Masters of the universe
The rise of the financial machines
Forget Gordon Gekko. Computers increasingly call the shots in financial markets
THE JOB of capital markets is to process information so that savings flow to the best projects and firms. That makes high finance sound simple; in reality it is dynamic and intoxicating. It reflects a changing world. Today’s markets, for instance, are grappling with a trade war and low interest rates.
But it also reflects changes within finance, which constantly reinvents itself in a perpetual struggle to gain a competitive edge. As our Briefing reports, the latest revolution is in full swing. Machines are taking control of investing—not just the humdrum buying and selling of securities, but also the commanding heights of monitoring the economy and allocating capital.
Funds run by computers that follow rules set by humans account for 35% of America’s stockmarket, 60% of institutional equity assets and 60% of trading activity. New artificial-intelligence programs are also writing their own investing rules, in ways their human masters only partly understand. Industries from pizza-delivery to Hollywood are being changed by technology, but finance is unique because it can exert voting power over firms, redistribute wealth and cause mayhem in the economy.
Because it deals in huge sums, finance has always had the cash to adopt breakthroughs early.
The first transatlantic cable, completed in 1866, carried cotton prices between Liverpool and New York. Wall Street analysts were early devotees of spreadsheet software, such as Excel, in the 1980s. Since then, computers have conquered swathes of the financial industry.
First to go was the chore of “executing” buy and sell orders. Visit a trading floor today and you will hear the hum of servers, not the roar of traders. High-frequency trading exploits tiny differences in the prices of similar securities, using a barrage of transactions.
In the past decade computers have graduated to running portfolios. Exchange-traded funds (ETFs) and mutual funds automatically track indices of shares and bonds. Last month these vehicles had $4.3trn invested in American equities, exceeding the sums actively run by humans for the first time. A strategy known as smart-beta isolates a statistical characteristic—volatility, say—and loads up on securities that exhibit it. An elite of quantitative hedge funds, most of them on America’s east coast, uses complex black-box mathematics to invest some $1trn. As machines prove themselves in equities and derivatives, they are growing in debt markets, too.
All the while, computers are gaining autonomy. Software programs using AI devise their own strategies without needing human guidance. Some hedgefunders are sceptical about AI but, as processing power grows, so do its abilities. And consider the flow of information, the lifeblood of markets.
Human fund managers read reports and meet firms under strict insider-trading and disclosure laws. These are designed to control what is in the public domain and ensure everyone has equal access to it. Now an almost infinite supply of new data and processing power is creating novel ways to assess investments.
For example, some funds try to use satellites to track retailers’ car parks, and scrape inflation data from e-commerce sites. Eventually they could have fresher information about firms than even their boards do.
Until now the rise of computers has democratised finance by cutting costs. A typical ETF charges 0.1% a year, compared with perhaps 1% for an active fund. You can buy ETFs on your phone. An ongoing price war means the cost of trading has collapsed, and markets are usually more liquid than ever before.
Especially when the returns on most investments are as low as today’s, it all adds up. Yet the emerging era of machine-dominated finance raises worries, any of which could imperil these benefits.
One is financial stability. Seasoned investors complain that computers can distort asset prices, as lots of algorithms chase securities with a given characteristic and then suddenly ditch them. Regulators worry that liquidity evaporates as markets fall. These claims can be overdone—humans are perfectly capable of causing carnage on their own, and computers can help manage risk.
Nonetheless, a series of “flash-crashes” and spooky incidents have occurred, including a disruption in ETF prices in 2010, a crash in sterling in October 2016 and a slump in debt prices in December last year. These dislocations might become more severe and frequent as computers become more powerful.
Another worry is how computerised finance could concentrate wealth. Because performance rests more on processing power and data, those with clout could make a disproportionate amount of money. Quant investors argue that any edge they have is soon competed away.
However, some funds are paying to secure exclusive rights to data. Imagine, for example, if Amazon (whose boss, Jeff Bezos, used to work for a quant fund) started trading using its proprietary information on e-commerce, or JPMorgan Chase used its internal data on credit-card flows to trade the Treasury bond market. These kinds of hypothetical conflicts could soon become real.
A final concern is corporate governance. For decades company boards have been voted in and out of office by fund managers on behalf of their clients. What if those shares are run by computers that are agnostic, or worse, have been programmed to pursue a narrow objective such as getting firms to pay a dividend at all costs?
