Muslim invasion of Spain created a religious diversity that is present nowhere else in Europe except perhaps in the Balkans, where the Ottoman Empire exerted control for many centuries. There was also a large and influential Jewish population in medieval Spain.

This diversity was a source of intellectual creativity – and of cultural provocation. Christian rulers in northern Spain never accepted the legitimacy of the Muslim invaders, and for centuries they pushed the Muslims farther and farther south. Their efforts culminated under Ferdinand and Isabella, who drove the last Moorish kingdom of Grenada off the peninsula in 1492. That same year, the Spanish Inquisition, which had begun in 1478, decreed that all Jews and Muslims remaining in the Iberian Peninsula should convert or leave.

Most of Europe was staunchly religious, but no Western European country remained as religious for as long as Spain. Spain’s national identity grew partly from the idea that it was where the Muslim invasion of Europe had been stopped. Spain may well have needed religion to hold its society together, since it could not depend fully on the peoples’ identification with a unified and indivisible Spanish nation. Being monarchs was not enough for Ferdinand and Isabella to receive support, but being the Christian vanguard in the fight against Islam substantiated their claims. Their tactic has been used throughout modern Spanish history. Francisco Franco, who helmed a military dictatorship in Spain for 39 years in the 20th century, was a devout Catholic who did not shy from using his faith to legitimize his rule and bring the country together under a common banner.

The second thing that happened under Ferdinand and Isabella was the discovery of the New World. Christopher Columbus was born in Genoa, but it was Ferdinand and Isabella who agreed to fund his expedition in 1492. Columbus was not expecting to discover the Western Hemisphere, of course, and Ferdinand and Isabella were not expecting him to discover it either. Columbus was looking for a shorter way to get to Asia. But Columbus did discover parts of the New World, and he claimed those discoveries for the Crown of Castile. By 1503, Isabella and Ferdinand were dispatching bureaucrats to their new holdings and organizing what would become the Spanish Empire. By 1545, the new Spanish Empire had struck gold (and silver). The political union that had been made possible by Ferdinand and Isabella’s marriage suddenly came with a dowry of immense wealth. Wealth conferred on Spain the power to challenge the rest of Europe itself.

Powerful though it may have been, Spain was still a hodgepodge of variegated peoples. The Spanish nation still did not exist. Money helped its rulers forget these differences, but the system that was built around it was difficult to sustain. By the 17th century, that system was beginning to come apart. A great example can be found in the Catalan Revolt of 1640. The crown had to finance its various military conflicts, and so it levied more taxes on the Catalans, lest Castile continue to foot a disproportionate amount of the bill. Catalonia, like other Spanish regions, viewed itself as part of the Spanish Empire but separate from Spain when it came down to culture, language and the rule of law. It revolted accordingly.

Centuries later, when nationalists of the 1800s sought to forge a Spanish nation, they harkened back to the reign of Ferdinand and Isabella and their two great marks on history. It was the perfect grist of a national myth, one compelling enough to bind together Spain’s disparate regions.

With Independence Came Chaos

Europe changed irrecoverably in the 19th century. Nationalism was in the air, and the emergence of new nation-states began to change the balance of power, with frightful consequences to come in the 20th century. For Spain, the watershed event was the Peninsula War of 1807-1814, one of the Napoleonic Wars. Spain and France allied together to invade Portugal, but France betrayed Spain and occupied it. In 1808, an insurrection against the French began in Madrid but soon spread to other regions. In the past these regions had squabbled among themselves, but France gave them a common enemy. Thus began the Spanish War for Independence.

Spain would win its independence, aided as it was by the United Kingdom, but with independence came chaos. The country had, in fact, already begun to destabilize – the Spanish Empire had been in decline for more than a century, and its alliance with Napoleon was a last-ditch effort to reverse the decline. The French occupation was merely the final straw. Now autonomous, Spain had the daunting task of building a system of governance capable of maintaining order in a rapidly changing yet already diverse country. The 19th century would not be a peaceful one. By the end of the century, Spain had tried its hand at nine different constitutions and two different forms of government. It was constantly changing democratic political structures and restoring the monarchs from different families.

Spain’s most famous civil war was fought after the turn of the century, from 1936 to 1939, but it was at war with itself well before then. The preceding conflicts are known as the Carlist Wars. The Carlist Wars had at least three chapters in the 19th century, but in the Third Carlist War (1872-1876) a new king was to be installed, one who meant to restore the local constitutions of Catalonia, Valencia and Aragon. During this time there was even a short-lived state in the Basque Country. The Spanish government managed to crush this rebellion, but the appetite for regional autonomy could not be suppressed. Increasingly a haven for labor movements, communists and even anarchists, Catalonia would revolt again in 1909, only to be put down by King Alfonso XIII. Jose Ortega y Gasset, one of Spain’s most famous philosophers, would write in 1922 that Spain had become an “invertebrate,” a people ruled by a government that hadn’t the slightest idea how to best respond to their needs.

