Buttonwood

Can private equity’s numbers be trusted?

More transparency is needed as the industry attracts new investors




In “the black island”, Tintin, the quiff-sporting boy reporter, uses a plane to chase a pair of forgers flying over Scotland. As he closes in on them, they suddenly disappear into a bank of clouds. “Just as I feared,” says his pilot. “Running into cloud.” After crashing into a dyke, Tintin emerges bruised but impressed by the itchy feel of Scottish fashion and his first pint of stout.

Running into cloud is a good description of the sustained rush into private equity. Sophisticated investors—pension funds, insurers and the like—have poured money into the asset class in recent years. Soon, in America at least, they may have more company. On August 26th the Securities and Exchange Commission, America’s markets watchdog, broadened the pool of “accredited investors” deemed savvy enough to play in private markets. They may include some retail investors.

But veterans and novices alike face the same visibility problem. Working out how much money is channelled into private equity, how much it makes and whether the adventure is worth it is fiendishly tricky. That is because, even if private equity today is not all that private—its biggest firms are listed, and they routinely buy and sell companies and securities in public markets—the data leave a lot to be desired.

Three areas of fuzziness stand out. First is the amount of money allocated to the industry. Some pension funds specify the proportion of their assets that they intend to invest in private equity but few reveal their precise disbursements. Reports by third-party researchers that calculate aggregate fundraising are “directionally suggestive” at best, says one.

He confesses their estimates often prove wrong six months on, sometimes by as much as 25%. Between data-crunchers, discrepancies arise. Pitchbook, one of them, says private-equity funds raised $474bn globally last year; Preqin, another, reckons they collected $595bn.

Assessing the returns the industry generates is the next headache. Investors commit money to private-equity funds. They provide it when it is called upon to buy assets. The favourite performance indicator of such funds is the “internal rate of return” (irr), which calculates returns on the capital deployed to buy the assets, but ignores the rest of the committed money.

For investors, immobilising money carries an opportunity cost, all the more so in an environment where idle cash, in real terms, earns you nothing or worse. irrs can be easily manipulated by altering the timing of payments and by using leverage. They also assume that when private-equity firms return capital to investors, it can be reinvested at the same rate that the rest of the fund is earning. That is hardly guaranteed.

The third shortcoming is the industry’s lack of a widely accepted benchmark—the equivalent, say, of the S&P 500 index in America’s public stockmarkets. Recently investors have developed measures dubbed “public-market equivalents” (pmes), which compare the results of investing in private markets with public ones.

But pmes often resemble fiddly do-it-yourself accounting devices rather than something dependable. The industry, which attracts some of the world’s shrewdest investors, has yet to come up with a way to measure the riskiness of an investment. Public markets have had the Sharpe ratio, which is used to gauge the risk-adjusted return of assets, for over 50 years.

The industry continues to attract newcomers who buy into its claims that it is a profitable form of investment and a good way to diversify. It insists that investors who stay in for the long haul have enjoyed buoyant returns. But the flimsiness of the data makes it disturbingly hard to verify these claims and means the critics of the industry and its defenders rarely fight on common ground.

Ludovic Phalippou, an Oxford University academic, claimed in July that the numbers were “a myth perpetuated by thousands of clever people”, mainly because of misuse of irrs. kkr, a private-equity giant, retorted that his arguments were based on “flawed assumptions and selective engagement with the facts”. Because of the deficiencies in the data, it was hard to say whose claims carried more weight.

Mysteriousness has long added to private equity’s elite status. But the more money the industry raises and prepares to deploy and the more it is open to ordinary investors, the more pressure it will come under from regulators to improve transparency. It doesn’t take a Tintin to work that out.

New job description

Will the Fed’s policy shift start a trend?

A weaker dollar may force other central banks to follow




In 2018, when America’s long recovery from the 2007-09 financial crisis pushed the unemployment rate below 4%, the Federal Reserve had a simple message for American workers: do not get used to it. The central bank’s economic projections revealed that its officials believed 4.5% to be the lowest sustainable jobless rate, to which America would need to return to stop inflation surging upwards.

If higher interest rates and slower growth were needed to achieve that, so be it.

On August 27th Jerome Powell, the Fed chairman, acknowledged what common sense suggested two years before: that an intentional increase in unemployment is an odd thing to pursue after nearly 20 years of depressed labour-market conditions. Speaking at an annual central-banking shindig, Mr Powell unveiled the conclusions of a monetary-policy strategy review begun in 2019.

The coming changes to Fed policymaking could initiate an important global shift in central-bank practice.

The Fed’s old framework was forged by the inflationary tumult of the 1970s. Post-war economists understood there to be a negative relationship between inflation and unemployment—known as the Phillips curve—such that policymakers could push unemployment as low as they liked, provided they were prepared to accept more inflation.

