Transitory Histrionics

Doug Nolan


May 3 – Financial Times (Sam Fleming): “Having lamented low inflation as one of the great challenges facing central bankers today in March, Jay Powell on Wednesday wrongfooted many investors with comments that seemed to play down the gravity of the problem. The new message from the Federal Reserve chairman — that ‘transitory’ drags may be slowing price growth, rather than more persistent problems — marked a rude awakening for investors who had been hoping that he would signal an ‘insurance’ interest rate cut this summer because of low inflation. To critics, Mr Powell’s sharp change in tone extends a pattern of unpredictable communications that have made Fed policy more difficult to read. While many accept that investors got ahead of themselves in treating a 2019 rate cut as a fait accompli, the risk is that in his effort to dial back expectations of easier policy Mr Powell undercut the central bank’s broader message: that it will do whatever is necessary to get stubbornly low inflation back on target.”

To many, Chairman Powell’s Wednesday news conference was one more bungled performance. It may not have been at the same level as December’s “tone deaf” “incompetence.” But his message on inflation was muddled and clumsily inconsistent. How on earth can Powell refer to below-target inflation as “Transitory”?

Chairman Powell should be applauded. Sure, he “caved” in January. And while he can be faulted (along with about everyone) for not appreciating the degree of market fragility back in December, markets had over years grown way too comfortable with the Fed “put”/backstop.

I don’t fault the Powell Fed for having attempted in December to let the markets begin standing on their own. It was about time – actually, way overdue. Fault instead unsound markets and decades of “activist” Fed policymaking. And when markets were on the cusp of dislocating, Chairman Powell did what he believed the Fed had to do: Dovish U-turn. From my point of view, the grave mistake was the unnecessary (“gas on a flame”) “exceed dovish expectations” March 20th meeting. I’ll assume the FOMC was prepared in March to err on the side of both caution and message consistency.

But it’s May now. Record stock prices, bubbling bond markets and a return to quite loose financial conditions – along with a marketplace having gone a little crazy with the rate cut narrative. It would have been unwise for the Fed to oblige. To further accommodate this highly speculative market environment would ensure an only greater price to pay down the line. Besides, does it really make sense to split hairs on the undershooting of the Fed’s 2% inflation target with the S&P500 returning 18% in about four months and the unemployment rate down to a 49-year low 3.6%? “Transitory” Histrionics.

We live in an era where unstable global financial markets dictate financial conditions and economic performance like never before. Moreover, the world is in the throes of history’s greatest financial and market Bubbles. So discard any fanciful notion of “equilibrium.” At this point, the Bubble either inflates or falters – and the longer it inflates the more acutely vulnerable everything becomes. The global Bubble was in jeopardy in December, with ill-prepared central bankers coming feverishly to the markets’ rescue. Their next rescue attempt will come with greater challenges.

It’s worth noting that monthly y-o-y gains in CPI averaged 2.5% in 2018 (up from 2017’s 2.1%). July’s 2.9% was the strongest reading since February 2012. Year-over-year CPI inflation was at 2.5% in October before dropping back to 1.5% by February.

Is it reasonable to contemplate that this recent pullback in inflation could prove Transitory?

After Q4’s market instability and resulting tightening of financial conditions, major U.S. equities indices have since recovered back to record highs. Most indicators of credit conditions are now pointing to the loosest backdrop since early-October (some loosest since last summer).

At $747 billion, year-to-date global corporate debt issuance is running at a record pace (Dealogic data courtesy of the FT). Synthetic CDOs are back. In China, the Credit slowdown from much of last year has reversed course, exemplified by a record expansion in Q1. And after the Q4 collapse from $75 to $43, the most important commodity for inflation (crude oil) has in 2019 rallied back to $62 (WTI).

Despite Powell’s “Transitory” coupled with a much stronger-than-expected (“goldilocks”) 263,000 April gain in Non-Farm Payrolls, markets still see a 50% probability of a rate cut by the December 11th FOMC meeting. While this is down from the previous week’s 66.4%, it remains above the 44.6% from two weeks ago and the 41.7% from April 12th. Ten-year Treasury yields ended the week at 2.53%, up a few bps for the week but still below the 2.56% close from two weeks ago. I’ll suggest it’s an appropriate juncture for analysts and pundits to contemplate factors beyond current Fed thinking for an explanation of why the markets expect rate cuts in the not too distant future.

It’s no coincidence that market probabilities for Fed rate cuts jumped as China indicated waning inclination to press ahead with aggressive stimulus. Curiously, the trading week ending April 26th saw a 5.6% drop in the Shanghai Composite along with a surge in Fed rate cut probabilities (by 12/11/19) to 66.4% from 44.6%. It’s worth adding that recent declines in crude, copper, aluminum, nickel and commodities more generally have been highly correlated with the reversal in Chinese equities. Furthermore, the dollar index jumped to two-year highs as China’s stocks reversed sharply lower.

Friday evening’s Drudge headlines are worthy of documenting for posterity: “Envy of the World. Unemployment 49-year Low. Wage Hits $27.77/hour. Stock Market Endless Rally. Trump Approval 50%.”

With Nasdaq up 23% so far this year, IPOs coming left and right and generally the most speculative market environment in two decades, it’s effortless these days to completely disregard China. Besides, Beijing has everything under control – don’t they? They always do.

My fascination with Bubbles goes back more than 30 years (Japan in 1986). There have been so many – seemingly an endless stream of Bubbles: Japan, U.S. equities, junk bonds and leveraged buyouts, the S&Ls, and coastal real estate Bubbles from the second-half of the eighties. Bonds, mortgage derivatives, Mexico from the early nineties. SE Asia, Russia and EM from the mid-nineties. A major U.S. Bubble in technology, telecommunications and corporate Credit more generally. Argentina. Iceland. The historic U.S. mortgage finance Bubble. Europe, especially Greece and the European periphery. Dubai and so on – to mention only the first that come to mind.

In my 30 years of studying Bubbles, a few things have become clear – I would argue indisputable: They always burst. During the Bubble, virtually everyone dismisses Bubble analysis, instead believing the boom is well-founded and sustainable. The pain on the downside is proportional to the excesses during the preceding boom. Tremendous damage is inflicted during the final “Terminal Phase” of excess.

