Finance

WHEN EXECUTIVES at American Airlines unveiled the world’s first frequent-flyer programme 40 years ago, they probably didn’t imagine it would one day be worth more than the airline itself. Last year analysts valued the scheme at around $18bn-30bn, eclipsing the company’s current market capitalisation of $12.9bn. Such programmes have proved a boon to American carriers in the pandemic. Firms including American Airlines have raised $30bn in debt backed by the schemes.Airlines once hoped simply to foster loyalty by offering customers freebies. Passengers collected miles as they travelled and were awarded a free flight once they racked up enough of them. But schemes today are far more sophisticated. Airlines profit by selling miles to credit-card firms at a price that exceeds the cost of providing reward flights and dishing out other perks, such as hotel stays. They also gain when miles expire unused or are cashed in for something of poor value. According to McKinsey, a consultancy, 15-30% of miles expired unused before the pandemic.Credit-card issuers in turn use miles to lure customers with bonuses. Airline-affiliated cards tend to rake in much more in transactions a year than other cards. Many miles are therefore earned not in the air, but through card spending on the ground.That explains why customers earned $6.8bn-worth of miles across big loyalty schemes in 2020, even as many kept to their homes. If they were to rush to convert those miles into free flights as travel takes off again, the profitability of such schemes would be jeopardised. But airlines have another way to ensure that their programmes stay profitable: they can deflate the value of their miles. In the early 2010s American airlines began to calculate the value of a mile based on a complex formula of fares and routes. In 2015 Delta Air Lines stopped disclosing how the value of its miles was calculated and embarked on a series of devaluations, prompting competitors to follow. In the past year or so Delta, Southwest and United have devalued miles on major routes by 6-20%.Airlines have tapped loyalty schemes for cash before, by selling miles to credit-card firms at discounted rates. United traded its miles with JPMorgan Chase, a bank, for $600m in the financial crisis. But the pandemic saw the first use of loyalty programmes as collateral in America, says Benjamin Metzger of Barclays, another bank. United was the first to do so with a secured loan in June 2020. Delta followed with a bond offering soon after.The deals have attracted more investors than bonds secured by old aircraft (which, unlike loyalty schemes, depreciate). Scheme-backed debt tends to boast a better credit rating than the airline issuing it. And investors are comforted by the structure of the deals, which use the schemes’ cash flows to repay debt, and limit risk if an airline goes bust. Affinity Capital Exchange, a fintech firm, is working with JPMorgan to securitise air miles, so that they can be more easily traded.The trick for airlines in all this is to balance the costs and benefits of perks so that customers stay engaged, while carriers’ margins are preserved. Endless devaluations could rattle that equilibrium and upset securitisation arrangements. Sky-high valuations are not assured. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Lifting off” More