But soaring prices persuaded many that this relationship did not hold below some minimum sustainable level of unemployment. Attempts to push joblessness lower would yield higher inflation, but at best only a temporary reduction in unemployment. By the 1990s, most central banks had resolved to target a low level of inflation, generally around 2%.

But since the embrace of inflation targeting in the 1990s, the relationship between employment and inflation has weakened. Soaring joblessness during the Great Recession failed to produce the expected plunge in prices. Neither have low levels of unemployment since then ended an era of historically low inflation.

Precisely why the relationship between inflation and joblessness changed is uncertain. Some economists reckon central banks’ credibility in managing inflation anchored the public’s expectations too well.

Others point to a decline in workers’ bargaining power, which has eased the pressure on firms to raise prices in order to cover the cost of expensive pay packets. Still others point to technological change and globalisation, which expand consumer options and allow firms to respond to increased demand without raising prices. Whatever the cause, the flattening Phillips curve biased monetary policy in an overly hawkish way, eventually prompting the Fed rethink.

The changes to its framework may seem modest. Because the maximum sustainable level of employment cannot be measured, the Fed will give up worrying about overshooting it and focus only on employment shortfalls. The 2% inflation target remains a constraint, but a more flexible one than before. It should be hit on average, Mr Powell explained, meaning that periods of below-target inflation can be offset by at least some time with inflation above the target as well.

But the conceptual change—abandoning the notion of a minimum sustainable unemployment rate—is significant. And the practical effects could be large. Had the Fed enjoyed more freedom in recent years, it could have raised interest rates more gradually, or not at all, enabling a faster and more complete labour-market recovery.

Whether policy will change much in practice is as yet unclear. Markets, for their part, appear not to see a radical change of regime in the offing. Market-based measures of inflation expectations are around 1.7%, below the Fed’s 2% target.

American stockmarkets, which seem to soar at the gentlest of nudges, have rallied, some hitting record highs in the past week. More important is the reaction in foreign-exchange markets.

The greenback has slipped nearly 1% against a basket of major currencies since Mr Powell’s speech, bringing its total decline since May to about 8%. A weakening dollar could indicate that markets see more room for policy divergence between the Fed and other central banks, most notably the European Central Bank, whose mandate does not explicitly require it to minimise joblessness.

Under any circumstances, the macroeconomic developments which led the Fed to revise its strategy would no doubt have influenced other central banks to adjust their own policies. But in weak advanced economies with interest rates close to zero, currency appreciation against the dollar places a drag on spending which cannot easily be offset by further easing.

The Fed may thus find that its modest adjustment encourages imitators elsewhere in surprisingly short order.

Saving for Retirement Is Never Easy. The Covid Pandemic Has Made It Even Harder.

By Reshma Kapadia


Illustration by Justin Metz



Ed Daizovi, a 57-year-old career diplomat, entered the retirement homestretch earlier this year: He had just moved back from Africa and was setting up a new home in Miami where he planned to retire next year with his wife of 29 years, after investing diligently to fund a comfortable retirement.

But the coronavirus pandemic—and the volatility stirred first by the market’s crash and quick recovery, and now by uncertainty heading into the election—is making Daizovi wary about his retirement timeline.

“If the market tumbles 30% to 50% by the time I’m ready to retire next year, I’m looking at one more tour in the foreign service,” Daizovi says. That’s far from ideal, as it would mean having to live apart from his wife as she settles into their retirement home.

For near-retirees, the Covid-19 recession marks the second major setback in little more than a decade—and this one strikes as many are hitting peak earnings and savings years. Now, they find themselves grappling with ways to preserve their retirement security—with fewer years to bounce back.

“Preretirees are getting the wind kicked out of them,” says Ken Dychtwald, head of consultancy Age Wave, of the challenges and confusion that those five to 10 years from retirement are facing. “Their portfolios are taking a hit. They can’t work longer with [high] unemployment. Their mom is sick, and their kids are moving back home.”

Among the near-retiree set of 50- to 64-year-olds, confidence about having enough saved for retirement has fallen to 48% from 65% before the pandemic, according to a poll by Edward Jones/Age Wave released in August. And among those in this group with adult children, 28% have provided them with financial support during the pandemic, exacerbating savings shortfalls.


These concerns come at a time when some families’ budgets are already strained by a variety of factors, such as job losses, income cuts, or efforts to keep small businesses afloat. Almost a third of small-business owners and 8% of baby boomers said their household income had fallen by half or more during the pandemic, according to a financial-wellness survey from Prudential Financial, Prudential Financial Inc. released in July.