There’s no sound reason to believe China has discovered some magic formula for escaping the downside. These days there’s every reason to contemplate what a bursting Chinese Bubble will mean to China and the rest of the world. And I find it very intriguing that there is absolutely no mention of China in all the discussion of inflation and Fed policy. I actually believe that acute Chinese fragilities go a long way towards explaining (the latest “conundrum” of) depressed global sovereign yields (especially Treasuries, bunds and JGBs) in the face of surging risk markets.

Sure, China’s boom has been inflating for so long that the naysayers (arguing the view of an unsustainable Bubble) have been long discredited. I would strongly argue that the historic Chinese Bubble has been the most perilous consequence of Bernanke’s zero rates/QE, Draghi’s “whatever it takes,” Kuroda’s “QE infinity,” and, more generally, the most aggressive and protracted synchronized global monetary stimulus imaginable. In many respects, China has become the epicenter of the now decadelong global government finance Bubble. Today, no market – sovereign debt, equities, corporate credit, commodities, currencies and derivatives – is immune to the Virulent China Syndrome.

The upshot to the most globally accommodated Bubble ever has been history’s greatest credit excesses; unprecedented domestic over/mal-investment; unparalleled inflations in bank Credit and apartment finance; a massive pool of Chinese global spending and investment; and the most dangerous distortions in global trade, financial flows, and structural imbalances the world has ever experienced.

The China Bubble has altered global inflation dynamics – it has fundamentally changed geopolitics and the world order. It has certainly played a prevailing role in a global backdrop promoting asset inflation at the expense of wages – in the process exacerbating inequality. And, increasingly, China’s ascendency on the world stage has spurred an extraordinary Arms Race in everything technology, industrial, military and geopolitical. In short, China has become the Global Poster Child for Unsound “Money” - with incredibly far-reaching consequences.

May 1 – Bloomberg (Susanne Barton): “Traders borrowing U.S. dollars to buy China’s yuan can count on Asia’s best risk-adjusted carry trade to perform well for another couple of months, according to Bank of America. The backdrop should remain favorable through June as the U.S. and China are unlikely to reach a trade deal before then and the Asian country won’t let its currency depreciate significantly in the meantime, said Claudio Piron, the bank’s co-head of Asian currency and rates strategy… The trade is being supported by a plunge in currency volatility, growing yield divergence between China and the U.S. and the prospect of bond and equity inflows into the world’s second-largest economy, Piron said. The drivers are allowing the yuan ‘to become increasingly stable and attract risk-on carry trades and CNY asset exposure,’ Piron wrote in a note to clients.”

How much speculative leverage has accumulated in Chinese Credit over the past decade? I have a difficult time believing it’s not History’s Greatest “Carry Trade”. Chinese banks and corporations are estimated to have borrowed more than $3.0 TN in dollar-denominated liabilities. In January, a Bloomberg article (Christopher Balding) pointed to $1.2 TN of Chinese dollar debt that would need to be rolled over during 2019.

Beijing’s huge horde of international reserve assets created the capacity for sustaining its Bubble beyond that of all previous developing economies. While down from the $4.0 TN peak back in mid-2014, China’s $3.1 TN of reserves has been sufficient to maintain confidence in the Chinese currency and hold market crisis fears at bay. There was a scare in late 2015. Fears subsided when China pushed through aggressive stimulus while global central banks adopted only greater QE and monetary stimulus. And when currency weakness again posed risk to the Chinese Bubble late last year, Beijing pivots to yet another round of stimulus.

While conventional thinking holds that Beijing can stimulate Chinese Credit and economic output at its discretion indefinitely, such optimism is at this point misguided. A large and growing portion of the recent Credit expansion has flowed into non-productive purposes – including inflated apartment markets, hopelessly insolvent corporate borrowers and egregiously overleveraged local government entities. Stimulus operations are losing the battle of diminishing marginal returns. Meanwhile, “Terminal” excess continues to ensure systemic risk rises exponentially – the apartment Bubble, the ballooning banking sector, resource misallocation and deep structural impairment. And let’s throw in unquantifiable “carry trade” speculative leveraging that has surely ballooned precariously.

It’s worth pondering that China’s international reserve holdings have not expanded in eight years. Over this period, Chinese banking system assets have inflated 165% (to $39TN). Chinese GDP has inflated 113% ($13.6TN). System Credit has easily more than doubled. And let’s not forget that there is little transparency as to the composition of China’s $3.1 TN of reserves. Much has been committed to China’s fledgling international lending programs.

While global risk markets have grown complacent with regard to China, the scope of myriad China-related latent risks should have alarm bells ringing. Yet I’ll be the first to admit that such risks can remain largely masked so long as Chinese Bubble inflation is uninterrupted. For this, Credit growth must accelerate.

Pedal to the metal in Beijing equates to pushing worries out to the future. But I don’t believe sustained aggressive stimulus is something China’s leadership is comfortable with. After a booming Q1, I expect Beijing to attempt to cautiously slow lending and somewhat tighten financial conditions. We’re at the precarious late-stage of Bubble excess where any slowdown in Credit and speculation poses acute systemic risk.

I believe markets are pricing in the high probability for some Chinese-related instability between now and year-end that will force the Fed and global central bankers into additional monetary stimulus. The Fed is fashioning a new “inflation targeting” regime that will be used to justify easing measures in the face of the lowest unemployment rate in five decades. Bond markets relish the prospect of rate cuts and the redeployment of QE.

Meanwhile, reminiscent of the second-half of 2007, collapsing market yields and anticipation of another round of Fed stimulus throw gas on the speculative mania burning white-hot in the risk markets. Why fret some potentially lurking Chinese developments months (or years) into the future with such easy “money” to be made in the risk markets in the here and now? If I were Chairman Powell, I certainly wouldn’t be interested in stoking that fire either.

Has the yield curve predicted the next US downturn?

Some believe that an inversion of the markets’ original ‘fear gauge’ is not a predictor but a cause of recessions

Robin Wigglesworth and Joe Rennison in New York




Alan Greenspan, the then Federal Reserve chairman nicknamed The Oracle for his economic soothsaying, told the US Senate on July 21 2005 to disregard an obscure glitch in markets that some fretted could portend an economic slowdown. The so-called “yield curve” was obsolete, he declared. “The evidence very clearly indicates that its efficacy as a forecasting tool has diminished very dramatically because of economic events,” Mr Greenspan confidently told the Senate Banking Committee.

The yield curve is Wall Street’s original “fear gauge”, notching up a perfect predictive record before pretenders such as the Vix index were even glimmers in the eyes of financial engineers.

