Rejoicing Central Banker Capitulation

Doug Nolan

June 21 - Neel Kashkari, Minneapolis Fed president: “In the Federal Open Market Committee meeting that concluded on Wednesday of this week, I advocated for a 50-basis-point rate cut to 1.75% to 2.00% and a commitment not to raise rates again until core inflation reaches our 2% target on a sustained basis. I believe an aggressive policy action such as this is required to re-anchor inflation expectations at our target.”

May 31 – Bloomberg (Matthew Boesler): “It’s too early for the Federal Reserve to begin cutting interest rates despite increasing concerns about low inflation and an escalating trade war, said Minneapolis Fed President Neel Kashkari. ‘Either of those could be cause for changing the path of monetary policy, Kashkari told Bloomberg… ‘I’m not quite there yet. I take a lot of comfort from the fact that the job market continues to be strong.’”

In three short weeks, Kashkari’s view evolved from “It’s too early” to begin cutting rates to advocating a dramatic 50 bps cut that in the past would have been in response to a market or economic shock. Yet nothing that extraordinary has occurred over recent weeks, outside of a major bond market rally that has the amount of global debt trading at negative yields jumping $2 TN to a record $13 TN (from Bloomberg). Unprecedented as well, talk is heating up for a 50 bps cut with the S&P500 at all-time highs (and corporate Credit spreads narrowing sharply and overall financial conditions loosening notably).

Markets, Rejoicing Central Banker Capitulation, have no intention of letting off the pressure.

There will be unrelenting pressure as well on Chairman Powell to fall in line - or face demotion. Crazy.

Question from Bloomberg’s Chris Condon at Chairman Powell’s Wednesday post-meeting press conference: “Mr. Chairman, if and when the committee decides to cut rates, I suspect there will be a debate over whether to move by 25 or 50 bps. Indeed, there is a pretty substantial body of academic literature arguing that a central bank close to the zero lower bound ought to act sooner and more aggressively than it otherwise would. I’m wondering what you think of that prescription, and if you could spend a couple of minutes discussing the pros and cons of a 50 bps cut and how you approach that question.”

Powell: “On the specific question of that - that’s just something we haven’t really engaged with yet. And it will depend very heavily on incoming data and the evolving risk picture as we move forward. So, nothing I can say about that is specific to the near-term question that we face. More generally, though, the research you refer to essentially notes that in a world where you are closer to the effective lower bound – it’s why research kind of shows this – it’s wise to react, for example, to prevent a weakening from turning into a prolonged weakening. In other words, sort of an ounce of prevention is worth a pound of cure. So, I think that is a valid way to think about policy in this era. I don’t know – and it’s always in the minds of policymakers during this era - because it’s well-understood to be correct. Again, I don’t know what that means in terms of the size of a particular rate cut going forward. That’s going to depend heavily upon the actual data and the evolving risk picture.”

There’s a theory that, with interest rates not much above zero (“effective lower bound”), central banks must be ready to cut aggressively – employing their limited firepower early and forcefully – to “prevent a weakening from turning into a prolonged weakening.” I say theory - as opposed to “research” - because the experimental nature of the current monetary policy framework ensures minimal empirical data to analyze and draw conclusions.

In my view, this “act sooner and more aggressively” is the latest iteration of policy activism that further distances the Fed from its primary mandate of safeguarding system stability. December’s rapid emergence of systemic fragility (i.e. faltering Bubbles) emboldened the view that central banks must provide assurances they are prepared to quickly adopt “whatever it takes” measures to bolster the markets. From the perspective of highly speculative markets, the January “U-turn” unleashed a speculative fire and this month’s rush to dovishness (Fed, Draghi, PBOC, BOE, BOJ, etc.) pours gas on a flame. Countering Powell’s “an ounce of prevention is worth a pound of cure,” I would warn of the enormous cost of stoking blow-off “Terminal Phase Excess.” An ounce of late-cycle stimulus creates a pound of destabilizing excess.

Two long-held CBB themes should especially resonate these days. First, the fundamental problem with discretionary central banking (versus rules-based) is the propensity for a policy mistake to lead to a series of ever bigger blunders. Second, aggressive expansion of central bank Credit/balance sheets (aka “QE”, “money printing”) is a slippery slope eventually leading to a multitude of unintended consequences (including speculative market Bubbles, maladjusted economic structure, and trapped central bankers). Who back in 2008 anticipated the prospect of ongoing central bank purchases would be deeply embedded into global bond and securities prices – and market expectations more generally – a full decade later?

