Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Dataviz was more-or-less invented in the back half of the 18th century by William Playfair, who was born near the village of Liff just outside Dundee.
If you’ve not read his Wikipedia entry, do. There’s murky spycraft, counterfeiting, extortion, propaganda, sibling rivalry, land speculation, a bank run, a debtor’s prison, and a cameo at the storming of the Bastille. Playfair’s life is among the most interesting ever lived, and what survives of him is charts. There’s a lesson in that.
In honour of Playfair, these are this week’s lines:
Email us your guesses for what those lines represent, remembering to put QUIZ in the subject line. One correct entry will be drawn at random for the prize of an exclusive FTAV quiz-winner T-shirt.
We usually name correspondents who get all the answers so if you don’t want that to happen, or would rather we use a pseudonym or whatever, be sure to tell us. The deadline for entries is Monday’s first light over the Bracken House roof garden and the judge’s decision is final.
Ajay Rajadhyaksha is global chair of research at Barclays. Micheal McLean is a public policy analyst at the bank.
After two years when the US economy seemed to thump everyone else, the narrative is starting to shift.
US stocks are now negative for the year (and are getting hammered by European equities!) the dollar rally has stalled, and bonds have rallied. And this isn’t just a market tantrum; data have started to soften too. The latest bit of bad news was yesterday’s ISM reading, soon followed by more bad tariff news.
The Atlanta Fed’s GDP tracker now suggests a 2.8 per cent economic contraction in the first quarter, after disappointing retail sales, personal spending, consumer confidence and manufacturing data. The nowcasting model has probably been skewed by a surge in imports ahead of tariffs coming into force, but we’re clearly seeing an economic slowdown, which could morph into something more malign.
However, the economic bulls can push back with one simple argument — look, new tax cuts are coming!
After all, the signature legislative accomplishment of the Donald Trump’s first term was the large tax cut in the Tax Cut and Jobs Act (TCJA) of 2017-18. And in recent months, the president has promised not just to extend the expiring TCJA but also to give new tax cuts on tips, overtime pay, Social Security earnings, SALT relief, etc.
Moreover, the House just passed a budget resolution, the first step to a budget reconciliation bill. The Senate has also gotten into the act, with Majority Leader John Thune calling for not just extending the TCJA, but making those cuts permanent. Even if the economy is softening, it seems only a matter of time before Congress rides to its rescue.
Except — the reality on the legislative ground is a little different.
Consider the just-passed House budget resolution. This isn’t a tax bill; it’s a framework that lays out targets for tax cuts ($4.5tn) funding increases ($300bn, mainly for immigration enforcement) and spending cuts ($2tn). Individual committees in the House are then supposed to hit those targets. For example, the Energy and Commerce committee (which oversees Medicaid spending among others) is supposed to come up with $880bn in spending cuts.
Based on this budget resolution, the House can add $4.5tn to the deficit via tax cuts. But House committees have to also come up with $2tn in spending cuts. The original draft didn’t include so many spending cuts, but Republican fiscal hawks on the Budget Committee insisted that they would stop the bill unless those were added. Crucially, every dollar below $2tn gets offset one-to-one by a dollar lower in tax cuts.
Add it all up — $4.8tn in tax cuts and border funding increases and $2tnn in spending cuts elsewhere — and Congress is aiming to increase the deficit by a maximum of $2.8tn. All these numbers are over a decade — from fiscal year 2025 to 2034.
But here’s the problem.
The Joint Committee on Taxation (JCT) estimates that simply extending all expiring tax cuts will add $4tn to the deficit over a decade. But extension is simply a continuation of the status quo — just ensuring that today’s tax bills don’t go up next year. Meaning no new fiscal stimulus. And yet, the current budget resolution targets deficits of $2.8tn. In other words, Congress (currently at least) is not only not planning for large new fiscal stimulus; it is at present targeting a $1.2tn fiscal drag.
There’s also the question of where the $2tn in spending cuts will come from. The Energy and Commerce committee is supposed to come up with almost half these cuts. Medicaid cost the US government $912bn last year and provided health coverage to 67mn people. The natural assumption is that this is where there will be large spending cuts, simply because that’s where there’s large spending.