Typically, countries pay less to borrow for three months than five years, and less for five years than for a decade — after all, investors want some compensation for the gradual erosion of inflation, or the risk, albeit faint, that a government could renege on its debt. Plotted on a graph, the bond yields of various maturities form a “yield curve” that most of the time slopes gently upwards.

But sometimes short-term yields rise above longer-term ones, an “inversion” of the usual shape of the curve that has been an uncannily accurate harbinger of recessions, preceding every downturn since the end of the second world war. For instance, when Mr Greenspan in 2005 read the last rites for the yield curve’s predictive powers, the three-month Treasury bill yield was still 0.9 percentage points below the 10-year Treasury yield. A year later the curve inverted and 18 months after that the US economy entered its worst recession since the 1930s.

Ominously, the US yield curve has now inverted once again, with the 10-year Treasury yield on March 22 dipping below the three-month T-bill yield for the first time since 2007. Combined with the length of the post-crisis expansion — this summer it will become the longest growth spurt in US history — and deteriorating economic data, the inverted yield curve has stirred fears that the countdown to the next downturn has already begun.

Chart showing how inversions of the yield curve have preceded recessions in the US in recent decades

“The curve has been flattening and sending a warning signal for some time,” says Douglas Peebles, head of fixed income at AllianceBernstein. “I’m a yield curve junkie and I don’t think you can ignore that.”

But it is a complicated soothsayer. Signs of steadier growth have now lifted the yield curve back into positive territory, and investors and economists remain relatively sanguine, arguing that there are market forces at play that are distorting the curve’s message.

“I’m not worried,” says Mohamed El-Erian, chief economic adviser at Allianz. “The yield curve’s signal is not what it used to be.”




Former Federal Reserve chairman Alan Greenspan declared the yield curve’s forecasting efficacy obsolete two years before the US entered recession


Paul Samuelson, the Nobel economics laureate, once joked that the notoriously fickle stock market had forecast nine of the past five recessions.

This was at the back of Campbell Harvey’s mind when he was considering doctoral dissertations at the University of Chicago in 1983. A summer internship at a Toronto mining company had hammered home how useful it would be for companies to have a better market indicator to gauge the economic outlook, but reams of research had also amply demonstrated the stock market’s patchy record of prediction.

Inspired by an obscure 1965 paper noting how the yield curve undulated with the economic cycle, Prof Harvey realised this could be a much cleaner way of gauging recession risks. His thesis committee was initially sceptical, given the paucity of observations, but it has become part of the canonical work on the yield curve.

Its simplicity is a major reason for the scepticism, according to Prof Harvey, now a professor of finance at Duke University. “The model is really simple. It’s a point of attack” for critics, he says. “But it’s got a good record.”




Federal Reserve chairman Jay Powell has now shelved plans to raise rates © Bloomberg


In essence, the yield curve distils the wisdom of millions of investors, and their views of the current and future health of the economy. Individual fund managers may be wrong from time to time, but the overall judgment of a lot of smart people tends to be fairly accurate.

Longer-term bond yields are influenced by interest rates set by central banks, but mostly by the economic outlook. When investors think economic clouds are gathering, which will depress inflation, they tend to buy Treasuries, lowering their yields. And when they sink below short-term bond yields — which are more closely aligned to base interest rates — it is a strong indication that investors think monetary policy is too tight for the deteriorating health of the economy. That can precipitate a recession and force the central bank to cut rates again, buoying bond prices.

However, there are many forces that shape yields. And some could be causing the bond market’s soothsaying glitch to suffer a glitch itself, say economists and investors. “You are an idiot to ignore the yield curve but it is not proof that a recession is coming by itself,” says Seth Carpenter, chief US economist at UBS and a former senior Treasury and Federal Reserve official.



Post-crisis regulation encouraged banks to keep more money in ultra-safe assets, and it is hard to find anything safer than US Treasuries. The Fed is still sitting on $2tn of Treasuries acquired through bond-buying programmes, while negative interest rates and quantitative easing programmes in Europe and Japan have nurtured colossal demand for highly rated debt. Combined with secular forces such as technology and demographics subduing inflation, that keeps longer-term yields pinned down — almost irrespective of the economic situation.

At the same time the US government is financing much of its yawning budget deficit by issuing short-term bills rather than longer-term bonds. Combined with the Fed’s recent balance sheet shrinkage and interest rate increases, that has exerted tremendous upward pressure on Treasury bill yields.




Nobel laureate for economics Paul Samuelson once joked that the stock market had forecast nine of the past five recessions


This is why many fund managers prefer to use the two- and 10-year Treasury yields as a cleaner measure of the curve’s shape. This “spread” has remained positive, bouncing around between 0.1 and 0.2 per cent since last year. The two and 30-year Treasury spread, another popular measure, has actually steepened this year, muddying the yield curve’s signal.

Moreover, its predictive abilities seem to travel poorly. Japan, the UK and Germany have all seen inversions in the past without suffering recession. Some investors therefore argue that the yield curve preoccupation is overwrought. “The market has become overly obsessed with it,” says Kasper Elmgreen, head of equities at Amundi, the asset management company.

However, this does not negate the signal the yield curve is sending, according to Peter Fisher, a former top New York Fed and Treasury official, head of fixed income at BlackRock and now a professor at Tuck School of Business at Dartmouth. “The mistake is to think it is a predictor of recessions,” he says. “I think it causes recessions.”

He argues that a flat or inverted yield curve dampens the willingness of banks to lend. After all, their funding costs are tied to short-term interest rates. But when longer-term rates fall below their cost of financing, the incentive to lend is ruined. That then ripples through the economy and helps cause a recession, rather than merely predicting one.

Graphic showing how to interpret a yield curve. Regular shape moves upwards from left to right. Inverted shape runs downwards from top left to middle right

Recent research by the St Louis Fed indicates that Prof Fisher’s causation argument may ring true, but it remains a minority view. Indeed, setting aside the bond market’s bout of nerves last month, most investors still seem fairly relaxed.

The US stock market took a beating on the day of the inversion, but has still enjoyed its best start to a year since 1998, and junk bonds — which should be particularly sensitive to any sign of weaker growth — have notched up their best quarter of returns in a decade. “The recent inversion of the US yield curve is a classic late-cycle, but not yet end-cycle, market indicator,” says Robert Buckland, chief global equity strategist at Citi. “History suggests it’s a reason to be wary, but not outright bearish.”

