Fingers point at hedge funds after Japan bond sell-off

Trend-following investors switched bets after price crossed key threshold

Laurence Fletcher and Tommy Stubbington in London and Leo Lewis in Tokyo

M&A bankers and lawyers say a 'profound' change of attitude is slowly embedding itself in Japanese boardrooms, making hostile bids a more plausible reality
Massive holdings of Japanese government bonds at the country’s central bank mean that the market rarely budges © Bloomberg

Hedge funds are taking the blame for a drop in Japanese government bond prices that has reverberated around global debt markets.

Benchmark bonds in the US, Germany and the UK have all taken a tumble in recent weeks, driven by an unusual outbreak of optimism about the global economic outlook that has boosted equities.

But sharp price falls in the typically tranquil Japanese government bond market have stood out — and some analysts say they bear the fingerprints of trend-seeking computerised hedge funds scrambling to cover losses.

The suspicions are rekindling a debate about the influence of these hedge funds, which have frequently been blamed when markets swing to extremes without clear fundamental triggers.

“Futures-driven selling has been the main cause of the [Japanese market] move,” said Peter Chatwell, head of rates strategy at Japan’s Mizuho International. “It looks like an unwind of leveraged long positions.”

Massive holdings of JGBs at the country’s central bank mean the market rarely budges, but the 10-year benchmark yield leapt this week to a high of minus 0.02 per cent, from minus 0.19 per cent at the start of November — a large move by Japanese standards that reflects falling prices.

The yield slipped back to minus 0.09 per cent on Thursday.

Line chart of 10-year government bond yield (%) showing Hedge funds dump Japanese debt

Certain types of hedge funds that try to latch on to trends in global markets — known in the industry as commodities trading advisers, or CTAs — had been betting successfully on rising JGB prices since around this time last year, according to Société Générale’s Trend Indicator.

But their investments turned sour as the market went into reverse in early September, leaving them nursing losses. The Trend Indicator has, as of late last week, shifted to betting on falling prices.

The global pullback in fixed income since mid-September has been sparked by easing trade tensions and a sense that the gloom about the prospects for the world economy was overdone.

Selling in JGBs — which also reflects receding expectations that the Bank of Japan is on the brink of cutting interest rates — has been a catalyst for broader moves at crucial points during the sell-off, including over the past week, according to Jim McCormick, global head of desk strategy at NatWest Markets.

“CTAs have built in some cases record long positions in core fixed income markets,” Mr McCormick said. “With momentum signals now turning less bullish, positions could be set to follow.”

Bond traders and analysts in Tokyo point out that trend-following hedge funds had built huge net long exposure to Japanese bonds by the end of August. Those positions, said analysts at Nomura, were highly leveraged and prone to sharper moves in the weeks and months that followed.

Some analysts calculate that the key point for many of those funds in 10-year yields was minus 0.11 per cent. Once the yields popped above that level in November, many funds that had bought the bonds in the August rush were left holding losses, turning them into automatic sellers.

Critics say these funds, which run about $300bn in assets, push markets further than they otherwise would have moved, damaging other market participants. But many managers of trend-following funds say the amount they trade is only a fraction of total market volume and their footprint is small.

And while these managers have sold Japanese government bonds, the extent to which they are now betting on falling prices varies. The bonds are “not a big short”, said an executive at one hedge fund.

Rotterdam-based hedge fund Transtrend, which manages $5.4bn in assets, owned Japanese government bonds for most of this year, making money in the process, but started cutting this position late last month. Rather than betting on falling prices, the fund now has no exposure. 
“We do not believe that Transtrend has played a significant role in exacerbating the safe haven or JGB trend,” said executive director André Honig. “For the CTA sector as a whole, it shouldn’t be the case either.”
CTAs employ teams of PhD scientists to design algorithms to spot and profit from market trends, and they have been enthusiastic buyers of bonds on very low or negative yields in recent years.
While many human hedge fund traders and other investors have recoiled at the prospect of effectively paying for the privilege of lending money to a government, quants, which feel no fear, kept holding on as the trend took yields into the deep freeze.
That has been a big driver of gains at trend-following funds this year. Such funds are on average up 6.2 per cent this year to the end of October, according to data group HFR, despite suffering some losses in recent months as bonds weakened.
London-based Aspect Capital has gained 18.5 per cent this year in its main fund. It has been betting on rising bond prices, according to an investor letter seen by the Financial Times, and suffered a loss on its bond position in early November. The letter did not detail which countries’ bonds Aspect owned. Aspect declined to comment.
Mr Chatwell said the swings in the market had undermined bond-buying strategies in recent weeks. He said: “While there’s all this volatility it’s harder to generate income from the JGB market. A lot of investors are sitting on the sidelines and waiting for a better entry point.”

