Digest Of The. Economist. 2006(2-3)Moving marketsShifts in trading patterns are making technology ever more importantAN INVESTOR presses a button, sending 1,000 small “buy” orders to a stock exchange. The exchange's computer system instantly kicks in, but a split second later, 99% of the orders are cancelled. Having found the best price, the investor makes his trade discreetly, leaving no visible trace on the market—all in less time than it takes to blink. His stealth strategy remains intact.Events like this happen many times a day, as floods of orders from active hedge funds and “algorithmic” traders—who use automated programs to buy and sell—rush through the information-technology systems of the world's exchanges. The average transaction size on leading stock exchanges has fallen from about 2,000 shares in the mid-1990s to fewer than 400 today, although total trading volume has soared. But exchanges' systems have to cope with more than just a growing onslaught of “buy” and “sell” messages. Customers want to trade in more complicated ways, combining different types of assets on different exchanges at once. Then, as always, there is regulation. All this is pushing technology further to the fore.Recent embarrassments at the Tokyo Stock Exchange have illustrated what can happen when systems fail to keep up with the times. In just the past few months, the importance of technology has been plain in mergers (those of the New York Stock Exchange and Archipelago, and NASDAQ and INET); collaborations (the decision by the New York Board of Trade to use the Chicago Board of Trade's trading platform); and the creation of off-exchange trading networks (including one unveiled recently by Citigroup).Technology is hardly a new element in financial markets: the advent of electronic trading in the 1980s (first in Europe, later in America) helped to globalise financial markets and drove up trading volumes. But having slowed after the dotcom bubble it is now demanding ever more of exchanges' and intermediaries' attention. Investors can now deal more easily with exchanges or each other, bypassing traditional routes. As customers' demands and bargaining power have increased, so the exchanges have had to ramp up their own systems. “Technology created the monster that has to be ad dressed by more technology,” says Leslie Sutphen of Calyon Financial, a big futures broker.Aite Group, a research firm, reckons that in America alone the securities and investment industry spent $26.4 billion last year on IT (see chart), and may spend $30 billion in 2008. Sell-side firms spend most: J.P. Morgan Chase and Morgan Stanley each splashed out more than $2 billion in 2004, while asset-management firms such as State Street Global Advisors, Barclays Global Investors and Fidelity Investments spent between $250m and $350m apiece. With brokerage fees for trades whittled down, many have concluded that better technology is one way to cut trading costs and keep customers.Testing all enginesGlobal growth is looking less lopsided than for many yearsLARR Y SUMMERS, a Treasury secretary under Bill Clinton, once said that “the world economy is flying on one engine” to describe its excessive reliance on American demand. Now growth seems to be becoming more even at last: Europe and Japan are revving up, as are most emerging economies. As a result, if (or when) the American engine stalls, the global aeroplane will not necessarily crash.For the time being, America's monetary policymakers think that their economy is still running pretty well. This week, as Alan Greenspan handed over the chairmanship of the Federal Reserve to Ben Bernanke, the Fed marked the end of Mr Greenspan's18-year reign by raising interest rates for the 14th consecutive meeting, to 4.5%. The central bankers also gave Mr Bernanke more flexibi lity by softening their policy statement: they said that further tightening “may be needed”rather than “is likely to be needed”, as before.Most analysts expect the Fed to raise rates once or twice more, although the economy slowed sharply in late 2005. Real GDP growth fell to an annual rate of only 1.1% in the fourth quarter, the lowest for three years. Economists were quick to ascribe this disappointing number to special factors, such as Hurricane Katrina and a steep fall in car sales—the consequence of generous incentives that had encouraged buyers to bring purchases forward to the third quarter. The consensus has it that growth will bounce back to an annual rate of over 4% in the first quarter and stay strong thereafter.This sounds too optimistic. A rebound is indeed likely in this quarter, but the rest of the year could prove disappointing, as a weakening housing market starts to weigh on consumer spending. In December sales of existing homes fell markedly and the stock of unsold homes surged. Economists at Goldman Sachs calculate that, after adjusting for seasonal patterns, the median home price has fallen by almost 4% since October. Experience from Britain and Australia shows that even a soft landing for house prices can cause an acute slowdown in consumer spending.American consumers have been the main engine not just of their own economy but of the whole world's. If that engine fails, will the global economy nose-dive? A few years ago, the answer would probably have been yes. But the global economy may now be less vulnerable. At the World Economic Forum in Davos last week, Jim O'Neill, the chief economist at Goldman Sachs, argued convincingly that a slowdown in America need not lead to a significant global loss of power.Start with Japan, where industrial output jumped by an annual rate of 11% in the fourth quarter. Goldman Sachs has raised its GDP growth forecast for that quarter (the