But the president has ruled out major cuts to Medicaid (in addition to Social Security and Medicare), which begs the question — how do you find $2tn in spending cuts given that defence, interest costs and the troika of Social Security + Medicare + healthcare (Medicaid, Children’s Health Insurance Program and the Affordable Care Act) is what the US government spent almost all of last year’s $6.9tn on?
Separately, what about the new tax cuts that the president has promised? The non-partisan Committee for a Responsible Federal Budget estimates that to fund all of Trump’s tax wishes could add as much as $11.2tn to the deficit over the next decade. A far cry from the $2.8tn deficit increase — and even that just passed the House with the barest 217-215 majority.
In recent days, the Senate has suggested making tax cuts permanent by amending the budget resolution so the Congressional Budget Office (CBO) and Joint Committee on Taxation is told to consider current policy, not current law when ‘scoring’ the bill. This is sausage-making at its finest. Basically, the CBO/JCT no longer has to account for the $4tn or so that it would cost to extend the tax cuts, if the “current policy” guideline is used.
But this is semantics. It doesn’t change the fact that the deficit will still go up by trillions simply if TCJA is extended. Republican House members worried about the deficit still know that the debt clock will rise at a worrying pace — telling the CBO to ignore it doesn’t change the numbers. Notably, the idea of using current policy was also considered at the time of writing the House budget resolution, but didn’t garner enough political support.
There’s one final wrinkle to consider. The assumption we’re making is that all these numbers are over a decade — because that’s what the current language specifies (and a 10-year window is the usual protocol). But the House budget resolution could theoretically be amended so that deficits go up by $4.5tn over (say) five years instead of 10. If so, it opens the door to large new tax cuts.
But that approach also has major problems.
First, if $2tn in spending cuts are incredibly difficult to manage even over a decade (given that the US doesn’t want to touch all the things it actually does spend money on), it’s virtually impossible to squeeze into five years.
Second, if the fiscal hawks are worried about adding $2.8tn to the deficit over a decade, presumably they will be even less thrilled about doing the same over five years.
Markets cheered a few days ago when the House passed the budget resolution. But it doesn’t actually provide for net new stimulus. And there’s a long way to go — and many hurdles to overcome — before it comes close to becoming law. So no one should expect large fiscal stimulus to cushion any looming economic setback.
Letter in response to this article: Federal VAT could cut the deficits better than tariffs / From Nic Hein, Washington, DC, US
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Won’t somebody please think of the children? Specifically about tariffs’ effects on their parents’ pocketbooks??
The US is putting 25-per-cent tariffs on goods from Canada and Mexico starting on Tuesday, along with another 10 percentage points of tariffs on China. That news was big enough to overshadow the Trump Administration’s weekend promise to create “strategic reserve” for alt-coins. (That’s another post.)
For those of us who have only looked at economic policy after the 1930s, a tariff is a levy on goods coming into the US. If commodities are priced on the margins (they are) and if companies pass on their cost increases to customers (they mostly do), tariffs start looking like pieces of paper that says “Make Prices Higher” for everything that’s imported, or that’s made of imported goods.
That’s a lot of stuff, especially because this round of tariffs is aimed at Canada, China and Mexico:
Financial markets made it clear that investors do not love this. Stocks fell sharply, and retailers’ shares were hit, with Dollar Tree down 5.6 per cent and Dollar General off 3.1 per cent. This is presumably because the US executive branch’s Make Stuff More Expensive Plan, if it persists, will mean Americans won’t be able to buy as much stuff.
While this bodes poorly for automakers, as MainFT has covered in depth, there’s a decent chance that prices won’t rise immediately on durable goods. This is because producers seemed to use that extra month of tariff delays to rush imports of inventory and materials. As an aside, Jason Furman had a helpful explanation today about why that boost in imports is probably dragging down the Atlanta Fed’s GDPNow figure into spooky recession territory.
But for our US readers who like to eat healthy, or have children, there is a more urgent concern: Tariffs on fresh produce, like berries, which can not be ordered in bulk and held in a warehouse for months.
Kids love berries. Berries are already expensive. Most kids love strawberries. And Mexico was the source of nearly 99 per cent of imported strawberries available in the US in 2022, according to the latest data from the Census Bureau.
While the US has a pretty robust domestic strawberry-growing business, imports still made up nearly 19 per cent of available supply from 2018-2020, according to the USDA.
