The summer of inflation: will central banks and investors hold their nerve?

Rising prices this week have given markets a foretaste of the risks that could lie ahead

Colby Smith in New York and Tommy Stubbington in London 

    © FT montage; Bloomberg; Getty Images

After three decades as a bond investor, Jim Leaviss has witnessed plenty of false alarms over the return of one of the biggest debt market nemeses: inflation. 

But as his screen flashed with Wednesday’s US consumer price index figures — showing a 4.2 per cent annual rise — he felt the stirrings of a new era in financial markets.

“It’s always been right to be sceptical when someone says ‘this is the year that inflation comes back’. 

But for the first time you can say this time is different,” says Leaviss. 

“The pandemic might be the systemic earthquake that changes the inflation outlook we have been used to for the past 30 years.”

A summer burst of inflation was always inevitable once lockdown measures began to ease: a year ago the spread of Covid-19 had crushed economies around the world, sending commodity prices plummeting and even pushing the cost of a barrel of oil in the US below zero. 

Central bankers — particularly at the US Federal Reserve — have been at pains to insist the current bout of price rises is temporary, and will not push them to an early unwind of the massive monetary stimulus actions they launched last year to combat the fallout from the pandemic. 

Those assurances, however, have not deterred a growing number of investors from becoming unnerved that a groundswell of deeper inflationary forces may soon test these policymakers.

A prolonged bout of inflation could hamper the post-pandemic recovery, potentially forcing the Fed and other central banks to quickly tighten its monetary screws. 

Also at stake is one of the most remarkable rebounds in financial history, which has seen equities and other risk assets leap from one all-time high to the next thanks to historically low borrowing costs.

Investors this week got an inkling of the potential pain to come, with the technology-heavy Nasdaq Composite among the indices falling in response to this week’s inflation data, before recouping some of those losses.

“It’s just one data point, but it’s the first blowout that shows inflation is really hitting consumers,” says Leaviss, who is head of public fixed income at M&G Investments. 

“Yes, it’s a reflection of where we were a year ago, and we know there are supply disruptions. 

But there comes a time when you can’t explain all of this away as one-offs.”

Before Wednesday’s CPI report — which Rick Rieder, BlackRock’s chief investment officer of global fixed income, called “jaw-dropping” — inflationary signals were already beginning to flash.

Sonal Desai of Franklin Templeton says that now, ‘inflation may have more legs’, while BlackRock’s Rick Rieder called Wednesday’s CPI report ‘jaw-dropping’

The cost of commodities critical to the global economy, including copper and iron ore, has soared. 

A semiconductor chip shortage has hampered new automobile production worldwide, driving buyers to seek out alternatives in the pre-owned market. 

Prices for used vehicles rose 10 per cent on a month-by-month basis in April, according to the US Bureau of Labor Statistics. 

Home prices have rocketed higher as well, alongside swelling lumber prices. 

A startling shortage of workers has emerged in several countries, too. 

“It is not just oil. It is not just copper. 

It is lumber. It is the fact that people cannot find workers. 

All of this together makes me think that inflation may have more legs,” says Sonal Desai, chief investment officer at Franklin Templeton’s fixed income group. 

“There is an entire generation of traders who have grown up investing in the post-global financial crisis world of no inflation,” she adds. 

“People shouldn’t underestimate how uncertain things will look if we are entering a new paradigm.”

Dropping the pre-emptive approach

Since Paul Volcker raised US interest rates to a record 20 per cent in the early 1980s, controlling inflation has been woven deep into the DNA of the world’s central bankers. 

With their inflation-targeting frameworks, these policymakers tended to act swiftly by raising interest rates at the merest whiff of a return to the inflationary 1970s. 

That held true in the years following the global financial crisis of 2008-09: Jean-Claude Trichet at the European Central Bank in 2011 and the Fed’s Janet Yellen in 2015 both started raising rates to stave off ascendant consumer prices.

Jay Powell, the current Fed chair, has taken the Fed in a different direction — culminating in August’s shift in the policy framework to explicitly tolerate periods of higher inflation in recognition that premature tightening by the central bank in the past along with fiscal austerity had prolonged the previous recovery.

Most other central banks have yet to mimic this so-called “average inflation targeting” but have nevertheless broken new ground with their pandemic responses. 

The current bond-buying programmes of the ECB and the Bank of England dwarf earlier ones in their scale.

“Central banks seem to have dropped their pre-emptive approach for dealing with inflation,” says Mark Dowding, chief investment officer at BlueBay Asset Management. 

“Instead, policymakers seem to be cheering it on from the sidelines.”

Fed governor Lael Brainard has urged patience in the face of a ‘transitory surge’ in inflation, while policymakers at the ECB, including German economist Isabel Schnabel, have dismissed near-term upticks

Few would argue this monetary largesse on its own should fire up prices, especially with deflationary impulses such as ageing demographics and technological innovation in play. 

Rather, it is how governments have responded to this crisis that has been transformative. Borrowing levels have exploded throughout the developed world, and the spending taps are still open.

