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Keeping Tabs — rethinking central banks, ESG and hotel stays

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By Jasper Cox, Toby Fildes, Tyler Davies
15 May 2020

There is a huge amount of information to take in at the best of times in the capital markets. During a crisis, it can be overwhelming. So, each week, Keeping Tabs brings you the very best of what we in the GlobalCapital newsroom have found most useful, interesting and informative from around the web.

Let’s start with historian Adam Tooze arguing in Foreign Policy  that central banks need a new purpose to be mapped out and defined. The essay is timely given the German Federal Constitutional Court’s judgement on the European Central Bank, the spending splurge to tackle the coronavirus crisis, and the recognition that finance needs to step in to prevent catastrophic climate change.

But the confusion about what central banks should actually do has been growing for a while: the old model of the independent, technocratic central bank acting primarily to restrain inflation is obsolete.

“It was a model that rested on a series of assumptions about the economy (there was a trade-off between inflation and unemployment), global financial markets (they had the power to punish), politics (overspending was the preferred vote getting strategy), and society at large (there were substantial social forces pushing for high employment regardless of inflation),” write Tooze.

The question is whether a new framework can be constructed.

There’s more on central banks at research house World Resources Institute, where Leonardo Martinez-Diaz and Giulia Christianson argue that quantitative easing programmes — which don’t appear to be going away any time soon — should be greened up.

Now onto a more local level. Finding something called The Good Economy is a rarity at the moment, with most economies heading through the U-bend at an unseemly rate of knots. But fear not, there is such a thing. Except that it is not a hidden Shangri-La that has somehow evaded the terrible effects of coronavirus.

Instead, The Good Economy is a social advisory firm, specialising in impact measurement and management. It has published a white paper recommending a “sector standard” approach to environmental, social and governance (ESG) reporting for UK housing associations.

While this might seem one for the purists, the concept of marrying a hungry ESG fixed income investor base with a sector that will play a crucial role in the UK’s economic and social recovery from the Covid-19 pandemic is very compelling. Priorities are changing and housing, along with healthcare, will be front and centre of the public's consciousness for the foreseeable future.

The transport sector is also in the limelight, with the news this week that Transport for London — which runs tube and bus services in the UK capital — has secured government funding. Here is an article from John Bull, published before that agreement, on the legal, financial and political risks facing TfL.

Across the Atlantic, the unemployment numbers have been particularly frightening. But what is underneath the bonnet of the labour market state-side? In a podcast, the FiveThirtyEight team discuss the Bureau of Labor Statistics’s April job report with the help of Erica Groshen, former commissioner of the Bureau.

Picking through the damage, one interesting finding is that many people have maintained a relationship with their employer without being reported as having been completely laid off. The silver lining is that this could help employment bounce back.

Meanwhile, in financial markets, Mark Holman, chief executive of Twenty Four Asset Management, says the rally in credit markets will continue. He points to several reasons: liquidity injections into economies and markets; central bank interventions in credit; the predictability of the recession’s timeline (Keeping Tabs  is maybe a touch more pessimistic on this pont); and the fact that higher quality credits are outperforming, suggesting to Holman that the rally is “rational”.

However, he warns against buying the most risky credits. “It is a fair assumption in our view that less than 50% of those companies in the CCC ratings band today will be around in five years’ time, in their current form at least.”

And finally, a surprising use of debt capital markets to help the badly-hit hospitality sector in Des Moines, Iowa. The Des Moines Register  reports on “Buy Now, Visit Later” hotel bonds: these cost customers $100 but entitle them to a $150 spending voucher if they book a room a couple of months later. The maturity date on the bonds is 60 days: Keeping Tabs calculated that to be an annualised yield of 1,078%.

By Jasper Cox, Toby Fildes, Tyler Davies
15 May 2020