official number is due on February 17th) to an annualized 4.2%. That would pushyear-on-year growth to 3.9%, well ahead of America's 3.1%. The bank predicts average GDP growth in Japan this year of 2.7%. It thinks strong demand within Asia will partly offset an American slowdown.Japan's labour market is also strengthening. In December the ratio of vacancies to job applicants rose to its highest since 1992 (see chart 1). It is easier to find a job now than at any time since the bubble burst in the early 1990s. Stronger hiring by firms is also pushing up wages after years of decline. Workers are enjoying the biggest rise in bonuses for over a d ecade.Pass the parcelOnline shoppers give parcels firms a new lease of lifeTHINGS must be going well in the parcels business. At $2.5m for a 30-second TV commercial during last weekend's Super Bowl, an ad from FedEx was the one many Americans found the most entertaining. It showed a caveman trying to use a pterodactyl for an express delivery, only to watch it be gobbled up on take-off by a tyrannosaur. What did the world do before FedEx, the ad inquired? It might have asked what on earth FedEx did before the arrival of online retailers, which would themselves be sunk without today's fast and efficient delivery firms.Consumers and companies continue to flock in droves to the internet to buy and sell things. FedEx reported its busiest period ever last December, when it handled almost 9m packages in a single day. Online retailers also set new records in America. Excluding travel, some $82 billion was spent last year buying things over the internet, 24% more than in 2004, according to comScore Networks, which tracks consumer behaviour. Online sales of clothing, computer software, toys, and home and garden products were all up by more than 30%. And most of this stuff was either posted or delivered by parcel companies.The boom is global, especially now that more companies are outsourcing production. It is becoming increasingly common for products to be delivered direct from factory to consumer. In one evening just before Christmas, a record 225,000 international express packages were handled by UPS at a giant new air-cargo hub, opened by the American logistics firm at Cologne airport in Germany. “The internet has had a profound effect on our business,” says David Abney, UPS's international president. UPS now handles more than 14m packages worldwide every day.It is striking that postal firms—once seen as obsolete because of the emergence of the internet—are now finding salvation from it. People are paying more bills online and sending more e-mails instead of letters, but most post offices are making up for that thanks to e-commerce. After four years of profits, the United States Postal Service has cleared its $11 billion of debt.Firms such as Amazon and eBay have even helped make Britain's Royal Mail profitable. It needs to be: on January 1st, the Royal Mail lost its 350-year-old monopoly on carrying letters. It will face growing competition from rivals, such as Germany's Deutsche Post, which has expanded vigorously after partial privatisation and now owns DHL, another big international delivery company.Both post offices and express-delivery firms have developed a range of services to help ecommerce and eBay's traders—who listed a colossal 1.9 billion items for sale last year. Among the most popular services are tracking numbers, which allow people to follow the progress of their deliveries on the internet.A question of standardsMore suggestions of bad behaviour by tobacco companies. MaybeANOTHER round has just been fought in the battle between tobacco companies and those who regard them as spawn of the devil. In a paper just published in the Lancet, with the provocative title “Secret science: tobacco industry research on smoking behaviour and cigarette toxicity”, David Hammond, of Waterloo University in Canada and Neil Collishaw and Cynthia Callard, two members of Physicians for a Smoke-Free Canada, a lobby group, criticise the behaviour of British American Tobacco (BAT). They say the firm considered manipulating some of its products in order to make them low-tar in the eyes of officialdom while they actually delivered high tar and nicotine levels to smokers.It was and is no secret, as BAT points out, that people smoke low-tar cigarettes differently from high-tar ones. The reason is that they want a decent dose of the nicotine which tobacco smoke contains. They therefore pull a larger volume of air through the cigarette when they draw on a low-tar rather than a high-tar variety. The extra volume makes up for the lower concentration of the drug.But a burning cigarette is a complex thing, and that extra volume has some unexpected consequences. In particular, a bigger draw is generally a faster draw. That pulls a higher proportion of the air inhaled through the burning tobacco, rather than through the paper sides of the cigarette. This, in turn, means more smoke per unit volume, and thus more tar and nicotine. The nature of the nicotine may change, too, with more of it being in a form that is easy for the body to absorb.According to Dr Hammond and his colleagues, a series of studies conducted by BAT's researchers between 1972 and 1994 quantified much of this. The standardised way of analysing cigarette smoke, as laid down by the International Organisation for Standardisation (ISO), which regulates everything from computer code to greenhouse gases, uses a machine to make 35-millilitre puffs, drawn for two seconds once a minute. The firm's researchers, by contrast, found that real smokers draw 50-70ml per puff, and do so twice a minute. Dr Hammonds's conclusion is drawn from the huge body of documents disgorged by the tobacco