TheChek News Flow

Unemployment is at 42-year low but wages fell in real terms

The pay squeeze for Britain’s workforce has continued for the sixth month in a row according to the latest official data, even though unemployment remains at a 42-year low.

Statistics on the state of the labour market for the three months to the end of August show a familiar pattern for the UK: high levels of employment, low levels of joblessness but stubbornly meagre pay growth.

Stephen Clarke, an economic analyst at the Resolution Foundation think-tank, said: “Today’s figures confirm the big picture trend that the UK labour market is great at creating jobs, but terrible at raising people’s pay.”

Inflation outstripped average regular wage growth again over the period, with the result that real pay fell 0.4 per cent.

Average regular pay rose 2.1 per cent in cash terms, slightly slower than the 2.2 per cent recorded the previous month, and about half the pace that was typical before the financial crisis.

The average worker in the UK still earns less in real terms in 2017 than in early 2006, before the crash dealt a heavy and long-lasting blow to living standards.

But economists said the data pointed to a jobs market that remained otherwise healthy. The unemployment rate held steady at 4.3 per cent, the lowest since 1975. There was a slight dip in the employment rate from last month, but it remained close to a record high at 75.1 per cent. Alan Clarke, an economist at Scotia Bank, said the drop in employment in the single month of August was “a tad disappointing” but added: “This series has been running a little bit hot, so no great surprise that it’s cooled off a touch.”

Almost all of the jobs growth over the past year has been in full-time jobs, which suggests the quality of employment is on the rise. Damian Hinds, the minister for employment, said: “Our economy is helping to create full time, permanent jobs which are giving people across the UK the chance of securing a reliable income.”

The jobs data present a dilemma for the Bank of England’s Monetary Policy Committee, which is weighing up whether to raise interest rates from their record lows at the next meeting in November. The very low unemployment rate would usually prompt them to tighten monetary policy. In addition, inflation in the UK rose to 3 per cent in September, its highest level for half a decade. But the persistent weakness in wage growth — in spite of high inflation — is a puzzle that may suggest the economy is not at risk of overheating after all.

“While the headline jobless and price inflation rates imply the economy needs a small interest rate rise, the pay squeeze says ‘not quite yet’,” said John Philpott from The Jobs Economist consultancy.

But John Hawksworth, chief economist at PwC, said the “underlying trend” for jobs growth remained strong. “Nothing here would deter the Bank of England’s Monetary Policy Committee (MPC) from raising interest rates on November 2 if they were already minded to do so,” he said. Economists expect the majority of the nine-person committee to vote for a rise, although not all their views are known.

Dave Ramsden, deputy governor for banking and markets, who is new to the BoE having previously been the government’s chief economic adviser at the Treasury, said on Tuesday he favoured keeping rates lower for longer. “A majority saw a case for removing some monetary policy stimulus in coming months . . . I was not part of that majority,” he said.

Disquiet rumbles over dumb indexing distortions fuelling a classic bubble

As the world marks the 30th anniversary of the 1987 Black Monday crash, a new villain has appeared on the scene. There is widespread disquiet with the growth of passive indexing, which traders believe to be distorting markets.

The concern centres on market-cap weighted indexing, where funds buy stocks in proportion to their market value, so that for example a US stock fund would currently hold more Apple stock than any other. The fear is that “dumb” indexing meekly accepts over-valuations and allows expensive stocks to grow even more expensive; classic ingredients for an investment bubble.

Such criticism makes sense as the passive sector has grown so large. The most heavily traded securities on stock exchanges each day are exchange traded funds; flows of new money into US equities are overwhelmingly into passive funds. And in the post-crisis years when index funds have hoovered in money, momentum has been remarkably consistent (in other words, the winners kept winning while losers kept losing), and value has fared terribly. Asked to explain why investors are not spotting the bargains among value stocks and buying them, it is popular to blame index funds, which persist in allocating relatively little to undervalued companies, and much more to expensive companies.

The circumstantial evidence, at least, is impressive. And after the crisis of a decade ago, we all know that otherwise positive financial innovations can cause unexpected problems. So headlines ask if index funds are “Marxist” or “evil”. It is quite a change in sentiment, and last week it brought forth a strong riposte from the industry. BlackRock, an enormous player in passive and active investment, published a paper last week called Index Investing Supports Vibrant Capital Markets.

It is an important position paper and some of its contentions are far more convincing than others. BlackRock’s best points are, at least in my opinion:

Correlations, both between different stocks, and between stocks and other asset classes, have reduced somewhat during the years that passive investing has boomed — and they were as high in the 1930s, long before passive investing was even thought of, as they were in the worst of the turmoil in 2008-09. The adage that “when the markets go down the only thing that goes up is correlation” appears to be true.