On top of those immediate issues, the pandemic is stirring uncertainty around a number of other key concerns in retirement, including taxes and pensions, as governments reassess budgets and spending priorities. Investors should also reassess what their savings could generate in long-term market returns as global economic growth takes a hit and interest rates are at historical lows in much of the world.

The pandemic also has had an impact on many near-retirees who are still employed. Roughly 15% of employers have either suspended or cut matching contributions to 401(k)s, with an additional 10% considering doing so, according to a survey of 543 employers by Willis Towers Watson.

And that can have an impact on overall retirement security. Among those with enough savings to fund their retirement needs, a 10% reduction in employer matches for a year along with a 10% reduction by employees in plans where the match is suspended cuts roughly 14% off the total surplus for 50- to 54-year-old workers, according to projections by the Employee Benefit Research Institute. 


On an individual level, there are ways to mitigate the Covid-19 hit—and not all have to be drastic. Barron’s canvassed financial planners and retirement experts to see what adjustments near-retirees can make to bridge a difficult period without derailing retirement plans.


RESIST RETIRING PREMATURELY

Given the health risks created by the pandemic and uncertain outlook for certain industries, early retirement may seem like an attractive option. But advisors recommend that those who are five to 10 years away from retirement should stay in the workforce, if possible.

“The best way to improve retirement financial outcomes is to work longer,” says Jamie Hopkins, director of retirement research at Carson Group. “A year or two before retirement, we see people tighten their belts and reduce spending, but that has minimal impact versus working six months to a year longer.” Indeed, 34% of 50- to 64-year-olds in the Edward Jones/Age Wave survey said that Covid-19 has changed their retirement timeline.



Of course, working longer is easier said than done—even more so now with a spike in unemployment. While older workers typically have substantially lower unemployment rates than those 25 to 54 years old—roughly 15% to 20% over the past decade—that hasn’t been the case through this pandemic, says Richard Johnson, director at Urban Institute’s Program on Retirement Policy. As of July, the overall unemployment rate for those ages 55 to 64 sits at 8.7%, just 5% lower than that for younger cohorts.

That’s a troubling trend, as it has also taken longer for older workers to get rehired out of past downturns, with those 62 and older who lost their jobs only half as likely to be re-employed as people in their 30s and 40s, Johnson says.

Advisors recommend taking a closer look at retirement savings, deferred compensation, and stock options to see if other paths to employment are feasible—including a job that pays benefits but doesn’t necessarily provide the same level of income, or turning a furlough into a phased retirement where workers transition in steps from full-time work to full-time retirement. Workers could tap savings to set up a consulting business, hire a career coach, or get more training to pivot into a different career.

Being realistic about the changes the pandemic has brought to various industries—and how long it could take to get back to a level of normalcy—is also important. “Some clients hold out for an equivalent offer and spend so much time out of the workforce they end up with a two-year gap,” says Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners.

“Then they are even older, and it becomes even harder to get back in the workforce.”

FREEING UP CASH

Finding a job could take time, and even those who have emergency savings may be running low nearly six months into the crisis. Yet the sharp stock market rebound from the March depths and historically low interest rates offer an opportunity to replenish and expand cash cushions.

Advisors recommend anywhere from 18 months to three years of expenses in liquid assets, depending on circumstances. For those who have gotten an early-retirement package or severance, Katherine Liola, founder of Concentric Private Wealth, suggests keeping much of it liquid to generate an income stream, since it could take some time to secure another job.

For small-business owners near retirement, having a cash pile is paramount, given the pandemic’s impact on many companies’ revenue and sale valuations. Some advisors recommend that business owners have two years of cash on hand to keep operations going until conditions return to more normal levels, enabling them to possibly sell the business. That might mean cutting expenses, negotiating with vendors, or tapping credit lines as well as any available pandemic aid.


“We don’t know what the recovery path looks like or the speed at which it could happen,” says Brandt Kuhn, managing director at Beacon Pointe Advisors. “If you qualify for [government relief] programs, take the opportunity and make your runway as long as possible.”

When it comes to freeing up cash, the pandemic has upended some of the traditional rules—like not taking on debt on the eve of retirement. With interest rates at record lows and housing prices holding up, some advisors recommend that near-retirees look to their homes as a possible source of cash.

If the rate on their mortgage is a percentage point or more than the current rate, refinancing could make sense. “Would you rather sell equities in a portfolio that you expect to earn 6% to 7% or borrow from a home at 3% to 4%? Use the asset with the lowest return in the portfolio, which is home equity,” Hopkins says.

Another option: opening a home-equity line of credit that can be drawn on in increments if markets take a turn for the worse. The idea is to tap the line of credit and pay it back when markets recover.

The next best place to free up cash is through investment accounts, taking into consideration taxes and asset types for a guide on what to tap first. Here, too, the pandemic has made it acceptable, if not ideal, to break some long-held guidelines, such as not raiding a 401(k).