Ortega y Gasset was right. Spain had not yet coalesced into a nation, and its leaders had not yet been able to respond to the needs of all the people. In 1931, yet another constitution was ratified, and for a few years, Spain’s Second Republic tried to bring order to the country. It failed. The new government was actually a friend to Spanish regions, but more traditional elements in the country, such as the military and the clergy, believed regional autonomy threatened the soul of Spain. They believed the electoral process unfairly brought certain groups to power – indeed, the Popular Front won the 1936 elections with less than 50 percent of the vote – and they were unable to fully assert their control.

Yet another military coup ensued. Its leader, Francisco Franco, would rule Spain as a dictator for almost 40 years. He was supported by the likes of Hitler and Mussolini, who saw in him a shared sense of nostalgia for “better” times. (Spain was “better” in the time of Ferdinand and Isabella, Germany was better in the time of Teutonic knights, and Italy was better in the time of ancient Rome. Such was the cultural currency of fascism.) On the primacy of Spanish nationalism, Franco would not compromise. The nation was all encompassing and all important. More than 500,000 people would die fighting over what it meant to be Spain before Franco emerged victorious in 1939.

Franco was an authoritarian, if not quite a totalitarian in the vein of Hitler. His rule was absolute. His military dictatorship crushed regional autonomy and political dissent throughout the country. And yet for all the regime’s sins, Franco’s government gave Spain its first extended period of political stability in more than a century. By the time he left office, Spain had become an important Cold War ally of the United States, and economic reforms had been made that significantly improved the Spanish economy and primed it for the success Spain would enjoy after it joined the European Union.

His “success,” such as it was, raises an uncomfortable question: Did Spain need a heavy-handed regime to define what it meant to be Spanish? The Spanish people eventually rejected Franco’s vision, of course, but Franco’s desire to unify Spain was nothing if not ambitious, something that all Spanish leaders before him had also desired to accomplish but never quite succeeded. Tellingly, the widespread dissatisfaction with Franco may have brought the Spanish people closer together, much as the contempt for the French occupation had more than a century earlier.

In any event, in 1978, Spain adopted a new constitution, one that recognized the Spanish nation as well as the legitimacy and rights of its autonomous regions. It was unclear whether the constitution would hold, but it did. Spanish King Juan Carlos put down a military coup in 1981 to protect it. It has defined Spanish politics to this day.


Most countries become countries violently. The United States did not become a nation until more than 600,000 soldiers and countless civilians died in its Civil War. Modern China did not become a nation until millions – and perhaps tens of millions – died in China’s Civil War. Birth is bloody and messy and painful, even if the end result is joyous.

All nation-states have demons to face. Even the most homogeneous of peoples are not completely homogeneous. Nationalism is a powerful ideology, one that is based on something very real: the desire of a people with shared language, or culture, or values, to live in community and freedom with and for each other.

But its power cuts both ways. A large portion of the Catalan population wants to be independent, and if history teaches us anything, it teaches us that a large portion of the Catalan population has always wanted to be independent. Not all Catalans do, though, for Catalonia is no more monolithic than is Spain. It doesn’t seem as though there is a critical mass of Catalans willing to pledge their lives, fortunes and sacred honor to prevent the central government from reasserting its control. Until Catalonia has the will and power to make itself independent, the desires of its secessionists will remain stillborn.

For Spain, Catalonia’s independence declaration – even if it represents the will of only some 38 percent of the Catalan population – leads to a dark place. The Spanish Constitution was designed in part to remove Spain from its past, to pave a democratic way forward for a country that could be as proud of its internal diversity as of the unity of the Spanish nation. But wishing something does not make it so, and writing it down in a constitution does not necessarily make it real for the people. In crushing Catalonia’s desires, the government in Madrid is doing the same thing previous Spanish governments have been forced to do when facing revolts in the periphery. Letting Catalonia go would mean the Spanish nation is more myth than reality. Forcing Catalonia to stay at gunpoint means present-day Spain is not exceptional – it is like all previous Spanish regimes.

This is an issue faced by nation-states around the world. For a time, the ideologies that moved the world were based on ideas, not on personal relationships. Communism tried to universalize the proletariat, wherever he was and whatever language he spoke. Western liberalism, with its emphasis on individual rights, said governments derived legitimacy by protecting the rights of individuals, wherever they lived and whatever personal beliefs they held. But a son does not choose his mother based on ideological preference, and a worker does not choose his or her language and culture.