Prof Harvey’s research indicates only an inversion of at least three months is a reliable recession indicator. The curve briefly inverted in 1998, at the peak of the turmoil caused by Russia’s default and the blow-up of Long-Term Capital Management, but quickly normalised before a subsequent, more durable inversion in 2000 preceded the dotcom bust. The latest inversion only lasted five trading days.

Chart showing how likelihood of recession increases as the yield curve flattens

Moreover, it can take a long time between an upside-down curve and an actual recession, and it appears that the delay is becoming longer. The shortest time was just one quarter, in 1957. The average lag is about five quarters, but the longest period between a negative yield curve and a recession was almost two years, and that was before the 2008 financial crisis.

This time it could take even longer. The Fed has now shelved plans to raise rates, and most analysts say growth is only slowing, not collapsing. The central bank’s own economists predict the pace of expansion will only decelerate slightly, to 2.1 per cent this year, 1.9 per cent in 2020 and 1.8 per cent in 2021.

Even self-confessed “yield curve junkies” such as Mr Peebles stress that any inversion should not trigger panic. “I’m not ignoring the yield curve, but for the time being I don’t think we have to be overly concerned,” he says.




Fed vice-chair Randal Quarles has attributed the inverted yield curve to the central bank’s balance sheet shrinkage © Bloomberg


Wary of the bond market jitters, the Fed’s top officials insist that the US economy remains in good shape, and argue that it is the yield curve that is malfunctioning.

“There are a lot of reasons to think that it has been a recession predictor for reasons in the past that don’t apply today,” John Williams, president of the New York Fed, said last week. Randal Quarles, the Fed’s vice-chair, attributed the twisted curve to the central bank’s balance sheet shrinkage. “I don’t view it as much of a harbinger,” he added last week.

However, there have always been various plausible reasons offered for why the yield curve is obsolete, and yet its record is spookily good — in fact, much better than the Fed’s. Prof Fisher points out that the only recession that the central bank has ever successfully forecast was the one it deliberately caused in the early 1980s, when then-chairman Paul Volcker ratcheted up interest rates to record levels to kill off inflation.

The New York Fed’s yield-derived model for calculating the probability of a recession over the next 12 months indicates that the odds on an economic downturn have shot up to 29 per cent, the highest since the beginning of 2007 — a higher probability than was seen a year ahead of five of the past seven recessions, according to Credit Suisse.

Prof Fisher fears the Fed and markets are complacent about the dangers. Paraphrasing the apocryphal saying about history often attributed to Mark Twain, he adds: “The yield curve doesn’t repeat itself exactly, but it has a rhythm.”


Additional reporting by Katie Martin
 
‘This time is different’ — why inversion has sometimes been ignored

“This time is different” are the four most dangerous words in finance. Here are the previous explanations given for why the yield curve’s inversion could safely be ignored.

1989 argument: The yield curve is artificially inverted because commercial banks are buying longer-term Treasuries instead of lending to real estate. Result: the US economy suffered a brief recession from July 1990 to March 1991, because of rising interest rates and an oil price shock caused by Iraq’s invasion of Kuwait in 1990 and the subsequent first Gulf war.

2000 argument: The yield curve is artificially inverted because the Clinton administration is running a budget surplus and no longer issuing long-maturity Treasuries. Result: the collapse of the dotcom bubble and the September 11 terrorist attacks caused a mild recession from March 2001 to November 2001.

2006 argument: The yield curve is artificially inverted because a global savings glut is keeping longer-term bond yields pinned down. Result: the deflating housing bubble and subprime mortgage meltdown caused a global financial crisis and the worst recession since the Great Depression, which lasted from December 2007 to June 2009.

2019 argument: The yield curve is artificially inverted because of the Fed’s market-distorting quantitative easing programme, a jump in Treasury bill issuance and low global interest rates. Result: unknown

Banking services

Tech’s raid on the banks

Digital disruption is coming to banking at last



OVER THE past two decades people across the world have seen digital services transform the economy and their lives. Taxis, films, novels, noodles, doctors and dog-walkers can all be summoned with a tap of a screen. Giant firms in retailing, carmaking and the media have been humbled by new competitors. Yet one industry has withstood the tumult: banking. In rich countries it is perfectly normal to queue in branches, correspond with your bank by post and deposit cheques stamped with the logo of firms founded in the 19th century.

Yet, as our special report this week explains, technology is at last shaking up banking. In Asia payment apps are a way of life for over 1bn users. In the West mobile banking is reaching critical mass—49% of Americans bank on their phones—and tech giants are muscling in. Apple unveiled a credit card with Goldman Sachs on March 25th. Facebook is proposing a payments service to let users buy tickets and settle bills.

The implications are profound because banks are not ordinary firms. It is one thing for Blockbuster Video to be wiped out by a technological shift, but quite another if the victim is Bank of America. It is not just that banks have over $100trn of assets globally. Using the difficult trick of “maturity transformation” (turning deposits that you can demand back at any time into long-term loans) they enable savers to defer consumption and investment and borrowers to bring them forward. Banks are so vital that the economy reels when they stumble, as the crisis of 2008-09 showed.

Bankers and politicians may thus be tempted to resist technological change. But that would be wrong because its benefits—a leaner, more user-friendly and more open financial system—easily outweigh the risks.

Banking is late to the smartphone age because entrepreneurs have been put off by regulations. And, since the financial crisis, Western banks have been preoccupied with repairing their balance-sheets and old-fashioned cost-cutting. Late is better than never, however. Several new business models are emerging. In Asia payment apps are bundled with e-commerce, chat and ride-hailing services offered by firms such as Alibaba and Tencent in China and Grab in South-East Asia.

These networks link to banks but are vying to control the customer relationship. In America and Europe big banks are still more or less in control and are rushing to offer digital products—JPMorgan Chase can open a deposit account in five minutes. But threats loom.

Mobile-only “neobanks” that do not bear the cost of branches are nibbling at customer bases. Payments firms like PayPal work with Western banks but are expected to capture a greater share of profits. Lucrative niches like foreign exchange and asset management are being harried by new entrants.

The pace of change will accelerate. Younger people no longer stay with the same bank as their parents—15% of British 18- to 23-year-olds use a neobank. Tech firms that people trust, such as Apple and Amazon, are natural candidates to grow big financial arms. The biggest four American banks are spending a total of over $25bn a year on perfecting better customer applications and learning to mine data more cleverly. Venture-capital firms invested $37bn in upstart financial firms last year.