The QE naysayers at that time focused on the risk of inflation – and even hyperinflation – in consumer prices. However, the paramount issue was instead market distortions and hyperinflation in securities (and asset) prices, where perpetual QE essentially removes any ceiling on sovereign debt prices (floor on yields). Why shouldn’t exuberant traders imagine Treasury yields at some point trading at the current Swiss bond yield of negative 52 bps?

Why not leverage 10-year Treasuries at 2.06% if the Fed will eventually become a price insensitive buyer of Trillions of these securities? Why not take levered positions in German bunds at negative 29 bps – better yet, Italian and Greek debt at 2.15% and 2.52% - appreciating it’s only a matter of (probably not much) time before the ECB fires back up the “electronic printing press.” Perhaps most consequential of all, why wouldn’t everyone speculating globally in the risk markets simultaneously leverage in sovereign debt, confident that aggressive global QE deployment devises the perfect market hedge? Why not hedge market risk with sovereign debt-related derivatives? In total, we have unearthed a recipe for history’s greatest episode of speculative leveraging (mortgage finance Bubble excess measly in comparison).

A crisis-period experiment in QE came with profound repercussions. The Fed’s 2011 “exit strategy” was supplanted the following year by Draghi’s “whatever it takes” – and there’s been no turning back. The prospect of Whatever and Whenever It Takes QE as essential to the global central banker toolkit has Changed Everything.

June 18 – Financial Times (Scott Mather): “Central banks around the world are pivoting toward easier monetary policy. In pursuit of a 2% target for inflation, major central banks seem willing to exhaust their monetary policy ammunition at a time when economic output is at — or above — potential. Unfortunately, there is little evidence to suggest that lower policy rates are successfully generating either better real growth outcomes or higher inflation. In some countries, this policy stance has the potential to reduce monetary policy effectiveness, create imbalances that may sow the seeds for the next crisis, and leave central banks powerless to respond to that crisis. It is time to ask whether the 2% inflation target has outlived its usefulness. Despite largely maintaining policy rates below their own estimated ‘neutral’ levels for more than a decade, the central banks of the US, euro zone and Australia, among others, have been guiding markets to expect lower rates for longer. This is happening even as employment rates are already above estimates of full capacity, and economic growth rates have been higher than what is deemed to be achievable in the ‘steady state’.”

There is indeed “little evidence to suggest that lower policy rates are successfully generating either better real growth outcomes or higher inflation.” Instead, there’s a strong case for the opposite: a decade of ultra-loose monetary policy has contributed to downward pressure on many consumer prices (along with deep economic maladjustment). China, India, greater Asia and the emerging economies in general have enjoyed an unprecedented period of protracted loose financial conditions, associated investment booms and resulting overcapacity across industries.

No sector has benefited from loose global finance as much as technology. How can the global proliferation of myriad high-tech products and services not enter into today’s inflation discussion? There is today essentially unlimited supply of technology devices and services capable of absorbing much of whatever purchasing power thrown into economic systems. How great is the global capacity to manufacture smart phones, computers and servers, telecommunications equipment, and the “Internet of things” - not to mention a veritable deluge of technology-related services and downloadable content? What is the capacity for global online media to absorb swelling corporate marketing budgets?

The nature of output and overall economic structure has changed profoundly over the past 25 years. Historians and analysts will look back at this period and struggle to comprehend the blind focus on an arbitrary target for aggregate consumer price inflation, when securities markets and asset prices were going completely haywire.

“Globalization” remains complex subject matter. To simplify, highly integrated global finance has fundamentally loosened financial conditions for much (if not all) of the world. China, in particular, has “enjoyed” unlimited capacity to expand cheap Credit on a protracted basis to an extent never before possible. If not for global post-crisis zero rates and QE, China’s international reserve holdings would never have inflated from about $1.5 TN (end of ’07) to a 2014 high of $4.0 TN ($3.1 TN today). And without this massive reserve horde, renminbi stability would not have survived history’s greatest Credit inflation (i.e. total bank assets $7.2 TN to $41 TN since the end of ’07).