The US has gone furthest with Joe Biden’s $1.9tn stimulus programme enacted in March and the promise of $4tn more in infrastructure and social safety net investments over a decade, if he can get sufficient congressional support. 

Even the more fiscally cautious eurozone has joined in with the bloc’s €750bn recovery fund.

Little wonder then that market-based inflation expectations really began to climb following Democrats’ legislative victories in January, which handed power over government spending to Biden’s party. 

The two-year break-even rate, which is a popular proxy for future inflation and is derived from prices of US inflation-protected government securities, now sits above 2.8 per cent, while the 10-year measure has risen to 2.5 per cent.

“People underestimate the role that austerity played in the deflationary pressures of the last decade,” says Karen Ward, chief market strategist for Europe at JPMorgan Asset Management.

Testing the Fed

Fed officials have so far brushed aside any concerns that bottlenecks in supply chains tied to the reopening of economies and enormous fiscal support will compound into something that compels the central bank to waver on its pledge to keep policy ultra-accommodative until its newfound goal of a more inclusive recovery is achieved.

Powell was adamant at the April meeting that the Fed has not yet seen “substantial further progress” towards its inflation and employment targets to warrant an adjustment to its $120bn monthly asset purchase programme. 

Fed governor Lael Brainard on Tuesday echoed these remarks, urging patience in the face of a “transitory surge” in inflation — a message also delivered by vice-chair Richard Clarida this week. 

Even policymakers at the ECB, including German economist Isabel Schnabel, have dismissed near-term upticks.

The Nasdaq MarketSite in New York. The technology-heavy Nasdaq Composite was among the indices to fall in response to this week’s inflation data © Michael Nagle/Bloomberg

Market pricing for future interest rates reflect the Fed’s success so far in quelling concerns about its ability to control consumer prices. 

One popular barometer, eurodollar futures, indicates that the central bank will begin raising rates by early 2023. 

While that is roughly a year earlier than the Fed’s most recent projections, it does not suggest widespread fears about runaway inflation.

“We are in a new era with the Fed,” says Anne Mathias, a senior strategist at Vanguard. “They have a new reaction function . . . [and] this is their first trip around the track with it.”

Investors lament, however, that they have been left guessing not only how the Fed defines “transitory”, but also the specific parameters that motivate a change in policy. 

That leaves the Fed susceptible to a communications blunder as inflationary pressures build this year, according to Vincent Reinhart, a former Fed economist who now serves as chief economist at Mellon.

“The committee is diverse and inflection points are tough,” he says. “Jay Powell is essentially saying, ‘we are going to be driving at top speed into the turn, but trust me, we know when to start turning the wheel’.”

“There will be some committee members who will have white knuckles at that point and will worry,” Reinhart warned. 

“That then feeds into the inflation jitters.”

Excavators at an iron ore mine in Australia. The cost of commodities critical to the global economy, including copper and iron ore, has soared © Ian Waldie/Bloomberg

Investor angst

Wednesday’s US consumer price figures landed in a market that was already anxious about inflation. 

A bond sell-off that had been on pause for two months briefly resumed this week, pushing yields in the eurozone to their highest level in two years. 

US Treasuries also weakened, although yields remain below their March highs and are still close to historic lows. 

After initially spiking to 1.7 per cent, the 10-year note, a benchmark for financial assets across the globe, fell back towards 1.6 per cent by the end of the week.

Some investors already sense an overreaction. “The market response is odd,” says Gurpreet Gill, a fixed-income strategist at Goldman Sachs Asset Management. 

“Everyone’s been talking about inflation for months. 

It’s been telegraphed.”

But the sellers are far more worried about a long-lasting pick-up in price growth than the current spike. 

Inflation is poison for bonds, eroding the fixed interest payments they offer.

“There’s quite a lot of complacency in this idea that inflation is transitory, and I think that’s born from the fact that a lot of people in financial markets haven’t ever seen any inflation at all,” says BlueBay’s Dowding. 

Jay Powell, the Fed chair, has shifted its policy framework to explicitly tolerate periods of higher inflation © Jim Lo Scalzo/POOL/AFP via Getty Images

The Fed’s determination to stay the course could also see long-term inflation expectations rise even further — leading to sharper rate rises down the line.

“If you are going to be intentionally late, it means you could have to be more aggressive on the back end of this,” says BlackRock’s Rieder.

That prospect is especially worrying for stock markets, which have surged to new heights led by gains from high-growth companies such as US tech giants. 

Those companies are valued based on their earning potential far into the future. 

Investors value those earnings relative to the “risk-free” rate they can earn by buying bonds, so higher yields in effect make them worth less today.

“The last few years have been great for investors because everything went up — you gained on your equities and your bonds,” says Mohamed El-Erian, chief economic adviser at Allianz and former co-investment chief at bond group Pimco. 

“Now you risk losing money on both sides. 

It’s a horrible environment, and I’m glad I’m not managing money.”

There’s no place like home — and the labour market needs to adjust

Jobs should be brought to people, not the other way roun

Rana Foroohar

           © Matt Kenyon

Conventional economic thinking tells us that people go where the jobs are. 