industry as part of various legal settlements that have taken place in the past few years, mainly as a result of disputes with the authorities in the United States.Dr Hammond suggests, however, the firm went beyond merely investigating how people smoked. A series of internal documents from the late 1970s and early 1980s shows that BAT at least thought about applying this knowledge to cigarette design.A research report from 1979 puts it thus: “There are three major design featur es which can be used either individually or in combination to manipulate delivery levels; filtration, paper permeability, and filter-tip ventilation.” A conference paper from 1983 says, “The challenge would be to reduce the mainstream nicotine determined by standard smoking-machine measurement while increasing the amount that would actually be absorbed by the smoker”. Another conference paper, from 1984, says: “We should strive to achieve this effect without appearing to have a cigarette that cheats the league table. Ideally it should appear to be no different from a normal cigarette...It should also be capable of delivering up to 100% more than its machine delivery.”Thanks to the banksCollege students learn more about market ratesA GOOD education may be priceless, but in America it is far from cheap—and it is not getting any cheaper. On February 1st Congress narrowly passed the Deficit Reduction Act, which aims to slim America's bulging budget deficit by, among other things, lopping $12.7 billion off the federal student-loan programme. Interest rates on student loans will rise while subsidies fall.Family incomes, grant aid and federal loans have all failed to keep pace with the growth in the cost of tuition. “The funding gap between what students can afford and what higher education costs has got wider and wider,” says Claire Mezzanotte of Fitch, a ratings agency. Lenders are rushing to bridge the gap with “private” student loans—loans that are free of government subsidies and guarantees.Virtually non-existent ten years ago, private student loans in the 2004-05 school year amounted to $13.8 billion—a compound annual growth rate of almost 30%—and they are expected to double in the next three years. According to the College Board, an association of schools and colleges, private student loans now make up nearly 22% of the volume of federal student loans, up from a mere 5% in 1994-95.The growth shows little sign of slowing. Education costs continue to climb while pressure on Congress to pare down the budget deficit means federal aid will, at best, stay at current levels. Meanwhile, the number of students attending colleges and tradeschools is expected to soar as the children of post-war baby-boomers continue matriculating.Private student loans are popular with lenders because they are profitable. Lenders charge market rates for the loans (the rates on federal student loans are capped) before adding up-front fees, which can themselves be around 6-7% of the loan. Sallie Mae, a student-loan company and by far the biggest dispenser of private student loans, disclosed in its most recent report that the average spread on its private student lending was 4.75%, more than three times the 1.31% it made on its federally backed loans.All of this is good news when lenders are hungry for new areas of growth in the face of a cooling mortgage market. Private student loans, says Matthew Snowling of Friedman, Billings, Ramsey, an investment bank, are probably “the fastest-growing segment of consumer finance—and by far the most profitable one—at a time when finding asset growth is challenging.” Last December J.P. Morgan, which already had a sizeable education-finance unit, snapped up Collegiate Funding Services, a Virginia-based provider of federal and private student loans. Companies from Bank of America to GMAC, the financing arm of General Motors, have jumped in. Other consumer-finance companies, such as Capital One, are whispered to be eyeing the market.In the beginning...How life on Earth got going is still mysterious, but not for want of ideasNEVER make forecasts, especially about the future. Samuel Goldwyn's wise advice is well illustrated by a pair of scientific papers published in 1953. Both were thought by their authors to be milestones on the path to the secret of life, but only one has so far amounted to much, and it was not the one that caught the public imagination at the time.James Watson and Francis Crick, who wrote “A structure for deoxyribose nucleic acid”, have become as famous as rock stars for asking how life works and thereby starting a line of inquiry that led to the Human Genome Project. Stanley Miller, by contrast, though lauded by his peers, languishes in obscurity as far as the wider world is concerned. Yet when it appeared, “Production of amino acids under possible primitive Earth conditions” was expected to begin a scientific process that would solve a problem in some ways more profound than how life works at the moment—namely how it got going in the first place on the surface of a sterile rock 150m km from a small, unregarded yellow star.Dr Miller was the first to address this question experimentally. Inspired by one of Charles Darwin's ideas, that the ingredients of life might have formed by chemical reactions in a “warm, little pond”, he mixed the gases then thought to have formed the atmosphere of the primitive Earth— methane, ammonia and hydrogen—in a flask half-full of boiling water, and passed electric sparks, mimicking lightning, through them for several days to see what would happen. What happened, as the name of the paper suggests, was amino acids, the building blocks of proteins. The origin of life then seemed within grasp. But it has eluded researchers ever