Central banks must shun fruitless political games

Both the ECB and the Fed should ignore bullying from Donald Trump

The editorial board

Mario Draghi, the outgoing European Central Bank president, was heckled by US President Donald Trump on Twitter © AFP

Setting monetary policy at a time of profound uncertainty about the way that economies are functioning is never an easy task. Doing so under intermittent volleys of criticism from the White House, directed at monetary policymakers outside America as well as within, only makes it harder. And for the head of a central bank leaving his post after a long and successful tenure, there is an extra layer of complexity in trying to bind in a potential successor who has often been critical of the institution’s policy regime.

There were two big events in central banking this week. One of them — the Federal Reserve keeping rates on hold but signalling likely cuts later in the year — was largely expected. The other, a speech from European Central Bank president Mario Draghi suggesting looser policy than the market was pricing in, was less so, and caused an abrupt weakening in the euro.

During his exemplary eight years in office, due to end this autumn, Mr Draghi’s public comments have rarely been careless, and it is very likely his signalling was deliberate. The ECB presidency, unhelpfully included as one of the prizes in an intergovernmental bargaining game for top EU policy jobs, may go to Jens Weidmann, the current president of the Bundesbank.

Mr Weidmann has misguidedly opposed the super-loose monetary policy through which the ECB has averted economic catastrophe in the eurozone. Mr Draghi’s departure will be a great loss, but with this speech he has at least made it more costly for a successor to make a hawkish turn.

No good deed in central banking these days goes unpunished, and Mr Draghi’s reward was to be heckled on Twitter by Donald Trump, who accused him of deliberately weakening the euro. This is, of course, absurd. Certainly, the exchange rate channel is one through which looser monetary policy works. But in a relatively closed economy like the eurozone it would be a foolish central bank that tried to manage growth and inflation primarily by manipulating the currency.

Across the Atlantic, Jay Powell, chairman of the Federal Reserve, must have felt a surge of solidarity with Mr Draghi. He has himself repeatedly been pressed by Mr Trump to loosen policy. Such pressure makes the messaging difficult when, as now, objective reality is also suggesting lower rates.

If the Fed’s expectations of loosening later this year are fulfilled, there will no doubt be speculation that Mr Powell and his fellow open market committee members have given way to presidential bullying. So be it. The central bank cannot get into a game where it systematically sets policy that is wrong for the US economy just to prove its independence from the White House.

The Fed faces a similar problem over Mr Trump’s trade policy and its negative effects on US and global growth. The central bank would be wrong to set interest rates purely on the basis of Mr Trump threatening more tariffs. His bluster — as with Mexico over immigration — often comes to nothing. If and when the president does increase distortions and thereby damages economic growth, the Fed must not allow itself to be bound by tactical concerns. To conclude that loosening policy would give succour to Mr Trump’s protectionism would be misguided.

Setting interest rates in an environment of hostile politics requires strong nerves. Decisions must be guided by a determination neither to give in to political pressure nor to keep policy unnecessarily tight purely to defy it. This week, the ECB and the Fed both indicated they were on the right track. It will take fortitude for them to continue down it.

Blackstone leads global surge in property investment

New York group retains crown as world’s biggest property landlord with assets of €202bn

Chris Flood

Blackstone has become the world’s largest property landlord under chief executive Stephen Schwarzman (Mark Kauzlarich/Bloomberg)

Blackstone’s real estate business raced past the €200bn asset mark for the first time in 2018 in a surge that helped the New York-listed group keep its crown as the world’s largest property landlord for a third year.

Real estate has enjoyed a bull run lasting almost a decade but rising property values and huge investor inflows have fuelled fears of unsustainable pricing bubbles in some markets.

Assets managed by Blackstone’s property arm jumped by almost a quarter to nearly €202bn ($231bn) last year, according to an annual ranking by Inrev, the European association that represents investors in non-listed real estate vehicles.

Kathleen McCarthy, co-head of real estate at Blackstone, said “property valuations today mean we have to work hard to find good deals” but she was confident her unit would continue to deliver attractive risk-adjusted returns to investors.

