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After years of being ‘squeaky clean,’ the Federal Reserve is surrounded by controversy

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The Marriner S. Eccles Federal Reserve building in Washington, D.C., on Friday, Sept. 17, 2021.

Stefani Reynolds | Bloomberg | Getty Images

The Federal Reserve has a big meeting on tap next week, one that will be held under the cloud of an ethical dilemma and a policymaking committee that finds itself with fairly pronounced divisions about the path ahead.

Markets largely expect the Fed to follow the two-day session with no major decisions, but rather just the first but significant nods that the historically easy money pandemic-era accommodation is coming to an end soon if slowly.

“Tapering” will be the word of the day when the post-meeting statement is issued Wednesday, at which time individual officials also will release their forecasts on the future arc of interest rates as well as economic growth and inflation.

All of that will be set against a backdrop of controversy: News reports in recent days indicate that Fed officials have been trading stocks and bonds that could be influenced at least indirectly by their policy decisions.

At the same time, speeches over the past several weeks indicate a schism between those who say the time is now to start tightening policy and those who’d rather wait.

For the normally staid Fed, the present circumstances are unusual and could yield some interesting dynamics.

“I think it’s embarrassing for the Fed. It had such a squeaky-clean reputation,” Greg Valliere, chief U.S. policy strategist at AGF Investments, said of the trading controversy that largely involved regional Presidents Robert Kaplan of Dallas and Eric Rosengren of Boston. “But I don’t think it’s going to change policy in any regard at all. I think it will be rearview mirror pretty soon, assuming there’s no other shoe to drop.”

Valliere did note the issue will help fuel Fed critics such as Sen. Elizabeth Warren, D-Mass., who had been a vocal detractor of the Fed’s looser regulatory approach in the years since the 2008-09 financial crisis.

A matter of credibility

More than that, though, the Fed lives on its credibility, and some of the recent problems could dent that.

There’s the market credibility issue – Wall Street and investors need to believe that the Fed is at least mostly unified in its monetary policy approach to setting interest rates and associated moves that have market impact. Then there’s the public credibility – at a time when faith in Washington’s institutions has plunged, ethical missteps only add to that and can have repercussions, especially at such a delicate time.

“The ethics here look bad. They should have known better,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist of the National Economic Council during the Trump administration. “Once you lose that moral authority, it’s a problem.”

Rosengren, Kaplan and any other Fed officials who traded stocks didn’t violate any laws or policies. In fact, that’s become part of the criticism leveled in some circles – that following the financial crisis the Fed didn’t do a housecleaning when it came to internal rules to make sure it avoided the kinds of conflicts that came to light during the financial crisis.

“Keep in mind, they already have [trading] rules they imposed on banks, for example, and yet the Fed’s governors don’t live by those same rules,” said Christopher Whalen, a Fed veteran and now chairman of Whalen Global Advisors. “After Dodd-Frank [the post-crisis banking reforms], every agency in Washington tightened up little conflicts like insider trading. And yet the Fed is somehow exempt from those rules? They look ridiculous.”

For its part, the Fed has noted that it is following rules for other government agencies and has supplemental rules as well.

Jerome Powell, nominee to be chairman of the Federal Reserve Board of Governors, shakes hands with US Senator Elizabeth Warren (R), Democrat of Massachusetts, prior to testifying during his confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, DC.

Saul Loeb | AFP | Getty Images

Still, a spokesman for the central bank said Thursday that Chairman Jerome Powell has directed Fed staff “to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,” a spokesman said.

“This review will assist in identifying ways to further tighten those rules and standards. The Board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct,” the official added.

The controversy comes against a delicate backdrop for the Fed.

The central bank is preparing to take its first steps to normalize policy again, after slashing benchmark interest rates to zero and doubling the size of its balance sheet through more than $4 trillion in bond purchases.

Fed officials are divided on policy: By Goldman Sachs’ count, six officials who have spoken publicly on the issue of tapering asset purchases are for it and six are against. On inflation, while Powell has said he expects price pressures to recede fairly soon, at least six Fed officials, including Governor Christopher Waller, have said they expect inflation to remain above the central bank’s 2% target beyond 2021.

One more complication thrown into the mix is that Powell’s term is set to expire in February, and President Joe Biden is expected to announce soon his preferred choice to lead the bank ahead. Most on Wall Street expect Powell to be nominated again, but there’s growing sentiment that Biden will move out Randal Quarles as vice chairman in charge of bank supervision and replace him with Governor Lael Brainard, who likely would use a heavier hand in bank regulation.

Amid all those pressures, Powell will have to make sure the Fed gets policy right and is able to clear away some of the contentiousness of late.

“It’s not a fait accompli that Jerome Powell is reappointed,” said LaVorgna, the Natixis economist. “The administration is understandably going to wait and see how the Fed handles the taper and what the markets do. That could be the determining factor in whether he’s reappointed.”

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Apple new MacBook Pros fix laptop problems from the last five years

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Before Monday, the last major redesign for Apple‘s larger MacBook Pros came in 2016, with several features that looked to the future.