Of course humans could override this. For example, BlackRock, the biggest ETF firm, gives firms guidance on strategy and environmental policy. But that raises its own problem: if assets flow to a few big fund managers with economies of scale, they will have disproportionate voting power over the economy.
Hey Siri, can you invest my life savings?
The greatest innovations in finance are unstoppable, but often lead to crises as they find their feet. In the 18th century the joint-stock company created bubbles, before going on to make large-scale business possible in the 19th century.
Securitisation caused the subprime debacle, but is today an important tool for laying off risk.
The broad principles of market regulation are eternal: equal treatment of all customers, equal access to information and the promotion of competition.
However, the computing revolution looks as if it will make today’s rules look horribly out of date.
Human investors are about to discover that they are no longer the smartest guys in the room.
MASTERS OF THE UNIVERSE: THE RISE OF THE FINANCIAL MACHINES / THE ECONOMIST
GERMAN SCEPTICISM OF THE ECB REVEALS A EUROZONE PARADOX / THE FINANCIAL TIMES OP EDITORIAL
German scepticism of the ECB reveals a eurozone paradox
Berlin remains wary of being the paymaster for a ‘transfer union’
Tony Barber
Sabine Lautenschläger, Germany’s representative on the ECB’s executive board, has resigned two years before her eight-year term is up © AFP
At the heart of Europe’s 20-year-old currency union lies a disturbing paradox. The beating heart of the eurozone economy is Germany. Yet, from the highest levels of policymaking to the lowest levels of the mass media, Germans are the most outspoken critics of the unconventional measures taken over the past decade to ensure the eurozone’s survival.
The paradox captured attention this week when Sabine Lautenschläger, Germany’s representative on the European Central Bank’s executive board, said she would resign more than two years before her eight-year term is up. This makes her the third German to resign from the ECB’s 25-member governing council, either wholly or partly because of disagreements with its policies, since 2011.
No representatives of the eurozone’s other 18 countries have ever resigned from the ECB council because of policy disputes. Germany’s dissent feeds concerns that Europe’s monetary union, rocked to its foundations in the sovereign debt and banking sector crises of 2010-12, is still not solid enough. György Matolcsy, central bank governor of Hungary, a non-eurozone country, even says: “The EU should admit the strategic error of the euro.”
In Germany, unhappiness with the ECB extends way beyond the rarefied realm of central banking. After Mario Draghi, the ECB president, announced the bank’s latest monetary stimulus measures on September 12, Helmut Schleweis, the head of the German Savings Banks Association, denounced the steps as “disastrous”. Bild Zeitung, Germany’s bestselling tabloid, likened Mr Draghi to a vampire sucking the blood of ordinary German savers.
Across the political spectrum, and across society, mistrust of the ECB’s actions is widespread. Chancellor Angela Merkel has lent quiet support to Mr Draghi and taken care not to make public criticisms of his initiatives. However, many politicians, economists, business leaders and media pundits display less restraint. The flood of attacks on Mr Draghi is submerging the once sacrosanct German principle that a central bank must be independent from political pressure.
Germany’s outlook reflects a certain reading of 20th-century history as well as the nation’s present-day circumstances. The hyperinflation of 1923 is a trauma never to be repeated. Fewer lessons are drawn from the disinflation and economic depression that propelled the Nazis to power in the early 1930s. German anxieties about inflation appear exaggerated, given that the eurozone’s average annual inflation rate since 2011 has been 1.1 per cent.
The ECB’s negative interest rates arouse indignation in Germany, where, it is argued, an ageing population needs decent returns on savings. However, the ECB’s measures benefit wealthy Germans by increasing the value of property, shares and other assets. Furthermore, the ECB’s unorthodox interest rate policies have handed a windfall to the German government by pushing sovereign bond yields to record lows.
With borrowing costs so cheap and the economy on the edge of recession, a chorus of voices is calling for Germany to loosen its fiscal strings and launch an infrastructure investment plan. Dieter Kempf, head of the BDI, Germany’s most influential business lobby, says it is time for the government to relax its insistence on balanced budgets. Bruno Le Maire, France’s finance minister, says: “Germany must invest and invest now. ”
The Christian Democrat-Social Democrat “grand coalition” that holds power in Berlin may one day take this advice. Its reluctance to do so reflects the view that Germany must set an example of budgetary prudence to other countries, mainly in southern Europe. Germany’s caution also illustrates a lack of firm direction at the heart of government. Ms Merkel is near the end of her long reign. Each ruling party senses that the CDU-SPD partnership — the third “grand coalition” out of four governments since 2005 — has outlived its usefulness.