Trading in ETFs remains low — by BlackRock’s estimates, index tracking funds turn over $460bn per year (7 per cent of their assets under management) against $10tn (80 per cent of assets) for active funds. Even if flows into passive are far greater, this suggests they are not yet setting prices at the margin.

ETFs do help with price discovery. For example, international ETFs can trade when the markets they track are close. Famously, a Greece ETF managed to trade in the US during the two weeks when Greek markets and banks were closed during the 2015 Grexit crisis.

Diversification of indices should deal with the issue that market cap-weighting leads to overcrowding in the biggest stocks. The popularity of “Smart Beta” funds, which use indexes that are weighted by measures other than market cap, should be seen as a positive counterweight to the problems caused by passive indexing. These days, there is indeed a continuum from active to passive with plenty of degrees in between.

But that said, the market is dominated by a few huge funds tracking a few well-known indices; diversification into factors and different weightings is a new development. According to ETFGI, market cap funds now have $2.6tn, against $630m in smart beta funds. It is still fair to say that indexing is largely about market cap-weighting. And plenty of traders attest that ETFs often get in the way of price discovery. For example, on a day when one sector is demand, all the stocks in the sector will rally, including the weakest, thanks to ETFs.

Where I find BlackRock’s paper least convincing is its repeated assertion: “Asset allocations — not products or vehicles — drive flows into different sectors. Index investing is just one way to implement these decisions.”

This is true at some level, but the impact of passive investing, particularly ETFs, has been so great that I find this disingenuous. It is a little like the argument that guns do not kill, but rather the people who fire them — while true as far as it goes, it is much easier to kill someone if you have a gun.

The ETF industry should be proud of the way it has opened new markets (particularly in the EM world) and even new asset classes to investment. The advent of exchange-traded products tracking commodity indices, spurred a commodity bull market a decade ago, for example. Selling volatility, once extremely esoteric, is widely practised by retail investors with ETFs.

Passive investing turned asset allocation into a pure top-down decision without having to worry about picking the best manager. Many tried their hand at it. ETFs enabled traders (mostly hedge funds) to trade in and out of whole asset classes through the market day.

These instruments are brilliant examples of financial engineering. What was the point if they were not going to have an effect on outcomes? If some of those outcomes prove to be negative, maybe we need to adjust the engineering.

Academics will determine this debate, and they have much research to do. With luck, they will get us near the truth. For now, we have an acknowledgment from the industry that they are perceived to be causing a problem, and an attempt to show that they can address it. That is positive.

Deposits provide liquidity to banks after neighbours’ decision to cut links

Qatar’s sovereign wealth fund has brought more than $20bn back onshore to cushion the impact of a regional embargo imposed on the Gulf state.

Ali Shareef al-Emadi, Qatar’s finance minister, told the Financial Times that Qatar Investment Authority deposits were being used to create a “buffer” and provide liquidity in the banking system after the gas-rich state suffered capital outflows of more than $30bn.

That followed the decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut diplomatic and transport links with the nation in June. The move has triggered the Gulf’s worst crisis in years.

“We are not liquidating anything. What we have done is taken some of our liquidity from outside to inside. This is through the Ministry of Finance and the QIA, which is very normal in this type of situation,” Mr Emadi said in an interview in London. “The measure we have taken is much more of a pre-emptive and precautionary measure.”

Moody’s, the rating agency, said last month that Qatar had injected $38.5bn into its economy since the crisis erupted.

The QIA, which is estimated to have about $300bn of assets under management, has been one of the Gulf’s most active sovereign wealth funds, acquiring trophy assets such as the Shard building in London and Harrods, the department store, as well as stakes in companies including Barclays Bank and Volkswagen.

The fund has in recent months cut its holdings in Credit Suisse, the Swiss bank; Rosneft, the Russian energy company; and Tiffany & Co, the jeweller. But Mr Emadi said the moves were related to the QIA’s investment strategy, not the crisis. He said the fund would continue to be active.

“We have enough liquid assets,” he said. “So if we see an opportunity arise, we’ll move. We will not stop our business and strategies . . . because we happen to have a problem with some of the neighbouring countries.”

Qatar is the world’s top exporter of liquefied natural gas and one of its richest nations in per capita terms. It has been spending $500m a week on preparations to host the 2022 football World Cup but was hit hard by the embargo, imposed because its neighbours accuse Doha of financing terrorism and supporting Islamist groups. Qatar denies the allegations.