Globalization is tightly intertwined with experimental monetary policy. The world followed the U.S.’s lead in “activist” policy intervention, along with a related move to securitizations and market-based finance. Resulting market booms fundamentally loosened finance, stimulated investment and propelled economic growth. It also worked to exacerbate wealth disparities, within and between nations. Booms and Bubbles also ensured U.S.-style policy activism enveloped the world, with each new round of instability and attendant monetary stimulus further undermining the stability of markets, finance, economies, societies and geopolitics.

Today’s prescription for unstable markets and finance: more monetary stimulus. For unstable economies: more monetary stimulus. For inequality, trade wars and geopolitical uncertainties: much more monetary stimulus.

Couple momentous advancement in various technologies with globalized finance and policy activism and one has a remarkable backdrop with momentous ramifications for global price dynamics. I would argue strongly against conventional wisdom that holds the so-called “technology revolution” (with associated productivity gains and disinflationary pressures) granted central bankers greater latitude to boost growth with accommodative monetary policies. The primary focus, instead, should have been the powerful inflationary dynamics fueling asset prices and dangerous Bubbles. If there was an overarching lesson to be learned from the 2008 fiasco, it was that distorted financial markets and resulting Bubbles pose systemic risks that completely overshadow those that might emanate from rising consumer prices.

I am not against market-based finance per-se, although market-based Credit is notable for being inherently self-reinforcing on both the upside and downside. The problem arises when “activist” policymaking incentivizes the upside – fostering Bubbles. On the downside, faltering policy-induced Bubbles then ensure even more destabilizing policy activism. And in this Age of Market-Based Finance, the longer the recurring cycle of activism incentivizing excess and greater Bubbles the greater the risk of a crisis of confidence in policymaking and financial assets more generally. This miraculous game of massive issuance of new financial claims at increasing prices is unsustainable.

We’ve reached the point in this most extraordinary cycle where it’s become pretty clear that loose monetary policies have minimal impact on aggregate consumer prices and maximum influence on highly speculative securities and derivatives markets. The Fed is poised to cut rates – perhaps even 50 bps – essentially to sustain market Bubbles. With 10-year Treasury yields nearing 2% - and in excess of $13 TN of bonds trading globally with negative yields – sovereign bond markets have become completely divorced from traditional fundamentals. This equates to governments from Rome to Washington essentially being handed blank checkbooks. And with the (“risk free” sovereign debt) foundation of global finance in market dislocation, how sound are markets for equities and corporate Credit?

Capitalism is in clear and present danger. This sounds extreme – unless you’ve followed the trajectory of developments over the years. How are capitalistic systems to operate with central banks abrogating adjustments and corrections both for market and economic systems? It takes a tremendous amount of wishful thinking to believe that today’s markets will effectively allocate real and financial resources. Sound analysis also points to only more precarious imbalances and maladjustment on a global basis. And with global fragilities increasingly conspicuous, it’s reached the perilous point where markets believe central banks will preemptively flood the global system with liquidity to forestall “risk off” in the markets and recession globally.

June 20 – Financial Times (Don Weinland): “Banks in China are facing a pinch on liquidity following the government takeover of a commercial bank that is resetting the rules for trading in the country’s interbank market. Many of China’s more than 4,000 banks face difficulty raising deposits in smaller cities and rural areas, making them more reliant on wholesale borrowing from the interbank market, where banks lend to one another. But the government takeover of Baoshang Bank in May has disrupted the willingness of larger banks to lend to smaller ones, leaving some strained for liquidity… For interbank lenders, including some of China’s largest financial institutions, the treatment of Baoshang represents a sharp shift in the rules of the market. ‘It’s not just concern on credit risk, it’s also about the resolution mechanism [for defaults on interbank borrowings],’ said Katherine Lei, co-head of Asia ex-Japan banks research at JPMorgan. ‘What is the mechanism and how long does it take?’”