The benefits of technological change are likely to be vast. Costs should tumble as branches are shut, creaking mainframe systems retired and bureaucracy culled. If the world’s listed banks chopped expenses by a third, the saving would be worth $80 a year for every person on Earth.

In 2000 the Netherlands had more bank branches per head than America; it now has just a third as many. Rotten service will improve—it is easier to get money to a friend using a chat app than it is to ask your bank to transfer cash. The system will get better at its vital job of allocating capital. Richer data will allow banks to take risks that currently baffle underwriters. Fraud should be easier to spot. Lower costs and the democratising effect of social media will give more people better access to finance. And more firms with good ideas should be able to get loans faster, boosting growth.

Yet change also poses risks. Because the financial system is embedded in the economy, innovation tends to create turbulence. The credit card’s arrival in 1950 revolutionised shopping but also sparked America’s consumer-debt culture. Securitisation lubricated capital markets in the 1980s but fuelled the subprime crisis. In addition, it is unclear who will win today’s battle.

One dystopian scenario is that power becomes more concentrated, as a few big banks learn to exploit data as ruthlessly as social-media firms do. Imagine a crossbreed of Facebook and Wells Fargo that predicts and manipulates how customers behave and is able to use proprietary economic data to squeeze rivals.

Another dystopia involves fragmentation and destabilisation. Banks could lose depositors to untested neobanks, creating a mismatch between their assets and liabilities that could lead to a credit crunch. If bank customers transact via tech or payment platforms, banks could end up with huge balance-sheets but without a direct connection to their clients. If they thus became unprofitable, they could be broken up, with the job of financing mortgages and absorbing short-term savings left entirely to capital markets, which are volatile.

To tap the benefits of technology safely, governments should give consumers control over their data, protecting privacy and preventing firms hoarding information. Innovation-friendly regulation would help; in 2017 the industry faced a regulatory alert every nine minutes (see article). And governments should keep the system’s safety buffers at today’s overall size (global banks hold $7trn of core capital). If new entrants are properly capitalised, central banks could extend to them the lender-of-last-resort facilities that provide shelter in a storm.

Banking’s dirty secret is that it is backward, inefficient and hidebound. Banks have formidable lobbying power, however. Wary of change, customers, politicians and unions complain when branches are closed and jobs cut—witness the recent collapse of a German mega-merger that depended on both. Regulators love dealing with a few big firms. The thing is that global growth is sluggish and productivity gains are hard to come by. A smartphone revolution in finance offers one of the best ways to boost the economy and spread the benefits.

Central bank buying gives gold market new lustre

China and Russia help drive 7% increase in global demand in first quarter

Henry Sanderson in London



The central banks of Russia and China helped drive a 7 per cent increase in global gold demand in the first quarter from a year earlier, according to the World Gold Council, as they continued efforts to trim their exposure to US dollars.

Central banks purchased a total of 145.5 tonnes of gold worth about $6bn, an increase of 68 per cent compared with last year and the strongest first quarter since 2013, the industry-led body said.

Russia was the biggest buyer during the period, adding 55.3 tonnes of the yellow metal to tilt the composition of its reserves away from the US dollar, amid rising tensions with Washington and the prospect of further sanctions. China added 33 tonnes to its holdings and Ecuador bought gold for the first time since 2014, said the WGC.

“There’s been lots of purchases by emerging market central banks looking to diversify their US dollar exposure, or in the case of Russia there are potential implications for FX reserve management if they become subject to sanction risk,” said Alistair Hewitt, a director at the WGC.

Last year central banks bought more gold than at any time since the end of the gold standard in 1971, led by Russia and Kazakhstan.

Still, the WGC data show that purchases have started to slow from last year. In the third quarter of 2018 central banks bought a total of 253 tonnes of gold, and 165.6 tonnes in the fourth quarter.

Overall gold demand also fell 17 per cent from the fourth quarter of 2018, said the WGC.

The price of gold rose to hit $1,347 a troy ounce in February, the highest level since April 2018, but has since fallen back to trade at $1,271 a troy ounce.

Total gold demand hit 1,053 tonnes in the first quarter, the WGC said, an increase of 7 per cent from a year earlier, with jewellery accounting for the largest share of demand at 530.3 tonnes.

Inflows into exchange traded funds backed by gold rose 49 per cent from a year earlier to hit 40.3 tonnes, said the WGC.

European gold-backed exchange traded funds hit a record high of $48bn during the first quarter, now accounting for 45 per cent of the global gold ETF market, it added.


Negative-Yield Bonds Are Back In Style. Why That’s A Bad Thing

by John Rubino

Paying someone in order to lend them money seems kind of pointless.

Yet the practice of stashing wealth in places where it yields nothing (and maybe even costs a bit for storage) is more common than you might think. Chinese, Russians, and Brazilians, for instance, buy US and Canadian condos and leave them empty as a way of moving their money beyond the reach of their rapacious governments. The taxes and condo fees produce a negative return, but most of the original investment will be there when needed. Other people store gold and silver in overseas vaults, paying 1% or so each year in fees. As the saying goes, such people are more concerned with return of capital than return on capital.

Even so, the spread of this kind of attitude beyond a small group of rich-and-worried is a sign of potential trouble. Which is why the surge in negative-yielding European bonds is worth watching.

In a healthy economy with lots of profitable opportunities, few investors have an interest in, say, a government bond yielding -0.3%. Europe is clearly not that kind of place anymore, as the outstanding amount of negative-yielding government bonds is up by 20% this year to about $10 trillion. That’s the highest since 2016, when the ECB was depressing rates by snapping pretty much every available eurozone sovereign bond.

Now QE has been scaled back but interest rates are still plunging. And it’s not just government bonds. Brand-name European companies like Sanofi SA and Moet Hennessy also have outstanding bonds that trade with negative yields.


European negative yield bonds


Clearly, growth is slowing in Europe and investors are scrambling to protect their capital against the coming wave of defaults.

Some implications:

Negative yields during an expansion (this one is now 10 years old and counting) deprive central banks of the ability to cut rates to fight the next recession. Yes, a -0.4% lending rate can be cut to -1% and maybe even -2%, but somewhere down there is a line that can’t be crossed – that is, a rate where the unintended consequences make the cure worse than the disease. We don’t know where this line resides, but we’re liable to find out in the next downturn.


At that point it’s not clear that fiscal policy — bigger government deficits and more central bank asset purchases — will be enough to stop the downward momentum. If they’re not, then it’s game over for the world’s hyper-leveraged economies.