In America, there is a long history of westward expansion in search of opportunity. 

In the UK, Margaret Thatcher’s employment secretary, Norman Tebbit, was fond of telling people about his father who, when unemployed, “got on his bike and looked for work, and he kept looking till he found it.” 

Clearly, it is easier to find work when you are mobile. 

But what happens when people can’t or won’t move to where the jobs are?

It is a question that American policymakers are focusing on in the wake of pandemic related job destruction. 

Covid-19 hit different groups of people in very different ways, with virtual knowledge workers doing far better than those in professions that require face-to-face contact. 

Statistics pointing to declining income inequality during the pandemic are misleading, say some academics, because they reflect short-term government policy responses, such as handing out stimulus cheques. 

Longer term, it’s quite clear that the nature of work is going to shift radically, with the possibility of many more jobs being done anywhere — be it Bangalore or Bangor.

This may open up a new globalisation of white collar labour markets, which could benefit workers in emerging markets that are moving ahead digitally, but could also put pressure on labour in richer countries. 

On the other hand, American workers unable to afford housing, childcare and schooling in expensive coastal cities could move to one of the less expensive “zoomtowns” that have grown during the pandemic.

It is impossible to know yet how this arbitrage for jobs, place and labour will play out. 

But what we do know is that place matters a lot more in terms of labour markets than we once thought it did. 

Economists have traditionally thought in terms of people, not geography. 

But a more location based approach to job creation is gaining steam. 

Research shows that communities adapt very differently to economic downturns so a variety of bespoke approaches are needed — rather than just policies designed to create job growth at a national level — to cope.

Harvard and Berkeley economists have, for example, shown that intergenerational mobility varies quite substantially across the US. 

A 2014 study showed the probability that a child born in the 1980s reaching the top quintile of national income distribution, when starting from a family in the bottom quintile, was 4.4 per cent in Charlotte, North Carolina (not a backwater, but a thriving Southern services hub). 

By contrast the chance of the same group from San Jose, California, was 12.9 per cent. 

Higher mobility areas like San Jose had some combination of less residential segregation, less income inequality and better primary schools. 

They also had greater social capital and family stability.

The point about social capital matters tremendously. 

Think of the book Hillbilly Elegy, when workers without college degrees lose their jobs, they tend not to move, but to cling to what little social capital exists in their home or community. 

Facts back up this narrative. 

As “China Shock” authors, economists David H Autor, David Dorn, and Gordon H Hanson have found, the classic economic assumptions about labour market adjustment in response to trade and tech related job displacement have not held true in recent decades. 

“For reasons economists still don’t understand,” wrote Hanson in Foreign Affairs recently, workers with less education rarely “choose to move elsewhere, even when local market conditions are poor”.

The result is localised recessions, and the dangerous politics that comes with them. 

What to do about this? 

For starters, Hanson and many experts advocate for greater buffering of workers in areas undergoing particularly dramatic changes, via trade assistance. 

But there again, solutions should be local, rather than one-size-fits-all. 

Some people might need money to pay bills, while others want retraining or help with new job searches. 

All of this should be done in conjunction with private sector assistance. 

When the pandemic hit, European governments did a better job keeping people in work because they worked with the private sector on short-term work schemes and wage subsidies. 

American companies just laid people off, and left them to fend for themselves.

This raises the point that any government subsidies or local city and regional incentives need to be designed for the benefit of both business and labour. 

The typical corporate subsidies given to lure employers to beleaguered cities tend to erode the tax base and not help troubled regions longer term. 

This is something for the Biden administration to think carefully about as it revisits Trump era “Opportunity Zone” tax breaks.

Ultimately, better education is the best buffer for labour. 

I’d love to see a high-tech version of the secondary school vocational programmes that liberals unwisely threw away in the 1970s over worries that poor kids would end up as welders and richer ones, say, opinion columnists (on this, I would just note that my plumber in Brooklyn makes more than I do at the FT). 

We need both liberal education and workplace learning, and there are models today that blend both — like the P-Tech programme, which has scaled nationally and international.

Even in a globalised world, place matters. 

We need to create jobs. 

But we also need to bring them to where people are.


The pitfalls of trading geopolitical risk

Beware the armchair general—especially if it’s yourself

Talk to those who regularly buy and sell financial assets in the world’s trouble spots and you soon come across a perennial source of irritation. 

Everybody is an expert. 

The prospect of conflict turns every know-nothing spreadsheet jockey into a military strategist or Kremlin-watcher. 

Buttonwood shares this indignation on behalf of newspaper columnists everywhere. 

Making bold statements based on a little knowledge is our racket. 

Move along, please. 

We’re already working this corner.

There is plenty just now to occupy the armchair general. 

Geopolitical risk is on the rise after a pause for the pandemic, concludes a recent paper from bca Research. 

Three proto-conflicts in particular are hogging headlines and testing the resolve of the new administration in Washington. 

Russia has deployed enough troops to stage fresh incursions into eastern Ukraine. 