June 17 – Wall Street Journal (Stella Yifan Xie and Zhou Wei): “Chinese regulators made fresh attempts to calm frayed nerves in the country’s financial sector, as bank liquidity remained tight by some measures three weeks after authorities took over a struggling city lender. On Sunday, securities regulators summoned a group of large Chinese brokerages and asset-management firms to a closed-door meeting in Beijing and asked them not to cut off trading and other dealings with smaller banks and financial institutions, according to a meeting summary… The memo said there had been some defaults in the repo—or repurchase agreement—market, where banks, brokers and other financial firms borrow cash for short periods by pledging securities against short-term loans. It said some institutions in the debt markets had placed certain trading counterparties on a ‘blacklist’ and demanded they post higher-quality collateral against their borrowings. In other instances, some firms were cut off from trading because of worries that they would not repay their obligations, it said. ‘If such mistrust is allowed to continue to spread, it will eventually become systemic financial risk,’ the memo said, adding that mutual funds and brokers need to provide liquidity support to each other.”

June 18 – Wall Street Journal (Nathaniel Taplin): “While the world has been focused on the U.S.-China trade conflict, another threat—potentially just as large—has been brewing beneath the surface of China’s financial system. On Sunday, the country’s securities regulator convened a meeting asking big brokerages and funds to support their smaller peers… The briefing cited rising risk aversion in money markets after defaults in the bond repurchase market. Some interbank lending rates have moved sharply higher in recent weeks… Nonbank borrowing through bond repos and interbank loans has skyrocketed since China’s central bank began easing monetary policy in early 2018. It hit a net 74 trillion yuan ($10.7 trillion) in the first quarter of 2019, according to Enodo Economics, up nearly 50% from a year earlier… Worryingly, problems appear to be migrating from the relatively small market for negotiable certificates of deposit (NCDs)—used primarily by small banks—into the much larger bond repo market.”

With a flock of dovish central banks, collapsing yields and record stock prices, it’s easy to disregard China. Haven’t they, after all, repeatedly overcome bouts of heightened systemic stress. Beijing always gets things under control. The PBOC can effortlessly print “money” and bail out its troubled banking system. Not so fast… “Bond repos and interbank loans” up nearly 50% over the past year to $10.7 TN. Those are two data points that should alarm the world – and surely help explain panic buying of Trillions of negative-yielding global bonds.

President Trump has officially commenced his reelection campaign. He has ample incentive to avert a trade war showdown with China. Chinese finance is nearing the precipice. President Xi has ample incentive to avert a showdown. Yet if these two historic strongmen leaders have irreconcilable differences they have irreconcilable differences. Neither can tolerate any display of weakness or lack of resolve.

If Trump and Xi don’t get negotiations back on track at next week’s G20, there’s a scenario where things could turn sour rather quickly. An unfolding crisis of confidence in China’s money market portends serious trouble ahead for China’s financial and economic Bubbles. The PBOC has been injecting enormous quantities of liquidity into China’s financial system. Much, much more will be required. If there is as much leverage in that system as I suspect, Beijing will be on the hook for Trillions of liquidity injections, bank bailouts/recapitalizations and debt monetization.

It all implies currency vulnerability. The good news for China is that currency values are relative – and the renminbi competes against a throng of structurally weak currencies. Little wonder gold has caught such a nice bid. Quite an equities run into “quadruple witch” option expiration. A decent short squeeze in EM securities markets and currencies. And wild volatility in crude and energy prices. Central Bank Capitulation seems to have unleased wild price instability throughout global markets. Things do get crazy during the late phase of Bubbles.

We’re witnessing Bubbles and Craziness in historic proportions.

Central banks must shun fruitless political games

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

The editorial board

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

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

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

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

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

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

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

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

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

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

Blackstone leads global surge in property investment

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

Chris Flood

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Value of negative yielding debt hits record $12.5tn

Central bank dovishness has sent a jolt through fixed income markets

Robin Wigglesworth in New York

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

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

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

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

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

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

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

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

Behavioural biometrics

Online identification is getting more and more intrusive

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

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

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

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

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

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

The lidless eye

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

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

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

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

US-China Confrontation Will Define Global Order

Victor Davis Hanson
Hoover Institution, Stanford University

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Any other thoughts?

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

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

Has Austerity Been Vindicated?

A correlation between fiscal retrenchment and economic growth tells us nothing about the underlying relationship between the two. This should be borne in mind in light of new research suggesting that austerity may well be the right policy in a recession.