“Our large real estate investment team, access to proprietary information and capacity to do deals that other managers cannot, help us to create value for our investors in any economic environment,” she said.

Four themes have been targeted for further investment: logistics where ecommerce businesses are increasing demand for warehouses; so-called innovation cities such as Seattle where tech companies need office space; rental housing in regions where there are supply shortages including the US west coast and Spain, and hospitality assets in order to meet the expected global increase in spending on travel.


Blackstone has created five “permanent capital” real estate investment vehicles that do not have a fixed expiry date unlike traditional closed end funds.

“Permanent capital vehicles allow Blackstone to hold real estate assets over a longer term which helps investors to compound value,” said Ms McCarthy.

Toronto-based Brookfield, the number two ranked player, saw its property assets increase 27 per cent last year to €164bn, while PGIM, the investment arm of US insurer Prudential Financial, retained third place after its property assets jumped 39 per cent to €148bn.

The three groups have a clear lead over the next two players which joined the exclusive club of managers with property assets of more than €100bn for the first time.

Nuveen Investments (previously TH Real Estate) moved up one spot to fourth place after its real estate assets reached €109bn, up by a fifth, while Texas-based Hines, another privately owned real estate managers, slipped to fifth in the ranking after its property assets grew 14 per cent to €104bn.

“The concentration at the top is becoming more obvious with the 10 largest managers accounting for about 40 per cent of global real estate assets,” said Henri Vuong, Inrev’s director of research and market information.

“Consolidation is still happening as more managers have ambitions to become global players and mergers and acquisitions offer the quickest route to meeting that objective,” she said.

Investors put a record €162bn of new money into real estate in 2018 in spite of worries that suitable opportunities to deploy capital are becoming more difficult to find. Pension funds accounted for just over a third of the new capital while insurance companies doubled their allocations to real estate compared with 2017 and sovereign wealth funds also increased their commitments to property markets.

The combination of record fundraising and price gains pushed the value of worldwide real estate assets under management to an all-time high of €2.8tn at the end of 2018, up 12 per cent on the €2.5tn the previous year. Property assets under management globally have more than tripled from the post financial crisis low of €900bn reached at the end of 2009 as real estate has become more widely entrenched in the portfolios of institutional investors.

“Institutional investors are still looking very favourably on property as an asset class even though we are late in the cycle. The knowledge and expertise developed by pensions funds and insurance companies about real estate over the past decade has helped to sustain inflows. Family offices and wealthy individuals are also becoming more important as new sources of capital,” said Ms Vuong.

Value of negative yielding debt hits record $12.5tn

Central bank dovishness has sent a jolt through fixed income markets

Robin Wigglesworth in New York

The universe of negative-yielding bonds has jumped to a new record of $12.5tn, after the European Central Bank poured more fuel on the global fixed income rally by hinting that it could restart its “quantitative easing” programme.

The global bond market has been buoyed by rising concerns that economic growth is petering out, and bets that central banks in the US, Europe and Asia will all have to ease monetary policy to prevent another downturn. The resumption of trade hostilities between the US and China have stirred investor fears, and sent bond yields tumbling.

The Federal Reserve is expected to cut interest rates three times or more this year, and ECB president Mario Draghi on Tuesday indicated that the central bank might also trim rates and resume its bond-buying should inflation continue to languish well below its 2 per cent target.

The dovish comments from Mr Draghi sent another jolt through fixed income markets and pushed another $714bn worth of bonds into sub-zero yield territory on Tuesday. The market value of bonds trading at negative yields — once thought to be economic lunacy — to a fresh record of $12.5tn, according to Bloomberg data, surpassing the last peak in 2016. The average yield of the global bond market is now just 1.76 per cent, down from 2.51 per cent in November last year.

