Why the Swiss should vote for ‘Vollgeld’

A radical rethink of the financial system was essential after a devastating crisis

Martin Wolf

A radical rethink of how the financial system works was, one might have thought, essential after the devastating crisis of a decade ago. Instead, the system was patched up. Now, predictably, the mood is shifting towards removing much of the regulation. That is why I hope, despite the polls, that the Swiss vote in favour of the Vollgeld proposal in the referendum on June 10. Finance needs change. For that, it needs experiments.

According to a database compiled at the IMF, 147 individual national banking crises occurred between 1970 and 2011. These crises afflicted small and poor countries like Guinea, and big and rich ones, like the US. They were colossally expensive, in terms of lost output, increased public debt and, not least, political credibility. Within just three years from 2007, cumulative output losses, relative to trend, were 31 per cent of gross domestic product in the US. In the UK, the recent crisis imposed a fiscal cost only exceeded by the Napoleonic war and the two world wars. (See charts.)

So how does this industry create mayhem on this scale? And why is it allowed to do so? It does so — and is allowed to do so — because, as the Bank of England has explained, banks create money, which is an essential public good, as a byproduct of their lending, which is an important economic good. We want banks to have risky assets and safe liabilities. Yet the liabilities of a highly leveraged, risk-taking institution cannot be safe and will unavoidably seem least safe during a crisis. Yet it is then that people want their money — their reserve of purchasing power in a frightening world — to be at its safest.

Worse, it is often easiest for banks to justify lending more just when they should lend less, because lending creates credit booms and asset-price bubbles, notably in property. The willingness of the public to treat bank liabilities as stores of safe purchasing power provides stable funding, until panic sets in. To reduce the likelihood of panic, governments insure bank deposits, liquidity and even solvency. That makes crises rarer, but bigger. The authorities are simultaneously supporting banks and reining in the excesses created by support. This is a system designed to fail.

Today, banks are less leveraged and better supervised than before the crisis. In the UK, retail banking is also ringfenced. Yet, the banks are leveraged at about 20 to 1: if the value of their assets falls by 5 per cent or more, such a bank becomes insolvent. One way to make banks safer then would be to increase their equity capital four or five times, as recommended by Anat Admati and Martin Hellwig in The Bankers’ New Clothes.

An alternative way to make the system safer is to strip banks of the power to create money, by turning their liquid deposits into “state” or “sovereign” money. That is the idea backed by the Vollgeld initiative. An alternative way of achieving the same outcome would be via 100 per cent backing of deposits by claims on the central bank — an idea proposed by free-market Chicago School economists in the 1930s. The rest of the financial system would then consist mainly of investment banking and mutual funds. The latter shift risk on to the investors automatically.

The former might need to be regulated, but mainly on capital.

The shift to a system like this would, as Thomas Jordan of the Swiss National Bank argues, be a mini-earthquake. Moreover, the proposal raises questions about the purposes to which the new sovereign money might be used.

The obvious possibility is to use the money to finance the government. This idea is highly objectionable to some: it would surely create big challenges. Yet those challenges are nothing like as fundamental as was transferring responsibility for a core attribute of the state — the creation of sound money — to a favoured set of profit-seeking private businesses, co-ordinated by a price-setting government institution, the central bank. In no other economic area is public power so mixed with private interests. Familiarity with this arrangement cannot make it less undesirable. Nor can familiarity with its performance.