Old, not yet rich

China’s median age will soon overtake America’s

Demography may be the Chinese economy’s biggest challenge

SHORTLY AFTER 9am the neighbourhood care centre for the elderly shuffles to life. One man belts out a folk song. A centenarian sits by his Chinese chessboard, awaiting an opponent.

A virtual-reality machine, which lets users experience such exotic adventures as grocery shopping and taking the subway, sits unused in the corner.

A bigger attraction is the morning exercise routine—a couple of dozen people limbering up their creaky joints.

They are the leading edge of China’s rapid ageing, a trend that is already starting to constrain its economic potential.

Since the care centre opened half a year ago in Changning, in central Shanghai, more than 12,000 elderly people from the area have passed through its doors.

The city launched these centres in 2014, combining health clinics, drop-in facilities and old-people’s homes. It plans to have 400 by 2022.

“We can’t wait. We’ve got to do everything in our ability to build these now,” says Peng Yanli, a community organiser.

The pressure on China is mounting.

The coming year will see an inauspicious milestone. The median age of Chinese citizens will overtake that of Americans in 2020, according to UN projections (see chart).

Yet China is still far poorer, its median income barely a quarter of America’s.

A much-discussed fear—that China will get old before it gets rich—is no longer a theoretical possibility but fast becoming reality.

According to UN projections, during the next 25 years the percentage of China’s population over the age of 65 will more than double, from 12% to 25%.

By contrast America is on track to take nearly a century, and Europe to take more than 60 years, to make the same shift.

China’s pace is similar to Japan’s and a touch slower than South Korea’s, but both those countries began ageing rapidly when they were roughly three times as wealthy per person.

Seen in one light, the greying of China is successful development. A Chinese person born in 1960 could expect to live 44 years, a shorter span than a Ghanaian born the same year.

Life expectancy for Chinese babies born today is 76 years, just short of that in America.

But it is also a consequence of China’s notorious population-control strategy.

In 1973, when the government started limiting births, Chinese women averaged 4.6 children each.

Today they have only 1.6, and some scholars say even that estimate is too high.

Fertility was bound to decline as China got wealthier, but the one-child policy made the fall steeper.

Even though the country shifted to a two-child policy in 2016 and may soon scrap limits altogether, the relaxation came too late.

The working-age population, which began to shrink in 2012, will decline for decades to come.

By the middle of the century it will be nearly a fifth smaller than it is now.

China will have gone from nine working-age adults per retired person in 2000 to just two by 2050.

The economic impact is being felt in two main ways.

The most obvious is the need to look after all the old people. Pension payouts to retired people overtook contributions by workers in 2014.

According to the Chinese Academy of Social Sciences, the national pension fund could run out of money by 2035.

The finance ministry is taking small steps to shore the system up: in September it transferred 10% of its stakes in four giant state-owned financial firms to the fund.

But far more is needed. Government spending on pensions and health care is about a tenth of GDP, just over half the level usual in older, wealthier countries, which themselves will have to spend more as they get even older.

The second impact is on growth. Some Chinese economists—notably Justin Lin of Peking University—maintain that ageing need not slow the country down, in part thanks to technological advances.

But another camp, led by Cai Fang of the Chinese Academy of Social Sciences, has been winning the argument so far.

A shrinking labour pool is pushing up wages and, as firms spend more on technology to replace workers, pushing down returns on capital investment.

The upshot, Mr Cai calculates, is that China’s potential growth rate has fallen to about 6.2%—almost exactly where it is today.

The labour shortage is hitting not just companies but entire cities.

From Xi’an in the north to Shenzhen in the south, municipalities have made it easier for university graduates to move in, hoping thereby to attract skilled young workers.

China could, in theory, mitigate the downside from its ageing by boosting both labour-force participation and productivity—that is, getting more people into work and more out of them. Neither is easy.