since. They are still looking, though, and this week several of them met at the Royal Society, in London, to review progress.The origin question is really three sub-questions. One is, where did the raw materials for life come from? That is what Dr Miller was asking. The second is, how did those raw materials spontaneously assemble themselves into the first object to which the term “alive” might reasonably be applied? The third is, how, having once come into existence, did it survive conditions in the early solar system?The first question was addressed by Patrick Thaddeus, of the Harvard-Smithsonian Centre for Astrophysics, and Max Bernstein, who works at the Ames laboratory, in California, part of America's space agency, NASA. As Dr Bernstein succinctly put it, the chemical raw materials for life, in the form of simple compounds that could then be assembled into more complex biomolecules, could come from above, below or beyond.Full to burstingRising levels of carbon dioxide will dump even more water into the oceansTHE lungs of the planet, namely green-leafed plants that breathe in carbon dioxide and breathe out oxygen, also put water vapour into the atmosphere. Just as people lose water through breathing (think of the misted mirror used to check for vital signs), so, too, do plants. The question is, what effect will rising concentrations of carbon dioxide have on this? The answer, published in this week's Nature by Nicola Gedney of Britain's Meteorological Office and her colleagues, would appear to be, less water in the atmosphere and more in the oceans.Measurements of the volume of water that rivers return to the oceans show that, around the world, rivers have become fuller over the past century. In theory, there are many reasons why this could be so, but some have already been discounted. Research has established, for example, that it is not, overall, raining—or snowing, hailing or sleeting—any more than it used to. But there are other possibilities. One concerns changes in land use, such as deforestation and urbanisation. The soil in rural areas soaks up the rain and trees breathe it back into the atmosphere, whereas the concrete in urban areas transfers rainwater into drains and hence into rivers. Another possibility is “solar dimming”, in which aerosol particles create a hazy atmosphere that holds less water. And then there is the direct effect of carbon dioxide on plant transpiration.Dr Gedney used a statistical technique called “optimal fingerprinting” or “detection and attribution” to identify which of these four factors matter. Her team carried out five simulations of river flow in the 20th century. In the first of these they allowed all four explanations to vary: rainfall, haze, atmospheric carbon dioxide and land use. They then held one of them constant in each of the next four simulations. By comparing the outcome of each of these with the first simulation, the team gained a sense of its part in the overall picture. So, for example, they inferred the role of land use by deducting the simulation in which it was fixed from the simulation in which it varied.As with any statistical analysis, the results are only as good as the model, the experimental design and the data. Dr Gedney and her colleagues acknowledge that their model does not fully take into account the use of water to irrigate crops—particularly important in Asia and Europe—nor the question of urban growth. They argue, however, that these aspects, taken together, would remove water from rivers, which makes their conclusion all the more striking. And it is this: fuller rivers cannot be explained by more rainfall or haze or changes in land use, but they can be explained by higher concentrations of atmospheric carbon dioxide.The mechanism is straightforward. A plant breathes through small holes, called stomata, found in its leaves. Plants take in carbon dioxide, and when the atmosphere is relatively rich in this gas, less effort is needed. The stomata stay closed for longer, and less water is lost to the atmosphere. This means that the plant doesn't need to draw as much moisture from the soil. The unused water flows into rivers.The great tech buy-out boomWill the enthusiasm of private-equity firms for investing in technology and telecoms end in tears, again?PRIME COMPUTERS, Rhythm NetConnections and XO Communications—all names to drain the blood from the face of a private-equity investor. Or so it was until recently, when investing in technology and telecoms suddenly became all the rage for private-equity companies. These investment firms—labelled “locusts” by unfriendly Europeans—generally make their money by buying big controlling stakes in companies, improving their efficiency, and then selling them on.In the late 1980s, Prime Computers became private equity's first great “tech wreck”, humiliating investors who thought they understood the technology business and could nurture the firm back to health away from the shorttermist pressures of the public stockmarket. After Prime failed, private-equity firms spent the best part of a decade focusing solely on the old economy. Only in the late 1990s, when the new economy was all the rage, did they pluck up the courage to return to tech and telecoms—a decision some of the grandest names in the industry were soon to regret. Hicks, Muse, Furst and Tate (Rhythm NetConnections) and Forstmann Little (XO) have both been shadows of their old selves since losing fortunes on telecoms.Now, investing in technology and telecoms is once again one of the hottest areas in the super-heated privateequity market. The multi-billion-dollar question is: will this round of investment end any less horribly than the previous two?Last month TDC, a Danish phone company, was