The 2007 financial crisis hit the UK’s finances hard

There are many other ideas in this broad area that seem worth pursuing. One would be to allow every citizen to hold an account directly at the central bank. The technological reasons for branch banking are, after all, perishing quickly. Nicholas Gruen, an Australian economist, has argued that no private institution should have better access to the public’s central bank than the public itself does. Furthermore, he adds, the central bank could operate monetary policy by lending freely against safe mortgages. The central bank would not need to lend to banks per se at all. It would focus on assets. 
The fundamental point here is that the burden of proof should not be on those who favour change. After a long series of huge and destructive crises, it falls rather on those who support the status quo, even today’s modified status quo. The advantage of the Vollgeld proposal is that it is a credible experiment in the direction of separating the safety rightly demanded of money from the risk-bearing expected of private banks. With money unambiguously safe, it would be far easier to let risk-taking institutions bear the full consequences of their failures. To the extent that bankruptcy remained difficult, regulation would still be needed, especially of equity capital. At the limit, as some argue, risk-bearing financial intermediation might need to be ended.
The Vollgeld proposal is not as radical as this. Yet it could provide an illuminating test of a better possible future for what has long been the world’s most perilous industry. May the Swiss dare.

The Next Bond Rout: It’s Bigger Than Italy

By Evie Liu

      Photo: ALBERTO PIZZOLI/AFP/Getty Images 

Now, that was a bond rout.

One week ago, concerns that Italy would leave the euro zone caused yields on its two-year notes to surge as high as 2.7%, as investors fled its bond markets for safer assets. The yield had been negative just two weeks earlier. (Bond prices and yields move in the opposite direction.) 
And no wonder. The chances of Italy ditching the euro zone increased—putting the stability of its bond market in jeopardy—after President Sergio Mattarella vetoed the two anti-establishment parties’ choice for finance minister. But investors had been shying away from Italy’s bonds even before last week’s crisis—and though things have stabilized since then, many questions remain.

It would be easy to assume the panic that gripped Italy’s bond market was specific to the country’s political precariousness. But maybe not. Technical evidence suggests that a reckoning may be coming for all risky bonds, according to the Andrew Addison of research firm the Institutional View. If he’s right, Italy may just be the beginning.

The spike in Italy’s bond yield didn’t come out of nowhere, though it certainly seemed that way for the two-year note. The yield on Italy’s 10-year bonds had been rising steadily since finding support around 1% twice between 2015 and 2017—creating what is known as a “double bottom,” in technical parlance—and establishing a range between 1.04% on the downside and 2.39% on the upside.

That range finally broke on May 21, just six days before Mattarella’s veto.

A breakout like this suggests there could be more room for yields to rise. Addison projects Italy’s 10-year yields should reach 4% (a consistent support level tested many times over the past 20 years) and may even reach 4.5% (nearly doubling the old resistance level of 2.4%) by the end of the year.

Investors might be expected to demand higher yields from Italy’s bonds due to the perception that they’re more dangerous than they were two weeks ago. But there is evidence that the investors are beginning to prefer safer bonds across Europe as well.

The spread between high-quality European bonds—as represented by the Iboxx Euro Non-Financials AA Total Return Index—and lower-quality ones—as represented by the Iboxx Euro Non-Financials BBB Total Return Index—has been dropping for over two years. Since April, the gap between the values of the two benchmarks has been narrowing, and now sits at -10.52 points as of last Friday, up from -11.85 points in April.

It’s a sign that investors now view higher-quality bonds more favorably, which could mean the beginning of a “risk-off” period, Addison says.

And not just in Europe. Investors have begun shying away from global high-yield bonds as well. During the past four months, the Bloomberg Barclays Global High Yield Total Return Index, which includes 34,000 high-yield bonds in the U.S., Europe, and emerging markets, has dropped 3.5% to 1281.8 as of last Friday, its lowest level since last August.

The damage looks even worse in chart form. The Bloomberg High Yield Index had been in an uptrend for about two years, but the recent decline formed a “rounding top”—represented by an upside-down “U” shape in the chart—breaking that trend and suggesting more downside to come.

When the market’s riskiest bonds start to dip, it can be an early sign of a weakening economy, even a possible recession, Addison says.

We’re not saying we’re there yet, but it’s something to keep an eye on.

domingo, junio 17, 2018



Spain’s Uneven Success Story

By Jacob L. Shapiro

By all accounts, Spain should be a European success story. As recently as 2012, the country was teetering on the edge of economic meltdown. Its economy contracted by 3 percent that year. Unemployment climbed to over 20 percent, on its way to a staggering 27 percent by the following year. A banking sector collapse was averted only by a 51 billion euro ($60 billion) bailout package from the European Stability Mechanism that June. There was real fear in Europe that Spain might be the next Greece.

