This Top 5 comes from interest.co.nz's Gareth Vaughan.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.
121 years of electricity generation
— Lion Hirth (@LionHirth) March 9, 2023
The global generation mix 1900 to 2021 pic.twitter.com/mwrSOxomAO
1) How 'excuseflation' is keeping prices and corporate profits high.
Bloomberg's Tracy Alloway and Joe Weisenthal have written a fascinating article on how US businesses are using one-off disruptions as cover to raise their prices. They're calling this "excuseflation."
Basically the idea is that businesses can push through price increases under cover of news about a big shock to the economy because there’ll be less pushback from customers at such a time. With the Covid-19 pandemic and all it entailed including global supply chain woes, and Russia's invasion of Ukraine, there has been plenty of disruption around.
Of course here in New Zealand the North Island's been hard hit by floods and cyclones this summer, adding to the perma-crisis feel. In an already high inflationary environment the expectation is the recovery/rebuild from extreme weather events will be inflationary. But how much "excuseflation" is also going in in NZ?
Here's Alloway and Weisenthal.
The key question is, in an economy where the consumer continues to spend freely, how sticky this ‘excuseflation’ proves to be and how high the Federal Reserve will have to drive up interest rates to prompt businesses to lower prices, or at least stop raising them. At 6.4%, annual inflation is down from its peak last year but still well above the Fed’s 2% target.
“A lot of companies had these one-off or very, very rare excuses to raise prices and begin to find how much the consumer would take,” Samuel Rines, a managing director at Corbu LLC, says in the latest episode of the Odd Lots podcast. “Once you get that price push, once you figure out that the consumer’s willing to pay it, that is margin expansive over time, as you begin to have a normalization in your input cost.”
He cites a plethora of companies that are taking price over volume, or the ‘POV’ strategy, as he’s dubbed it. These include all-American favorites like PepsiCo Inc. and Home Depot Inc. and even two retailers long known for their discounted prices: Walmart Inc. and Dollar Tree Inc.
And while any company would naturally like to always be able to raise prices without taking a major hit to market share, in this environment of sub-3.5% unemployment and average hourly earnings growth running over 4% annually, consumers are by and large stomaching these price hikes. They’ve typically only sparked modest hits to customer demand. That explains why the Fed is so focused on cooling off the labor market — and wage growth, in particular — to get inflation back under control.
In the meantime, a defining factor of this excuseflation — and one potential reason it’s proving difficult to stamp out — is that it gives companies a cover to raise prices together, limiting in the process customers’ ability to vote with their feet by shopping elsewhere.
There's more in the latest episode of Alloway and Weisenthal's excellent Odd Lots podcast here.
2) Is there 'excuseflation' in Australia too?
Across the Ditch the Australian Broadcasting Corporation (ABC) has also looked at whether Australia's big corporates are "profiteering" in an inflationary environment.
Rising prices have seen margins improve for some consumer-facing businesses, such as Woolworths and Qantas, higher interest rates have boosted CBA's coffers, mother nature has helped insurers such as Suncorp, and energy producers such as Woodside have benefited from the war in Ukraine.
"Corporate Australia is still in a pretty good spot," noted UBS Australia equity strategist Richard Schellbach.
With the cost of just about everything going up, from milk to electricity to home loans, could it be argued that the biggest losers this profit-reporting season are consumers?
Despite higher fuel prices, labour costs, and flight capacity not yet getting back to pre-pandemic levels, the tourism sector, led by Qantas, has seen its profits soar.
Perhaps most telling, though, is its operating margin, or the amount of money it made on every dollar consumers spent with the airline, which rose to 15.6 per cent.
That margin was a loss of 36.7 per cent in the previous corresponding half, which isn't a surprise because of the COVID travel restrictions.
But notably its operating margin in the December 2018 half, before COVID-19, was just 10 per cent.
Thus the latest result represents more than a 50 per cent improvement on the margins it had before the pandemic.
"Absolutely, there have been additional costs passed on to the consumer," Tribeca Alpha Plus portfolio manager Jun Bei Liu said.
3) Simon Upton on 'pure self interest' in reducing livestock methane emissions & promising new mitigation technologies to help.
In a recent speech to the New Zealand Agricultural Climate Change Conference, the Parliamentary Commissioner for the Environment Simon Upton talked up "promising new mitigation technologies" to combat livestock methane emissions. But he also had a warning about potential large reductions in stock numbers.
Upton noted the current target of a 24% to 47% reduction in methane emissions by 2050, saying reductions in livestock emissions can be achieved by reducing livestock numbers, through lower stocking rates per hectare and land use change, and by reducing emissions per animal, through changes in management practices and using new on-farm mitigation technologies as they become available.
These [technologies] include methane and nitrification inhibitors, breeding low-emission sheep and cattle, low-emission feeds and feed additives, and of course, the Holy Grail, a methane vaccine. These mitigation technologies are all at different stages of development and each has its own particular set of challenges and barriers to overcome before it can be widely implemented in a New Zealand context.
