TheChek News Flow

Let innovators in, so standards develop and productive services can be delivered.

Apple CEO Tim Cook was asked recently about the dreaded green bubble—the one that appears when you send a message to someone without, gasp, an iPhone running the proprietary iMessage app. But it’s worse than that. His questioner added, “I can’t send my mom certain videos and she can’t send me certain videos and so . . .” Mr. Cook interrupted with a chuckle and said, “Buy your mom an iPhone.” Corporate hubris usually precedes a downfall.

Interoperability can make or break technology, and much is still broken. Many Google apps don’t work well on an iPhone. Why? Apple wants you to use its apps, interoperability be damned. The iPad only recently added support for a mouse, but it’s not good enough for iPads to replace Mac computers and laptops. Why? To protect Apple’s $35 billion Mac business. Users suffer. Technology has a long history of ignoring interoperability. America Online ran its business like a walled garden. More hubris that didn’t end well. It even had two messaging services, AOL Instant Messenger and ICQ (I seek you), that couldn’t send messages to each other until 2003.

In 1990 a judge ruled that competitors infringed Lotus Development’s copyright on its 1-2-3 spreadsheet’s command structure and keystrokes. But it turns out that file formats can’t be copyrighted or patented, allowing Microsoft Excel to read and write Lotus 1-2-3 spreadsheets. This interoperability was a boon to users, though in the end not so good for Lotus, as the company didn’t innovate enough beyond spreadsheets. To protect its Windows operating system, Microsoft was slow to embrace internet protocols like TCP/IP and mobile standards such as Bluetooth and lost its edge in both.

Standards matter. Think of road widths, gasoline mixtures and lights that don’t blind opposing drivers. The 120/220 volt electricity divide was fixed via sensors that allow travelers to use their computer and phone chargers universally, although with different plugs. AA batteries were introduced in 1907, standardized in 1947, AAA in 1911 and 1969. Cellphone standards were another benefit to users and keep evolving—6G isn’t coming until 2030 or so.

To figure this out, Facebook aka Meta announced the purchase of Within, maker of virtual-reality fitness app Supernatural. Almost immediately, the Federal Trade Commission fought the purchase. Yes, there should be some caution about one company monopolizing the Metaverse the way Apple monopolizes the iPhone ecosystem and discriminates within iMessage. But the market is still tiny. The Journal reports Meta’s Horizon Worlds has a meager 200,000 monthly active users so far.

Some form of the Metaverse will happen, but we’re still in the Palm Pilot stage of development—clunky, expensive equipment and low-resolution offerings that don’t do much. That will change. Reinventing education alone will make it worth it. Who cares if Meta buys a fitness app? In Silicon Valley, many companies are bought not for their products but for their people. This is known as acquisition hiring, or “acquihires.” Heck, some venture capitalists build companies just to be bought.

My free-market instincts make me allergic to government intervention. Instead, as in financial markets, government’s role is to set up rules for the sandbox and then let everyone play in it. Let the best sand castle win. Make sure everyone can get in and out of the sandbox on equal terms. We almost have to let Meta or anyone buy companies early in the development of the Metaverse to tinker with applications and business models and prove to others what works, enticing them to join in.

If I were the FTC, I’d let Meta, Microsoft or Google make as many acquisitions as they want for the next decade, but only in exchange for open standards and interfaces so that competing firms can build their own version of this space to connect and be interoperable with what already exists. Governments are involved with standards—the National Institute of Standards and Technology is part of the U.S. Commerce Department. But instead of defining details of these new worlds, the focus should be on sensible interfaces and application programming interfaces so everyone can access the sandbox.

When there are standards for basic technology formats and protocols, battles move higher up the value chain, to more important things, such as delivering real productive services rather than worrying if things made by Google will work with things made by Meta. This would benefit us all rather than letting Tim Cook protect long-in-the-tooth products such as the iPhone. Standardizing the past is what will force innovators to buzz the Hive or swirl the Vortex and invent the future.

But monetary policy alone will not be enough to bring yields down

An unorthodox interest rate rise of 12 per cent by Hungary’s central bank should be a winner for foreign investors in the €930bn local currency government bond market. The move last week was meant to prevent further depreciation of the forint. That is one of three elements needed to lower the yields and raise the prices of government debt.

The other two items to watch are fiscal policy and the release of EU funds. The first looks well anchored. The government has shown determination in keeping spending down. The release of EU funds is less assured. The government seems confident this will happen in December. The EU has yet to say.