Policy makers have made it easier for those affected by the pandemic to do just that—and advisors say those who need to bridge an income gap should take advantage of the changes. The Cares Act allowed those affected by the pandemic to tap up to $100,000 in retirement assets this year without getting hit with the 10% penalty if they are under 59½, and the act also made it easier to take out a loan of up to that same amount that can be paid back over a period of five years

Of the two options, advisors slightly favor the loan because, behaviorally, it increases the chances that the money will be replenished. If the loan is paid back in five years, there is no tax hit. And for those who opt to take distributions of up to $100,000 from their 401(k) or individual retirement account this year, taxes will be spread out over three years. But for those who manage to repay the distribution within three years, a tax credit is applied, essentially making it akin to a tax-free loan.

The determination of whether someone wants to take a loan or distribution has to be decided up front, with loans required to be paid back on a specific schedule.

Tax considerations also support use of retirement assets for those who have lost their job or had their income reduced. Savers who find themselves in a lower tax bracket could minimize taxes paid on a withdrawal from a 401(k) or individual retirement account—something that could become even more important when the Cares Act provisions are no longer in effect.


However, if someone has already made substantial income this year, Carolyn McClanahan, founder of Life Planning Partners, says that it may be better to draw from taxable accounts where the 15% tax on capital gains may be a less costly way to free up cash than paying income tax on retirement assets. What’s more, with stocks in certain sectors still down after the crash, an investor might be able to sell at a loss and take a tax deduction.

Which assets to sell first? Given the market’s rise, advisors recommend taking profits in stock portfolios with the most-aggressive profiles, or rebalancing to rebuild cash cushions, if possible.

Here’s one rule that has stayed largely the same: If you are in good health, try to wait to claim Social Security as long as possible. The roughly 8% increase in benefits each year a worker delays claiming through age 70 is difficult to match elsewhere. Plus, the payout is for life—so the bigger it is, the better—and tapping it early can have ripple effects for the surviving spouse.

RETHINKING RISK

The pandemic is the type of event that calls for introspection—and that holds for finances, as well, with advisors encouraging clients to re-examine their risk tolerance and long-term return projections. Near-retirees should also use this time to consider how they want to be cared for as they age, and their expectations about pensions and taxes.

Indeed, nearly a quarter of older Americans said the crisis had caused them to reduce their risk tolerance for the long term, according to a June survey of 56- to 75-year-olds with at least $100,000 in investible assets by the Alliance for Lifetime Income, a group focused on educating the public about annuities and promoting them as a tool for retirement income.

One place to start a reassessment is with a look at asset allocation. For near-retirees who have lost jobs or are worried about layoffs, McClanahan has been encouraging them to shift closer to a 50/50 stock and bond portfolio, taking advantage of recent market gains to rebalance. For those under 59½ who may need to rely on nonretirement assets next year, McClanahan recommends an even more conservative allocation in the taxable brokerage account, if it needs to be used as a bridge after this year’s Cares Act provisions expire.

The unprecedented amount of stimulus pumped into the global economy also means that investors should take a closer look at the safer, fixed-income part of the portfolio, as some bond funds have suffered double-digit losses.

Some advisors favor bond ladders once clients are beginning to tap portfolios, rather than bond funds, to minimize volatility, especially as many funds have veered into riskier assets to generate returns. The premise is simple: buy bonds that mature in different increments with the intent of holding them to maturity, collect interest income along the way, and replenish with new bonds as old ones roll off.

Other advisors, like Jason Fertitta, head of registered investment advisor Americana Partners, are wary of exchange-traded bond funds whose sharp losses could precipitate selling from investors, exacerbating possible pain for investors. “Of all the asset classes, fixed income is the one you need to be most careful in,” he says.

Given all the easy money being pumped into the global economy, Fertitta says he has turned more defensive and sees a case for a longer-term inflation hedge by increasing clients’ exposure to real assets like real estate to 10%-15% from 3%-5%. “My biggest concern is that the levers the Federal Reserve is having to pull to keep this market going is very experimental, and we don’t know when inflation is coming,” he adds. “We have to put in some assets that could benefit from inflation. Real assets historically were a small part of the portfolio, and we are certainly open to that being a larger piece.”

Near-retirees are also rethinking another risk: their long-term care plans, with the Edward Jones/Age Wave poll showing that the pandemic prompted almost 30 million Americans to have end-of-life discussions for the first time.