Iran has stepped up its nuclear programme, to the ire of Israel. 

And China is menacingly carrying out drills around the island of Taiwan.

An escalation of these tensions has the potential to knock markets sideways. 

And it is tempting for investors to try to anticipate a flare-up, so as to harvest “geopolitical alpha”, the excess returns from bearing conflict-related risks. 

By and large, the temptation should be resisted. 

Trading successfully around geopolitics is a lot harder than it looks.

Perhaps the most seductive idea to repel is that you have some expertise. Genuine experts are not in short supply. 

Just about anyone who spent time at the State Department or as a national-security adviser appears to have set up a consultancy. 

But there are pitfalls for the unwary, as Marko Papic of Clocktower Group, an alternative-investment firm, argues in his book “Geopolitical Alpha”. 

The first thing to remember is that former intelligence agents no longer have access to classified intelligence. 

Be especially wary of high-conviction views, says Mr Papic. 

Consultants tend to exaggerate the likelihood of the worst outcomes, because it is a good way to showcase their insight. 

A true expert will be circumspect, setting out scenarios and pinpointing the factors you need to monitor.

In fact few geopolitical events have a lasting impact on stockmarkets. 

As Mr Papic shows in his book, the pattern from the 1962 Cuban missile crisis onwards is for a short-term fall in America’s stockmarket to be followed by a rally over the following year, and often quite a strong one. 

An exception is the Yom Kippur war and the subsequent oil embargo. 

But in general, markets regain their poise. 

The economy carries on. 

From this we might grope towards the germ of a useful trading rule. 

The best way to profit from geopolitical risk might simply be to trade against the excessive fears of others.

At the outset of a geopolitical crisis, events move more quickly than you can trade on them. You read of tensions in the Middle East. 

So you buy oil futures. 

But algorithmic traders will beat you to the punch. 

You could chase the escalation. 

But now you are a momentum trader, rather than a geopolitical-risk trader. 

And sometimes there is no obvious trade to execute—or the seemingly obvious trade doesn’t entirely make sense. 

When North Korea stepped up its missile testing in 2017, a popular trade was to buy credit-default swaps, a form of insurance, on South Korean government debt. 

But you might reasonably ask whether a debt default would really be your biggest concern in the event of a nuclear strike.

If you instead decide to look for oversold assets, you still have some thinking to do. 

You might, for instance, decide that Russian assets are cheap. 

The trouble is that tensions between Russia and America could easily worsen. 

If you want to “buy the dip” in this way you should have a theory of how things might eventually be resolved, based on informed judgments about what each party to a conflict wants and what their political and economic constraints are. 

You would need to map the potential flashpoints from here to there. 

If you judge that a conflict cannot de-escalate easily, the wiser course might be to stay away.

In geopolitics, a little knowledge can be a dangerous thing. 

Yet investors cannot be entirely agnostic about the broad sweep of international relations. 

The long boom of the 1990s is not easily detached from the fall of the Berlin Wall. 

China’s accession to the World Trade Organisation in 2001 ushered in a commodity super-cycle. 

Avoid the narrow purview of the typical spreadsheet jockey. 

But beware the armchair geopolitical strategist—especially if it is you.

 Netanyahu’s master plan for Israel and Palestine has failed

Diplomacy with the Gulf states is no substitute for a just settlement with the Palestinians

Gideon Rachman

       © James Ferguson

Until about a week ago, it looked like Benjamin Netanyahu had a good chance of disproving the adage that “all political careers end in failure”. 

His grip on power in Israel was weakening. But even if he lost office, Netanyahu would still leave politics as Israel’s longest serving prime minister ever — and one of its most consequential.

Last year, Netanyahu secured a historic breakthrough in the Jewish state’s relations with the Arab world. 

The Abraham Accords normalised relations between Israel and the United Arab Emirates and Bahrain. 

Israel under Netanyahu was at peace, prosperous and breaking out of its international isolation. 

The long and often bloody struggle with the Palestinians was out of the headlines. 

A world-beating Covid-19 vaccination programme had further burnished the country’s image. 

There was just the small matter of avoiding conviction in a corruption trial and a possible jail sentence — and his legacy would be secure.

But over the past week, Netanyahu’s plan for securing Israel’s future has collapsed. 

The Israeli prime minister’s hope that the Palestinian issue was safely sidelined has proved to be a delusion. 

A dispute which started with clashes between Israeli police and Muslim protesters in Jerusalem has escalated — with rockets being fired at Israeli cities, Israel bombing Gaza and violent clashes between Arabs and Jews breaking out across Israel.

With the encouragement of the Trump administration, the Netanyahu government had followed what some called the “outside-in” strategy. 

This was the idea that Israel should pursue agreements with the outside world, above all the Arab world, to help solve its internal conflict with the Palestinians. 

This was a reversal of the more traditional “inside-out” approach to the conflict — which held that Israel first had to secure a settlement with the Palestinians; and only then could expect to achieve a durable peace and international acceptance.