The 2016 MacBook Pros sported universal USB-C connectors that could power displays and peripherals, a “butterfly” keyboard that allowed the devices to become even thinner, and a long, narrow touchscreen at the top of the keyboard called “Touch Bar,” in a device powered by an Intel processor.

Apple’s new MacBook Pro models, announced on Monday, conspicuously lack all of those features.

The MacBook Pro is strategically important for the company, because programmers can only make iPhone apps on a Mac, and picky programmers often choose the most powerful machine they can get. But Apple’s pro laptops are pricey, starting at $1,999 with some configurations costing more than $6,000.

Apple MacBook Pro

Source: Apple

The new machines address longstanding user complaints, revealing that Apple does listen to user feedback, especially from programmers and other professional users.

It turns out, Apple’s last redesign for the MacBook Pro wasn’t popular among picky users, leading to a period between 2017 and 2020 with eight out of 10 quarters of flat or negative annual growth in its Mac business.

It didn’t take long for problems to crop up with Apple’s pricey laptops after the redesign in 2016.

  • Users complained they needed pricey adapters to plug in mice or thumb drives, and missed Apple’s older MagSafe connector, which ingeniously disconnected if someone tripped over the power cord.
  • The butterfly keyboard was unreliable, with keys getting stuck due to crumbs or dust. Apple is still repairing butterfly keyboards for free, and even faced a class action lawsuit over them.
  • The Intel chips insider Apple’s MacBook Pros ran hot, making them uncomfortable to use on your lap.
  • Users and developers never embraced the Touch Bar, and touch typists complained you needed to look at it in order to pick a button.

The laptops that Apple announced on Monday look more like the pre-2016 MacBook Pro:

  • The new MacBook Pro models still use USB-C connectors, which have become an industry standard. But the three Thunderbolt USB-C ports also have an HDMI port alongside them for connecting monitors, and a SD Card slot for downloading photos from a professional camera. It now uses a magnetic MagSafe connector to charge.
  • They use Apple’s Magic Keyboard, which is a more traditional design that’s deeper and has garnered positive reviews.
  • Apple is no longer using Intel chips in its newest laptops, instead opting for its own silicon, which is designed to be power-efficient and not waste energy by giving off heat. The new design also has feet to prop up the laptop and improve airflow.
  • There’s no Touch Bar on the new Macs. It’s replaced by traditional function keys that can control screen brightness, media playback, and a big escape key, which is important for programmers.

The biggest advancement from Apple’s perspective is the chip inside the new 16-inch and 14-inch MacBook Pros. They use Apple’s own M1 chips, either in “Pro” or “Max” configurations, instead of the same Intel or AMD chips Windows PCs use.

An Apple employee points to the Touch Bar on a new Apple MacBook Pro laptop

Stephen Lam | Getty Images

Apple’s chips have led to improved battery life in computers they’ve shipped in, like the 13-inch MacBook Pro and the MacBook Air. While the ultimate laptop processor speed crown is contested, it’s clear that Apple’s chips are good enough to send emails, browse the web, and even get some light gaming in.

But users who care less about the guts and specs inside their computers may find the new design — which does not depend on technological improvements over the past half decade — to be more convincing reasons to upgrade than the number of transistors in the M1 Max (57 billion, for the record).

Since Apple began to update its laptops with new keyboards and chips, the Mac division has been on a roll, selling $26 billion worth in the most recent three quarters, which Apple CEO Tim Cook says is the company’s “three best quarters ever” in the Mac’s nearly 40-year history. Even before Apple released its new MacBook Pros, sales were up nearly 33% annually over that period.

That sales boost was partially due to the pandemic. But it was also partially driven by releasing new computers that had reliable keyboards and strong battery life. On Monday, Apple extended that strategy to its higher-end computers, and extended it by bringing magnetic charging and a port for connecting displays back.

Improvements aside, the 2021 MacBook Pro could still arouse controversy among Mac loyalists. The computer comes with a “notch” or an iPhone-like cutout to house the laptop’s improved 1080p webcam — a controversial design move that could distract users.

Expect Apple to continue to revamp its laptop lineup, especially in the lower-cost, higher-volume models. The MacBook Air and 13-inch MacBook Pro have Apple’s M1 chip, but neither current model has a magnetic charger or HDMI port, and the 13-inch MacBook Pro still comes with a Touch Bar.

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Alibaba launches new server chip to boost its cloud business

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Signage at the Alibaba Group Holdings Ltd. headquarters in Hangzhou, China, on Wednesday, March 24, 2021.

Qilai Shen | Bloomberg | Getty Images

GUANGZHOU, China — Chinese e-commerce giant Alibaba launched a new server chip on Tuesday, as it looks to boost its cloud computing business and compete against U.S. rivals like Amazon.

The processor, called Yitian 710, will go into new servers called Panjiu.

The chip and servers will not be directly sold to customers. Instead, Alibaba’s cloud computing clients will buy services based on these latest technology. These servers are designed for artificial intelligence applications and storage.

The company did not say when the services based on the latest chip and server will be available for customers.

Alibaba will not be manufacturing the semiconductor but will be designing it instead.

That’s a trend among Chinese companies. Huawei designed its own smartphone chips and Baidu raised money this year for a standalone semiconductor business. U.S cloud computing rivals including Google and Amazon have also done the same.