The pandemic’s toll on nursing homes and other congregate-care facilities has further increased near-retirees’ preferences to add at-home care to their retirement planning, Hopkins says. Such care isn’t cheap: A home health aide can range from $150 to over $350 a day, with Genworth Financial estimating $50,000 a year for a home health aide working a 44-hour week, and rising to an average $150,000 for full-time care. 
The trillions of dollars being spent to help the economy out of this recession means that investors should also reassess expectations for pensions and taxes. Many state and local governments were already struggling financially, but the crisis has exacerbated the situation, and pension funding levels are forecast to take another hit, says Olivia Mitchell, executive director of the Pension Research Council and a professor at University of Pennsylvania’s Wharton School of Business. Among the most precarious are states such as Connecticut, with a funding level of just 28%, and Illinois, at 20%.

The fallout will take time—and a lot depends on Congress and what it does to deal with local governments’ fiscal distress. As of now, many states have constitutional provisions that require pensions to be paid in full, but Mitchell notes that the bankruptcies of Puerto Rico and cities like Detroit brought pension cuts—a 4.5% haircut in Puerto Rico and the elimination of the cost-of-living adjustment in Detroit’s case. Congress would have to change laws for states to declare bankruptcy.

Still, the potential hit to pensions is enough for planners like Jody D’Agostini at Equitable Advisors to be cautious. She bakes in a reduction in expected pension payments for clients, and takes a conservative approach to Social Security that factors in no cost-of-living adjustment and a 20% to 25% reduction in benefits for wealthier clients who could be the first to see a reduction.

Then there are taxes. At some point, the bill is also going to come due for the trillions being spent to help the U.S. economy. “If taxes have to double because of the fiscal hole we are in, that does tend to threaten people’s planning,” Mitchell says.

The November election could offer some clarity, but for now, advisors are stressing diversification, including adding to Roth IRA accounts if possible, as well as tax-efficient investments like municipal bonds. As the postpandemic world becomes clearer, the name of the game for near-retirees will continue to be flexibility.

For the diplomat Daizovi, the stock market rebound has provided an opening to sell some of his positions and build a bigger cash buffer, so he can follow through with his original retirement plan—and still have some money to buy stocks when the market dips. “This situation has given me a reason to take a hard look and come up with a plan B,” he says.

sábado, septiembre 19, 2020

THE SERVICE ECONOMY MELTDOWN / THE NEW YORK TIMES

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The Service Economy Meltdown

As companies reconsider their long-term need to have employees on site, low-wage workers depending on office-based businesses stand to lose the most.

By Eduardo Porter

David Engelsman abruptly lost his job as a restaurant server in Portland, Ore., in March. Now he is fighting to get health insurance for his family.
David Engelsman abruptly lost his job as a restaurant server in Portland, Ore., in March. Now he is fighting to get health insurance for his family.Credit...Will Matsuda for The New York Times


March 16 was the last day David Engelsman walked into the Jackrabbit, an acclaimed restaurant at the boutique Duniway Hotel in downtown Portland, Ore. The lead server on morning duty, Mr. Engelsman was told before his shift started that his job was no longer needed. He left early, at 10:30 a.m. The restaurant didn’t reopen the next day.

A total of 330 workers at the Duniway and another Hilton property across the street have been let go since then. With two autistic children, a wife with a severe heart condition and now no health insurance, Mr. Engelsman has devoted much of his time to the fight by his union, UNITE HERE, to get Hilton to make health-plan contributions for laid-off workers until the end of the year. “We’re left standing here with nothing,” he said. “I know I sound dramatic, but it is dramatic.”

With 11.5 million jobs lost since February and the government’s monthly report Friday showing a slowdown in hiring, stories like this have become painfully common. When companies dispatched office staff to work remotely from home, cut business trips and canceled business lunches, they also eliminated the jobs cleaning their offices and hotel rooms, driving them around town and serving them meals.

For this army of service workers across urban America, the pandemic risks becoming more than a short-term economic shock. If white-collar America doesn’t return to the office, service workers will be left with nobody to serve.
The worry is particularly acute in cities, which for decades have sustained tens of millions of jobs for workers without a college education. Now remote work is adding to other pressures that have stunted opportunities. The collapse of retailers like J.C. Penney and Neiman Marcus has wiped out many low-wage jobs. The implosion of tourism in cities like New York and San Francisco will end many more.
Maria Valdez, a laid-off housekeeper at the Grand Hyatt in San Antonio, is scraping by with three children on a $314 weekly unemployment check. Kimber Adams, who lost her job as a bartender at the Seattle-Tacoma International Airport, is pinning hopes on her “Plan B” to become a phlebotomist. Waldo Cabrera, let go from his job cleaning the cabins of American Airlines jets at the Miami airport, hopes an offer to drive a tanker truck in Texas will wait until he can move at the end of the year. “Perforce I have to leave here,” he said.
 Mari Duncan is relatively lucky. She is still drawing a paycheck, even though her job marinating meats and cooking soup at Facebook’s Seattle campus ended when Facebook sent its managers and engineers to work from home. But she fears that her deal — Facebook is still paying its food service contractor so it can cover payroll — can’t last forever. “When I saw a story break about how Facebook will stay remote until July of 2021,” she said, “I freaked out a little bit.”