The central bank’s move had two immediate effects. The forint soared against the euro. It is up almost 4 per cent since the rise on October 14. Bond yields also rose as prices fell, with the benchmark 5-year yield up 0.6 percentage points to 12.23 per cent over the past week, according to Refintiv data. The government hopes the currency will hold its gains and bond yields fall back. It is in with a chance.

On Friday, the central bank widened its “interest rate corridor”, between the unchanged policy rate at 13 per cent and the overnight collateralised loan rate, up 9.5 points to 25 per cent. The one-day deposit facility offers 18 per cent, which the bank can raise at will. The aim is to suck liquidity out of the foreign exchange and interbank markets. That is bad news for investors who have shorted the forint since the central bank called a halt to its policy rate tightening cycle last month.

The bank also said it would offer foreign currency directly to energy importers, taking a further chunk out of the market. Hungary’s bill for imported energy is about €12bn; that aside, it would run a current account surplus of almost €3bn. It is far more exposed to soaring energy costs and has much less room to diversify supplies, particularly away from Russia, than other countries nearby.

Taken together, the bank hopes its measures will strengthen the forint and help it fight inflation by keeping import prices in check. That, along with fiscal discipline, should be good for bondholders. The rest is up to Brussels.

Warning that rising interest rates could prompt prolonged downturn

UK commercial property market valuations are falling at their fastest pace since the Brexit vote and dealmaking is stuttering to a halt, in early indications that higher interest rates could tip the market into a prolonged downturn.

According to index provider MSCI, UK commercial property values fell 2.6 per cent last month, the largest monthly fall since July 2016.

“It’s a fairly gloomy outlook. There’s clearly a great degree of uncertainty in the market at the moment,” said Tom Leahy, head of real assets research for Europe, the Middle East and Asia at MSCI.

The outlook is similar across much of Europe as investors have retreated following rapid dealmaking at the start of the year. In the first nine months of 2022, a record €229bn of transactions were completed. But in the past three months levels were down 16 per cent on the same period last year, according to property company CBRE.

Rising rates and mounting risks in the economy have quickly transformed the outlook for European property owners.

Borrowing costs — a function of central bank rates and lenders’ perception of risk for the sector — have increased sharply in the past six months, while inflation has driven up construction costs.

The attractiveness of property has also diminished as bond yields have risen. If they remain high, commercial property yields — which move inversely to prices — will have to increase considerably to tempt investors back.

“Why would anyone bother buying commercial property if gilts remain above 5 per cent,” said the head of real estate at a large bank. Property yields have dropped as low as 3 per cent in some sectors.

Leahy expected the unwinding of almost 15 years of ultra-low rates to trigger price falls in commercial real estate across Europe.

He warned that the UK could be particularly exposed to a downturn as a result of recent political turmoil. With a leadership contest underway following the resignation this week of Liz Truss as prime minister, the country is set for its fifth Conservative prime minister since 2016.

“The notion of the UK as a safe haven is coming under severe pressure because of our politics,” said Leahy, adding that political stability had been “in our favour for a long time — London was popular during the financial crisis for that reason — but there is a sense that the ship is slightly adrift at the moment”.

Property brokers and investors said the UK commercial property market peaked at the turn of the year.

According to CBRE, investment volumes have dropped for three consecutive quarters. The number of pending transactions tracked by MSCI is at its lowest level since 2013, indicating that the market is likely to slow further.

Deals that were being struck were at a substantial discount to the levels valuers considered realistic at the start of the year — before the war in Ukraine and surging inflation led to successive rounds of rate rises.

The biggest deal to go through in recent months was Landsec’s sale of Deutsche Bank’s new City of London office, 21 Moorfields.

Late last year, Landsec was privately approached by a potential investor willing to pay about £1bn, according to people with knowledge of the offer.

Landsec instead opted for a public sales process and last month settled for almost 20 per cent less, agreeing a £809mn deal with Australian developer Lendlease.

Analysts and investors said property owners in northern Europe, particularly Germany and the Nordics, were also exposed to a downturn. 

The country can’t say it wasn’t warned about overreliance on Russia for energy

Regarding Walter Russell Mead’s “Germans See Affluence Ahead” (Global View, Oct. 18) and Joseph Sternberg’s “Germany Finally Says the F-Word: ‘Fracking’” (Political Economics, Oct. 7): My firm’s geologists had researched European shale resources. We estimated that, with fracking, Europe had about 700 trillion cubic feet of recoverable natural gas, enough to power the continent for 50 years. I was asked to present this information to the energy-security-policy leadership (Energie Sicherheitsführung) of the German parliament in April 2006.