The measures taken against the import-dependent country drove up the prices of food and raw materials and forced Doha to seek new trading partners. Qatar’s trade plummeted 40 per cent in the first month of the embargo but had bounced back to “99.9 per cent” of its pre-crisis levels, Mr Emadi said.

The bulk of the capital taken out of the Qatari banking system was withdrawn by the states that imposed the embargo. Mr Emadi said most of these deposits had now been withdrawn and there should not be large capital outflows in the future.

After being a “little bit bumpy” in the first few weeks of the crisis, “things are back to normal”, Mr Emadi said.

“At this level we are comfortable but I will say that . . . we will defend our market if needed. If we see any systematic risk, we are going to take appropriate measures,” Mr Emadi said. “If we need to do anything like this we will not hold ourselves to limits or caps.”

He insisted Doha would be able to tap international capital markets if it thought conditions were right.

“We will be flexible on the market. If we see opportunities, yes — it all depends on our appetite,” he said. “We have always had discussions with banks; this has been almost a Qatar strategy regardless of where we stand.”

The dispute between the Gulf states, which pits US allies against each other, has reached a stalemate after the governments leading the embargo put a list of extraordinary demands to Doha, including that it pay reparations and close Al Jazeera, Qatar’s satellite television network.

“I hope it’s finished, but if it isn’t, we are also going to plan for our economy to be sustainable, regardless,” said Mr Emadi. “We were a peninsula and now we are operating as an island.”

Supreme Headlines New Streetwear Vertical at StockX

StockX is a marketplace platform that functions like a stock market for products.

The streetwear vertical will include other brands such as A Bathing Ape, Kith and Off-White at a later date. More than 3,000 Supreme products are now live on StockX.

The online “stock market of things” was started in February 2016 via a partnership between Josh Luber, Greg Schwartz and Dan Gilbert, with sneakers as the first vertical. Luber provided his sneaker expertise; Schwartz his technology and product development background, and Gilbert — who is founder and chairman of Rock Ventures, Quicken Loans and majority owner of the Cleveland Cavaliers — his approval for start-up funding through his investment firm Detroit Venture Partners. Luber was the creator of Campless in August 2012, which monitored eBay to provide users with market analysis of sneaker resales and values. Other investors include Eminem, Mark Wahlberg, Ted Leonsis, Tim Armstrong, Scooter Braun and Ron Conway.

Luber said, “Streetwear has been on the ‘stock market of things’ roadmap since Day One,” adding that StockX’s sneaker customers have been asking for the vertical to be included. The company hired Rob Gonzales, who has more than 15 years in the streetwear sector, to head up the newest vertical.

The buy/sell platform that was created for the sneakers vertical — which guaranteed authentication of product listings, real-time market pricing, in-depth market analysis, historical sales/volume metrics and individual user portfolio tracking ­— has since been expanded to include verticals for watches and handbags. Sneakers are required to be brand new, or inventory that is considered “deadstock,” while handbags and watches are to be in “excellent used condition,” according to Luber.

Sneaker brands on the platform include Adidas, Nike, Jordan and Yeezy. Handbags on the site include Louis Vuitton, Chanel, Gucci and Hermès. Watch brands include Rolex; Cartier; Breitling; Omega; Patek Philippe, and Audemars Piguet.

According to Luber, the online platform connects buyers and sellers using an anonymous “live bid/ask” market in the same fashion that the equity exchanges operate. That provides buyers and sellers with transparency in data, whether that is real-time pricing, volume metrics or historical sales data. Because of the data transparency, buyers can buy immediately at the lowest price that is listed, or via a placed “bid” that any individual seller can choose to accept. Conversely, sellers can sell at the highest current bid or place an “ask,” leaving it up to any buyer to decide whether to accept. Luber said completion of any transaction occurs following shipment of the product to Detroit for authentication.

Luber said the company as of June 2017 had surpassed $100 million in gross merchandise value. He projected the gross sales run rate to pass $200 million by the end of 2017. The company this year hired Reginald Brack, former senior vice president at Christie’s, to head the watch vertical, and Cynthia Houlton, former vice president of business development at The Real Real, to lead the handbag category.

Brack said a master watchmaker will open every watch to inspect the movement and check internal and external components. “The watch must meet the watch manufacturer’s specifications for functionality and finish,” Brack said, adding that every component including straps and bracelets, even replacement parts, must contain 100 percent authentic products from the manufacturer. As for the “stock market model,” Brack called it “disruptive” for the pre-owned watch sector.