Every one of them is itching to get back to work. But a fear is budding that even when the pandemic has passed, the economy may not provide the jobs it once did. “Some law firms are finding that it is more productive for their lawyers to stay at home,” said Kristinia Bellamy, a janitor who was laid off from her job cleaning offices at a high-rise housing legal firms and other white-collar businesses in Midtown Manhattan. “This might be the beginning of the end for these commercial office buildings.” Consider Nike’s decision in the spring to allow most employees at its headquarters in the Portland area to work remotely. Aramark, which runs the cafeteria and catering at Nike, furloughed many of its workers. With no need for full services anticipated “for an undefined period,” Aramark says, 378 employees — waiters, cooks, cashiers and others — now face permanent layoff on Sept. 25.
The question is whether dislocations like this will be only temporary. About one-fifth of adults of working age who do not have a college degree live in the biggest metropolitan areas — in the top quarter by population density — according to estimates by David Autor of the Massachusetts Institute of Technology. Most are in service industries that cater to the needs of an affluent class of “knowledge workers” who have flocked to cities in search of cool amenities and high pay.

And having discovered Zoom, what company will fly a manager across the country for a day’s worth of meetings? A lasting reduction in business travel will endanger the ecosystem of hotel and restaurant workers serving corporate travelers.

Jonathan Dingel and Brent Neiman of the University of Chicago have calculated that 37 percent of jobs can be done entirely from home. Those jobs tend to be highly paid, in fields like legal services, computer programming and financial services. And they tend to concentrate in affluent areas like San Francisco; Stamford, Conn.; and Raleigh, N.C.

Recent research by the economists Edward Glaeser, Caitlin Gorback and Stephen Redding found that when Covid-19 struck, activity — measured by the movement of cellphones in and out of ZIP codes — declined much more sharply in neighborhoods where a larger share of residents had jobs that could potentially be done from home.


The economists at Opportunity Insights in Cambridge, Mass., estimate that in the year to Aug. 9, consumer spending in high-income ZIP codes declined 8.4 percent, with the impact felt disproportionately by industries that rely heavily on the nation’s low-wage labor force: restaurants and hotels, entertainment and recreation services.



A lasting change in the behavior of the high-wage layer atop urban labor markets would have an outsize effect. Many service jobs that held on in the face of globalization and widespread automation may not survive.

 “I don’t know what a less-skilled worker does in West Virginia,” said Mr. Glaeser, an urban economist at Harvard University. “If urban service jobs disappear, the whole of America becomes like West Virginia.”

Nike isn’t Portland’s biggest private employer. That’s Intel, the semiconductor giant, which employs 20,000 mostly well-paid people there. It is a pillar of a high-tech cluster known as the Silicon Forest stretching between Hillsboro and Beaverton on the western edge of the city. And it supports a network of contractors and subcontractors whose income trickles down through the area’s economy.

Only about 40 percent of Intel’s employees are working on site — those indispensable to its vast chip-making plants — and remote work is set to continue until at least next June. Even after that, said Darcy Ortiz, Intel’s vice president for corporate services, “there will be more flexibility in the way we work.”

For businesses that rely on Intel’s footprint, that may not be great news. “Intel has sustained us,” said Rick Van Beveren, a member of the Hillsboro City Council who owns a cafe and a catering business that remain mostly shuttered. “We cater to a constellation of businesses around Intel.”

The same type of decision is being made around the country. Scott Rechler, chief executive of RXR Realty, which owns over 20 million square feet of office space in New York City, estimates that every office worker sustains five service jobs, from the shoeshine booth to the coffee shop. Yet only about 12 percent of his tenants are in the office.

Kristinia Bellamy was laid off from her job cleaning Midtown Manhattan offices. “This might be the beginning of the end for these commercial office buildings,” she said.Restaurant Associates — the food-service conglomerate operating cafeterias at companies including Google and The New York Times, and restaurants at the Smithsonian and the Quadrangle Club of the University of Chicago — employed 10,500 workers before the pandemic.

Though the company has been scrambling for new business since then — to feed health workers, or to make home-delivered meals — Dick Cattani, the chief executive, said that only some half of them are working today.

Of course, a lot of the urban economy that employs low-wage service workers was shut down by city and state governments hoping to contain the pandemic. The risk of infection is also keeping many people at home. Presumably these fears and restrictions will relax once a vaccine or a treatment for Covid-19 is developed.

In New York, for instance, Amazon, Facebook and Google expect to add thousands more workers in the city. “It will take time to recover,” Mr. Rechler said. “Many small businesses may not survive. There will be some urban flight. But that will be backfilled by the next young bright cohort of people who want to come to New York.”