“ECB President Draghi used his keynote Sintra address to tee up a new phase of ECB easing with a clear default to act in the absence of a positive break in the outlook,” Krishna Guha, a strategist at ISI Evercore said in a note. “Unless the latest Trump-Xi maneuverings mark the beginning of a genuine and durable de-escalation of global trade-wars . . . the ECB will step up its stimulus in July-September.” 

Large swaths of the European and Japanese government bond market has been trading with negative yields since 2016, but on Tuesday the French and Swedish 10-year yield sagged below zero for the first time. The equivalent German Bund yield stands at minus 0.29 per cent.

Traders are now widely anticipating that the Fed will also ease monetary policy, most likely starting in July. The Fed Funds futures market is pricing in a greater-than-even chance of three interest rate cuts by the end of the year, and a decent chance of a fourth one.

“The bar is certainly higher for Jay Powell to deliver a dovish surprise than it was for Draghi but he must certainly be feeling the pressure to do s,” said Kris Atkinson, a bond fund manager at Fidelity International. “In my view the case for immediate easing is weak given still decent growth and the upcoming G20 trade talks. My hunch therefore is that the Fed stands firm and awaits more data but of course, as shown yesterday, bold predictions on central bank actions have a tendency to age quickly.”

Behavioural biometrics

Online identification is getting more and more intrusive

Phones can now tell who is carrying them from their users’ gaits

MOST ONLINE fraud involves identity theft, which is why businesses that operate on the web have a keen interest in distinguishing impersonators from genuine customers. Passwords help. But many can be guessed or are jotted down imprudently. Newer phones, tablets, and laptop and desktop computers often have beefed-up security with fingerprint and facial recognition. But these can be spoofed. To overcome these shortcomings the next level of security is likely to identify people using things which are harder to copy, such as the way they walk.

Many online security services already use a system called device fingerprinting. This employs software to note things like the model type of a gadget employed by a particular user; its hardware configuration; its operating system; the apps which have been downloaded onto it; and other features, including sometimes the Wi-Fi networks it regularly connects through and devices like headsets it plugs into. 
The results are sufficient to build a profile of both the device and its user’s habits. If something unusual is then spotted—say, access to a bank account being sought from a phone with a different profile from that which a customer usually uses—appropriate measures can be taken. For example, additional security questions can be posed.
LexisNexis Risk Solutions, an American analytics firm, has catalogued more than 4bn phones, tablets and other computers in this way for banks and other clients. Roughly 7% of them have been used for shenanigans of some sort. But device fingerprinting is becoming less useful. Apple, Google and other makers of equipment and operating systems have been steadily restricting the range of attributes that can be observed remotely. The reason for doing this is to limit the amount of personal information that could fall into unauthorised hands. But such restrictions also make it harder to distinguish illegitimate from legitimate users.

That is why a new approach, behavioural biometrics, is gaining ground. It relies on the wealth of measurements made by today’s devices. These include data from accelerometers and gyroscopic sensors, that reveal how people hold their phones when using them, how they carry them and even the way they walk. Touchscreens, keyboards and mice can be monitored to show the distinctive ways in which someone’s fingers and hands move. Sensors can detect whether a phone has been set down on a hard surface such as a table or dropped lightly on a soft one such as a bed. If the hour is appropriate, this action could be used to assume when a user has retired for the night. These traits can then be used to determine whether someone attempting to make a transaction is likely to be the device’s habitual user.

Behavioural biometrics make it possible to identify an individual’s “unique motion fingerprint”, says John Whaley, head of UnifyID, a firm in Silicon Valley that is involved in the field. With the right software, data from a phone’s sensors can reveal details as personal as which part of someone’s foot strikes the pavement first, and how hard; the length of a walker’s stride; the number of strides per minute; and the swing and spring in the walker’s hips and step. It can also work out whether the phone in question is in a handbag, a pocket or held in a hand.