As a Deutsche Bank economist put it recently, “It’s just not a great starting point to already have negative interest rates … It’s getting more and more difficult for policy makers to respond to headwinds.”

Europe’s sudden lurch to the downside also explains the recent rise in the dollar’s exchange rate (illustrated in the following chart with the DXY index). Current US bond yields, being low but positive, look increasingly attractive compared to, say, the German Bund’s -0.4% yield. And America’s relative stability makes it possible for bond and real estate investors to still find assets that offer returns both on and of capital.

dollar exchange rate negative yield bonds


But in a fiat currency world it’s all relative. The US is making the same mistakes as Europe, accumulating an ever-larger mountain of debt, keeping interest rates so low that the next recession will be hard to fight with monetary policy, and electing politicians with “free stuff for everyone” platforms. It’s just moving a little more slowly than most other major economies.

Looked at this way, Europe is the “proof of concept” experiment for negative interest rates. In the next (maybe imminent) recession, we’ll find out how far down rates can go, and what happens when they get there. And we almost certainly won’t like the result.


Michael Pento: Here’s How You Know The Market Is Overvalued

by John Rubino
 


There’s a lively debate out there over the size of the Everything Bubble. In the following excerpt, money manager Michael Pento concludes that this bubble both histocially huge and soon to be popped.

When Overvalued And Dangerous Markets Meet Stagflation 
To put into perspective how overvalued and dangerous the US market has become; I often cite the figure of total market cap to GDP—currently 145% of the economy. How high is 145% of GDP? It is a full 30% higher than it was before the start of the Great Recession. The twin sister to this metric is the Household Net Worth to GDP Ratio.  
Household net worth as a percent of GDP is calculated by dividing the current bubbles in home prices and equities by the underlying economy, which has been artificially inflated by interest rates that have been pushed into the sub-basement of history. This metric is now an incredible 535% of GDP, which is a record high and 19% higher than the NASDAQ bubble of 2000. To put that figure in perspective, the good folks at Daily Reckoning have calculated that the historical average is 384%. 
These valuation measurements are much more accurate than Wall Street’s favorite PE ratio valuation barometer because they cannot be easily manipulated by corporate share buybacks that have been facilitated by record-low borrowing costs. And, as hinted at already, the GDP denominator of today is much more tenuous because it has become more than ever predicated on the record amount of fiscal and monetary stimulus from the government. 
This begs the question: why are asset prices at an all-time high when Japan and Europe are stuck at zero percent GDP growth, U.S. growth has been cut in half, and the growth rate of China is decelerating. What caused these bubbles is no mystery: a decade’s worth of Zero Interest Rate Policy and Negative Interest Rate Policy worldwide that led to a massive pulling forward of consumption through a record level of new debt, which in turn was primarily used to purchase (a.k.a. inflate) asset prices. 
Global Central Banks have become the captains on this heavily overcrowded and doomed ship that has a woefully insufficient number of lifeboats; where investors have been forced onboard chasing risk because traditional bank deposits offer little no return. 
However, this daunting game can continue skipping along until one of two daggers present themselves to annihilate these bubbles. The two catalysts are; intractable inflation or a recession/depression. I include depression as a likely outcome in the next economic contraction because the level of economic distortions has never been more manifest. 
So how will inflation prick this bubble and what level will most likely accomplish this?  
First, it is crucial to understand that central banks cannot accurately create a certain level of inflation. Central banks are undergoing a process of trying to inflate asset prices by eroding the confidence in fiat currencies, which is ultimately what inflation is all about.  
They do this by printing enough money to ensure nominal bond yields are below inflation. 
Therefore, it is impossible for a handful of academics that sit on the Fed Open Market Committee to accurately pinpoint where the rate of inflation will end up, much less be able to maintain it at a certain level. This is especially true given their professed knowledge of inflation matches that of an amoeba with a low IQ. One possible outcome is that inflation eventually brings the Fed back into tightening mode. This would most assuredly occur if the core level of its preferred metric, core PCE price index, reaches above 2.5% in a sustainable fashion and then continues higher from there. And, even if the Fed did not react to this inflation by increasing the Fed Funds Rate, longer-duration yields would surely begin to spike to offset the increasing loss of purchasing power over time. The already-embattled auto and real estate markets would then crater just as the consumer is crushed under rising debt service payments on the record amount of household debt. In addition, the junk bond market would implode just as equity prices crash due to the increasing competition for cash–in other words, a replay of Q4 2018 that can’t be so easily cut short and mollified just by another Fed pause. It would take rate cuts and a return to QE to have a chance at arresting the next economic and market downturn. 

The other dagger is an economic contraction; which, given how far asset values have grown above the underlying economy, is virtually guaranteed to be a long and brutal one.  
Surging government expenditures along with falling revenue will send trillion-dollar deficits soaring above $2 trillion in short order. Annual deficits will be accretive to the $22 trillion National Debt just as the GDP denominator in the Debt to GDP Ratio heads sharply lower—causing the already dangerous 105% National Debt to GDP Ratio to surge. 
The bottom line is the bubbles will break just as they have in the past. But investors must first become afraid of not only losing their profits but their ability to retire.  
Falling GDP, and/or spiking interest rates will accomplish this. And, given the fact that both equities and bonds are in a bubble, there is a chance that bonds and equities will collapse in price together. 
Today’s market is trading at a nominal record high and record high valuations. But these prices exist in the context of unprecedented economic distortions. To be specific; there is $10 trillion worth of sovereign debt with a negative yield, global debt has surged by $70 trillion—to $250 trillion–since 2008, central banks are stuck at the zero-bound interest rate range and have already permanently monetized $14 trillion worth of debt and have destroyed the free market and the middle class in the process. 
Hence, the only prudent strategy at this time is to have a robust and proven model that will identify when the inflation or the growth slowdown has reached critical mass so you can protect and profit from the next air-pocket in equity prices. As a reminder, during the last two recessions, investors lost half of their wealth. February and October of last year proved beyond a doubt how fragile this market is, and that tenuous state is the direct consequence of its artificial construction. 
Wise investors will think about these facts and use this strategy to avoid getting sucked into the markets biggest black hole in history.