Retirement ages are very low in China (in many jobs, 60 for men and 50 for women), but the government has resisted raising them for fear of a backlash.

And a return to state-led growth under Xi Jinping appears to be hurting productivity.

As George Magnus, an economist, writes in “Red Flags: Why Xi’s China is in Jeopardy”, demography is not destiny, and China has time to change course.

“The bad news, though, is that the time that is available is passing by rapidly,” he says.

One piece of good news is that China is thinking creatively about how to look after the swelling ranks of pensioners. Traditionally, children have been expected to care for their elderly parents, which helps explain why public investment in old-age homes has been minimal.

But most families now have just one child, and that child is working. Suzhou, a wealthy city near Shanghai, shows how China can take advantage of its scale.

In 2007 Lu Zhong, an entrepreneur, founded Jujiale as a “virtual retirement home”, dispatching helpers to private homes on demand.

It now has 1,800 employees serving 130,000 retired people.

Mr Lu says that it needs to grow by about 15% a year to keep up with demand.

Yet that is a silver lining in a grey-haired cloud. On October 1st China celebrated the 70th anniversary of the People’s Republic.

By the centenary in 2049, Mr Xi has vowed, China will have developed to the point that its strength is plain for the world to see.

But as Ren Zeping, a prominent economist, tartly noted in a recent report, the median age in China in 2050 will be nearly 50, compared with 42 in America and just 38 in India.

That, he wrote, raised a question: “Can we rely on this kind of demographic structure to achieve national rejuvenation?”

A U.S.-China Trade Deal Won’t Rescue Emerging Market Stocks

What is happening in the slowing Chinese domestic economy matters far more for the MSCI EM index than the latest mood on tariffs

By Mike Bird

The prospect of a limited truce on trade between China and the U.S. was enough to lift global stocks in October, but even an actual deal—however likely that is—would offer little more than temporary relief for beleaguered emerging markets.

Rather, emerging-market stocks will have an opportunity to outperform only if the Chinese economy enters an unexpected upswing.

Given Beijing’s reluctance to undertake a 2016-style stimulus this year, that seems unlikely.

Emerging markets are a diverse bunch, but if there is a dominant driver of their problems in 2019 it is probably the slowing Chinese domestic economy, which is only partly related to U.S. tariffs.

The MSCI EM Index is trailing the MSCI World Index by 10 percentage points this year on a total-return basis.

Even once the U.S. is removed from the calculation, EM stock markets are lagging well behind those of the world’s other advanced economies for 2019.

The flagship EM index has seen its direct weighting to China increased in recent years, from 17.9% a decade ago to almost 32% now.

But it isn’t just Chinese stocks themselves dragging the benchmark down.

Shoppers at a Costco in Shanghai. Photo: wu hong/Shutterstock

South Korea, the second-largest component of the index, has had an even more miserable year.

In large part, that is because of its exposure to the manufacturing sector of its big neighbor. China buys around 25% of its exports, up from 10% 20 years ago.

There is a similar story for commodity exporters outside Asia, such as Brazil.

China accounts for more than a quarter of the South American country’s outward trade, up from more like 2% in 1999.

Excluding Asia makes little difference to the underperformance of EM stocks versus their developed-market counterparts this year.

When EM stocks fared badly last year, the difference was often attributed to the unwinding of Federal Reserve largess, which had helped them in previous years.

A mountain of dollar debt would become more difficult to service in a world of higher interest rates.

This year, that monetary trend has reversed, sending 10-year Treasury yields a full percentage point higher.

This may have saved them from a worse fate, but it hasn’t been enough to fuel an EM rally.

Their recent underperformance hasn’t left EM stocks on particularly cheap valuations.

The index is priced around 12 times its expected earnings for the next 12 months, not far from its highs over the past decade. In fact, their performance could have been a lot worse.

The EM index is up 9% for 2019, while more modest Chinese growth has left the CRB Raw Industrials Spot Price Index down 9%. The two usually move in tandem.

Halting additional U.S. tariffs on Chinese goods might provide a meager lift for EM equities.

But given China’s struggle to deal with its mounting debt pile while providing further stimulus to the economy, growth will very likely continue to slow.

Unless something on that front changes, EM stocks—whose wagons have become firmly hitched to China—will struggle to make major gains.

Hong Kong Protesters Call for U.S. Help. China Sees a Conspiracy.