That fear turned out to be misplaced. Over the past three years, gross domestic product growth has averaged over 3 percent. Unemployment has dropped to 17 percent and is projected to fall below 14 percent next year. The European Commission reported that wage growth in Spain is expected to rise faster than inflation in 2019 – so not only are more people finding jobs, but they are getting paid more as well. The government succeeded in pulling Spain back from the brink, and according to the Bank of Spain, it cost the country itself only 26.3 billion euros – not a bad deal considering that its economy is the fourth-largest in Europe and only slightly smaller than Russia’s.

Yet, despite Spain’s much improved economic position, Spanish politics are more unstable now than they have been in decades. With a government plagued by a corruption scandal for years, Mariano Rajoy, who had served as prime minister since 2011, was ousted in a no-confidence vote last week – the first Spanish head of state to have lost such a vote since the 1978 constitution was adopted. Rajoy will be replaced by Pedro Sanchez, head of the Socialist Party, which holds only 84 of 350 seats in parliament and has already promised to call early elections. Spain now joins Italy, France, Germany and the United Kingdom as the latest European country with an extremely weak government.

This isn’t the way things are supposed to work. Economic recoveries don’t usually result in political upheavals. But that is indeed what has happened in Spain. In addition to the prime minister’s ousting, the issue of Catalan independence remains unresolved. The day after Rajoy’s deposal, Quim Torra was sworn in as Catalan president – the first since Rajoy dissolved the Catalan regional government last October and instituted direct rule after an independence referendum that Madrid declared illegal but proceeded anyway. Rajoy’s heavy-handed approach to Catalonia apparently hasn’t dented its desire for sovereignty. During his swearing-in ceremony, Torra committed to creating an independent Catalan republic.

A similar scenario has played out across Europe. All headline economic statistics throughout the EU are trending upward, exceeding even the most optimistic projections of a few years ago. But the moderate economic recovery has been accompanied by increasingly unstable politics. In Germany, the anti-establishment party Alternative for Germany is now the third-largest political party. In Italy, a hodgepodge of euroskeptic, anti-establishment parties have formed a coalition to lead the new government. And in France, if the National Front had a leader with a surname other than “Le Pen,” it may well have prevailed in last year’s elections.

Spain is part of this European trend – and it’s not just because of Rajoy’s fall from grace or Catalonia’s irascibility. It is part of a larger degradation of what has been until now Spain’s predominantly two-party political system. A recent poll by Spanish newspaper El Pais showed that if elections were held today, the top two vote-getters would be anti-establishment parties: Ciudadanos (29.1 percent) and an electoral alliance led by Podemos (19.8 percent). Rajoy’s Popular Party and Sanchez’s Socialist Party – the only two parties in Spain that have formed governments since 1982 – would come in third and fourth place, respectively.

Podemos supports left-wing economic policies, including increased state control over the economy and government services, but it’s also a nationalist party. Ciudadanos, the current frontrunner by a wide margin, may be anti-establishment but it’s not anti-EU. It has combined Spanish nationalism with pro-EU and classical liberal policies like lower taxes and free trade. It’s comparable to French President Emmanuel Macron’s En Marche party, and indeed, the two parties have even reportedly been in touch recently, offering hope to Europhiles that out of this weekend’s chaos might come a Spanish government supportive of French and German proposals to reform the EU by giving Brussels expanded powers.

