Posts in category Business and finance


Business and financeGulliver

Things might become more tolerable for travellers in America this summer

GULLIVER was flying at the end of last week, and received an e-mail from Spirit Airlines with the foreboding subject line “URGENT: Get to the airport early.” The message warned:

Baltimore, MD (BWI) is experiencing longer than usual lines and extensive wait times at TSA security checkpoints, causing some travelers to miss flights.

It’s been all over the news. Check out some articles about it here, here, and here. We don’t want this to happen to you, so please arrive at the airport at least 2 hours before departure.

Spirit is right: the daunting queues are the talk of America this summer. We recently rounded up some novel Continue reading

Read more 0 Comments
Business and financeButtonwood's notebook

After Brexit; ye ken noo

THERE is an old story that puritanical Scottish preachers used to tell their congregations about sinners cast into the fires of hell. The condemned call out to the Almighty for mercy who replies “Did I not tell you to abandon your lives of drinking, fornicating and sinning?” “Yes, lord” comes the pitiable reply “but we didna ken.”* “Well” comes the implacable reply “Ye ken noo.”

The British vote on the EU is remarkably close despite the parade of experts – the Bank of England, IFS, IMF and OECD, as well as the vast majority of economists – who have pointed to the potential adverse effects. The problem is that many voters simply don’t believe the experts, especially in the wake of the 2008 crisis. And the Conservatives in the Leave campaign, who cheerfully cite such experts when attacking Labour party policies during general elections, now disdain them altogether. Similarly when business leaders pronounce for Remain, their views are dismissed by Tories who normally treat the needs of business as pretty sacrosanct.

Cite those strategists who say that sterling or the markets will fall after a Brexit and…Continue reading

Read more 0 Comments
ApprovedBusinessBusiness and finance

Trust me

JUNE is usually a cheerful month for admen: they are scheduled to celebrate their feats at the humbly titled Cannes Lions International Festival of Creativity, which starts on June 18th. Yet the get-together this year may be abuzz with darker talk. On June 7th America’s Association of National Advertisers (ANA), a trade group for marketers, published a report accusing advertising agencies of accepting rebates, or kickbacks, from media companies. A group representing American ad agencies slammed the report as “anonymous, inconclusive, and one-sided”. The brawl is sure to continue.

The ANA’s report is the culmination of years of conjecture about such rebates, whereby media companies reward agencies for buying chunks of ad space by giving them cash, fees or other benefits. In some countries advertisers know of such rebates and plan for them. In America the practice has haunted the industry.

Big advertising holding companies such as WPP, which owns several big ad agencies, deny the existence of rebates. Others in the industry say rebates are a shadowy practice, undermining clients’ interests. Last year a former WPP executive declared rebates to be widespread. In October the ANA hired an independent company, K2, to investigate.

Its report has fanned advertisers’ fears. Based on interviews with 150 anonymous sources, K2 found that rebates are…Continue reading

Read more 0 Comments
ApprovedBusinessBusiness and finance

No El Dorado

WHEN phone footage came to light last year of a stripper opening the throttle during the take-off of a commercial jet operated by Aerolíneas Argentina, the public outcry was predictably fierce. Argentina’s state-owned flag carrier swiftly sacked the pilots who had invited her into the cockpit and the lady herself was banned from the airline for five years. Endangering the safety of passengers is a serious concern. Yet the company’s assault on the public finances is almost as reckless: Argentines have tolerated vast subsidies and huge losses at their national airline.

Even without the drag of state ownership, other South American airlines have recently either lost money or made only meagre profits (see chart). Airlines in Latin America as a whole (whose performance is flattered by the inclusion of Mexico’s mostly profitable flyers) even surpassed Africa’s beleaguered carriers in their ability to lose money in 2015, according to IATA, an industry body. That marks them out at a time when the tailwinds of growing passenger numbers and cheap fuel have carried many other airlines to unusual heights of profitability.