The United States, viewed as a champion of democracy, occupies a symbolic role in the protests. Activists now want President Trump to take a tougher stand against Beijing.

By Edward Wong

Protesters rallying last month in Hong Kong.Credit...Lam Yik Fei for The New York Times

HONG KONG — The Hong Kong protests at times seem like love fests with the United States. Depending on the day, demonstrators wave American flags or Uncle Sam recruitment posters, and even dress as Captain America, complete with shield.

The United States represents democracy, and the activists hope that maybe, just maybe, it will save Hong Kong. Five months in, they are trying harder than ever to draw the United States into their movement.

The protesters are pressing Hong Kong officials and their overseers, the authoritarian Communist Party leaders of China, for greater democratic rights and rule-of-law in the autonomous territory. As they see it, the Trump administration might be able to make demands of Chinese leaders or Hong Kong officials, especially because members of elite political circles want to maintain access to the United States.

Also, they note, the trade war with China, started by President Trump, is adding pressure over all on President Xi Jinping.

For the American government, the protests are more complicated — a potential policy dilemma but also a potential point of leverage with Beijing and a way to channel American values to the rest of the world.

“The United States should continue to deter Beijing from use of force, maintain an unblinking eye on Hong Kong, and make Beijing pay a heavy reputational cost for curtailing the rights and freedoms of Hong Kong citizens,” said Ryan Hass, a former State Department and National Security Council official now at the Brookings Institution.

Yet, he added, “I worry that the protesters in Hong Kong risk misinterpreting American sympathy and support of their cause for expectation that the United States will shield them from Beijing’s heavy hand.”

If the protesters are sending out a siren song, some American officials and lawmakers are answering it, eager to show their commitment to the cause.

Members of Congress have appeared in Hong Kong in public displays of solidarity. Last month, Senator Ted Cruz, Republican of Texas, donned an all-black outfit, while Senator Josh Hawley, Republican of Missouri, posted photographs from a protest.

In Washington, Nancy Pelosi, the speaker of the House, has met with activists, pro-democracy politicians and Jimmy Lai, a publisher considered radioactive by Beijing. Vice President Mike Pence singled out Hong Kong as a beacon of liberty in a speech, saying, “We stand with you; we are inspired by you.”

And versions of a bill that would give support to the protesters are moving though Congress with bipartisan backing. The legislation, among other things, would allow the United States to impose economic sanctions and a travel ban on Hong Kong officials deemed responsible for human rights abuses.

“We hope this bill will pass,” said Selina Po, a 27-year-old protester wearing a mouth mask in the Admiralty neighborhood as she held up a sign with the bill’s name, the Hong Kong Human Rights and Democracy Act. “It’s our hope for winning this war. We’re trying all we can.”

But American officials say the United States needs to weigh its moves carefully.

Greater involvement by Americans could give Beijing more ammunition in its propaganda effort to portray the pro-democracy movement as one stoked by foreign forces.

The Chinese government and state-run news organizations talk about “black hands” behind the unrest and spread conspiracy theories, including one centered on an American diplomat in Hong Kong who was photographed with activists in the lobby of the JW Marriott Hotel.

As the protests persist, American officials are watching for surges in violence and tracking the movement of People’s Liberation Army soldiers into Hong Kong. Some are beseeching demonstrators to stick to nonviolent tactics, even in the face of police crackdowns and attacks by people sympathetic to Beijing.

On Sunday, at least six people were injured when a man with a knife who is believed to be against the democracy movement attacked a family at a shopping mall. In the melee, the attacker bit off part of the ear of a pro-democracy district council member, Andrew Chiu.

“We’re telling everyone that we interact with, we don’t want violence,” Secretary of State Mike Pompeo said on Wednesday. “We think there should be a political solution to the conflict that’s taking place there.”

Two Democratic Congressmen, Tom Suozzi of New York and John Lewis of Georgia, the icon of the American civil rights movement, posted a video last month praising the activists for their “great work” and urging them to stick to nonviolence.

Whether the United States takes greater action on Hong Kong hinges on the unpredictable Mr. Trump. Administration officials and American lawmakers talk openly about checking the authoritarian impulses of the Chinese Communist Party. But the president rarely, if ever, mentions human rights and democracy, and he has not made strong statements on Hong Kong.