But for Spain, unlike Germany and France, this is all complicated by the fact that what is at stake is not just the status of the European Union but the future of a unified Spain itself. Ironically, Ciudadanos began as a Catalan political party – its headquarters are still in Barcelona. And yet, Ciudadanos has taken a harsh line on the issue of Catalan separatism, pushing instead for a more tightly knit Spanish nation-state. Podemos, headquartered in Madrid, has thus far presented itself as more accommodating than either the outgoing Spanish government or Ciudadanos when it comes to Catalonia’s independence movement. That makes some sense. It would appear hypocritical for Podemos to support anti-EU sentiment in Spain and then reject nationalist sentiments in Catalonia.

Of course, all countries have these sorts of divisions. In France, the divide is between Paris and the rest of the country. In Germany, the old East-West split of the Cold War is still alive and well. In the U.K., Brexit has reanimated conversations on just how much authority Scotland, Wales and Northern Ireland really have.

In Spain, the primary (but by no means only) division is between the country’s leading GDP contributor, Catalonia, and its second-largest contributor, Madrid. This is a riddle no Spanish political entity has ever really solved. Even at the height of the Spanish Empire’s power in the 1640s – when Spanish armies outnumbered the combined military manpower of France, England and Sweden – Spain was in danger of tearing itself apart. Catalonia, along with Aragon and Valencia, had its own independent legal and tax systems at the time, and it even revolted against the crown when Madrid tried to integrate Catalonia’s economy into the empire.

During those days, it was the Castile region, with its capital moved to Madrid by Phillip II in 1561, that held the fractious kingdom together, both with its soldiers and with its money. And though Spain has had its fair share of instability since the empire fell, Castile has always been the force that kept Spain together, whether by war, dictatorship or, most recently, constitutional arrangement. Catalonia has at times opposed this, but never wholly and never successfully. Even so, the 2008 financial crisis stirred up old animosities because a passionate faction of the Catalan population no longer wanted to send its tax revenue to Madrid – a desire that has not abated even as the Spanish economy has recovered.

Other European countries have been keeping a close eye on developments in Catalonia. In some parts of Europe, particularly in the east and the Balkans, the sacrosanctity of borders is sometimes viewed not as a valuable principle in and of itself but as a paltry ideological justification for empowering some at the expense of others. Catalonia may be an internal problem for Spain, but self-determination is an issue that has long plagued the whole continent, even if it has been relatively dormant in recent decades. Disenchantment with establishment politics and the debate over the optimal degree of sovereignty to be ceded to the European Union is not just a Spanish concern but a European problem.

And while all this is happening, keep in mind that, for Spain, this is now what it looks like when things are generally going well. Imagine what it would look like if they weren’t, and you’ll understand how frayed the fabric of Europe has become.

The Battle of German Yields: Bill Gross vs. Eurozone Politics

The economic logic pushing German yields higher should prevail in the end, but investors need patience

By Richard Barley

German 10-year bond yield minus German consumer price inflation

Source: FactSet
Note: monthly data

Higher inflation and less central-bank stimulus should equal higher bond yields, right?

The answer has been yes in the U.S., but not in Germany, where Italian political turmoil has pushed yields lower, wrong-footing even Bill Gross. A battle that will shape markets is under way between the economic logic forcing German yields higher and the political problems weighing them down.

In one way, last week’s blow-up in Italian bonds, which sparked a rush into safer securities, gives the bet on higher German yields even more potential, as the starting point is more extreme. The thesis is simple: The deflation panic has passed, central banks will withdraw monetary stimulus in response to higher inflation, so yields on “safe” assets like Bunds and Treasurys should rise.

The European Central Bank’s chief economist Peter Praet signaled Wednesday that eurozone policymakers would debate a further step back from its bond-buying program next week. That was a surprise to investors who had thought political risk might lead the ECB to slow down.

Ten-year government bond yields

Source: WSJ Market Data Group

But while the U.S. market has followed the playbook, with 10-year yields recently reaching a near seven-year high, Germany is still way out of whack on historical measures. Janus Henderson’s Mr. Gross has been expecting the gap between German and U.S. yields to narrow.

Instead, it has kept widening to levels not seen in 30 years. 10-year Treasurys are now at 2.95% and Bunds at 0.44%.