And so the world, after a move toward larger and larger political bodies, is self-segregating, rallying around familiarity and self-reliance and national loyalty. It is Spain’s turn now. But it won’t stop in Spain. What Spain does will not affect the world – but the demons Spain is facing are not Spain’s alone.

The US Plutocracy’s War on Sustainable Development


Inmates in the USA

NEW YORK – The US plutocracy has declared war on sustainable development. Billionaires such as Charles and David Koch (oil and gas), Robert Mercer (finance), and Sheldon Adelson (casinos) play their politics for personal financial gain. They fund Republican politicians who promise to cut their taxes, deregulate their industries, and ignore the warnings of environmental science, especially climate science.

When it comes to progress toward achieving the United Nations Sustainable Development Goals, the US placed 42nd out of 157 countries in a recent ranking of the SDG Index that I help to lead, far below almost all other high-income countries. Danish author Bjørn Lomborg was puzzled. How could such a rich country score so low? “America-bashing is popular and easy,” he surmised.

Yet this is not about America-bashing. The SDG Index is built on internationally comparable data relevant to the 17 Sustainable Development Goals for 157 countries. The real point is this: sustainable development is about social inclusion and environmental sustainability, not just wealth.

The US ranks far behind other high-income countries because America's plutocracy has for many years turned its back on social justice and environmental sustainability.

The US is indeed a rich country, but Lord Acton’s famous aphorism applies to nations as well as to individuals: power corrupts, and absolute power corrupts absolutely. The US plutocracy has wielded so much power for so long that it acts with impunity vis-à-vis the weak and the natural environment.

Four powerful lobbies have long held sway: Big Oil, private health care, the military-industrial complex, and Wall Street. These special interests feel especially empowered now by Donald Trump’s administration, which is filled with corporate lobbyists, not to mention several right-wing billionaires in the cabinet.

While the Sustainable Development Goals call for mitigating climate change through decarbonization (SDG 7, SDG 13), US fossil-fuel companies are strenuously resisting. Under the sway of Big Oil and Big Coal, Trump announced his intention to withdraw the US from the Paris climate agreement.

America’s annual energy-related per capita CO2 emissions, at 16.4 tons, are the highest in the world for a large economy. The comparable figure for Germany, for example, is 9.2 tons. The US Environmental Protection Agency, now in the hands of lobbyists from the fossil-fuel sector, dismantles environmental regulations every week (though many of these actions are being challenged in court).

The SDGs also call for reduced income inequality (SDG 10). America’s income inequality has soared in the past 30 years, with the Gini coefficient at 41.1, the second highest among high-income economies, just behind Israel (at 42.8). Republican proposals for tax cuts would increase inequality further. The US rate of relative poverty (households at less than half of median income), at 17.5%, is also the second highest in the OECD (again just behind Israel).

Likewise, while the SDGs target decent jobs for all (SDG 8), American workers are nearly the only ones in the OECD that lack guaranteed paid sick leave, family leave, and vacation days. The result is that more and more Americans work in miserable conditions without job protections. Around nine million American workers are stuck below the poverty line.

The US also suffers from an epidemic of malnutrition at the hands of the powerful US fast-food industry, which has essentially poisoned the public with diets loaded with saturated fats, sugar, and unhealthy processing and chemical additives. The result is an obesity rate of 33.7%, the highest by far in the OECD, with enormous adverse consequences for non-communicable diseases. America’s “healthy life expectancy” (morbidity-free years) is only 69.1 years, compared to 74.9 years in Japan and 73.1 years in Switzerland.

While the Sustainable Development Goals emphasize peace (SDG 16), America’s military-industrial complex pursues open-ended wars (Afghanistan, Iraq, Syria, Yemen, Libya, to name some of America’s current engagements) and large-scale arms sales. On his recent visit to Saudi Arabia, Trump signed a deal to sell over $100 billion in weapons to the country, boasting that it would mean “jobs, jobs, jobs” in America’s defense sector.

America’s plutocracy contributes to homegrown violence as well. The US homicide rate, 3.9 per 100,000, is the highest of any OECD country, and several times higher than in Europe (Germany’s rate is 0.9 per 100,000). Month after month, there are mass shootings in the US, such as the massacre in Las Vegas. Yet the political power of the gun lobby, which opposes limits even on assault weapons, has blocked the adoption of measures that would boost public safety.

Another kind of violence is mass incarceration. With 716 inmates per 100,000 people, America has the world’s highest incarceration rate, roughly ten times that of Norway (71 per 100,000).

Remarkably, America has partly privatized its prisons, creating an industry with an overriding interest in maximizing the number of prisoners. Former President Barack Obama issued a directive to phase out private federal prisons, but the Trump administration reversed it.