But it is clear that without accelerated progress on some of these technical fixes, the only way we will meet our 2050 methane target will be through very large reductions in stocking rates. The work being undertaken by our science and research organisations on reducing agricultural emissions is therefore a critical component of New Zealand’s climate change policy. We must get this right.
Upton also hit out at the idea that because NZ's a small country there's no point in us doing anything.
Under the Paris Agreement, New Zealand has an international obligation to do as much as it can to keep the 1.5 °C global goal within reach. It is not a credible negotiating position to say that our largest contribution to warming is off limits when we have the option to reduce it. Neither, by the way, is it credible to say that global mitigation has failed so we may as well just get on with adapting. A 3–4 °C warmer world won’t be a very happy place for agriculture. As a little country we need to argue hard for international action and we have no credibility if we seek a leave pass for our largest contributor.
Neither should we be tempted by the argument that since we’re a little country it doesn’t make sense for us to develop the technologies needed to solve the world’s problems and that we should instead be a fast follower. That might be true of concrete or steel but when it comes to agricultural emissions, who are we waiting to follow? We have more skin in this game than others. We have serious research capacity. We have long congratulated ourselves on our productivity and resourcefulness. The logic all leads to the conclusion that we have to tackle this problem head on.
And there is pure self interest in this. We have an interest in continuing to sell products to high-income markets where consumers are taking an increasing interest in the emissions footprint of their food and drink. Being able to show that New Zealand products are associated with the lowest possible emissions will be essential if we are to continue to be a preferred supplier.
Upton's speech is here and the presentation accompanying it here.
4) Sarah Huckabee Sanders' Dickensian legislation.
You might remember Sarah Huckabee Sanders doing one of the most unenviable jobs going around; serving as Donald Trump's press secretary. These days Huckabee Sanders is Governor of Arkansas, a role previously filled by both Bill Clinton and her father Mike Huckabee.
In what sounds very Dickensian, The Washington Post reports on Huckabee Sanders signing off on legislation rolling back her state’s child labour protections.
It sounds like this issue might see another state versus federal government battle line emerging.
Arkansas Gov. Sarah Huckabee Sanders, a rising Republican star, on Tuesday signed legislation into law that eliminated age verification requirements for youth workers younger than 16 years old. A similar proposal is advancing in Missouri. Iowa legislators are considering a bill that would allow 14 and 15-year-olds to work certain jobs in meatpacking plants and shield businesses from civil liability if a child laborer is sickened, injured or killed on the job. A bill in Minnesota would permit 16 and 17-year-olds to work construction jobs.
Instead of making it easier to hire youths for dangerous work, governments should try to “increase accountability and ramp up enforcement” of existing laws, Labor Solicitor Seema Nanda said in statement. “No child should be working in dangerous workplaces in this country, full stop.”
Federal officials have pledged a crackdown on child labor law offenses after regulators discovered hundreds of violations in meatpacking plants, and after news reports emerged of children working in hazardous occupations around the country.
The Labor Department has observed a 69 percent increase in minors employed in violation of federal law since 2018, Nanda said. The agency in February fined Packers Sanitation Services, a subcontractor for meatpacking plants, $1.5 million for illegally hiring children, some of whom sustained chemical burns after working with caustic cleaning agents.
I'm not sure whether Arkansas has many chimneys the kids could be sent up to sweep. Hopefully not.
5) Good work if you can get it.
The Financial Times reports Ark Investment Management, run by high profile US fund manager Cathie Wood, has pocketed more than US$300 million in fees for its flagship exchange traded fund (ETF) since its launch nine years ago, while "wiping out" almost US$10 billion of its investors’ cash over the same time period.
Favouring risky technology companies, the fund hasn't been helped by a rising interest rate environment.
Ark has earned more than 70 per cent of its $310mn fees since the fund’s valuation plummeted by nearly three quarters from its high in February 2021, according to FactSet data. This year it has brought in an average of roughly $230,000 in fees a day as ARKK’s value recovered slightly, rising by a quarter.
“Investment fees have provided ARK and Cathie Wood a very good living,” said Elisabeth Kashner, director of global funds, research and analytics at FactSet. “Her investors haven’t been so lucky.”
The fund manager has amassed a devoted following for her punchy bets on fast-growing tech companies, which until early 2021 produced outsized returns for investors and drew eye-popping inflows.
According to the FT, Ark's fees are almost twice as high as what similar funds normally charge.
ARKK is unusually expensive — its annual management fee of 0.75 per cent of assets is about double the average for actively managed ETFs, according to FactSet.
The fee bill calls attention to ARKK’s unusually high investor retention for an ETF with such poor performance. Flows have remained resilient despite the fund losing $9.5bn in investor cash with Wood’s bold bets, according to Morningstar data.
“It’s extraordinary that investors who chased returns on the way up didn’t reverse course,” Kashner said. “The vast majority of investors have stuck with Cathie Wood.”
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