Using these variables UnifyID sorts gaits into about 50,000 distinct types. When coupled with information about a user’s finger pressure and speed on the touchscreen, as well as a device’s regular places of use—as revealed by its GPS unit—that user’s identity can be pretty-well determined, Mr Whaley claims. UnifyID began offering behavioural biometrics to its clients (which include retail banks, online retailers, delivery companies and ride-sharing firms) in 2017. In time, advertisers will pay for the scoop on individuals’ lifestyle-revealing movements, reckons Mr Whaley, though his firm has no plans yet to expand in that direction.

The lidless eye

Behavioural biometrics can, moreover, go beyond verifying a user’s identity. It can also detect circumstances when it is likely that a fraud is being committed. On a device with a keyboard, for instance, a warning sign is when the typing takes on a staccato style, with a longer-than-usual finger “flight time” between keystrokes. This, according to Aleksander Kijek, head of product at Nethone, a firm in Warsaw that works out behavioural biometrics for companies that sell things online, is an indication that the device has been hijacked, and is under the remote control of a computer program rather than a human typist.

On a device with a touchscreen rather than a keyboard, however, the reverse is true. Most people type with their thumbs on touchscreens, so flight times between keystrokes are longer. In this case, therefore, it is short flight times which are a signal of something suspicious going on—for example, that a touchscreen device is actually being operated remotely, using the keyboard of a laptop.

Used wisely, behavioural biometrics could be a boon. As Neil Costigan, the boss of BehavioSec, a behavioural-biometrics firm in San Francisco, observes, the software can toil quietly in the background, continuously authenticating account-holders without badgering them for additional passwords, their mother’s maiden name “and all that nonsense”. UnifyID and an unnamed car company are even developing a system that unlocks the doors of a vehicle once the gait of the driver, as measured by his phone, is recognised.

Used unwisely, however, the system could become yet another electronic spy, permitting complete strangers to monitor your actions, from the moment you reach for your phone in the morning, to when you fling it on the floor at night.

US-China Confrontation Will Define Global Order

Victor Davis Hanson
Hoover Institution, Stanford University

The United States is at a crossroads with an increasingly aggressive China, which could define America’s security and the international order for decades to come, Hoover scholar Victor Davis Hanson says.

Hanson, the Martin and Illie Anderson Senior Fellow at the Hoover Institution, studies military history and the classics. Last year, Hanson won the Edmund Burke Award, which honors people who have made major contributions to the defense of Western civilization. He is the author of the 2019 book The Case for Trump, and 2017's The Second World Wars. He was recently interviewed on US policy toward China:

What is the Trump strategy behind these tariffs, short term and long term?

Hanson: Short term, Trump feels that he can take the hit of reciprocal Chinese tariffs, given that quietly his opposition, the Democrats, have been raging about Chinese cheating for decades, and, second, that the US economy is so huge and diverse that China simply cannot cause serious damage.

Remember the United States is a country one-third the size of China that produces over double China's annual gross domestic product and fields a military far more formidable with far more allies—while enjoying a far more influential global culture and a far more sophisticated system of higher education and technological innovation. China’s Asian neighbors and our own European Union allies quietly are hoping Trump can check and roll back Chinese mercantilism, while publicly and pro forma chiding or even condemning Trump's brinksmanship and his resort to fossilized strategies such as tariffs and loud jawboning.

Long term, Trump believes that if present trends are not reversed, China could in theory catch and surpass the US. And as an authoritarian, anti-democratic superpower, China's global dominance would not be analogous to the American-led postwar order, but would be one in which China follows one set of rules and imposes a quite different set on everyone else—perhaps one day similar to the system imposed on its own people within China.

Is China a more formidable rival now than Russia was during the Cold War, and if so, why?

Hanson: Yes. Its population is five times greater than that of even the old Soviet Empire’s. Its economy is well over twenty times larger, and over a million Chinese students and business people are in European and American universities and colleges and posted abroad with Chinese companies. So, unlike the old Soviet Union, China is integrated within the West, culturally, economically, and politically. The Soviets—like Maoist China—never leased Western ports, or battled Hollywood over unflattering pictures, or posed as credible defenders of Asian values or owned large shares of Western companies or piled up huge trade surpluses with Western nations. Soviet propaganda and espionage were crude compared to current Chinese efforts.