Mr. Cattani sees this as an opportunity to buy new businesses. And the company is expanding into hospitals, to feed patients and their visitors. “Covid can’t change the underlying energy of creative workers in a single place,” said John Alschuler, chairman of the real estate advisory firm HR&A Advisors.

A large share of the American labor force hopes he is right. Mr. Engelsman, the restaurant server in Portland, has no idea how he will pay for his wife’s medication when a month’s dose of beta blockers alone costs $580. Mr. Cabrera, the American Airlines cabin cleaner in Miami, had to dip into the insurance money he got after somebody crashed into his car, and is now carless.

Ms. Valdez, the hotel housekeeper in San Antonio, was called back for the Grand Hyatt’s reopening this month, but says she can’t return until school starts because she must care for her 11-year-old son. She worries that Hyatt will try to make do with fewer cleaning workers and not hire everybody back.

Angel Carter, who was laid off in March from her job cleaning three floors in Philadelphia’s Center City, notes that janitors at work are putting their health at risk. They are more important than ever — given the pandemic — because offices must be cleaned extra thoroughly. She argues that the job these days merits hazard pay. But above anything else, Ms. Carter said, “I’m praying that they do open back up.”

Present tense, future market

Is Wall Street winning in China?

As America tries to cut links, China is opening its door to foreign capital and firms




If you want a sure-fire way to get rejected, try asking Western financial firms for interviews about how geopolitical tensions have affected their strategies in China. “This topic carries some sensitivities,” one bank demurs. “We don’t want to end up in a Trump tweet,” says another.

The Economist sought interviews with 15 global banks, insurers and asset managers. All declined to speak—except on background.

Such bashfulness from the swaggering titans of finance is revealing in itself. They are on unfamiliar ground. For years the American government called on China to open up to foreign capital, while China dragged its feet. Suddenly, these roles have been reversed. President Donald Trump’s administration wants global financiers to pull back from China. But China is enticing them in, creating opportunities that few had expected to come so quickly, if ever.

It has made for a disconnect between the political and the financial realms. Many observers focus on the decoupling between America and China. Yet for those managing the trillions of dollars that flow through global markets every day, the main trend looks more like coupling. Consider these moves by investment and commercial banks in the past half-year alone. Goldman Sachs and Morgan Stanley took majority control of their Chinese securities ventures.

HSBC acquired full control of its Chinese life-insurance venture. Citi received a coveted custody license to serve institutional investors in China. Among asset managers, BlackRock received approval to sell its own mutual funds in China and Vanguard decided to shift its Asian headquarters to Shanghai.



Even more astonishing are the money flows. Roughly $200bn has entered China’s capital markets from abroad over the past year. Foreign holdings of Chinese stocks and bonds at the end of June were, respectively, 50% and 28% higher than a year earlier (see chart 1). Some of this reflects an inevitable pull as global index compilers such as msci add Chinese assets to their benchmarks; fund managers that passively track these benchmarks must allocate cash in line with the new weightings.

But it is more than that. China has made it much easier for foreigners to enter its markets, and it offers two things that are rare in the world at the moment: gdp growth and interest rates higher than zero.

Despite talk of a new cold war, there are two reasons to think that coupling, not decoupling, will remain the better description of Sino-American financial ties. The first is China’s own actions. It is pursuing what Yu Yongding, a prominent economist, has described as a “linking strategy”, seeking to create more connections with foreign companies.

Since late 2019 the government has lifted foreign ownership caps on asset managers, securities firms and life insurers. It has belatedly allowed MasterCard and PayPal to enter its payments industry. And it has let foreign ratings agencies cover more Chinese firms.

Even without the linking strategy, China has ample incentive to open its financial system more widely. Its current-account surplus has steadily narrowed as a share of gdp over the past decade (though it will soar this year because of the covid-19 impact); that puts pressure on it to attract more inflows through its capital account. At the same time reformist officials want greater foreign participation in the financial system.

Zhou Xiaochuan, China’s former central-bank governor, has argued that just as competition from abroad helped make Chinese manufacturers world-class, so it can elevate the finance industry. Regulators also want companies to raise more funding by issuing bonds and stocks, to lessen reliance on bank lending.

China’s regulatory relaxation dovetails with the second factor: the interests of foreign financial firms. The Chinese market is simply too big to ignore. The investable wealth of retail clients is projected to grow from about $24trn in 2018 to $41trn by 2023, according to Oliver Wyman, a consultancy. And few sophisticated, globally minded asset managers operate in China today.

Foreign institutions know better by now than to assume that the economy’s scale will directly translate into business for them. In the early 2000s China began opening its commercial-banking industry to foreigners, but their share of the market, always tiny, has shrunk over time, dipping to just about 1% of domestic-banking assets. They are bit players.