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How Evergrande found itself on the wrong side of China’s regulators

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High-rise apartment buildings at China Evergrande Group’s under-construction Riverside Palace development in Taicang, Jiangsu province, China, on Friday, Sept. 24, 2021.

Qilai Shen | Bloomberg | Getty Images

BEIJING — Chinese developer Evergrande made little progress toward complying with Beijing’s crackdown on real estate debt — until it was too late for investors who poured money into its offshore bonds, now worth at least $19 billion.

Worries about the giant developer’s ability to repay its debt and a total of $300 billion in liabilities have put global investors on edge. Beyond the company itself, there are worries about a potential spillover into the rest of China’s real estate industry or economy.

A closer look at Evergrande revealed a company with many of the same problems as others in the Chinese property sector, but didn’t act as quickly to respond to government rules aimed at resolving those issues.

Evergrande has failed to meet several payment deadlines since September, and the latest was on Oct. 11 for interest owed on one of its U.S. dollar-denominated bonds. That brought its total missed payment to $279 million since last month, according to Reuters.

While the developer had taken on debt for years, its latest problems really came after tighter regulation in the last two years, analysts said.

China’s central bank on Friday said most real estate developers had stable operations, and called Evergrande a unique case in which the company “blindly” diversified and expanded. There was little indication a full-on rescue plan was on its way.

Here’s how the world’s most indebted property developer ended up in such dire straits:

Evergrande crosses all three red lines

Chinese authorities met with 12 real estate developers in August 2020, and asked them to reduce their reliance on debt. Evergrande was among those at the meeting, state media said.

The report described a “three red lines” policy, which hasn’t been officially announced. State media describe the “red lines” as three specific balance sheet conditions developers must meet if they want to take on more debt. The rules require developers to limit their debt in relation to the company’s cash flows, assets and capital levels.

Last summer, all 12 of the developers at the meeting had crossed at least one of the red lines, said Julian Evans-Pritchard, senior China economist at Capital Economics.

The problem this entire industry faces is the entire model relies too much on finance.

Zhang Yingji

senior fellow, ICR

One year later, Evergrande and Greenland were the only companies of the original dozen that had still crossed at least one of the red lines, Evans-Pritchard said in a Sept. 22 report. As of the end of June, he said Greenland had crossed one, while Evergrande had breached all three red lines.

In contrast, “among the top 30 [developers], less than a third exceed any of the limits, compared with over two thirds a year ago,” he said. “Even firms that are not officially subject to the rules have generally complied.”

Evergrande warned investors of default in late August. Just days earlier, China’s central bank and other authorities told the company’s executives in a rare meeting to resolve their debt problems.

“The problem this entire industry faces is the entire model relies too much on finance,” said Zhang Yingji, senior fellow at Chinese real estate research institute ICR.

He said the restrictions on how quickly developers can expand come as ensuring affordable housing is a major part of China’s economic development plan for the next five years.

The average price for a residential home in China — typically an apartment — more than quadrupled between 2001 and 2019, while that of a new house in the U.S. rose 80% during the same time, according to official data from China and the U.S.

The price surge came even as Beijing began in 2016 to promote a slogan that “houses are for living in, not speculation.” It was an effort to control a property market that many likened to a bubble.

Evergrande’s U.S. dollar overseas debt

Heavy reliance on pre-sales

Like many developers in China, Evergrande sold apartments to individual consumers before the properties were completed. This allowed the company to generate cash, while taking out loans to develop the properties.

Over the last decade, the value of Evergrande’s properties under construction rose so quickly that it far exceeded the value of the company’s completed projects as well as what the company was able to sell.

By 2020, Evergrande had 1.26 trillion yuan ($195.89 billion) worth of projects under construction. But that was about 70% more than the properties the company was able to sell that year, at 723.2 billion yuan. Only about 148.47 billion yuan of projects were actually completed.

The value of properties under development accounted for just over half of Evergrande’s total assets, ticking up to 54.7% in the first half of this year, up from 54.3% at the end of last year.

Keeping up with such a high ratio of construction projects became unsustainable once the new regulation kicked in and affected Evergrande’s ability to obtain financing.

“Financial institutions have already curtailed their direct exposures to Evergrande over the past two years,” Moody’s analysts said in an Oct. 11 note.

They said there was a drop in the company’s borrowings from banks, trust companies and other financial firms to 393.9 billion yuan at the end of June, down sharply from 604.7 billion yuan at the end of 2019.

Many of Evergrande’s projects lie in smaller Chinese cities, where economists say there is an oversupply of housing, compared to China’s largest cities, where there is a housing shortage.

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The company is also in a tougher situation than other developers because of its heavy use of supplier commercial bills – tradeable contracts for paying suppliers and construction contractors, S&P Global Ratings analysts said in a Sept. 20 note.

“Evergrande’s contracted sales have fallen more than other issuers in the sector that have experienced distress,” the report said.

Without sufficient financing, it is harder to keep up construction and other assets that can be sold, S&P said. “This is shutting down Evergrande’s most important source of cash flow: contracted sales of its property projects.”

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