At the time Germany was already planning to expand its gas pipelines to Russia. That natural gas cost around $17 per million British thermal units, compared with a cost of $3 at home. I asked the leaders to imagine the positive effects of being able to power their economy from local resources and in that price range. Their faces showed stunned disbelief. As one of their Ph.D.s explained in German: “A Halliburton truck fracking on a German hill? Never, never!”

Following the meeting, they budgeted the princely sum of 300,000 euros to study what I had presented, but they decided to stick with the pipelines. The Germans can’t say they weren’t warned.

Rates of transmitted infections are rising including a 26 per cent jump in syphilis cases

More funding is needed for sexual health services along with innovative testing and prevention tools to tackle an “alarming” rise in sexually transmitted infections across the US, the nation’s top public health agency has warned.

Dr Leandro Mena, director of the division of STD prevention at the Centers for Disease Control and Prevention, told the Financial Times that new data showing the number of syphilis cases surged by more than a quarter last year highlighted the “crisis” unfolding in the sexual health of America.

The rise in cases of syphilis and other bacterial STDs — such as gonorrhoea and chlamydia — is being fuelled by a combination of underfunding of sexual health services, reduced condom use among certain groups and stigma surrounding sexual diseases and access to treatment, he said.

“We find these [statistics] pretty alarming. For six or seven consecutive years STI rates have been increasing in the US and last year’s 26 per cent jump in syphilis cases was one of the largest year-to-year increases that we have ever seen,” he said.

The resurgence of STIs in the US and elsewhere is causing concern among health officials, who warn services are already overstretched owing to Covid-19 and monkeypox. Last year the CDC estimated one in five Americans had an STI at some point during 2018 and the lifetime cost of treating new infections acquired during that single year would be up to $16bn.

Mena said US prevention and treatment services for sexual health had been underfunded for more than two decades, resulting in a more than 40 per cent reduction in per capita purchasing power when inflation is taken into account. This had resulted in a decrease in testing and screening services in many communities, he said.

“To address the crisis that we recognise that we have in the sexual health of America I think we really need innovation,” said Mena. “We need to improve access to stigma-free, discrimination-free, affordable sexual health services . . . we need more tools to fight the national spike in bacterial STIs.”

Preliminary data released last month by the CDC shows 2.5mn bacterial STI infections were reported in 2021, a rise of 4.4 per cent on the previous year. The number of gonorrhoea and chlamydia cases grew by about 3 per cent year-on-year while reported cases of syphilis, a potentially life-threatening disease when not treated, increased significantly faster.

Infection rates for syphilis reached a historic low in 2000-2001, according to CDC data, but have steadily increased since then. Over a five-year period reported cases of syphilis have surged almost 70 per cent while the number of congenital cases — when a mother passes a syphilis infection to her baby during pregnancy — has surged by 184 per cent since 2017.

“Congenital syphilis can have devastating outcomes that affects perhaps the most vulnerable individuals in society, newborns. It is also 100 per cent preventable, so it represents in many ways failures in our systems,” said Mena.

He said there had been a decline in use of condoms among some groups, including young people, and men who have sex with men as the availability of antiretroviral treatments for HIV expanded in recent years. Substance abuse and the opioids epidemic is linked to increases in risky sexual behaviour and stigma played a role in keeping people away from accessing screening services and treatments, said Mena.

He said people needed access to “stigma-free and affordable” sexual health screening services to tackle increasing infection rates. The development and rollout of home test kits and point of sale testing in pharmacies or locations other than health clinics could also help, added Mena.

He said the CDC is evaluating “exciting” research published in July which showed that a single pill of a common antibiotic taken up to the three days after sex could significantly reduce infection rates from bacterial STIs.

“We’re very encouraged by these initial data in an NIH funded study for the use of doxycycline as post-exposure prophylaxis to prevent infection,” said Mena.

He said the agency wants to review the full data set from the study before issuing guidance to doctors on use of doxycycline among high-risk groups. This would consider the issue of anti-microbial resistance and whether prescribing the antibiotic in this manner could cause other pathogens to build resistance against doxycycline, said Mena.

Officials have suggested the government has ‘limitless’ funds to defend the country’s currency

Japanese authorities are likely to have spent more than $30bn last week in their second intervention in a month to prop up the yen after it fell to a fresh 32-year-low against the dollar, according to estimates by traders.

The intervention conducted on Friday came after the yen hit ¥151.94 to the dollar, causing it to briefly surge to ¥144.50 during a typically quiet time of the week for trading. The yen closed around ¥147 on Friday.

During a visit to Australia over the weekend, Fumio Kishida, Japan’s prime minister, said the government would take “appropriate measures” to address excessive volatility in currency markets.