Lomborg also wonders why the US gets a low score on global “Partnership for the Goals,” even though the US gave around $33.6 billion in official development assistance (ODA) in 2016. The answer is easy: relative to gross national income of almost $19 trillion, ODA spending by the US amounted to just 0.18% of GNI – roughly a quarter of the global target of 0.7% of GDP.

America’s low ranking in the SDG Index is not America-bashing. Rather, it is a sad and troubling reflection of the wealth and power of lobbies relative to ordinary citizens in US politics. I recently helped to launch an effort to refocus state-level US politics around sustainable development, through a set of America’s Goals that candidates for state legislatures are beginning to adopt. I am confident that a post-Trump America will recommit itself to the values of the common good, both within America and as a global partner for sustainable development.

Jeffrey D. Sachs, Professor of Sustainable Development and Professor of Health Policy and Management at Columbia University, is Director of Columbia’s Center for Sustainable Development and of the UN Sustainable Development Solutions Network. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, and, most recently, Building the New American Economy.


Criticism of index-tracking funds is ill-directed

Theories of their malignance run ahead of reality

INDEX funds were devised in the 1970s as a way of giving investors cheap, diversified portfolios.

But they have only become very popular in the past decade. Last year more money flowed into “passive” funds (those tracking a benchmark like the S&P 500) than into “active” funds that try to pick the best stocks.

In any other industry, this would be universally welcomed as a sign that innovation was coming up with cheaper products to the benefit of ordinary citizens. But the rise of index funds has provoked some fierce criticism.

Two stand out. One argues that passive investing is, in the phrase of analysts at Sanford C. Bernstein, “worse than Marxism”. A key role of the financial markets is to allocate capital to the most efficient companies. But index funds do not do this: they simply buy all the stocks that qualify for inclusion in a benchmark. Nor can index funds sell their stocks if they dislike the actions of the management. The long-term result will be bad for capitalism, opponents argue.

A second argument is that index funds pose a threat to competition. The asset-management industry used to be remarkably diverse. It was hard for any active manager to keep gaining market share; eventually, their performance took a hit. But passive managers benefit from economies of scale. The more funds they manage, the lower their fees can become, and the more attractive the product.

Since passive managers like BlackRock and Vanguard own the shares of every company in an industry, the fear is that they might play a role reminiscent of the monopoly “trusts” of the late 19th century. Studies have argued that the concentrated ownership of shares is associated with higher fares in the airline industry and fees in the banking sector.

These criticisms cannot surely both be true. They require index funds simultaneously to be uncritical sheep-like investors and ruthless top-hatted capitalists devoted to gouging consumers. Furthermore, passive investors, in the form of mutual funds and exchange-traded funds, own only 12.4% of the American equity market. It seems remarkable that they can have such a big impact on the corporate sector with such a small stake.

It is worth examining the criticisms in detail. The Marxist criticism implicitly assumes that the investment community is divided into two—passive investors and active managers devoted to combating corporate excess and ferreting out exciting new bets. But a lot of “active” investors run portfolios that cling closely to a benchmark index for fear of getting fired if they underperform. So they, too, own shares in the biggest firms. A few “activist” investors do try to change corporate strategy but most fund managers don’t have the time to campaign. They may be active but they are not activist.

When it comes to voting at annual general meetings, moreover, passive managers can and do get involved. In one 12-month period, BlackRock says it voted in support of proposals from activists 39% of the time, compared with 33% of occasions where it backed existing management.

As for the studies that found evidence of anti-competitiveness caused by passive money, they have been challenged. A recent academic paper* found “no relationship between common ownership and prices in the airline industry”; another** from the Federal Reserve on the banking industry found some results that were consistent with an anti-competitive effect but “the sign of the effect is not robust, and implied magnitudes of the effects that are found are small.”

Even if you concede the potential for a small group of fund managers to exert baleful influence on a few sectors through their cross-holdings, passive managers are surely the least likely participants in such a conspiracy. The point of their existence is that they hold the market weight in every industry; they have no reason to favour the success of one over any other. If a conspiracy were to occur, it would surely be driven by active managers buying very large stakes in a particular industry, and hoping to benefit accordingly.

There is an element of reductio ad absurdum about the anti-passive arguments. Yes, if the market was 100% owned by index funds, that would be a problem. And if there were no crime, policemen would be out of work. But we are nowhere near that point. Stop worrying and enjoy the low fees.

* “Common ownership does not have anti-competitive effects in the airline industry” by Patrick Dennis, Kristopher Gerardi and Carola Schenone

** “Testing for competitive effects of common ownership” by Jacob Gramlich and Serafin Grundl