For all berries that aren’t strawberries, we get about 51 per cent of our imports from Mexico and Canada, according to the Census Bureau.
A whopping 62 per cent of available blueberry supply was imported in 2018-2020, according to the USDA. While blueberries are imported from a wider range of countries, roughly a third came from Mexico and Canada in 2020:
In other words, we’re talking about a 25-per-cent price increase on roughly one-fifth of available blueberries and strawberries in the US.
For vegetables — equally important for kids, if less loved — nearly 70 per cent of imports come from Canada and Mexico. (This is going by the somewhat puzzling NAICS category that excludes potatoes, sugar beets and corn, but includes melons.)
Again, fresh produce markets are fundamentally commodity markets, meaning they’re definitely priced on the margins. Because of this, it’s tough to argue the tariffs won’t matter for prices at the grocery store.
These unfriendly maths could also help explain US President Donald Trump’s decision to take another step towards agricultural autarky Monday, with this post threatening tariffs on exports of agricultural products.
But there are pretty clear problems with any US attempt to fully replace some of that supply . . . for example, the blueberry-growing seasons in Michigan or Oregon probably don’t extend through January and February, when it is summer in Peru.
To take a step back: US officials keep saying they want Americans to have more kids. If so, it could help to make it a little less expensive to do that. No need to worry about car seat requirements! It’d be fine to just avoid unnecessary berry price increases. We might be able to put chicken coops in our backyards, but growing berry bushes is a different matter altogether.
Your guide to what the 2024 US election means for Washington and the world
The intensity and hostility of the Oval Office clash between Donald Trump, JD Vance and Volodymyr Zelenskyy has left many observers taken aback. For those of us who have spent careers in investment banking, however, the scene had a familiar ring.
What unfolded in that meeting mirrored a strategy used by some leaders in finance: the use of rhetorical dominance as a substitute for substantive dialogue. It’s a tactic wielded in meeting rooms and on conference calls when actual arguments are in short supply. Designed to shut down opposition, it reinforces the pecking order, and remind the other parties of their place. The repeated demands for gratitude, the warning not to “litigate” the issues “in front of the American media,” the reminders of Ukraine’s weakness — these kinds of statements aren’t meant to foster real debate; they’re meant to stifle disagreement.
Every investment banker has seen this in action. And these tactics sometimes pay off. Most banking veterans can recall times when the bullies got the promotions while the collaborators were sidelined. These apex predators don’t climb the ranks by fostering fresh ideas or building consensus; they ascend by tightening their grip on their fiefdoms and wielding power with ruthless efficiency.
Early in my career, I proposed a carefully structured block trade, only to have it summarily shot down by senior managers who, as it later turned out, had incurred unrelated trading losses they didn’t care to disclose. Instead of a straightforward explanation, they deployed the standard arsenal: “We’ve beaten this issue into the ground and there’s nothing left to discuss”, “We’ve backed you so many times before”, “You’re not being a good partner.” The message was clear: Drop it or risk losing crucial allies for future deals. Shut up and take the L.
So I made the awkwardly mortifying call to the client, walking back the nonbinding price indication I had previously given (an indication I had cleared internally with the same senior leaders). Days later, a competitor executed the exact same trade at a sharper price, earning an eight-figure fee and lavish client praise. I could only seethe in silence. Internally, no one acknowledged the blunder. Even now, many years later, the memory stings. Could I have pushed harder? Maybe. But that would have been career seppuku.
On another occasion, a commitment committee call to approve a convertible bond underwriting took a turn when a senior banker — clearly set against the deal for no discernible reason — started peppering my colleague with rapid-fire questions. She handled each one with aplomb and precision, but his frustration only grew. Finally, he snapped, “Please stop lecturing me about this stuff. I was doing convertibles before you were even born.” A long, airless silence followed. That was the moment we all knew the deal was dead. The rationale didn’t matter. What mattered was that we had failed to pay homage to him early enough. He hadn’t just appointed himself gatekeeper — he had anointed himself high priest, and the temple doors were staying firmly shut.
Just about everyone I know across the City and Wall Street has similar stories, often much more lurid, yet only on rare occasions will the exchanges result in an HR complaint. There’s no profanity, no explicit misconduct — but just enough residual unpleasantness to leave the recipient feeling undermined and victimised, partly because there’s no clear avenue for redress. Similarly, while Trump and Vance may have been harsh towards Zelenskyy, they can plausibly argue they relied on forceful rhetoric rather than outright abuse.