Robert Skidelsky


LONDON – Harvard University Professor Alberto Alesina has returned to the debate on budget deficits, austerity, and growth. Back in 2010, Alesina told European finance ministers that “many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run” (my italics). Now, with fellow economists Carlo Favero and Francesco Giavazzi, Alesina has written a new book entitled Austerity: When It Works and When It Doesn’t, which recently received a favorable review from his Harvard colleague Kenneth Rogoff.

New book, old tune. The authors’ conclusion, in a nutshell, is that “in certain cases the direct output cost of spending cuts is more than compensated for by increases in other components of aggregate demand.” The implication is that austerity – cutting the budget deficit, not expanding it – may well be the right policy in a recession.

Alesina’s previous work in this area with Silvia Ardagna was criticized by the International Monetary Fund and other economists for its faulty econometrics and exaggerated conclusions. And this new book, which analyzes 200 multi-year austerity plans carried out in 16 OECD countries between 1976 and 2014, will also no doubt keep the number crunchers busy.

But that is not the main point. Correlation is not causation. The association of fiscal retrenchment and economic growth tells us nothing about the underlying relationship between the two. Does shrinking the deficit cause economic growth, or does growth cause the deficit to shrink? All the econometrics in the world cannot prove that one caused the other, or that both may not be the result of something else. There are simply too many omitted variables – that is, other possible causes of either or both outcomes. So-called statistical proofs always start with a theory of causation, to which the data are “fitted” to get the result the theorist wants.

Alesina’s theory rests on two conceptual pillars. The main one is that if deficits persist, businesses and consumers will expect higher taxes and will therefore invest and consume less. Spending cuts, on the other hand, signal lower taxes in the future, and thus stimulate investment and consumption.

The second, supplementary pillar is the assumption that rising public debt leads investors to expect a default. This expectation forces up interest rates on government bonds, leading to higher overall borrowing costs. Austerity, by stopping the growth of debt, can bring about a “sizeable reduction” in interest rates, and thus enable increased investment.

This supplementary case cannot be regarded as a general rule. If a country has its own central bank and issues its own currency, the government can cause interest rates to be whatever it wants them to be by ordering the central bank to print money. In this case, low interest rates will be the result not of austerity, but rather of monetary expansion. And this, of course, is what has happened with quantitative easing in the United States, the United Kingdom, and the eurozone. Interest rates have stayed at rock bottom for years as central banks have pumped hundreds of billions of dollars, pounds, and euros into their economies.

So we are left with Alesina’s main pillar: a credible commitment to public spending cuts today will boost output by removing the expectation of higher taxes tomorrow. The same argument explains why, on Alesina’s view, it is better to reduce the deficit by cutting spending than by raising taxes. Spending cuts address the “problem” of “the automatic growth of [welfare] entitlements and other spending programs,” whereas tax increases do not.

Alesina writes: “Modern macroeconomics emphasizes that people’s decisions about what to do today are influenced by their expectations of what will happen in the future.” John Maynard Keynes, too, understood the crucial importance of expectations: he is credited by John Hicks with introducing the “method of expectations” into economics. However, Keynes’s expectational map was very different from Alesina’s. His investors do not form their expectations by looking at the government’s deficit and calculating what effect it will have on their future tax bills. In fact, they scarcely notice the deficit at all.

What they do notice is the size of their markets. For Keynes, entrepreneurs’ decisions to create jobs depend on their expected income from increasing employment. An economic downturn reduces their expected sales proceeds, causing them to lay off workers. A cut in government spending implies that they can expect still fewer sales, causing them to lay off even more workers, thus deepening the recession. Conversely, a rise in government spending, or tax cuts, increases expectations of sales and so reverses the downturn.

For example, if the demand for automobiles falls, fewer will be sold, and fewer workers will be employed in making them. If the government increases its spending on public works, this will not only employ more workers directly, but also increase the demand for automobiles, so the output of the economy grows by more than the government’s extra spending, thus reducing the deficit.

In very simple terms, therefore, we have two opposite theories of the appropriate fiscal policy in a slump. Keynes says an announced reduction in public spending signals to businesspeople that their incomes will be reduced because fewer people will be buying the goods and services they produce. But Alesina says that an announced reduction in public spending signals to businesspeople that they can expect lower taxes tomorrow, and therefore will spend more today.