The signing of the Abraham accords was brandished as evidence that the outside-in strategy was working. 

Israel hoped that Saudi Arabia, the most powerful country in the Arab world, would be next to establish diplomatic relations.

As for the Palestinians, the hubristic hope in Netanyahu’s circle was that, deprived of Arab and international support, they would lose the will to resist. 

Human rights activists could continue to support their cause but the wider world would move on, allowing Israel to impose its own terms on a weakened and dispersed Palestinian population. 

Some Israelis speculated that the Palestinians might end up like the Tibetans — a people whose national aspirations look increasingly forlorn and forgotten.

The rockets raining down on Israel’s cities from Gaza have inflicted grave damage not just on property and citizens, but on that strategy too. 

The hope that Netanyahu’s policies had rendered the Palestinian issue irrelevant now looks foolish. 

International condemnation of Israeli actions has revived, spurred on by civilian deaths in Gaza, including many children. 

Further Israeli diplomatic breakthroughs look unlikely.

Most serious of all, the brutal clashes between Jews and Israeli-Arabs, who make up 20 per cent of the population of the country, have brought the conflict inside the borders of Israel itself, leading to talk of civil war.

In recent years, many Israeli politicians had come to hope and believe that Arabs living inside the country were no longer identifying so strongly with the Palestinian cause. 

But the current crisis has brought a renewed sense of unity between Palestinians in Gaza, the West Bank and Israel itself. 

The idea that the Palestinian problem could be safely walled-off, out of sight, is no longer credible. 

Instead, Netanyahu’s strategy may have increased the threat to his country — by inadvertently opening up a new front, within Israel itself. 

That threat will remain, even after the pummelling of Gaza has stopped.

The major flaw in the outside-in strategy was its assumption that Palestinian despair would lead to quiescence. 

In reality, the increasing boldness of the Israeli far right — which is determined to push ahead with further annexations of Palestinian property and land — eventually provided the spark that ignited the latest conflagration. 

The far right had itself been courted and legitimised by Netanyahu, as he sought allies in his efforts to hang on to power.

For Netanyahu himself, the current crisis does have one significant benefit. 

After the fourth inconclusive election in a row, his opponents were on the brink of forming a coalition government that would finally lever him out of power. 

Those negotiations have now stalled — and so Netanyahu looks likely to continue as prime minister.

A successful effort to cling on to power — and to fend off the corruption cases against him — would demonstrate that Netanyahu remains a master political tactician. 

But the upsurge of violence this week has gravely undermined his claim to be a statesman. 

His supporters boasted that his diplomatic strategy had provided a route out of the Israeli-Palestinian conflict — one that did not even require painful concessions on land and Palestinian rights. 

But Netanyahu’s route out of conflict now looks like a dangerous dead-end.

Coinbase Is Issuing a Convertible Bond. Why Its Stock Is Dropping.

By Al Root

    Vladyslav Yushynov/Dreamstime

Cryptocurrency exchange Coinbase Global surprised investors Monday evening with a convertible bond offering that raises several new questions for investors—including a new one that investors haven’t heard about before in prior company filings. 

More questions mean more uncertainty and investors hate uncertainty. 

Coinbase shares are falling as a result.

Coinbase (ticker: COIN) is raising about $1.3 billion in a convertible bond sale. 

Shares are down about 2.6% in after-hours trading.

There are a few reasons stocks are weak. 

For starters, Coinbase is selling convertible bonds and, as their name implies, the bonds can be converted into stock, under certain conditions. 

More stock is dilutive to existing shareholders.

And when a convertible bond is issued, arbitrage traders, oftentimes, will buy the convertible bond and short the company stock, essentially locking in a yield they find attractive. 

Shorting a stock generates selling pressure and a stock can fall in the immediate aftermath of a convertible sale.

Dilution and arbitrage are two reasons, but investors might also be questioning the timing of this bond sale. 

The offering comes about a month after the company completed its direct stock listing. 

Coinbase didn’t pursue a traditional initial public offering because, presumably, it didn’t need the cash. 

The company generates positive cash flow, is growing rapidly and analysts are upbeat about earnings prospects. 

So why raise money now? 

And why with a bond? 

Those questions don’t really have answers yet.

Coinbase, around the time of its direct listing, did say a direct listing was more in keeping with the ethos of cryptocurrencies. 

Initial public offerings are run by large banks, which typically reward their best customers. 

That’s one potential answer to why now and why a bond.

But there is one other question raised by the offering. 

The news release says the purpose of the offering is to strengthen the company’s balance sheet. 

The cash will be used for “general corporate purposes, which may include working capital and capital expenditures, and to pay the cost of the capped call transactions.”

A capped call is a call option trade that limits the call buyer’s upside. 

A traditional call option gives the buyer the right to buy something at a fixed price. 

The gain is theoretically limitless. 

The capped call just has a cap. 

Capped calls don’t show up in a search of the company’s prospectus. 

The capped call is most likely to limit the dilution of the offering by limiting the number of shares issued. 

If that’s the case then why not just issue a smaller bond with less dilution and no cash paid for capping dilution?