What is China doing in terms of cheating on trade and intellectual property as the Trump administration says, and how can the United States stop this behavior?

Hanson: China does not honor patents and copyright laws. It still exports knock-off and counterfeit products. It steals research and development investment through a vast array of espionage rings. It manipulates its currency.

Its government companies export goods at below the cost of production to grab market share.

It requires foreign companies to hand over technology as a price of doing business in China.

And, most importantly, it assumes, even demands, that Western nations do not emulate its own international roguery—or else.

The result is a strange paradox in which the United States and Europe assume that China is an international commercial outlaw, but the remedy is deemed worse than the disease. So, many Western firms make enormous profits in China through joint projects, and so many academic institutions depend on China students, and so many financial institutions are invested in China, that to question its mercantilism is to be derided as a quaint nationalist, or a dangerous protectionist, or a veritable racist. China is an astute student of the Western science of victimology and always poses as a target of Western vindictiveness, racism, or puerile jealousy.

Remedies? First, we must give up the 40-year fantasies that the richer China gets, the more Western and liberal it will become; or that the more China becomes familiar with the West, the greater its admiration and respect for Western values; or that China has so many internal problems that it cannot possibly pose a threat to the West; or that Western magnanimity in foreign policy and trade relations will be appreciated and returned in kind. Instead, the better paradigm is imperial Japan between 1930 and 1941, when Tokyo absorbed Asian allies; had sent a quarter-million students and attachés to the West to learn or steal technology and doctrine; rapidly Westernized; declared Western colonial powers and the US as tired and spent, and without any legitimate business in the Pacific; and considered its own authoritarianism a far better partner to free market capitalism than the supposedly messy and clumsy democracies of the West.

How is China able now to leverage its arguably less powerful military to confront the United States globally?

Hanson: Global naval dominance is not in the Chinese near future. Its naval strategy is more reminiscent of the German Kriegsmarine of 1939 to 1941, which sought to deny the vastly superior Royal Navy access at strategic points without matching its global reach. China is carving out areas where shore batteries and coastal fleets can send showers of missiles to take out a multibillion-dollar American carrier. And its leasing of 50 and more strategically located ports might serve in times of global tensions as transit foci for armed merchant ships. But for now they do not have the capabilities of the American carrier or submarine fleet or expeditionary Marine forces—so the point is to deny America reach, not to emulate its extent.

Why are the current administration policies different than those in the past in confronting China on many different fronts and levels?

Hanson: Trump believes that economic power is the key to global influence and clout. Without it, a military wilts on the vine. A country with GDP growth at a 3 percent annual clip, energy independence, full employment, and increasing labor productivity and trade symmetry can renegotiate Chinese mercantilism and reassure China’s Asian neighbors that they need not appease its aggression. Past administrations might have agreed that China violated copyright and patent laws, dumped subsidized goods, appropriated technology, and ran a massive global espionage apparatus, but they considered remedies either impossible or dangerous and so essentially negotiated a slowing of the supposed predestined Chinese global hegemony. Trump was willing to confront China to achieve fair rather than free trade and take the ensuing heat that he was some sort of tariff-slapping Neanderthal.

Any other thoughts?

Hanson: I think Secretary of State Mike Pompeo’s State Department is the first to openly question the idea that China will eventually rule the world and has offered a strategic plan to check its trade and political agendas. In this regard, a number of Hoover Institution scholars, currently working with Hoover fellow Kiron Skinner, director of policy planning at the US Department of State, are offering alternatives to orthodox American approaches of the past, with the caveat that the most dangerous era in interstate relations is the transition from de facto appeasement to symmetry—given that the abnormalities of the past had become considered “normal,” and the quite normal efforts of a nation to recalibrate to a balanced relationship are damned as dangerously “abnormal.”

Victor Davis Hanson is also the chairman of the Role of Military History in Contemporary Conflict Working Group at the Hoover Institution.