He is a transactional president. In June, he told Mr. Xi on a call that he would stay quiet on Hong Kong as long as Washington and Beijing were making progress on trade talks, according to an American official who spoke on the condition of anonymity.

In October, the Trump administration imposed some restrictions on Chinese companies and organizations for their roles in the mass repression of Muslims in mainland China, but Mr. Trump has held back from harsher actions for fear of upsetting the trade negotiations.

If a Hong Kong bill reaches Mr. Trump’s desk, analysts say, the president might see it as merely a tool to wring concessions from China and could forego support if a trade agreement were close.

“Strong American bipartisan support for the peaceful protesters is not enough to override President Trump’s transactional instincts,” Mr. Hass said. “He does not look at Hong Kong through a values-based lens. And as long as he remains president, this outlook will limit America’s responses to developments in Hong Kong.”

Administration officials argue that Mr. Trump’s approach gives the United States a stronger hand in constraining Beijing on Hong Kong — even if it appears that Mr. Trump just wants to use the Chinese territory to his advantage.

“America expects Beijing to honor its commitments,” Mr. Pence said, “and President Trump has repeatedly made it clear it would be much harder for us to make a trade deal if the authorities resort to the use of violence against protesters in Hong Kong.”

In the eyes of Beijing, there has been no shortage of provocations by American politicians. On Oct. 22, Ms. Pelosi posted on Twitter a photograph of herself on Capitol Hill with three pro-democracy figures — Mr. Lai, Martin Lee and Janet Pang.

“My full support and admiration goes to those who have taken to the streets week after week in nonviolent protest to fight for democracy and the rule of law in #HongKong,” she wrote.

On Wednesday, Ms Pelosi slammed the decision by Hong Kong officials to bar the activist Joshua Wong from running in local elections. She said it was “another blow against rule of law in Hong Kong and the principle of ‘one country, two systems,’” referring to the foundation for the policy of autonomy that Britain and China agreed would be used to govern the territory.

Ms. Pelosi met Mr. Wong in Washington in September.

A Chinese Foreign Ministry spokeswoman, Hua Chunying, lashed out, saying, “It is precisely because of the naked cover-up and connivance of external forces such as Pelosi that the violent anti-law forces are even more fearless.”

“No matter how your eyes are blinded by prejudice, no matter how your heart is filled with evil, Hong Kong is China’s Hong Kong,” the spokeswoman added. “Any attempt to interfere in Hong Kong affairs will not succeed.”

Many demonstrators want American intervention and are focusing their attention on the legislation. The mere threat of American sanctions, they say, would give the movement greater voice with Beijing.

On Oct. 14, the night before a vote on the bill in the House of Representatives, protesters held a rally in the Central district to call for its passage. Tens of thousands attended, many of them carrying American flags.

“The power of Hong Kong people alone is limited, and we need other countries, such as the U.S., to help us counter China and keep ‘one country, two systems,’” said Eric Kwan, 32. “I doubt the act can be an ultimate game-changer, but I think it is enough to give pressure to China.”

Along with allowing for sanctions, the legislation requires the State Department to review each year whether Hong Kong is still autonomous enough to qualify for the benefits of the 1992 Hong Kong Policy Act, which grants the city a trade and economic status different from that of mainland China.

Some American officials say the bill could harm Hong Kong residents if the United States determines that the territory no longer qualifies as an autonomous entity. But the bill’s proponents defend its practical and symbolic value.

“Standing in support of Hong Kongers and preserving Hong Kong’s autonomy should be a priority of the United States and democracies worldwide,” said one of the bill’s sponsors, Senator Marco Rubio, Republican of Florida.

The bill passed the House by unanimous vote last month. Though the Senate majority leader, Mitch McConnell, has not scheduled a vote yet, the measure is expected to pass that chamber easily, with a veto-proof majority. Then Mr. Trump would have to decide whether to sign it into law.

Ezra Cheung contributed reporting from Hong Kong, and Amber Wang contributed research from Beijing.

The Case for International Civil Servants

Cooperation among nation-states is still the most important element of global governance. But organizations and civil servants that serve the world as a whole are an indispensable source of support for necessary collective action to address major opportunities and threats.

Kemal Derviş


WASHINGTON, DC – The notion of an “international” civil service goes back a century, to the establishment of the League of Nations after World War I. Whereas civil servants had until then always served their countries or empires, the League’s small secretariat would facilitate cooperation among member states.