INFLATION IS SURGING around the world, with price rises now exceeding central banks’ targets. But Japan is a notable holdout. Although policymakers there have long sought to generate inflation, consumer prices still refuse to budge. In September they rose by just 0.2% year-on-year, and inflation, excluding fresh food and energy prices, actually fell by 0.5% in the same period. Analysts at Goldman Sachs, a bank, expect that measure to fall to -0.8% in the latest data, which was due to be published after this was written. By comparison, a “core” measure rose by 4.6% in America in October, 3.4% in Britain and 2.9% in Germany (see chart).What’s going on? Japan is not insulated from global trends. In October producer prices rose by 7.9% year-on-year, the largest single increase since 1980. The pickup was overwhelmingly led by higher import costs, which rose by 38% in yen terms. The prices of petroleum products and lumber rose by 45% and 57%, respectively, compared with the same month last year.These increases may in small part have been offset by an idiosyncratic factor. Tumbling mobile-phone fees, driven by a government campaign against carriers, are pulling down the consumer-price index as a whole. The communications segment of the basket is down by 28% year-on-year. Yet even if fees were flat, inflation would still be below target. That suggests broader economic factors are an important part of the story.Entrenched expectations built up through decades of little to no inflation play a big role in explaining why rising producer costs have not fed through to consumer prices. Domestic companies are notoriously unwilling to pass on increases in the prices of imports to consumers. At a press conference in October Kuroda Haruhiko, the governor of the Bank of Japan, attributed this reluctance to habits picked up during the country’s periodic bouts of deflation. Companies have a good reason to resist increases. Last week Kikkoman, a producer of soy sauce, announced a 4-10% increase in its prices from February. Such an event might barely be noticed in America. But in Japan it made the national news.Another crucial factor is the weakness of Japan’s consumer recovery. Private spending fell in the third quarter of the year, and is now 3.5% below where it was at the end of 2019. Spending on durable goods, the source of much American inflation, has been practically flat for the past eight years in Japan.The Bank of Japan was an early adopter of zero-interest-rate policies and bond-buying programmes, tools that have since been used elsewhere in the rich world as interest rates hit rock-bottom after the global financial crisis of 2007-09. The absence in Japan of the same inflationary pressures apparent across other advanced economies once again makes the country a laboratory for economists.Despite the Bank of Japan’s activism, inflation has persistently failed to reach its 2% target. Its assets ran to 103% of Japanese nominal GDP even before the pandemic, and bond and stock purchases since have pushed that share up to 134%. In the same period, the Federal Reserve’s purchases have risen from 19% to 36% of American GDP. The Bank of Japan’s policy to keep ten-year government-bond yields at around 0% is still firmly in place, even as a similar effort at yield-curve control by the Reserve Bank of Australia was abandoned after it came under market pressure in October.This suggests that whatever is raising prices elsewhere in the world—whether supply-side constraints associated with the pandemic, demand-side stimulus, or some combination of the two—monetary easing alone is struggling to move the needle when confronted with decades of low inflation expectations. Kishida Fumio, Japan’s new prime minister, has vowed to deploy a fiscal-stimulus package that includes cash for poor families and the under-18s. Analysts at Barclays, another bank, expect new spending worth 3.7% of GDP.These handouts may well nudge up inflation, if the money is actually spent by consumers rather than saved. But for now Japan seems to be the place that inflation forgot yet again. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Land of the falling price” More

VISITORS TO MURKY corners of the internet may encounter ads promising “one weird trick” to help them lose weight or acquire millions. To meet its climate obligations and upgrade its digital infrastructure, Germany needs to rustle up perhaps €50bn ($57bn) a year in public investment. But a “debt brake” inserted into the constitution in 2009 limits annual borrowing to 0.35% of nominal GDP (equivalent to about €12bn). Changing the constitution looks impossible. Squaring this circle means the three parties now negotiating a coalition agreement, after an election in September, will need some tricks of their own.Several are doing the rounds. The first is to establish off-budget public companies that can tap markets for funds devoted to specific aims: insulating buildings, say, or charging stations for electric cars. Deutsche Bahn, Germany’s rail giant, operates this way. A related but distinct proposal is to beef up the KfW, the state development bank, to enable it to leverage private funds for green investment. In theory hundreds of billions could be raised this way, although EU state-aid rules are a constraint.A more cunning ruse is to go on a one-off borrowing binge in 2022, exploiting the temporary suspension of the debt brake applied last year, which allowed the government to fund furlough schemes and the like in the pandemic. Experts have mentioned a sum of €500bn, to be spent over the next decade. But a badly designed scheme could attract the beady eye of Germany’s constitutional court.Perhaps the cleverest wheeze comes from Dezernat Zukunft, a Berlin-based think-tank. Noting that the debt brake relies on estimates of the mysterious “output gap”—or the difference between GDP today and a measure of the economy’s potential—the group suggests tweaking some of the inputs to that calculation. Assuming more slack in the labour market than the finance ministry does, for example, would raise the spending limit. Conservatives dismiss the idea as “Pippi Longstocking economics”. But it involves no legal jiggery-pokery and rests on assumptions no more outlandish than those already in use. “No one understands these bureaucratic methods, which is why they are politically attractive,” says Jens Südekum of Heinrich-Heine University in Düsseldorf. They could add €20bn of annual spending.More conventional sources may offer fiscal crumbs. A new global corporate-tax deal could raise a few billions, as could the legalisation and taxation of cannabis, which is likely under the next government. EU climate funds might offer a bit more. The odd subsidy might be cut. And the government anyway has a tendency to underestimate projected tax revenues; 2020 brought in €11.4bn more than expected (see chart). These will not flood the coffers, but every little helps.Each of these proposals, to varying degrees, may make it into the coalition agreement promised by the end of November. The absurdity of some of Germany’s finest economic minds concocting complex schemes to escape the country’s self-imposed limitations is not lost on all of them. “It’s ridiculous that so much time is spent trying to find a way around rules we have set ourselves,” says Philippa Sigl-Glöckner of Dezernat Zukunft. Clicking on “one weird trick” ads is rarely wise. But Germany has left itself little choice. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Houdini economics” More