There are a few issues to sort through. 

Coinbase referred Barron’s to its news release when asked about details of the convertible offering.

Coinbase listed its shares for trading at $250. 

The stock closed at about $328 the first day but have since fallen 24% to just below $248.24. 

The S&P 500 and Dow Jones Industrial Average, for comparison, are both up a little over the same span.

Now, Coinbase stock is down 2.6% at $241.75 in after-hours trading. 

Don’t be surprised if it remains weak until some of the questions are answered.

Covid-19 Wrecked the Algorithms That Set Airfares, but They Won’t Stay Dumb

Using more live data to set fares has become a necessity for carriers during the pandemic, and may lead to greater price discimination in the future

By Jon Sindreu

Vaccinations are making people start to book further out when booking vacations. / PHOTO: A. PéREZ MECA/ZUMA PRESS

Summer vacations are coming back. 

So are the airline algorithms that know how much you are prepared to pay for them.

In the leisure market, domestic air travel is normalizing in terms of both bookings and fares. 

Crucially, vaccinations are making people start to book further out: Online travel agency Skyscanner estimates an average booking horizon of around 75 days in March, compared with a low of 55 last July.

While most businesses charge the same price for the same product, airlines’ secret sauce is so-called price discrimination: selling equivalent seats at different rates to different people. 

As a result, they don’t just need demand to be stronger, but also somewhat predictable.

Because the summer “seasonality” is starting to look more normal, “we will be able to hold our yield-management strategies, especially when we talk about the weekends of the peak periods,” 

Spirit Airlines Chief Commercial Officer Matt Klein recently told analysts.

Traditionally, airlines use two different teams to manage fares. 

The pricing department sets a range of prices for each trip and cabin type. 

Responding to demand then mostly falls to the yield- or revenue-management department, which chooses how many tickets of each class to make available. 

As seats in one fare category fill up, buyers are bumped to the next.

This process is managed using a complex set of algorithms. 

Based on what has happened before, airlines can anticipate how strong demand will be on a particular day and time, or exactly when people will fly to visit family before a holiday. 

Much revolves around corporate travel, which is a big chunk of airline profits: Business fliers avoid Tuesdays and Wednesdays, prefer short trips to weeklong ones and book late. 

They are the reason why carriers hold back seats even at the risk of not filling planes and block cheap fare classes close to departure.

All this went out of the window during the pandemic. 

With historical patterns suddenly unreliable and even live data being muddied by cancellations, algorithms published ludicrous prices. 

Humans had to take over.

Recovering these lost efficiencies should be an extra boon for carriers as travel returns. 

As a rule of thumb, a 10% improvement in the accuracy of demand forecasts increases sales by 1%, said Benjamin Cany, head of airline offer optimization at Amadeus, which builds revenue-management software.

This recovery is still mostly an American domestic story. 

On Monday, European budget leader Ryanair said that, while sales picked up a bit in April, booking visibility is still close to zero. 

Even in the U.S., historical data alone won’t do, because international and business travel is yet to return.

But the pandemic has served to stress-test useful innovations, such as putting greater weight on recent booking figures and using online searches to predict when and where demand will pop up, in the vein of e-commerce specialists like

Simulations had long suggested that “dynamic” or “continuous” pricing—fully varying the fare charged to each passenger based on live data—could boost airline revenues by up to 7%. In the real world, the danger of introducing too much noisy information urged caution.

“Before, we weren’t at the stage of using this technology massively; now it has been accelerated,” Mr. Cany said.

Carriers will need to learn the right blend of historical and live data. 

Also, upping prices on consumers in real-time could provoke a backlash. 

Yet Covid-19, having almost killed airlines’ pricing bots, could end up making them even stronger.

Covid-19 Vaccine Works, Even if Side Effects Differ for All, Doctors Say

Age and other factors may play a role, but scientists say the shots provide immunity, including in the absence of fatigue, chills or other symptoms

By Peter Loftus

Infectious-disease doctors say most people get protection from the vaccines, even if they don’t experience side effects. / PHOTO: JILL CONNELLY/BLOOMBERG NEWS

Infectious-disease specialists are working to reassure people that they are still getting protection from Covid-19 vaccines, even if they don’t experience the flulike side effects that hit some people after vaccination.

Fatigue, chills and other symptoms in the days following vaccination are evidence that the vaccine is having the desired effect on the body’s immune system, according to public health officials. 

The U.S. Centers for Disease Control and Prevention and the World Health Organization say on their websites that side effects mean the body is “building protection” against the coronavirus.

That message may lead some people to infer that the absence of side effects indicates that vaccination isn’t causing the body to build immunity to the virus. 

Yet infectious-disease doctors say most people get protection from the vaccines, even if they don’t experience side effects.

“I don’t think someone should correlate the extent of their reactions to the vaccine with protection from infection,” said H. Cody Meissner, chief of the pediatric infectious diseases division at Tufts University School of Medicine in Boston. 

“We know that people who don’t respond to a vacin tercine ms of the side effects still are well protected. 