Of course, many senior banking leaders don’t operate this way. In fact, most of the people I reported to over the years valued informed debate and constructive pushback. And it wasn’t always a black-and-white case of dominance or dialogue — some leaders would run roughshod over those they saw as weak or out-of-favour while showing respect, even deference, to others perceived as stronger or able to defend themselves. This is much like Trump’s contrasting treatment of Zelenskyy and Emmanuel Macron; the American president tolerated disagreement from the French president in their meeting far more than from his Ukrainian counterpart.
When rhetorical dominance prevails, it creates a self-perpetuating cycle. A leader surrounds himself (it’s usually, though not always, a man) with sycophants, discourages challenging perspectives, and creates an environment where subordinates spend more time deciphering his whims and wishes than developing sound strategies. The resulting atmosphere of confusion and obsequiousness undermines institutional effectiveness, and yet, paradoxically, the leader’s grip tightens.
This approach might deliver short-term wins — bigger compensation pool allocations, more headcount, internal victories — but the long-term consequences are steep. Morale withers. Market share erodes. Innovation dries up. Key considerations are overlooked. Meanwhile, the architects of this culture keep rising, leaving others to clean up the wreckage.
To be fair, there are moments in investment banking when decisiveness has to trump endless debate. When dealing with politically savvy colleagues (and most bankers excel at internal politics), excessive consultation can stall necessary reforms, derail change, or compromise strategy. As an erstwhile mentor once told me, “Sometimes you have to steamroll people to get things done.” I’d like to think that when I led teams, I relied on my powers of persuasion rather than naked appeals to my own authority — but at times my patience wore thin, and decisions had to be made, cutting off discussion and dialogue.
The White House dispute has, at least temporarily, scuppered the agreement between the US and Ukraine to develop Ukraine’s natural resources. While Trump and Vance may not have mastered the art of the deal, they have perfected the art of stifling dissent and ostracising anyone who defies their authority — an expertise still alive and well on Wall Street.
Only one reader got both hints (almost) for last week’s charts quiz, despite our attempts to hit you over the head with them.
Sure, even with lithium’s increased geopolitical importance, it might’ve been ambitious to think someone would know the CME launched a spodumene futures contract last year.
But 1) the post’s subhed was a line from Nirvana’s “Lithium”, 2) the picture was from Nirvana’s “Lithium”, and 3) we changed the beginning date on the chart so the line didn’t actually start until the futures contract launched.
More readers submitted correct guesses about the PNUT shitcoin, which is one of the dumbest lines to be used on an FTAV quiz.
Anyway, here are your chart answers to review:
This is the stock chart for Snap, which has been mentioned offhand as a potential acquisition target for AppLovin.
This is the CME’s new spodumene futures price (continuous, via FactSet).
And this is the market capitalisation of the Peanut the Squirrel shitcoin (PNUT).
Big congrats to Erik Johnsson, who has outquanted the rest of you. Unclear whether he got the Nirvana references, though. Better luck next week.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Yes, we’re going to write about portfolio trading, again. Our previous posts have mostly focused on how a big deal it has become in the US, but a new Barclays report shows it’s now a growing phenomenon in Europe as well.
Barclays has previously estimated that a big fat portfolio trade now hits the US fixed-income market every seven minutes, with volumes topping $1tn annually. Portfolio trading now accounts for as much as a quarter of investment-grade corporate bond trading, and a sixth of junk bond trading.
Calculating the same in Europe is tricky because of the lack of any consolidated tape of bond trades (though that’s about to change) so the UK’s bank’s analysts used an algorithmic approach to identify probable portfolio trades and get a rough estimate.
Barclays found that total annual volumes probably topped €250bn in 2024. In frequency, that equates to a portfolio trade happening every 20 minutes on average, down from every 33 minutes just two years ago.
It has become particularly prevalent in investment grade, euro-denominated corporate bond market, where portfolio trading now accounts for 11 per cent of all trading volume. In sterling bonds and euro high yield it has reached a 9 per cent and 7 per cent market share respectively.
Most portfolio trades identified by Barclays happened on electronic platforms like Tradeweb, and involved about 60 bonds worth a total of €40mn on average.