ONE OF THE most extraordinary growth records over the past two decades was to be found, perhaps surprisingly, in the horn of Africa. Real GDP per person in Ethiopia, the second-most-populous country in Africa, rose by an average annual rate of 9.3% from 1999 to 2019, just 0.4 percentage points less than China’s pace of growth. Now a year-long war between Ethiopia’s government and forces led by the Tigrayan People’s Liberation Front (TPLF) threatens to spill into the capital city, wreak humanitarian disaster and wipe away those economic gains.From the late 1990s, a roaring Chinese economy provided the impetus for a boom in the rest of the developing world. As China became richer, some of its industry moved abroad, allowing poorer countries like Bangladesh and Vietnam to follow in its wake. In the 2010s some optimists hoped that this process of sequential industrialisation might eventually shift to Africa. More than any other country there, Ethiopia illustrated this potential.Three decades ago, its economy was among the world’s least developed. Then in 1991 forces led by the TPLF overthrew the Marxist regime that had long run things. Though the TPLF-dominated government remained authoritarian, it began liberalising the economy and directing investment towards infrastructure. Ethiopia’s GDP per person has risen more than sevenfold since 1995, faster than other sub-Saharan economies and the emerging world as a whole (see chart). The share of Ethiopians living in extreme poverty fell from half the population to under a quarter in the 2010s.Ethiopia’s success was first owed to increasing productivity in agriculture, which lifted incomes and helped the construction and service sectors expand. While employment in industry rose rapidly from the late 1990s into the 2010s, most manufacturing workers laboured at small firms, making food and beverage products and other goods for local markets. Coffee and cut flowers remain big exports.Yet over the past decade, manufacturing for export has gained a foothold. In industrial parks scattered across the country factories sprang up, many dedicated to making the textiles and clothing that often represent the first rung on the industrialisation ladder. Apparel giants like H&M and Primark began sourcing products from Ethiopian plants, and the value of clothing exports rose more than sixfold from 2009 to 2019. Foreign direct investment roughly quadrupled from 2011 to 2017, much of it from China. The vast majority of direct investment—about 80%—flowed into the manufacturing sector.But economic development depends more on sustaining growth over long periods than on bursts of explosive growth. Fighting in Tigray, one of Ethiopia’s most important industrial centres, has idled or destroyed many factories. Others are increasingly being shut out of markets. On November 2nd President Joe Biden suspended Ethiopia’s tariff-free access to America, citing “gross violations of internationally recognised human rights”, chiefly by the forces of the prime minister, Abiy Ahmed. Plans to privatise more of the economy are faltering as foreign investors lose their appetite.A swift, diplomatic resolution to the crisis may let Ethiopia salvage something of its economic miracle. Still, the road ahead would be difficult. Even before the Tigrayan forces’ advance, the government faced unmanageable foreign debts of nearly 30% of GDP: a heavy burden for a poor country coping with covid-19, and which collects less than 7% of GDP in tax.Nor can the destruction of capital be easily undone. Foreign investors may prove difficult to lure back. China enjoyed good relations with the TPLF when the group ran the country, and might be expected to provide support if the TPLF wins. But it faces a slowdown at home; and because China’s spending in Ethiopia favoured manufacturing, rather than the production of commodities needed by Chinese industry, it may treat its investments there with less urgency.A protracted conflict, by contrast, would undo most or all of the country’s past economic gains. Whatever happens next, Ethiopia’s case already demonstrates that a state’s capacity to maintain order is the most important, and often the most elusive, condition for development. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Lost promise” More