Yet foreigners may fare better in the sectors newly open to them. No global bank can compete for deposits against the likes of Industrial and Commercial Bank of China, which boasts some 15,700 branches. Success in investment banking and asset management, however, is more related to experience than to sheer heft.

Can an adviser help structure a cross-border acquisition? Can an asset manager offer the right interest-rate swaps to hedge currency exposure? “These are the areas where foreign firms feel they have an advantage,” says Mark Austen, head of the Asia Securities Industry and Financial Markets Association, a group that represents many of the world’s biggest financial institutions.

Not that China is going to make it easy. A taste of the potential complications came in the approval granted to BlackRock for a fund-management company. Unlike prior approvals for Chinese-owned entities, the regulator added a condition, demanding adherence to the Internet Security Law. BlackRock will need to store client data within China and authorities could demand access, likely forcing it to segregate its Chinese and global systems.

Foreign firms will also face a ferocious battle with domestic firms on a playing field that is tilted against them. “They’ll never just completely open and be fine with us crushing the locals,” says one banker.

State-owned firms will reserve their juiciest deals for domestic banks. The government is engineering mergers to create what it calls an “aircraft-carrier” investment bank to repel foreigners. And global asset managers will have little choice but to distribute their products through domestic banks and tech platforms.

Chantal Grinderslev, founder of Majtildig, a Shanghai-based advisory firm, sees a split between foreign firms that commit capital to China for the long haul and those that are less patient. “If you have to be profitable in three years or less, this is not the market to enter,” she says.

JPMorgan Chase, she notes, is on track to buy out the local partner in its asset-management venture for $1bn, a 50% premium over fair value. That is expensive, but it also testifies to the weight that Jamie Dimon, the banking colossus’s chief, places on China. “He is looking to build a real business,” she says.

The political tussle with America looms over these corporate decisions. “Global headquarters asked us to develop optimistic, realistic and pessimistic scenarios,” says the ceo in China of an American bank. “I laughed because there’s no point thinking of things getting better.

It’s binary. Either we can continue in China or we can’t.” So far things have clearly remained on the remain-in-China side of the equation. America’s financial measures against China have thrown some sand in the gears but have not stopped them from turning.



The Trump administration has blocked a federal-government pension plan from investing in Chinese stocks. It has threatened to delist Chinese firms from American stock exchanges. And it has placed sanctions on Chinese officials in Hong Kong and Xinjiang. All three moves are, in the grand scheme, mild. The government pension plan that now excludes Chinese stocks represents just 3% of American pension assets.

China has until 2022 to stave off the threatened delistings, and has already proposed a compromise, giving American auditors more access to its companies’ books. In the meantime, the value of Chinese listings on Wall Street has risen this year (see chart 2). As for the sanctions, they can be painful for individuals, but would have harmed China much more if they had named entire banks.

It is only prudent for firms to prepare for America to take a tougher line against China. But the implications in the financial sector are different from, say, the industrial sector. Factories require a large fixed investment and carefully configured supply chains. Investments in bonds or equities are, by contrast, much easier to adjust—at least so long as China lets investors move cash out of its markets.

Even for firms building up brokerages or asset-management operations in China, the investments are small compared with their global footprints. The Chinese securities firm controlled by ubs, for instance, held just 5bn yuan ($730m) in assets at the end of 2019—bigger than any other foreign-owned securities firm in China but barely 0.2% of ubs’s global investment-banking assets.

The one American action that could almost instantaneously derail financial coupling would be to block China from the dollar-payments system. The administration could do so by pressuring swift, a Belgium-based messaging system that underpins most cross-border transfers, to boot out Chinese members. Or it could order the big banks which clear dollar payments in America to stop serving Chinese banks.

Chinese officials, alarmed by these once-unthinkable possibilities, have held meetings in recent months to discuss how they might respond. They have talked about promoting the yuan as an alternative to the dollar and home-grown payment networks as alternatives to swift. In practice, neither would help much. The yuan, constrained by capital controls, remains a weakling in global finance, while China’s would-be swift replacements have failed to gain traction.

The biggest constraint on America is the damage that it would suffer itself. Cutting China off from the dollar would undermine not just Chinese banks but also China-based companies that account for more than a tenth of the world’s exports.

This would trigger a collapse in international trade, massively disrupt supply chains and, quite possibly, deepen the global recession. The fact that American policymakers must contemplate such consequences is an argument in favour of China’s linking strategy.

“The only option is more openness,” says Larry Hu, head of China economics at Macquarie Group in Hong Kong. “You must create a situation where your counterpart has more to lose.” For foreign financiers in China, that, oddly enough, is music to their ears.