Meanwhile, relative to domestic inflation, which stands at 2.2%, German yields are at a level seen only once before in 63 years, notes Deutsche Bank . That was early in 2017, when the ECB had yet to signal that it was thinking of starting on the long road to tighter monetary policy.

Bill Gross will need patience and a thick skin for the bet to pay off. Photo: lucy nicholson/Reuters 

But the European market is not the U.S. market. As a collection of national markets it has many moving parts with potentially conflicting policies. As Italy has reminded investors, this means politics can trump economics. Counter-intuitively, tighter ECB policy could even depress German yields if the move is seen as contributing to stress elsewhere in the bloc.

Eurozone growth will need to be solid to counterbalance that.

Ultimately, economic logic should prevail. Investors can’t indefinitely be happy with a negative real return on German bonds. But the likes of Mr. Gross need patience and a thick skin for the bet to pay off.

How millennials became the world’s most powerful consumers

They are the biggest global generation — and their choices ​​are upending business​ from the US to China

© Ollanski

When Scott Norton and Mark Ramadan were undergraduates at Brown University in Rhode Island a decade ago, they were horrified not by the 2008 financial crisis but by Heinz tomato ketchup. The bright red sauce was so common in shops and kitchens round the world that it seemed it would be there forever. “At the centre of supermarkets were all these classic American brands that hadn’t evolved in 70 years,” recalls Mr Norton.

As they talked to their student friends, they realised that none of them wanted bland, mass market products shipped from factories by huge corporations. So they started to mix their own organic ketchup in an off-campus apartment. On graduation, they founded a company and, having no origin story with resonance, invented a joke one. They named it after a mythical Victorian called Sir Kensington, a monocled adventurer who had “advised the British East India company in the acquisition of spices”.

The pair are now 31, at the heart of a millennial generation that has come of age, transforming business not only in the US but round the world. In April, their company was acquired by Unilever, the British-Dutch group that had fended off a takeover by Kraft Heinz. Their ketchup, once a student jape, has just gone on shelves in Walmart and Target. “Sir Kensington’s is the playbook for reaching millennials,” says Richard Hartell, president of strategy and transformation at Publicis Media.

Millennials are ‘core’ business

This is the millennial moment, long expected and feared by companies that built their brands for baby boomers. They are ageing and their offspring, once called the “echo boom”, are no longer teenagers, or even students. Pew Research Center, the US research group, defines millennials as the 73m Americans aged between 22 and 37, who will next year overtake boomers in number. “We don’t think of them as special or different any more. They are the core of our business,” says Alan Jope, president of beauty and personal care at Unilever.

When Scott Norton (left) and Mark Ramadan realised that none of their friends wanted to buy bland, mass market products like Heinz Tomato Ketchup, they started to create their own organic ketchup, Sir Kensington

The coming of age of the world’s 2bn millennials is not only a generational shift: it is one of ethnicity and nationality. Forty three per cent of US millennials are non-white, and millennials in Asia vastly outnumber those in Europe and the US. Despite China’s former one-child policy, it has 400m millennials, more than five times the US figure (and more than the entire US population) while Morgan Stanley estimates that India’s 410m millennials will spend $330bn annually by 2020.

Millennials have reached what the bank calls “the most important age range for economic activity”, when households are formed, babies are born and money is spent not just on going out but on settling down. Simon Isaacs, co-founder of Fatherly, an information and ecommerce site for millennial parents, cites family camping as one of its most popular topics. “That does extremely well for us. They like to buy cool family tents and share videos of their trips.”

This reflects the depth to which technology is integrated into millennials’ lives and habits. The oldest were teenagers at the time of the Netscape initial public offering in 1995, as the internet became a mass medium, and the youngest were 11 when the Apple iPhone was launched in 2007. They are used not only to communicating online but buying most things there: $25bn was spent on Alibaba’s Singles Day online shopping festival in China on November 11.