HOUSING COSTS across the rich world are rising fast. In America and Australia prices have increased by nearly 20% in the past 12 months, and rents too are on the up. In the past year, prices in New Zealand have shot up at a pace of more than NZ$2,000 ($1,400) a week. Costs in big cities have been going up for years, propelled by a mix of cheap borrowing and a scarcity of new homes. The pandemic has made matters worse; lockdowns boosted demand for larger homes, while labour and materials shortages constrained housing supply. As they try to bring down costs, governments are throwing all sorts of ideas at the problem.One set of policies involves helping first-time buyers and renters, while discouraging other types of prospective homeowners. Spain, for instance, wants to get young people out of their parents’ houses, and is offering them nearly $300 a month for rent. In South Korea, President Moon Jae-in has brought in more than 20 different regulations, including tighter lending rules and punitive taxes on expensive homes.Officials elsewhere are focused on deterring foreign buyers. Justin Trudeau, Canada’s prime minister, vowed a two-year ban on house purchases by non-residents during his re-election campaign in August. New Zealand’s ban on foreigners buying homes came into force in 2018 after the controversial purchase of a ranch in the country by Peter Thiel, a Silicon Valley heavyweight. Yet although these policies have successfully put off foreigners, they have missed the mark on affordability. House prices in New Zealand have risen even as purchases by overseas buyers have dried up. Mr Moon’s efforts have, likewise, failed to curb steep price rises. Prices of flats in Seoul have increased by over a third during his presidency.That might explain why the focus in South Korea has shifted to supply. This year the government unveiled a plan to build 83,000 homes in the capital. America has pledged to subsidise construction. Officials in Hong Kong, who blame unaffordable housing for the anti-government protests that erupted in 2019, want to ease costs by building a new city near the territory’s border with mainland China. The development could house as many as 2.5m people—a third of Hong Kong’s population.But Britain’s experience shows just how difficult expanding housing supply can be. The government wanted to revamp planning rules to open up more land to housebuilding. Then fears of a backlash from NIMBY voters and disagreements within the governing Conservative Party prompted a rethink.Faced with the failures of managing demand and the political difficulties of expanding supply, some governments are turning instead to a more expedient target: big landlords. In October Spain’s left-wing coalition agreed on a housing bill aimed at cracking down on investment funds. The new legislation imposes rent controls on landlords with more than ten properties. The changes—due to take effect in the second half of 2022—are a blow for companies such as Blackstone, a private-equity giant that is Spain’s biggest landlord.Spain is only the latest country to propose restrictions on large property investors. Similar approaches have sprung up in Ireland and New Zealand. In America President Joe Biden wants to restrict the types of homes large investors are allowed to own. Canada’s central bankers plan to analyse investors’ role in surging prices. In a referendum in September Berlin’s residents took the drastic step of voting to expropriate big landlords such as Vonovia and Deutsche Wohnen. (The result is non-binding, and legal setbacks mean it may never become reality.)Taking on big investors might be popular with voters, and easier to achieve than loosening supply constraints. But whether such an approach will lead to more affordable housing is less clear: curbs on big landlords make it less profitable to build new properties. If the crackdown continues, investors could simply take their pots of capital elsewhere, leaving housing costs to rise further still. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Patch-up job” More

“I think there are a lot of indicators that there is a bubble” in fintech, J. Christopher Flowers told CNBC.
Fintech companies like PayPal and Square have seen their market values soar over the past year.
Investors have flocked to high-growth companies at a time when interest rates are at historic lows and money is cheap.