Readers must decide which theory they find more plausible. Personally, I much prefer the characterization contained in the recent book Austerity: 12 Myths Exposed: “Austerity is a tool of…financial interests – not a solution to the problems caused by them.”

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

World Looms Large in Fed Rate Plans

Fed is world’s de facto central bank and world seems to be in trouble

By Greg Ip

Federal Reserve Chairman Jerome Powell said Wednesday the central bank decided to leave interest rates unchanged. Photo: kevin lamarque/Reuters

Like it or not, the Federal Reserve is the world’s central bank. Thus, the Fed is now signaling it will likely cut rates in coming months, not because the U.S. is headed into recession, but because shadows are growing over the rest of the world.

On Wednesday, the Fed held interest rates steady while indicating a rate cut could come soon, a notable shift from just seven weeks ago when it saw no case for any rate adjustment. In explaining what changed, Fed Chairman Jerome Powell cited two developments in particular: a downturn in indicators of global growth and a worsening of trade tensions, which are damping confidence throughout the world, not just the U.S.

The Fed’s duty is to the U.S., not to the world. But it still has to incorporate global developments into its monetary-policy decisions. Weakening growth abroad eventually spills into the U.S. through trade links or financial contagion. In 2015, a collapse in oil prices initiated by Saudi Arabia and a bungled devaluation by China ricocheted around the world and badly hammered U.S. oil producers and manufacturers. Global sentiment was further dented by Britons’ vote in mid-2016 to leave the European Union. Those developments led then Fed-Chairwoman Janet Yellen to take a yearlong break from raising rates.

Something similar may be under way now. Manufacturing activity has fallen sharply in Europe and China, in some cases into contractionary territory. American factory activity is now slowing in lockstep. Some of this is probably due to the U.S. tariffs on Chinese imports and the threat of more tariffs, not only on goods from China but also from other trading partners, including Mexico, Japan and the EU. Identifying the contribution of trade anxiety to the slowdown is tricky, but it is clearly a factor. American companies that are more exposed to China have seen their share prices fall relative to their peers, according to Goldman Sachs. Mexico may now be in recession, which is likely hampering demand for U.S. exports.

The global picture also influences Fed policies because the dollar’s central role in global finance means changes to U.S. interest rates ripple out to every country. The Fed raised its short-term interest rate target from a range of 0.25% to 0.5% in late 2016 to 2.25% to 2.5% last December as U.S. economic growth strengthened, inflation firmed and unemployment fell to levels that have usually fueled inflation in the past. But that tightening forced emerging markets that rely on dollar borrowing to also raise rates, slowing their growth. Many have since stumbled, which may explain why commodity prices, which are sensitive to global growth, began falling last year.

The Fed’s current policy rate of 2.25% to 2.5% is now the highest among major advanced economies. Australia cut rates to 1.25% from 1.5% earlier this month. Canada’s key rate stands at 1.75%, Britain’s at 0.75% and Japan’s at negative 0.1%. The European Central Bank’s target rate is negative 0.4%, and on Tuesday its president, Mario Draghi, signaled it may go more deeply negative.

This prompted a broadside from President Trump who claimed the ECB’s possible rate cut would drive down the euro. Yet while few economists share Mr. Trump’s obsession with the trade deficit, which tends to rise when the dollar strengthens, there is a kernel of validity to his complaints. The growing differential between U.S. and foreign rates has supported the dollar, restraining U.S. growth and inflation, which is already below the Fed’s 2% target.

More generally, the dovish direction of its foreign peers should prompt the Fed to reconsider whether 2.25% to 2.5% is appropriate. Though stimulative by historical standards, it may be restrictive in a low-inflation, slow-growing world.

For the past year, the U.S. defied global trends as a tax cut and a federal-spending boost lifted growth well above the level of other advanced economies. As that stimulus fades, the U.S. may be returning to growth more in line with its foreign peers. And if U.S. economic performance begins to resemble the rest of the world’s, so, arguably, should its monetary policy.

Mr. Trump has long demanded U.S. policies should prioritize U.S. over global interests. Ironically, the Fed, because of its attention to global developments, may end up delivering the interest rate cuts Mr. Trump also wants.