The vaccines work even if you don’t have fatigue and headache and fever and muscle pain and joint pain.”

Experts say more research is needed to establish what vaccine-related side effects, or their absence, tell us about the strength of people’s immune responses. 

“There are just so many nuances in terms of how you respond,” said Kathryn Edwards, professor of pediatrics and a vaccine researcher at Vanderbilt University School of Medicine in Nashville, Tenn.

Dr. Edwards said there is a biological basis to tell people “it’s good to feel bad” because side effects can be a sign of an immune response. 

But, she added, “I think we should have confirmation there is a relationship.” 

She said she has fielded questions from vaccine recipients who didn’t experience side effects and worried that the absence meant they weren’t getting protection.

Vaccines against other diseases have been known to cause side effects because the immune response releases inflammatory substances in the body.

A small study conducted recently by scientists at the University of Pennsylvania found that people who had more robust side effects after receiving either of the two leading vaccines in the U.S.—from Pfizer Inc. PFE -0.20% / BioNTech SE and Moderna Inc. —had slightly higher antibody levels than those who had less robust side effects. 

Yet all people getting the vaccine in the study had good immune responses, said study co-author E. John Wherry, director of the Penn Institute for Immunology.

The Pfizer and Moderna vaccines use RNA-based technology and can cause similar side effects. 

Ranging from injection-site pain, fatigue, headache, muscle pain, joint pain, in addition to fever and chills, these typically arise within a day of vaccination and resolve within a couple of days. 

The side effects can often be managed by taking acetaminophen or another pain reliever.

The vaccines were at least 94% effective at protecting against Covid-19 in separate, large clinical trials that started last year.

Experts say more research is needed to establish what vaccine-related side effects, or their absence, tell us about the strength of people’s immune responses.

Injection-site pain or swelling is the most common reaction, occurring in 92% of Moderna vaccine recipients and 84% of those getting the Pfizer shot, the studies found.

A Pfizer spokeswoman said side effects don’t indicate the level of immunity conferred by its vaccine. 

It wouldn’t be able to demonstrate such high efficacy, if the only people protected were the ones with symptoms, she said.

Moderna didn’t immediately reply to a request for comment.

Johnson & Johnson’s JNJ 0.15% one-shot Covid-19 vaccine uses a different technology than the Pfizer and Moderna shots. 

A large study found that injection-site pain affected about 49% of recipients, while headache, fatigue or muscle ache occurred at lower rates. 

A small number of J&J vaccine recipients have developed serious blood clots.

Age appears to be a factor in determining who experiences side effects. 

People over age 65 are less likely than younger people to experience side effects. 

Older adults tend to have less robust immune responses to vaccines.

Vanderbilt’s Dr. Edwards said women appear to be more likely than men to experience the side effects, which may be related to hormonal or weight differences.

The Food and Drug Administration says age, sex and general health likely influence the occurrence and severity of common side effects in the first couple of days after vaccination. 

Side effects don’t correlate with the effectiveness of a vaccine in an individual, an FDA spokeswoman said.

Some doctors say heredity may also play a role. 

“I am sure that our genes at some level determine differences in these responses,” Paul Offit, director of the vaccine education center at Children’s Hospital of Philadelphia, said of varying levels of symptoms following vaccination.

For some receiving the RNA vaccines, side effects are more pronounced after the second dose, making it hard for people to work or be active. 

In contrast, people who were previously infected with the coronavirus have had more pronounced side effects after the first dose, Dr. Edwards said.

Major Hayden, a 38-year-old software developer living near San Antonio, said he began feeling chills, fatigue and fever several hours after getting the second dose of Moderna’s vaccine in early May. 

He took acetaminophen and began to feel better the following day.

“For me it just seemed like the risks from the vaccine were much smaller than the risks of Covid,” he said.

Escaping Serfdom

by Jeff Thomas


The concept of government is that the people grant to a small group of individuals the ability to establish and maintain controls over them. 

The inherent flaw in such a concept is that any government will invariably and continually expand upon its controls, resulting in the ever-diminishing freedom of those who granted them the power.

When I was a schoolboy, I was taught that the feudal system of the Middle Ages consisted of serfs tilling small plots of land that belonged to a king or lord. 

The serfs lived a meagre life of bare subsistence and were subject to the tyranny of the king or lord whose men would ride into their village periodically and take most of the few coins the serfs had earned by their toil.

The lesson I was meant to learn from this was that I should be grateful that, in the modern world, I live in a state of freedom from tyranny, and as an adult, I would pay only that level of tax that could be described as "fair".

Later in life, I was to learn that, in the actual feudal system, some land was owned by noblemen, some by common men. 

The commoners typically farmed their own land, whilst the noblemen parcelled out their land to farmers, in trade for a portion of the product of their labours.

As a part of that bargain, the nobleman would pay for an army of professional soldiers to protect both the farms and the farmers. 

Significantly, unlike today, no farmer was required to defend the land himself, as it was not his.