Continue reading
Read more 0 Comments
ApprovedBusinessBusiness and finance

The germ of an idea

No more soft-soaping

“HARMLESS to humans”, assured the slogan on humidifier disinfectants sold to South Koreans in the early 2000s by Oxy, a local unit of Reckitt Benckiser, an Anglo-Dutch consumer-goods company. A widening criminal investigation by South Korea’s government into dozens of cases of lung disease, some of them fatal, suggests the opposite. It is now examining compensation claims by another 750 victims, on top of the 530 lodged since 2011.

Chemical sanitisation in homes and offices is prized as a sign of the country’s rapid progress since its economic take-off in the 1980s lifted millions from squalor and disease. Killing germs, says Lee Duck-hwan, a professor of chemistry and communication at Sogang University in Seoul, became the “single most important topic of daily discussions” in the 1980s. Since then, everything from baby soap to washing machines has claimed to act as a steriliser—something Mr Lee decries as “phobia marketing”. So it is a particular blow when it turns out that products which should improve cleanliness might do harm.

The government suspended sales of the…Continue reading

Read more 0 Comments
ApprovedBusiness and financeFINANCEFinance and economics

Unyielding

TRY and try again. On June 8th the European Central Bank (ECB) started buying corporate bonds, in its latest effort to gin up inflation in the euro area. Prices declined slightly in May compared with the same month a year before; the ECB’s inflation target is just under 2%. The scheme has already helped boost the zone’s corporate-bond market. Doing the same to its economy looks a tall order.

The purchases form part of the ECB’s quantitative-easing programme, under which it is already buying €80 billion-worth ($91 billion) of public-sector bonds, covered bonds and asset-backed securities monthly. (Government debt, of which the ECB has amassed more than €800 billion, accounts for most.) To qualify, corporate bonds must be investment-grade and issued by euro-area firms other than banks.

Analysts reckon that €600 billion-plus of bonds fit these criteria. The bank hasn’t yet said whose debt, or how much, it will buy; from mid-July it will report holdings weekly. According to Bloomberg, first-day purchases included bonds issued by Anheuser-Busch InBev, the world’s biggest brewer; Generali, an Italian insurer; Siemens, a German engineering giant; and…Continue reading

Read more 0 Comments
ApprovedBusinessBusiness and finance

Where the smart is

THE fanfare has gone on for years. Analysts have repeatedly predicted that the “internet of things”, which adds sensors and internet capability to everyday physical objects, could transform the lives of individuals as dramatically as the spread of the mobile internet. Providers have focused on the home, touting products such as coffee pots that turn on when the alarm clock rings, lighting and blinds that adjust to the time of day, and fridges that send an alert when the milk runs out. But so far consumers have been largely resistant to making their homes “smart”.

That’s not for want of trying by tech firms, which have poured cash into their efforts to connect everyday objects to the internet. In 2014 Google made the biggest statement of intent so far, spending $3.2 billion to acquire Nest, a smart thermostat-maker, and $550m to buy Dropcam, which makes home-security cameras. Nest absorbed Dropcam; it is now one of the best-known smart-home brands. But it is also a warning about how long it will take for such gadgets to enter the mainstream.

Nest has undoubtedly disappointed Google. It sold just 1.3m smart thermostats in 2015,…Continue reading

Read more 0 Comments
ApprovedBusiness and financeFINANCEFinance and economics

Of snowballs and red ink

It was the trades that went off the rails

IT HAS been called “the worst trade ever”. Shortly before the financial meltdown of 2008, Metro do Porto and three other Portuguese public-transport companies entered into a series of interest-rate swaps with Santander, a Spanish bank, in hopes of reducing interest payments on their debts. But they soon discovered why these particular derivatives were dubbed “snowball swaps”.