JPMorgan CEO Jamie Dimon Says the Stock Market’s Brutal 4th Quarter ‘Might Be a Harbinger of Things to Come’

By Andrew Bary


Photograph by Justin Sullivan/Getty Images



JPMorgan Chase CEO Jamie Dimon defended capitalism, lower corporate taxes, and stock buybacks while highlighting the bank’s strength’s including its “fortress balance” in his annual letter to shareholders released on Thursday.

In a wide-ranging letter running nearly 50 pages, Dimon defended capitalism as the “most successful economic system the world has ever seen.” At a time when socialism is finding adherents on the Democratic left in the U.S., Dimon took aim at it, writing:

“Socialism inevitably produces stagnation, corruption and often worse—such as authoritarian government officials who often have an increasing ability to interfere with both the economy and individual lives—which they frequently do to maintain power,” Dimon wrote. “This would be as much a disaster for our country as it has been in the other places it’s been tried. I am not an advocate for unregulated, unvarnished, free-for-all capitalism. (Few people I know are.) But we shouldn’t forget that true freedom and free enterprise (capitalism) are, at some point, inexorably linked.”

The volatile fourth quarter of 2018 was also addressed in the letter, with Dimon saying that it “might be a harbinger of things to come—creating both risks for our company and opportunities to serve our clients.”

In the fourth quarter, he wrote, “stock markets fell 20%, investment grade bond spreads gapped out by 36% and certain markets (like initial public offerings and high yield) virtually closed down. Even at the time, these large swings seemed to be an overreaction, but they highlight two critical issues.

One, which we never forget, is that investor sentiment can veer widely from optimism to pessimism based on little fundamental change. And second, for the fourth or fifth time in this recovery, there were excessive moves in the market with rapidly increasing volatility accompanied by steep drops in liquidity.”

Dimon also discussed the Chinese economic situation, writing: “There are legitimate concerns around China’s economy (in addition to trade), but they are manageable.”

The Dimon letter, like the one from Berkshire CEO Warren Buffett, is eagerly awaited because of Dimon’s stature as the country’s leading banker, his often outspoken views, and the breadth of the topics that he addresses

Dimon also defended stock buybacks when many Democrats in Congress have criticized the practice as benefiting the wealthy and coming at the expense of capital investment and higher wages for workers.

“We much prefer to use our capital to grow than to buy back stock. We believe buying back stock should be considered only when either we cannot invest (sometimes as a result of regulatory policies) or we are generating excess capital that we do not expect to use in the next few years. Buybacks should not be done at the expense of investing appropriately in our company. Investing for the future should come first, and at JPMorgan Chase, it does,” Dimon wrote. He noted that the bank has bought back almost $55 billion in stock, or nearly 20% of its shares outstanding, in the past five years.

Dimon reiterated his view that the cut in the U.S. corporate tax rate to 21% from 35% was a beneficial development for business and the country.

“The new tax code establishes a business tax rate that will make the United States competitive around the world and frees U.S. companies to bring back profits earned overseas. The cumulative effect of capital retained and reinvested over many years in the United States will help cultivate strong businesses and ultimately create jobs and increase wages,” the CEO wrote.

He noted in the letter that the lower tax rates have boosted his bank’s net income by $3.7 billion. He said JPMorgan used some of the windfall from lower corporate taxes to “massively” increase investment in technology, add new branches and bankers and boost minimum pay, now $31,000 annually for full-time entry-level jobs in the U.S.

Dimon also cited the bank’s high returns relative to peers and its strong stock market performance measured against the financial services industry and the S&P 500 index during his tenure as CEO. JP Morgan earned a 17% return on tangible equity last year and Dimon said he thinks the bank can “continue to exceed 15% return on tangible equity for next several years.”

He reiterated his dislike of earnings guidance and said the bank, while not predicting a recession, is prepared for one:

“We generally do not spend a lot of time guessing about when the next recession will be—we manage our business knowing that there will be cycles. First and foremost, we will continue to serve our clients. From the prior parts of this letter, you can see that we continued to make responsible loans to our clients during and after the Great Recession when they needed us most—and we will do that again. We will not stop investing in our future, investing in technology or building new branches. We will continue to make markets for our clients. We will not overreact to the credit cycle.”

JPMorgan’s stock was 0.4% lower in morning trading on Thursday, at $104.95.


Globalization Needs an Upgraded Operating System

New technologies, climate change, rising social tensions, and geopolitical fragmentation have pushed globalization into a new phase for which the international community is woefully ill-prepared. Meeting these challenges will require a collective effort no less ambitious than that at the end of World War II.

Richard Samans




GENEVA – The G20 Leaders’ Summit in London on April 2, 2009, is widely regarded as one of the best examples of global cooperation in a generation. Meeting as a group for only the second time, leaders of the world’s top economies, accounting for some 85% of global GDP, agreed to provide $5 trillion in fiscal stimulus and $1 trillion in additional resources to the International Monetary Fund, and to implement a wide-ranging program of financial regulatory reform. Coming on the heels of the 2008 financial crisis, the summit was instrumental in restoring confidence in capital markets and bringing the global economy out of its freefall.

The 2008 crisis showed that the international community had been far too complacent about adapting financial governance to the effects of new technologies and changing market and macroeconomic conditions. A decade later, we find ourselves in a similar situation. The Fourth Industrial Revolution is challenging the way we organize our economies and societies, as well as cooperate internationally. To maximize the benefits and mitigate the risks of the latest technological advances, we will need to strengthen and modernize national and global policy frameworks.

The current wave of technological disruption is combining with three other epochal transformations: the emergence of new ecological imperatives, particularly those concerning climate change; the advent of a multipolar world order; and an explosion of social discontent, fueled largely by rising inequality. Taken together, these developments represent a new phase of globalization – Globalization 4.0 – the trajectory of which will depend on how we adapt political, corporate, and international governance models to changing realities.

Contrary to popular narratives, the choice we face is not between openness and protectionism, technology and jobs, immigration and national identity, or economic growth and social equity. These are false dichotomies; but their prominence in contemporary political discourse illustrates how underprepared we are for Globalization 4.0.

To catch up to the pace of change, we need to upgrade the “operating system” through which we cooperate internationally and govern domestically. To that end, the international community can draw inspiration from the Dumbarton Oaks and Bretton Woods conferences, the two processes of international dialogue that gave birth to the United Nations system and the Bretton Woods institutions, respectively, at the end of World War II. In each case, extended discussions created the necessary space for participants to reflect on the lessons of the recent past and reach a consensus about the design of new cooperative architecture.