“We cannot tolerate excessive volatility caused by speculative trading. We are watching developments in the foreign exchange market with a strong sense of urgency,” Kishida said while declining to confirm if an intervention was carried out on Friday.

Finance ministry officials have not commented on whether they had conducted an intervention on Friday, but two people close to the government confirmed that the action was taken. Authorities had already spent $20bn in September conducting Japan’s first yen-buying operation since 1998.

The Bank of America estimated after last month’s intervention that the Japanese government, which has $1.3tn in foreign reserves, could execute up to 10 more interventions by selling liquid assets.

Masato Kanda, the country’s top currency official, recently suggested that the government had a “limitless” amount of funds to conduct interventions, according to Japanese media.

But analysts say that the effectiveness of such interventions would be limited as long as the interest rate differentials between ultra-loose Japan and the tightening US remained wide. Japan is not alone in its struggle to respond to sharp volatility in financial markets with both regulators in Taiwan and South Korea also introducing market-supporting measures.

Takahide Kiuchi, executive economist at Nomura Research Institute, said the latest intervention had a bigger impact than expected due to several factors. Traders were surprised because they had expected the government to intervene during Tokyo trading hours instead of during European and US market hours.

“There is also the possibility that the size of the currency intervention was significant,” Kiuchi said without specifying the size. Currency traders estimated that Japan spent at least $30bn in the intervention.

Analysts said the move may have been precipitated by a report in the Wall Street Journal that Federal Reserve officials were likely to debate next month on whether to approve a smaller rate increase in December as global financial stress mounts because of the sharp rate hikes.

Trade body argues that revenue cap on renewables will penalise low-carbon investments

The UK government’s de facto windfall tax on low carbon electricity companies will have “catastrophic consequences” for investment in green technologies such as wind and solar, energy companies have warned.

Energy UK, a trade body that represents companies including Centrica, EDF Energy, ScottishPower and SSE, this weekend joined criticism of the government’s revenue cap on low carbon electricity generators, which was confirmed by Liz Truss’s government before she stepped down as prime minister.

The policy, which was introduced to raise funds for the government’s energy bills support scheme for households and could remain in place until the end of 2027, is included in a controversial energy prices bill that is still progressing through parliament. However, ministers are yet to confirm the level of the cap.

It applies to companies that own low carbon electricity generation assets such as wind and solar farms, plus nuclear and biomass power plants. Gas-fired power plants are excluded despite also benefiting from the surge in wholesale power prices following Russia’s full blown invasion of Ukraine.

Energy companies have branded the policy an effective windfall tax and are concerned it is even more punitive than a separate levy on oil and gas producers, which was introduced by former chancellor Rishi Sunak in May.

Energy UK has sent a briefing to all MPs ahead of chancellor Jeremy Hunt’s fiscal statement — expected on October 31 — warning that the cap, as it is currently designed, would “cement a tax regime heavily tipped in favour of oil and gas, and send a disastrous message [to global investors] about the UK’s climate commitment”.

The group argues that while the levy on oil and gas — which raised fossil fuel producers’ headline tax rate from 40 to 65 per cent — is charged only on profits, the cap will limit its members’ profit opportunities, which is potentially even more damaging.

The group also points out that Sunak’s so-called energy profits levy on fossil fuel producers was accompanied by a generous investment allowance that companies can use to reduce their tax bill if they embark on new drilling operations.

The oil and gas levy includes a sunset clause that would remove it at the end of 2025, whereas the energy prices bill would hand ministers the power to keep the revenue cap in place two years longer, until the end of 2027, Energy UK warns.

Unless similar allowances are built into the revenue cap, the government will “penalise investment in clean, cheap, low-carbon generation in favour of polluting oil and gas extraction”, the briefing says.

A “poorly designed” revenue cap would be “an unprecedented policy that could have catastrophic consequences for the investment needed to safeguard both our climate targets and energy security both this winter and beyond”, the briefing adds.

Energy companies are hoping a new Conservative prime minister will pause some of Truss’s initiatives and work with the sector to design better solutions to the energy price crisis.

A spokesperson for the government said: “We are taking action to temporarily decouple gas and electricity prices and set a fair price for low carbon electricity generation and will shortly be running a consultation on the Cost-Plus Revenue Limit to ensure that interested parties can have their say on its design.”

 “The Energy Prices Bill comes alongside longer-term measures in place to reform the energy market, giving Britain back control of its own homegrown energy and breaking ties to the ever-increasing volatility and uncertainty of the global gas market.”