Big companies have scrambled to adjust to millennial tastes. “Local, original, and what they can feel and trust are all good. Maybe there is a bit of a reaction to globalisation,” says Laurent Freixe, who heads Nestlé’s US and Americas business, “Organic, natural, and non-GMO are crystallising in the US very fast.” Nestlé last year bought the Blue Bottle chain of coffee shops and in May signed a $7.1bn licensing deal with Starbucks to refresh its Nescafé and Nespresso brands.

Generations as a percentage of the global population over time

But it is placing immense strain on institutions that once thrived on mass marketing of products through television advertising. Growth has slowed and investors are unhappy. “They are only about global brands, one size fits all. That was great in the ’80s and ’90s but the world has changed. Millennials want these little brands, local brands,” Nelson Peltz, the 75-year-old activist investor, said last year as he attacked Procter & Gamble.

Some are being outflanked by young rivals with roots in internet and mobile. Google and Facebook have shaken marketing groups such as Publicis and WPP, and the streaming service Netflix last month overtook Walt Disney as the world’s most valuable entertainment company.

Often, revenues are simply nibbled away by upstarts: Boston Consulting Group estimates that between 2011 and 2016, large US consumer groups lost $22bn in sales to smaller brands.

‘We cannot change things’

Ella Kieran, head of WPP’s Stream conferences for its clients, is the epitome of the high-flying young global executive. At 31-years-old, she and her entrepreneur husband have a one-year-old daughter, and she divides her time between London and New York. But the couple are still renting and she worries about her generation’s future.

“The pessimism of my generation is the sense that you cannot change things,” she says. “If you don’t have a lot of money, it does not feel as if you are going to get it. Now, as I have a family, I’m happy that baby food is better, thanks to five years of people before me saying: ‘This brand does not speak to me.’ But you guys got houses and we got slightly nicer shampoo.”

Ella Kieran, a 31-year-old global executive, divides her time between London and New York, but she and her entrepreneur husband cannot afford to buy a house in either city © Anna Gordon/FT

In the US and Europe, many millennials are disenchanted with their lot as they attain maturity. A UK Resolution Foundation study found that pessimists outweighed optimists by two to one when they were asked about their chances of improving on their parents’ fortunes. They are highly educated: 39 per cent of British 25 to 39-year-olds are graduates, compared with 23 per cent of those between 55 and 64. But their sophistication and ambition is not matched by security.

This is largely an accident of history. Older millennials entered the workforce in the mid-2000s, and many lost jobs after the 2008 crisis. They were also caught by rapid inflation in house prices as interest rates fell and remained low. The milestones of leaving home, getting a job, marrying and having children have been delayed — 45 per cent of 18 to 34-year-old Americans had done all four in 1975, but only 24 per cent had in 2015.

It has spawned widespread distrust, both in organisations and individuals. A Pew study in 2014 found that only 19 per cent of millennials believed that others could be trusted, compared with 40 per cent of boomers and 31 per cent of the generation Xers born between 1965 and 1980. Millennial faith in institutions is also low. “This generation is incredibly sceptical of governments and big corporations,” says Keith Niedermeier, professor at the Wharton business school.

Malcolm Harris, author of Kids These Days, a book about “why it sucks to have been born between 1980 and 2000”, says distrust is only natural among a generation that has to struggle for security. “If competition is the main feature of your world, you would be a fool to find people trustworthy,” he says. The preference for local, organic and craft products is also logical, in his view: “You want to be part of a circle of production and consumption that is not centred on enriching the 1 per cent.”

Breaking traditional habits

The pattern of preferring smaller, independent brands and outlets extends to media consumption.

Technology and social media have unleashed an extraordinary fragmentation in how they absorb information. In the US, they watch 19 hours a week of broadcast and cable television, compared with the average adult’s 34 hours, according to Nielsen. Radio stations have lower reach among millennials but 37 per cent of them listen to at least one podcast a week.