Despite party squabbles, a consensus exists that Germany should not be lured into grand schemes of European integration that cast Berlin in the role of paymaster of a “transfer union”. Germany offered a lukewarm response to the proposals for deeper integration by President Emmanuel Macron of France.
At the ECB, the problem for Christine Lagarde, the IMF chief who will replace Mr Draghi on November 1, is that Germans are not the only critics. Nine ECB council members expressed opposition or reservations about the new measures at the September 12 meeting. They included the national central bank heads of Austria, France and the Netherlands, as well as Germany.
Independent experts have doubts, too. Ashoka Mody, a Princeton University economist, warns that the ECB’s measures could not only damage eurozone banks but have dangerous consequences if financial markets fear that heavily indebted governments will have to bail out the banks.
In principle, Europe’s central bankers and politicians can strike a bargain that balances tighter monetary policy and fiscal expansion. Without such a deal, the risk is that markets will focus on the eurozone’s faultlines and the ECB’s internal disputes.
As long as Germany is the odd man out, doubts about the eurozone’s stability will persist.
THE MOST CROWDED TRADE / SEEKING ALPHA
The Most Crowded Trade
- We may be reaching a tipping point for the dollar, where a multi-year bullish trend reaches its apex and sets up for a reversal.
- Look for a weaker dollar in 2020. Nothing is for certain, but that's how the math seems to converge.







How to Rethink Capitalism
The 2008 financial crisis, together with failed efforts to combat climate change and sharply rising inequality, has frayed the neoliberal consensus that has prevailed in the United States and much of the West for more than two generations. Three issues must be considered in weighing what comes next.
Simon Johnson
WASHINGTON, DC – The United States Business Roundtable, an organization of CEOs of large US companies, recently issued a statement that caused quite a stir in some circles. Rather than focusing primarily or exclusively on maximizing shareholder value, America’s corporate titans argued, companies should attach more weight to the wellbeing of their broader stakeholder community, including workers, customers, neighbors, and others.
As CEOs of large companies are hired and fired mostly on the basis of their contributions to profits, such statements merit a certain amount of cynicism. Unless and until incentives created by financial markets change, we should expect the short-term profit motive to prevail.
The Business Roundtable’s views are part of broader attempts to reimagine capitalism – the topic now of high-profile courses at Harvard Business School, Brown University, and elsewhere. In his recent book The Economists’ Hour, Binyamin Appelbaum, an influential New York Times journalist, argues that economists are to blame for tilting too much of the world excessively toward profits. And Democratic presidential candidates are putting forward ideas that range from modest reform to a more substantial overhaul of how markets work.
There are three main issues to consider when thinking about how to adjust the role of markets in the modern American economy in a sensible way.
The first issue is that market incentives are actually positive in some contexts. If you are an entrepreneur and want to raise capital, appealing to a broader social good will get you very little. To transform an industry – and challenge the incumbents represented on the Business Roundtable – you need a business model that promises future profits. For example, private venture capital financed the process of converting research on the human genome into life-saving drugs over the past two decades.
Second, a balance obviously needs to be struck between public and private (profit-seeking) efforts. Appelbaum’s strongest argument is that leading economists denigrated public action and, at least since the 1960s, viewed private business through rose-tinted glasses.
As James Kwak (my co-author on other matters) correctly points out, powerful interests lay behind the development and dissemination of these ideas (although his own book, Economism, also highlights how policymakers distort sensible economic analysis to bolster the naive view that business is infallible).
Third, the private sector typically does not consider positive and negative externalities – actions that affect other people but not the actor. For example, in Jump-Starting America, Jonathan Gruber and I argue that the public sector has a robust role to play in investing in basic science, because the general knowledge that results affects many people, in ways that are hard to predict.
This was exactly the rationale behind the very successful government backing provided to the human genome project; it also motivates the broader funding provided to the National Institutes of Health. Almost all modern drugs emerge from a process supported, at its early stages, by the NIH.