Billionaire investor J. Christopher Flowers is worried there’s a bubble emerging in the financial technology market.
“I think there are a lot of indicators that there is a bubble” in fintech, Flowers, CEO of investment firm J.C. Flowers & Co, told CNBC’s Annette Weisbach in an interview.

Fintech companies have seen their market values soar in both the public and private markets over the past year, with some firms trading at higher valuations than major banks.
PayPal, for example, has a market cap of $242 billion, higher than that of Wells Fargo or Citigroup. Square, the fintech venture of Twitter CEO Jack Dorsey, is worth nearly $107 billion, more than U.S. Bancorp.
Among privately-held companies, Stripe was last valued at an eye-watering $95 billion.
“If you look at traditional — or even not so traditional — valuation metrics, many companies trade at 10 times what a normal company would trade at for that kind of thing,” Flowers said.
“There are also many examples of companies which really aren’t very good trading at high valuations,” he added, without naming any names. “It’s a mixed bag. There’s a lot of fluff out there.”

Investors have flocked to high-growth companies at a time when interest rates are at historic lows and money is cheap. Fintechs have also benefited from a surge in demand for online services during the coronavirus pandemic.
Still, Flowers thinks there’s money to be made in the sector.
“On the other hand, there’s also many interesting trends and opportunities in fintech as well,” he said.
Investors should focus on companies in the payments sector rather than lending firms, Flowers said. Market players should also back profitable fintechs over loss-making ones, he added.
“Companies that make money, at least on a unit basis … are a lot more interesting than ones that say they’re going to make money but actually lose money,” he said.
Flowers, 64, began his career at Goldman Sachs before founding his private equity firm J.C. Flowers & Co in 1998.
He is perhaps best known for his role in the 2008 financial crisis, having helped advise Bank of America and Merrill Lynch on their merger. According to Forbes, Flowers’ net worth is $1.2 billion.

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Check out the companies making headlines before the bell:
Macy’s (M) – Macy’s surged 8% in the premarket after the retailer reported better-than-expected quarterly sales and profit, and raised its full-year outlook. Macy’s earned an adjusted $1.23 per share for the quarter, well above the 31-cent consensus estimate, and the raised forecast is easing concern about holiday season inventory shortages.

BJ’s Wholesale (BJ) – The warehouse retailer beat estimates by 11 cents with adjusted quarterly earnings of 91 cents per share, while revenue and comparable-store sales also topped forecasts. BJ’s also announced a new stock buyback program worth up to $500 million.
Kohl’s (KSS) – Kohl’s rallied 6% in premarket trading as the retailer reported adjusted quarterly earnings of $1.65 per share compared with a consensus estimate of 64 cents. Kohl’s also reported better-than-expected revenue and comparable store sales, and raised its full-year sales forecast.
Petco (WOOF) – The pet products retailer beat estimates by 2 cents with adjusted quarterly earnings of 20 cents per share and revenue also above estimates. Comparable store sales were also better than expected, and Petco raised its full-year forecast.
Alibaba (BABA) – The Chinese e-commerce giant slid 5% in premarket action after top- and bottom-line misses in its latest quarterly report. Alibaba is attributing the drop in profit from a year ago to a decline in the value of its equity investments.
JD.com (JD) – JD.com beat estimates on both the top and bottom lines with the China-based e-commerce company continuing to benefit from sustained and elevated demand for online shopping. Shares rose 1.4% in the premarket.