Today, we need an analogous but more inclusive and sustained process of reflection and dialogue about the governance implications of the technological, ecological, geopolitical, and social changes currently underway. Because these changes span countries, industries, and traditional policy domains, they demand a global, systemic response.

Fortunately, because it is so universal in nature, our governance challenge is also an opportunity. It could provide the basis for a common project just when international relations are fracturing. Global cooperation toward shared goals would help to build trust between countries and other stakeholders, producing positive spillover effects across disparate social and economic domains.

With the 75th anniversary of the UN and the Bretton Woods institutions approaching in 2020, the international community should mark the occasion by heeding the lesson of the 2008 financial crisis. Complacency must give way to a new process of reflection and inclusive dialogue on how to strengthen and supplement the multilateral system.

With that goal in mind, the World Economic Forum has published a white paper based on consultations with a diverse range of experts before, during, and after its annual meeting in Davos in January. The paper presents eight general design specifications and 100 examples of existing initiatives and proposals that could strengthen international cooperation and domestic policy in trade, finance, climate, technology, cybersecurity, corporate governance, and labor-related policies. By spotlighting initiatives currently being led by the UN, the Bretton Woods institutions, the OECD, the World Trade Organization, the WEF, and other institutions, the paper shows that there are numerous opportunities for progress already available and awaiting wider support.

Looking ahead, a top priority must be to preserve and reinforce the existing multilateral system. Humanity has made remarkable progress since WWII, and we owe much of it to the foundation of international norms and shared policy agendas established by the UN and the Bretton Woods institutions. The white paper calls for this precious institutional infrastructure to be strengthened, modernized, and embedded in a wider, multidimensional framework of cooperative arrangements – a more robust underlying operating system.

We should not wait for another crisis to provide the impetus for adapting governance to a changing world. There are already numerous opportunities for deeper cooperative engagement among stakeholders at all levels. What we need now is a renewed commitment from government, business, and civil-ociety leaders to engage in collective dialogue about our shared challenges.


Richard Samans is Managing Director and Member of the Managing Board of the World Economic Forum.


The Heart of a Swimmer vs. the Heart of a Runner

Regular exercise changes the look and workings of the human heart. And researchers are discovering that different sports affect the heart differently.

Gretchen Reynolds


Credit Doug Mills/The New York Times



Do world-class swimmers’ hearts function differently than the hearts of elite runners?

A new study finds that the answer may be yes, and the differences, although slight, could be telling and consequential, even for those of us who swim or run at a much less lofty level.

Cardiologists and exercise scientists already know that regular exercise changes the look and workings of the human heart. The left ventricle, in particular, alters with exercise. This chamber of the heart receives oxygen-rich blood from the lungs and pumps it out to the rest of the body, using a rather strenuous twisting and unspooling motion, as if the ventricle were a sponge being wrung out before springing back into shape.

Exercise, especially aerobic exercise, requires that considerable oxygen be delivered to working muscles, placing high demands on the left ventricle. In response, this part of the heart in athletes typically becomes larger and stronger than in sedentary people and functions more efficiently, filling with blood a little earlier and more fully and untwisting with each heartbeat a bit more rapidly, allowing the heart to pump more blood more quickly.

While almost any exercise can prompt remodeling of the left ventricle over time, different types of exercise often produce subtly different effects. A 2015 study found, for instance, that competitive rowers, whose sport combines endurance and power, had greater muscle mass in their left ventricles than runners, making their hearts strong but potentially less nimble during the twisting that pumps blood to muscles.
These past studies compared the cardiac effects of land-based activities, though, with an emphasis on running. Few have examined swimming, even though it is not only a popular exercise but unique. Swimmers, unlike runners, lie prone, in buoyant water and hold their breaths, all of which could affect cardiac demands and how the heart responds and remakes itself.

So, for the new study, which was published in November in Frontiers in Physiology, researchers at the University of Guelph in Canada and other institutions set out to map the structure and function of elite swimmers’ and runners’ hearts.

The researchers focused on world-class performers because those athletes would have been running or swimming strenuously for years, presumably exaggerating any differential effects of their training, the researchers reasoned.

Eventually they recruited 16 national-team runners and another 16 comparable swimmers, male and female, some of them sprinters and others distance specialists.

They asked the athletes to visit the exercise lab after not exercising for 12 hours and then, when on site, to lie quietly. They checked heart rates and blood pressures and finally examined the athletes’ hearts with echocardiograms, which show both the structure and functioning of the organ.
It turned out, to no one’s surprise, that the athletes, whether runners or swimmers, enjoyed enviable heart health. Their heart rates hovered around 50 beats per minute, with the runners’ rates slightly lower than the swimmers’. But all of the athletes’ heart rates were much lower than is typical for sedentary people, signifying that their hearts were robust.

The athletes also had relatively large, efficient left ventricles, their echocardiograms showed.

But there were interesting if small differences between the swimmers and runners, the researchers found. While all of the athletes’ left ventricles filled with blood earlier than average and untwisted more quickly during each heartbeat, those desirable changes were amplified in the runners. Their ventricles filled even earlier and untwisted more emphatically than the swimmers’ hearts did.

In theory, those differences should allow blood to move from and back to the runners’ hearts more rapidly than would happen inside the swimmers’.

But these differences do not necessarily show that the runners’ hearts worked better than the swimmers’, says Jamie Burr, a professor at the University of Guelph and director of its human performance lab, who conducted the new study with the lead author, Katharine Currie, and others.

Since swimmers exercise in a horizontal position, he says, their hearts do not have to fight gravity to get blood back to the heart, unlike in upright runners. Posture does some of the work for swimmers, and so their hearts reshape themselves only as much as needed for the demands of their sport.

The findings underscore how exquisitely sensitive our bodies are to different types of exercise, Dr. Burr says.

They also might provide a reason for swimmers sometimes to consider logging miles on the road, he says, to intensify the remodeling of their hearts.
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Of course, the athletes here were tested while resting, not competing, he says, and it is not clear whether any variations in their ventricles would be meaningful during races.


The study also was cross-sectional, meaning it looked at the athletes only once. They might have been born with unusual cardiac structures that somehow allowed them to excel at their sports, instead of the sports changing their hearts.

Dr. Burr, however, doubts that. Exercise almost certainly remakes our hearts, he says, and he hopes future experiments can tell us more about how each activity affects us and which might be best for different people.

But even now, he says, “an important message is that all of the athletes showed better function than a normal person off the street, which supports the message that exercise is good for hearts.”