The founding of the United Nations following World War II gave a new and much stronger impetus to the idea and practice of an international civil service. And today, when global efforts are essential to address issues such as climate change and the spread of new digital technologies, the world needs high-quality international civil servants more than ever.

The concept is enshrined in Article 100 of the UN Charter: “In the performance of their duties the Secretary-General and the staff shall not seek or receive instructions from any government or from any other authority external to the Organization.” Moreover, “They shall refrain from any action which might reflect on their position as international officials responsible only to the Organization.”

Whom, then, are international civil servants supposed to serve, if not national governments?

Although national governments determine the missions of multilateral institutions, the staff of organizations that are bound by the UN Charter – including the International Monetary Fund and the World Bank – are formally international civil servants. They serve the peoples of the world through their organizations, and travel with “international” UN passports, not their national ones.

These officials’ special status extends global governance beyond cooperation among nation-states, but it does not reflect a utopian attempt establish a world government. Rather, international organizations and civil servants strengthen global collective action by advancing the “common good,” as Bruce Jenks, Senior Adviser at the Dag Hammarskjöld Foundation and former Assistant General Secretary at the UN Development Programme (UNDP), puts it, rather than any particular private or public interests.

Game theory has taught us that individual nation-states, while rationally pursuing their own interests, can end up in a situation that is suboptimal for all of them. On the other hand, as Todd Sandler argues in his 2004 book Global Collective Action, “impartial” international organizations can provide an institutional framework that helps to produce mutually beneficial results.

In practice, impartiality is not easy to maintain. Governments both promote and try in various ways to influence their nationals within international organizations, and nationality is often a determining factor in appointments to top international jobs. When I was Administrator of the UNDP, I had to deal with constant “requests” from government representatives.

Usually, they were formulated in an acceptable way, asking me to “look into” a particular issue. But I also received requests – often from the global superpowers – in a way that was in clear violation of Article 100 of the UN Charter, and I had to spend a great deal of time trying to avoid engaging with governments on such terms.

Nonetheless, my overall experience at the UNDP and the World Bank suggested that staff and management could and did behave in accordance with Article 100. Being responsive to member states’ concerns and priorities was right and normal; taking orders from them was not.

In addition to mediating and helping to forge political compromises, international civil servants can launch initiatives and act as advocates. The late Kofi Annan was emblematic in that regard. Coming from a small country, Ghana, and having made his career at the UN, Annan certainly did not have the special backing of any major international power.

Yet, as secretary-general, he developed great moral authority, and was revered by civil-society leaders around the world. On Annan’s initiative, the UN launched the Millennium Development Goals at the turn of the century, giving development cooperation new momentum – which the current 2030 Agenda for Sustainable Development is maintaining.

Critics argue that international organizations should not exercise such “independence,” on the grounds that these bodies derive all their legitimacy from governance and consent by member states. And because nation-states remain the constitutive units of the international political system, it is tempting to define multilateralism, or even global governance, as simply the process of cooperation among them. But such a view is too narrow.

The problem of climate protection provides a good example of what is at stake. The UN system, including the World Bank and the IMF, is working with civil society to raise global awareness about the extent of the threat, and conducting or supporting impartial technical analyses of the costs and benefits of alternative courses of action. In addition, UN Secretary-General António Guterres, and his predecessors Ban Ki-moon and Annan, have played leading roles in advocating for climate protection.

All these efforts have created a political space that has made climate-related negotiations among national governments somewhat easier. It is not the job of international civil servants to try to determine specific national policies, or to decide how governments will share the burden of combating global warming. Rather, their role is to advocate generally for science-based measures that can address the challenge, and to help implement them once member states have decided on the specifics.

Thirty years ago, the fall of the Berlin Wall appeared to hold out the promise of lasting peace and cooperation, fostered by a new, fully global multilateralism. Today, we are still far short of that optimistic vision, and cooperation among nation-states remains the most important element of international governance. But in an era of unprecedented opportunities and threats that transcend political borders, organizations and civil servants that serve the world as a whole are an indispensable source of support for necessary collective action.

Kemal Derviş, former Minister of Economic Affairs of Turkey and former Administrator for the United Nations Development Program (UNDP), is Senior Fellow at the Brookings Institution.