Cisco Systems (CSCO) – Cisco tumbled 6.3% in premarket trading after forecasting current-quarter revenue below forecasts. The networking equipment company is seeing supply chain and other issues driving up costs. Cisco did report better-than-expected earnings for its most recent quarter, but revenue was slightly short of Wall Street forecasts.
Nvidia (NVDA) – Nvidia came in 6 cents above estimates with adjusted quarterly earnings of $1.17 per share, and the graphics chip maker saw revenue come in above forecasts as well. Nvidia is benefiting from high demand for videogame and data center chips. The stock jumped 8.5% in the premarket.
Sonos (SONO) – Sonos matched estimates in reporting a quarterly loss of 7 cents per share, but the maker of wireless home audio equipment saw revenue come in slightly below analyst projections. However, Sonos also issued a better-than-expected fiscal 2022 sales forecast, even in the face of supply constraints that are impacting its production levels, and the stock added 1.9% in premarket action.
Bath & Body Works (BBWI) – Bath & Body Works reported an adjusted quarterly profit of 92 cents per share, beating the 60 cents consensus estimate, while the personal care products retailer also saw revenue beat Wall Street forecasts. The quarterly report was the first for Bath & Body Works as a standalone company following the split-up of L Brands. The stock gained 5% in premarket trading.
Victoria’s Secret (VSCO) – Victoria’s Secret shares surged 11.5% in premarket trading after the company beat estimates by 10 cents with adjusted quarterly earnings of 81 cents per share. This was the first quarterly report for Victoria’s Secret as a standalone company, also a product of the L Brands split-up.
Deere (DE) – Deere workers approved a new six-year contract after rejecting two previous tentative deals, ending a strike that began October 14. Deere rose 1.4% in the premarket.

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N26’s American customers will no longer be able to use its app from Jan. 11, 2022.
The Berlin-based fintech said the move was aimed at shifting focus to its core European business.
It’s a reminder of how difficult it has been for European fintechs to expand their services in the U.S.

N26 co-founder and CEO Valentin Stalf speaks on stage during TechCrunch’s Disrupt Berlin event at Treptow Arena on November 30, 2018 in Berlin, Germany.
Noam Galai | Getty Images for TechCrunch

German digital bank N26 is shutting down its U.S. operations, less than two-and-a-half years after it launched in the country.
N26’s 500,000 American customers will no longer be able to use its app from Jan. 11, 2022, the company said in a statement Thursday.

The Berlin-based fintech, which was valued at $9 billion in a recent funding round, said it wanted to shift focus to its core European business.
“U.S. customers will be able to use their accounts as usual until January 11, 2022, and will receive further instructions on how to withdraw their funds to ensure a smooth transition,” the bank said.
It’s not the first time N26 has pulled its services from a major English-speaking market. The firm withdrew from the U.K. early last year, blaming the country’s exit from the European Union. N26 had reportedly been struggling to gain U.K. users.
The news is a reminder of how difficult it has been for European fintechs to expand their services in the U.S.
British digital bank Monzo, which started testing its service in U.S. in 2019, recently withdrew its application for a U.S. banking license.

On the flip side, American online brokerage Robinhood tried and failed to launch internationally, scrapping plans to roll out a U.K. version of its app last year.
As well as refocusing its attention on Europe, N26 said it will also ramp up spending on new features like investment products in the coming year. It’s also planning to expand into Eastern Europe amid growing demand in the region.
The company said it will aim to move U.S. staff to other areas of its business “where possible.”
N26’s U.S. expansion, which began in July 2019, has faced a number of setbacks. For one, the firm laid off 10% of its New York-based workforce last year, citing challenges resulting from the coronavirus pandemic. Nicolas Kopp, the head of its U.S. operations, subsequently quit the bank.
N26 is also facing regulatory pressure in its home market. German regulators fined the bank $5 million in June for failing to submit suspicious activity reports on money laundering on time.
And last month, as N26 announced a new $900 million cash injection from investors, the company said it had reached an agreement with the watchdog BaFin to limit how many customers it onboards each month.
N26 has raised a total of $1.7 billion in funding to date. The company counts the likes of U.S. investment manager Coatue, Singapore sovereign wealth fund GIC and tech billionaire Peter Thiel as investors.

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