The firms’ losses exploded to several times the underlying debts, and by all accounts continue to swell today. They sued Santander, but in March an English court ruled the bank’s way. Though some documents “do the bank no credit”, the judge concluded, the transport companies could have been in no doubt about the scale of risk they were taking on. Santander did not coax them into signing contracts it thought would be contrary to their interests. The companies were not its clients, owed a fiduciary duty, but its counterparties, on the opposite side of the trades.

In the go-go years before the crisis public-sector entities were sold plenty of complex derivatives that subsequently went badly…Continue reading

Read more 0 Comments
ApprovedBusinessBusiness and finance

Alpha minus

Who’s the Terminator now?

“EMPOWERING great entrepreneurs and [allowing] companies to flourish.” This was one of the reasons Larry Page, the co-founder of Google, gave when he announced almost a year ago that the firm would restructure itself. Google, which comprises the internet-search and advertising business, now sits as a subsidiary in a holding company called Alphabet, alongside the “other bets”, a dozen startup businesses that range from fibre networks and smart cities to robotics and life sciences. Yet for now at least, the flourishing is limited and the entrepreneurs seem somewhat less than empowered.

When Tony Fadell, the boss of Nest, which makes wireless thermostats and other “smart home” devices (see article), resigned last week, it was not only because of Nest’s disappointing results and his abrasive management style, but the fact that he no longer got along with Mr Page. Even before Alphabet was launched, Andy Rubin, who ran the company’s robotics…Continue reading

Read more 0 Comments
ApprovedBusiness and financeFINANCEFinance and economics

The Fed’s tributaries

OUTSIDE the Federal Reserve’s imposing building in Washington, DC, water cascades from two fountains shaped like chalices. Inside, the Fed’s decision-making generates equally prodigious spillovers, channelling the flow of capital around the world. The consequences, especially for emerging economies, can be monumental but they are rarely elegant.

Until last week many emerging economies had been bracing themselves for an imminent rise in the Fed’s benchmark interest rate, perhaps as early as this month. Higher rates could draw more money into America from emerging markets, weakening their currencies and raising their bond yields. Even the expectation of tighter money can be enough to cause trouble. In such circumstances, central banks far from the Fed often feel compelled to raise rates too, even if economic conditions at home do not entirely warrant it. In 2014 Arvind Subramanian, now the chief economic adviser to India’s government, complained of “dollar imperialism”.

On June 3rd, however, the emperor granted a reprieve. Surprisingly bad jobs figures released that day ended all talk of a Fed rate hike this month…Continue reading

Read more 0 Comments
ApprovedBusiness and financeFINANCEFinance and economics

Index we trust

WHEN John Bogle set up Vanguard Group 40 years ago, there was no shortage of scepticism. The firm was launching the first retail investment fund that aimed simply to mimic the performance of a stock index (the S&P 500, in this case), rather than to identify individual companies that seemed likely to outperform. Posters on Wall Street warned that index-tracking was “un-American”; the chairman of Fidelity, a rival, said investors would never be satisfied with “just average returns”; and the Securities and Exchange Commission (SEC), Wall Street’s main regulator, opposed the firm’s unusual ownership structure. The fund attracted just $11m of the $150m Vanguard had been hoping for, and suffered net outflows for its first 83 months. “We were conceived in hell and born in strife,” Mr Bogle recalls.

Vanguard now manages over $3.5 trillion on behalf of some 20m investors. Every working day its coffers swell by another billion dollars or so. One dollar in every five invested in mutual or exchange-traded funds (ETFs) in America now goes to Vanguard, as does one in every two invested in passive, index-tracking funds, according to Morningstar, a…Continue reading

Read more 0 Comments
ApprovedBusinessBusiness and finance

Bloated but still bingeing

Aiming high

GUO GUANGCHANG made headlines around the world in December when the billionaire industrialist suddenly disappeared, supposedly to co-operate “voluntarily” with Chinese anti-corruption investigators at a secret location. Shares in his company, Fosun, China’s biggest private-sector conglomerate, tumbled. Potential takeovers abroad began to unravel. He was released without accusation of wrongdoing, but the incident served as a warning about political risk in China. Mr Guo recently downplayed the incident: “Half a year has already passed…we are back to normal.”