The private sector is also not generally good at regulating itself, again mainly because of externalities. For example, financial sector firms lobby hard to relax regulation – allowing them to make higher profits but also to take greater risks. No individual firm cares enough about risks to the entire system. Similarly, energy companies want to extract more natural resources. Their CEOs are not paid to worry about climate change.
The long-prevailing model for the US economy was to allow the market to organize most economic activity and then regulate or redistribute relative to the outcomes. But the 2008 financial crisis, together with failed efforts to combat climate change and disappointing longer-term economic outcomes for most Americans (while some rich people have become much richer), has frayed the consensus underlying this model.
Can we have a more inclusive form of capitalism that yields better outcomes? Yes, according to Senator Elizabeth Warren, who is running for the Democratic presidential nomination on a pro-reform platform. Warren, who made a political name for herself by advocating for stronger consumer protection for financial products, is not at all anti-market.
Rather, she argues that designing market structures differently will lead to different (and better) outcomes. Many of her various proposals amount to rethinking what is allowed in terms of market structures and firm behavior, as well as how to limit the influence of money in politics.
The market is not necessarily good or bad. What you get out of capitalism depends on how you shape it. If you rely on wealthy people and already powerful businesses to make the key decisions, you will mostly get what you already have – a highly unequal economy, prone to crises, rushing headlong toward a climate catastrophe.
Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with Jonathan Gruber, of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.
FAMILY FEUD AT LA REPUBBLICA OWNER BURSTS INTO THE OPEN / THE FINANCIAL TIMES
Family feud at La Repubblica owner bursts into the open
Carlo De Benedetti seeks to buy a stake in the newspaper publisher he founded
Rachel Sanderson in Milan
Carlo De Benedetti gave up day-to-day management of GEDI media group in 2009 © Bloomberg
A feud at one of Italy’s most powerful dynasties has burst into the open after tycoon Carlo De Benedetti sought to regain a stake in the newspaper business he founded and has accused his sons of mismanaging.
Shares in GEDI media group, which is home to titles including La Repubblica and La Stampa, surged more than 15 per cent on Monday after the octogenarian made a €38m offer over the weekend to buy a 30 per cent stake in the group.
The 84-year-old, who has been a towering figure in Italian media for almost half a century, also launched a withering attack on his sons Rodolfo De Benedetti, 58, and Marco De Benedetti, 57, to whom he handed control of GEDI in 2012.
He accused them of having “neither the competence nor passion” to manage the media group, according to a letter quoted by Italian news agency Ansa. He added that he wanted to relaunch “the group with which I have been associated for most of my life”.
His sons shot back, with Rodolfo De Benedetti declaring he was “shocked” by his father’s behaviour, the news agency reported. A statement from CIR, the family holding company that owns about 44 per cent of GEDI, on Sunday described the offer as “inadmissible”.
Carlo De Benedetti, who founded the left-leaning La Repubblica and gave up day-to-day management of GEDI in 2009, offered 25 euro cents a share for the 30 per cent stake, Ansa reported. Despite surging on Monday, shares in GEDI have plunged 85 per cent from a recent high in 2014, leaving the group with a market capitalisation of under €150m.
In an effort to combat the broader downturn in the Italian media market, three years ago La Repubblica, its sister titles and Genoan local paper Il Secolo XIX were merged with the Agnelli family’s La Stampa. Agnelli scion John Elkann, who is also chairman of Fiat Chrysler, kept a 5 per cent stake in the merged group.
CIR turned down a takeover offer for GEDI from former media and telecoms executive Flavio Cattaneo last year, according to Italian media.
The attempt to return to the fray by the senior Mr De Benedetti is the latest in a flurry of activity by high-profile Italian octogenarian tycoons who made their fortunes during Italy’s economic boom of the 1980s.
Leonardo Del Vecchio, 84, the eyewear tycoon who built Ray-Ban maker EssilorLuxottica, and Luciano Benetton, 84, the retail magnate behind the Benetton jumpers to toll roads dynasty, have both returned to the frontline in a bid to revive businesses facing the challenges of globalisation and technological disruption.
Even Silvio Berlusconi, 83, the former Italian prime minister and longstanding media foe of Mr De Benedetti, has backed changes at Mediaset, the broadcaster he founded, as his daughter Marina and son Pier Silvio seek to expand it into a pan-European media group.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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