New companies can reach millennials via social media, which further encourages fragmentation. Beauty is a prime example. Revenues of smaller brands grew 16 per cent a year between 2008 and 2016, according to the consultancy McKinsey. Millennials will often experiment with edgier brands such as Urban Decay, which was acquired by L’Oréal in 2012. Make-up artists, including Charlotte Tilbury and Trish McEvoy, have attracted large followings.

Chart showing predicted millennial income in the future

Beauty’s expansion into a $250bn global industry has been fuelled by Instagram. Marla Beck, co-founder of Bluemercury, a US chain of cosmetics stores, cites the growth of face masks, including many Korean brands, as an example. Smaller companies are now selling black, silver and even rainbow masks. “Masks used to be a teeny category but they are very visual,” she says. “You can display your face [on Instagram] and show that you know about lifestyle, that you take care of yourself.”

Technology has not eliminated a millennial desire for community experience. Shared workspaces are expanding — the co-working company WeWork was valued at $20bn last year — members’ clubs such as Soho House are growing and festivals have proliferated. Live music alone had global revenues of $26bn in 2016, according to PwC. “I laugh about the terms community and experience, but they are exactly what we provide,” says Nick Jones, founder of Soho House.

Instagram has helped fuel beauty's expansion into global millennial market. Marla Beck (right), Bluemercury founder, says: 'You can display your face [on Instagram] and show that you know about lifestyle, that you take care of yourself' © AP

Big spenders in Asia

Asia’s millennials, the biggest generation of all, share many attributes with those in the west, but not their insecurity. They are confident of living better lives than their parents, particularly in China, where baby boomers lived through Maoism and the cultural revolution of the late 1960s and 1970s.

Even in south-east Asian “tiger” economies that achieved rapid growth, families often saved all that they could.

Millennials in China, many of whom are single children, behave quite differently. “They are very optimistic about the future and they are willing to spend money,” says Jessie Qian, KPMG’s head of consumer markets in China. McKinsey, the consultancy, describes young Chinese adults as “confident, independent minded, and determined to display it through consumption.”

It is having a profound effect on global patterns of consumption, with more to come. Emerging and developing economies are home to 86 per cent of millennials, and the World Bank estimates that Chinese millennials’ income will overtake that in the US by 2035. The luxury industry has tilted towards Asia, where prestige brands are seen as guarantees of quality. A third of Chinese millennials said in one survey that they were very likely to buy a Swiss watch.

Chart showing how millennials consume media differently from other generations

Like others, the luxury industry is having to adjust to what these consumers want. It was once tightly controlled, with seasonal fashion shows to unveil designs that were then pushed through stores. Now, social media influencers such as Chiara Ferragni, an Italian fashion maven with 13m Instagram followers, set the trends and the pace has quickened. “They need more regular product, more drops, something new on Instagram,” says Helen Brand, UBS European luxury analyst.

The surprise is the degree to which Asia’s luxury consumers have been joined by a segment of millennials in the west. “A few years ago, millennials were seen as young people who could not afford luxury,” says Ms Brand. The bank estimates that they account for 50 per cent of Gucci’s sales and 65 per cent of Yves Saint Laurent’s. It is a taste of millennials’ buying power — their collective annual income will exceed $4tn by 2030, according to the World Bank.

This also reflects the divide in fortunes among millennials in the US and Europe, not just between high and low earners but between those born to asset-rich baby boomers and those lacking familial wealth. Accenture estimates there will be a transfer of at least $30tn in wealth from US baby boomers to millennials during the next three decades. The move has started with parental loans to young adults to buy homes, and will continue through death and inheritance.

Social media influencers such as Chiara Ferragni, who has 13m Instagram followers, set fashion trends and the pace has quickened

Other millennials are out of luck, along with the institutions that flourished in the baby boom era and are being disrupted. Ms Kieran of WPP has little sympathy for the consumer giants. “We can’t win on anything else, so if we rattle the cage of corporations on sustainability, that’s good.”

Here is the voice of a generation that now wields greater power than even some of its members realise. The companies that cannot meet their demands are in trouble.