That is not the good news it seems, because “normal” involves an even bigger risk. Fosun has vast debts after an orgy of foreign acquisitions that has cost, by one estimate, around $30 billion. In recent years, it has acquired France’s Club Med, a resort operator, and bought stakes in Britain’s Thomas Cook, a travel agent, and in Canada’s Cirque du Soleil, an entertainment troupe.

Fosun has also been buying insurance firms worldwide. That is not going entirely smoothly. It confirmed on June 4th that one recent acquisition, of…Continue reading

Read more 0 Comments
ApprovedBusiness and financeFINANCEFinance and economics

When barometers go wrong

AMERICA’s labour market has become a reliable source of comfort when other economic indicators dismay. When growth slowed to just 0.8% in the first quarter of the year, economists were mostly unperturbed, because payrolls were growing by over 150,000 workers a month. Wage growth was picking up. Even labour-force participation was rising, after a long period of decline.

So the news on June 3rd that the economy created a mere 38,000 new jobs in May—the lowest total since 2010—was a nasty shock. Three days later Janet Yellen, the Fed’s chairman, hinted that she no longer favours raising interest rates this summer. This abrupt change of direction followed weeks of warnings from Fed officials that a rate rise was coming, perhaps as soon as the conclusion of the Fed’s next meeting on June 15th. That now looks all but impossible.

The consensus forecast was for about 160,000 new jobs in May. Even accounting for 35,000 striking workers at Verizon, a telecoms firm, the shortfall was substantial (though the estimate, which has a wide margin of error, may yet be revised up). A labour-market slowdown that had seemed gentle now looks pronounced: between March and May, the economy created on average 116,000 jobs per month, compared with 222,000 in the year to February. The fizzing labour market had been tempting Americans who had given up on work back into the…Continue reading

Read more 0 Comments
ApprovedBusiness and financeFINANCEFinance and economics

Secret agents

WHAT is the purpose of the finance industry? Everyone knows that it provides a very good living for many of its employees and that it is prone to occasional crises that can disrupt the global economy. But what good does it do the rest of humanity?

A new book* by Stephen Davis, Jon Lukomnik and David Pitt-Watson lists four main roles for the industry: providing safe custody for assets, a payments system, intermediation between savers and borrowers, and risk reduction (insurance). Its performance should be judged by its success or failure in providing those services.

The financial crisis in 2007-08, when many banks had to be rescued by governments, shows that finance does not always do a bang-up job of providing safe custody. Banks were allowed to gear up their balance-sheets in pursuit of short-term profits—not a good deal from society’s point of view. There has also been an explosion in the volume of securities trading in recent decades. But it is not clear how that helps the economy: liquid markets are a virtue, but do deals really need to be executed in milliseconds?

Another important issue is how efficiently the…Continue reading

Read more 0 Comments
Business and financeGulliver

Have we reached the bottom for service levels on aeroplanes?

MOST people agree that the glamour of regular business travel is not what it used to be. Budget airlines and cheap long-haul carriers have initiated a race to the bottom, on service as much as price. Charging for every possible add-on has not just made for opaque pricing but has also added new layers of inconvenience and complexity to flying. Add to this increasingly invasive security and demotivated, underpaid airline staff, who seem keener to sell you a scratchcard than top up your coffee, and it is tempting throw up your arms and wonder where it will all end. Even British Airways is considering charging for food and drink.

But perhaps things are finally beginning to look up. Not only are airlines running out of add-ons to charge for, but low oil prices have taken the pressure off margins, allowing carriers to invest in service again. As BA mulls charging for food, United and American have reintroduced complimentary snacks. Delta has gone one step further by Continue reading

Read more 0 Comments