That’s lower than the $50-60mn average in the US, but this is maybe less than you you’d expect, given how much larger and more liquid the US corporate bond market is, and how developed portfolio trading is becoming there.
Zornitsa Todorova, head of thematic fixed income research at Barclays, reckons that portfolio trading volumes in Europe will roughly double to account for about 20 per cent of all dealer-to-client volumes within the next three years.
How big a deal is all this? Well, pretty big if you’re a bond fund manager.
Index-tracking fixed income vehicles often use portfolio trades to rejig their exposures, but it has become a hugely valuable tool for active managers as well, as Todorova highlights. Her emphases below:
Our analysis attributed the majority of portfolio trading volumes in Europe to active investors, though we found that passive investors do use PTs to rebalance portfolios at month-end and to manage inflows and outflows intra-month by buying or selling a ‘slice’ of their holdings that closely resembles the index they track. In addition to these use cases, active managers also frequently use PTs to adjust their portfolios towards specific credit risk dimensions, such as rating, sector or maturity, along with hedging and de-risking.
The fact that active investors are the marginal consumers of PT liquidity is significant for several reasons. Unlike passive investors, who track an index, active investors, in particular open-end mutual funds, frequently trade bonds and depend on liquidity to efficiently enter and exit positions. These investors set marginal prices when they trade, influencing bond spreads and market depth. Their activity also impacts liquidity risk premia, as bonds with lower liquidity command higher yields.
Portfolio trading has the potential to transform credit markets in several ways: by adding more volume to the market, it improves liquidity, lowers the barrier to entry for new investors, and enables new strategies, such as systematic credit.
Further reading: — ETFs are eating the bond market (FTAV)
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There are some things in global finance which you really shouldn’t look at too closely if you value your sanity. Repo and money markets would definitely be one. But even the banking system’s funding arrangements are benign compared to the Lovecraftian horror of their IT outsourcing, because there’s no central bank to guarantee a happy ending. As one senior bank supervisor put it a few years ago, there is no such thing as a database provider of last resort.
In other words, Hell is empty, and all the demons are in the ECB Outsourcing Register. The annual “horizontal review” from the ECB’s Banking Supervision committee was published last week. Do you want to know what proportion of “critical functions” are not compliant with basic regulatory guidelines? It’s just under 10 per cent. The average number of “critical” service providers per large bank? Fifty-eight per cent. What’s the average number of subcontractors on the average banking industry outsourcing contract? Four and a bit. What proportion of critical outsourcing providers would be “easy” to replace in the event of a problem? Just 17.7 per cent, although the good news is that the proportion which would be “impossible” to replace is now 8.6 per cent — the remainder are apparently “difficult”.
Whatever the opposite of “setting your mind at rest” might be, that’s what it does to consider the extent to which the European banking system (and it’s unlikely that the US or UK are any better) relies on a complicated web of supply chains for software-as-a-service, offsite data centres and other euphemisms for “other people’s computers”. It’s all driven by the growth of cloud computing, of course — cloud now makes up more than a fifth of the total, having grown 13.5 per cent in the last year (and the ECB’s report is based mainly on data as of the end of 2023, so it is likely to be even more important now).
The growing role of cloud contracts has meant that European banks are, more than ever, dependent not only on a small number of outsourcing providers (30 firms account for half the total spend), but on non-EU firms. Within these top-30 firms, slightly more than 50 per cent of contracts are with companies whose ultimate parent is a US corporation.
Which raises a bit of an issue for Europe, as it starts to worry about strategic independence in a world of heightened geopolitical tension. As Henry Farrell and Abe Newman pointed out in their book Underground Empire, the US controls a number of systems of “weaponised interdependence”, of which two of the most important are the global dollar banking system and the internet. However, it seems that the interaction of finance and distributed computing might have created a third; the Euro area banking system (including the payment rails over which any future central bank digital currency will have to run) is highly dependent on server farms which might be physically located in Europe, but whose owners might ultimately answer to a foreign power.
If you’re looking for a crumb of comfort, it might be that the regulatory definition of a “critical function” in this context is quite expansive; it doesn’t necessarily mean that an executive order could switch off the whole European financial system. But the trouble with the system as it’s currently set up is that it’s practically impossible to say anything about the true level of risk with any degree of confidence.
(* Editorial note to pedants: the FT style guide says data is singular.)