finally acquired after a bid of $15.3 billion by a consortium including European giants Permira Advisors and Apax Partners, and American veterans Kohlberg Kravis Roberts (KKR), Blackstone Group and Providence Equity Partners. In the past five years, there has been private-equity involvement in about 40% of telecoms deals in Europe.On the other side of the Atlantic, the action has focused mainly on technology, rather than telecoms. Last summer, a consortium including Silver Lake Partners and KKR completed the biggest private-equity tech deal to date, buying SunGard Data Systems, a financial-technology firm, for $11.3 billion. Since then the deals have continued to flow. The $1.2 billion acquisition of Serena Software by Silver Lake is due to be completed by the end of March. Blackstone and others are said to be circling two IT outsourcing firms—Computer Sciences and ACS.There are reasons to hope that this time will be different. In telecoms, for instance, private-equity firms are mostly trying to buy established firms—often former national monopolists—that, while they might be threatened by internet telephony, have strong cash flow, physical assets and plenty of scope to improve the quality of management. These are the sorts of characteristicsprivate-equity investors thrive on. By contrast, the disastrous investments in the late 1990s were in new telecoms firms that were building their operations.In technology, private-equity interest has grown as the industry has matured, and cash-flow and profitability have become more predictable. Until recently, it has been the norm for tech firms to plough back all their profit and cashflow into investing in the business. They have carried no debt and paid no dividends. Now private-equity firms see the opportunity to pursue their classic strategy of buying firms by borrowing against cashflow, and then returning money to shareholders. Glenn Hutchins of Silver Lake thinks the tech sector is now in a similar condition to the old economy in America in the early 1980s, which is when private equity first started to have an impact, by restructuring and consolidating many industries.How to live for everThe latest from the wacky world of anti-senescence therapyDEATH is a fact of life—at least it has been so far. Humans grow old. From early adulthood, performance starts to wane. Muscles become progressively weaker, cognition fails. But the point at which age turns to ill health and, ultimately, death is shifting—that is, people are remaining healthier for longer. And that raises the question of how death might be postponed, and whether it might be postponed indefinitely.Humans are certainly living longer. An American child born in 1970 could expect to live 70.8 years. By 2000, that had increased to 77 years. Moreover, an adult still alive at the age of 75 in 2002 could expect a further 11.5 years of life.Much of this change has been the result of improved nutrition and better medicine. But to experience a healthy old age also involves maintaining physical and mental function. Age-related non-pathological changes in the brain, muscles, joints, immune system, lungs and heart must be minimised. These changes are called “senescence”.Research shows that exercise can help to maintain physical function late in life and that exercising one's brain can limit the progression of senescence. Other work—on the effects of caloric restriction, consuming red wine and altering genes in yeast, mice and nematodes—has shown promise in slowing senescence.The approach advocated by Aubrey de Grey of the University of Cambridge, in England, and presented at last week's meeting of the American Association for the Advancement of Science, is rather more radical. As an engineer, he favours intervening directly to repair the changes in the body that are caused by ageing. This is an approach he dubs “strategies for engineered negligible senescence”. In other words, if ageing humans can be patched up for 30 years, he argues, science will have developed sufficiently to make further repairs more effective, postponing death indefinitely.Dr de Grey's ideas, which are informed by literature surveys rather than experimental work, have been greeted with scorn by those working at developing such repair kits. Steven Austad, a gerontologist based at the University of Texas, warns that such therapies are many years away and may never arrive at all. There are also the side effects to consider. While mice kept onlow-calorie diets live longer than their fatter friends, the skinny mice are less fertile and are sometimes sterile. Humans wishing both to prolong their lives and to procreate might thus wish to wait until their child-bearing years were behind them before embarking on such a diet, although, by then, relatively more age-related damage will have accumulated.No one knows exactly why a low-calorie diet extends the life of mice, but some researchers think it is linked to the rate at which cells divide. There is a maximum number of times that a human cell can divide (roughly 50) before it dies. This is because the ends of chromosomes, structures called telomeres, shorten each time the cell divides. Eventually, there is not enough left for any further division.Cell biologists led by Judith Campisi at the Lawrence Berkeley National Laboratory in California doubt that every cell has this dividing limit, and believe that it could be only those cells that have stopped dividing that cause ageing. They are devising an experiment to create a mouse in which senescent cells—those that no longer divide—are prevented from accumulating. They plan to activate a gene in the mouse that will selectively eliminate senescent cells. Such a mouse could demonstrate whether it is。