There was no exact standard as to what the noblemen would charge a farmer under this agreement, but the general standard was "one day’s labour in ten".

This was not an amount imposed or regulated by any government. 

The nobleman could charge as much as he wished; however, if he raised his rate significantly, he would find that the farmers would leave and move to another nobleman’s farm. 

The 10% was, in essence, a rate that evolved over time through a free market.

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Modern Serfdom

Today, of course, if most countries levied an income tax of a mere 10%, there would be dancing in the streets. 

And the days of one simple straightforward tax are long gone.

Today, the average person may expect to pay property tax (even if he is a renter), sales tax, capital gains tax, value added tax, inheritance tax, and so on. 

The laundry list of taxes is so long and complex that it is no longer possible to compute what the total tax level actually is for anyone.

And to this, we add the hidden tax of inflation. 

In the US, for example, the Federal Reserve has, over the last hundred years, devalued the dollar by 98%, a hefty tax indeed. 

And the US is not alone in this.

Only 50 years ago, the average man might work a 40-hour week to support a wife who remained at home raising the children. 

He often had a mortgage on his home but might have it paid off in ten years. 

He paid cash for nearly everything else that he and his family owned or consumed.

Today, both husband and wife generally must be employed full time. 

In spite of this, they can’t afford as many children as their parents could, and they generally remain in debt their entire lives, even after retirement. 

This is significant inflation by any measure.

In contrast, in the Middle Ages, the cost of goods might remain the same throughout the entire lifetime of an individual.

In light of the above, the 10% that was paid by the serfs is beginning to look very good indeed.

However, the great majority of people in the First World are likely to say, "What can you do; it’s the same all over the world. 

You might as well get used to it."

Well, no, actually, it’s not. 

There are many governmental and economic systems out there and many are quite a bit more "serf friendly" than those in the major countries.

Countries such as the British Virgin Islands, the Cayman Islands, Bermuda and the Bahamas have no income tax. 

Further, some have no property tax, sales tax, capital gains tax, value added tax, inheritance tax, and so on.

So how is this possible?

The OECD countries state that it is largely accomplished through money laundering, but this is not the case. 

In fact, low-tax jurisdictions are known to have some of the most stringent banking laws in the world.

The success of these jurisdictions is actually quite simple. 

Most of them are small. 

They have small populations and therefore need only a small government. 

Yet each jurisdiction can accommodate large numbers of investors from overseas. 

This results in a very high level of income per capita.

But unlike large countries, the money that is deposited or invested there is overseas money, so it is not captive. 

Investors can transfer it out overnight if need be.

So, even if the politicians are no better than those in larger countries (generally, they are of the same ilk), they’re aware that, like the noblemen of old, if they attempt to impose taxation, the business will dry up quickly.

In fact, such a free market dictates that the jurisdictions keep on their toes and keep trying to outdo their competitors by being more investment friendly.

Therefore, the politicians in these countries, who might be only too happy to promise entitlements to their constituents, then tax them to the hilt in order to pay for the entitlements, are kept restrained by their own system.

Are there downsides to living in a low-tax jurisdiction? 


As most of them are small but require a very high standard of living in order to attract investors, they must import virtually all goods needed by residents. 

This means a higher cost of all goods, as compared to the cost in a country that produces such goods. 

However, the wage level is also higher, which tends to balance out the equation.

But there are also upsides.

Those who move to such a jurisdiction find that after the first year there (when the basics such as cars, televisions, etc., have been paid for), all further income that has been saved from taxation is beginning to get deposited in the bank.

At some point, the deposit level becomes great enough that investment becomes advisable. 

And as low-tax jurisdictions tend to be naturally prosperous, there is generally no limit to the opportunities for investment within the jurisdiction.

There is a further benefit to living in a low-tax jurisdiction that tends to become apparent over time. 

Any government that depends on major investments from overseas parties must, of necessity, be non-intrusive and non-invasive. 

Such a government stays out of people’s business, eschews electronic monitoring and most certainly is not given to SWAT teams crashing down doors for imagined wrongdoing.

Benjamin Franklin famously said, "Nothing can be said to be certain, except death and taxes."

He was correct, but the level of tax can vary greatly from one country to the next. 

And just as important, the level of government intervention into the affairs of its citizenry varies considerably.

In a country where the level of tax is low, the quality of life is generally correspondingly high.

A thousand years ago, noblemen, from time to time, became overly confident in their ability to keep the serfs on the farmland and demanded taxes beyond the customary "one day’s labour in ten". 

When they did, the serfs of old often voted with their feet and simply moved. 

Today, this is still possible.

If the reader presently contributes more than one day’s labour in ten to his government, he may wish to consider voting with his feet.

Editor’s Note: The political and economic climate is constantly changing... and not always for the better. It's clear the situation in the US, Europe, and other parts of the world will continue to deteriorate. Obtaining the political diversification benefits of a second passport is crucial to ensuring you won't fall victim to a desperate government.

Fortunately, there are numerous options to obtain a second passport or residency. 

However, the menu of options is constantly changing, and there is no-one-size-fits-all solution.