Chocolate Prices Will Shoot Up

Scott Buchanan2 Comments

I write about various topics, usually with at least some loose connection to economics. Sometimes these are fairly macro issues, other times there are specific, actionable observations. For instance, back in March of 2021, we inferred from the critical shortages of semiconductors that car manufacturing would be severely crimped, likely leading to big price increases in cars.  Our post “Chip Shortages Shutting Down Auto Assembly Lines; Buy Your Car Now Or Else” came out just in time (red arrow below) to alert the readership here:

https://fred.stlouisfed.org/series/CUSR0000SETA02 – – Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average

Chocolate Prices

But now, a price increase of more ubiquitous import looms. Most of us were not in the market for cars in March of 2021, but some 81% of us eat chocolate, with the average American consuming about 9.5 pounds a year. Indeed, 50% “cannot live without it every day.”

And so, it is with a heavy heart that I bring warning of a rise in the price of chocolate. Back in pandemic lockdown, I was bored and speculated a few bucks in cocoa futures, as tracked by the NIB exchange traded fund. My shares went up, and then down, and I sold out to limit losses (which was a good move at the time), and moved onto other investments.

Imagine my surprise when I randomly checked on NIB this week and saw the price ramp-up in the past few months:

Source: Seeking Alpha

A quick internet search led to a CNBC article which confirmed my worst fears:

“The cocoa market has experienced a remarkable surge in prices … This season marks the second consecutive deficit, with cocoa ending stocks expected to dwindle to unusually low levels,” S&P Global Commodity Insights’ Principal Research Analyst Sergey Chetvertakov told CNBC in an email.

…Chetvertakov added that the arrival of the El Niño weather phenomenon is forecast to bring lower than average rainfall and powerful Harmattan winds to West Africa where cocoa is largely grown. Côte d’Ivoire and Ghana account for more than 60% of the world’s cocoa production. 

The price of cocoa will feed into the price of consumer chocolate products, especially dark chocolate which has more actual cocoa content. And the price of sweets generally will rise on the back of sugar prices, which stand at 11-year highs, driven again largely by weather.

There is still time to stock up ahead of the hoarders…

Variance means looking past who won

mdmakowskyLeave a comment

I’ll keep it brief today. The best golfers in the world are usually in the running, but who wins depends on who flips heads on the most coins i.e. who makes the most putts. Putting is a skill to be sure, but there is enough chaos in the green that randomness has a heavy say in who wins. Skill can wholly dominate when the differences between the best and everyone else is greater than multiple standard deviations of a coldly binomial distribution.

The greatest record in golf is not who won the most tournaments, but Tiger Woods making 142 consecutive cuts after the first two days of tournaments. He was so much better than everyone else that even when every coin flip went against him he was still in the top half of the leaderboard. The greatest record in tennis is Roger Federer making 23 consecutive semifinals in major tournaments. The greatest record in the NBA may be Lebron James reaching the NBA finals 8 times in a row, including with some Cleveland teams exceedingly thin on talent. The home run record is nice, but Barry Bonds greatest achievement may be his reaching base 61% of at-bats in 2004. 61%! To put that in context, the leader last year reached base 42.5% of the time.

The mark of true excellence is when repeated competition reveals a gap from their opposition so great that even the cruel left tail of randomness can rarely overcome it.

To Dunk or Not to Dunk

Joy Buchanan1 Comment

I’m writing an article about fast-fashion, so I’m reading Fashionopolis by Dana Thomas. 

This paragraph is from the intro chapter:

Since the invention of the mechanical loom nearly two and a half centuries ago, fashion has been a dirty, unscrupulous business that has exploited humans and Earth alike to harvest bountiful profits. Slavery, child labor, and prison labor have all been integral parts of the supply chain at one time or another – including today. On occasion, society righted the wrongs, through legislation or labor union pressure. But trade deals, globalization, and greed have undercut those good works.

She invokes religion with “good works.” Thomas and I are of different opinions concerning globalization and “greed” and legislation. My instinct is to rip this paragraph apart. Has legislation never been motivated by greed? Has globalization not improved the lives of children? Has the mechanical loom not improved the lives of women who used to spend hours spinning and weaving by hand?

I am also reading pastor Tim Keller’s biography right now, so I’m having a What Would TK Do moment.

With his gifts (smart, funny, articulate…), Keller could have made a fortune by taking a side. He could have picked the Right or the Left. He could have expertly appealed to a Side, convincing them that they were good-smart and the Other is evil-stupid. Instead, Keller relentlessly stayed in the center. One of his books is actually called Center Church.

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Intro to Textual Indices: Ngrams & Newspapers

Zachary BartschLeave a comment

There have been a lot of popular papers in the past decade or so that make use of textual analysis. A fun one is “The Mainstreaming of Marx” by Magness & Makovi. They use Google Ngram to analyze the popularity of people mentioned in books and determine when Karl Marx became popular.  “Measuring Economic Policy Uncertainty” by Baker, Bloom, & Davis is one of my favorites. They use set theory to detect terms in newspapers that denote economic policy uncertainty. In this post, I’m just going to describe practical differences between the two data sources and how the interpretations differ.

Ngram

Ngram measures takes a term and measures how popular that term is in its corpus of book text, which is about 6% of all books ever written (in English, anyway). Because popularity is expressed as a percent, we can make direct popularity level comparisons among words. For example: “Cafe” & “Coffee Shop”. In the figure below, we can see that the word “cafe” was more popular in books until very recently.

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A Surprisingly Good Year for Homebuilders

James Bailey3 Comments

The Federal Reserve has been increasing interest rates at the fastest pace since the 1980’s, from near-zero rates in March of last year to over 5% today. This has led to rapid slowdowns in interest-rate sensitive sectors like housing, cars, and startups. Because most people finance their home buying, higher interest rates mean higher monthly payments for a house at a given price. Since many people were already buying houses near the highest monthly payment banks would allow them to, higher interest rates mean they need to buy cheaper houses or just stay out of the market and rent. This is especially true as the interest expense on mortgages has tripled in two years:

Source: Jeff Weniger

You’d think this would be bad news for homebuilders, and for most of 2022 markets agreed: homebuilder stocks fell 36% from the beginning of 2022 to September 2022 after the Fed started raising rates in March. But homebuilder stocks have recovered since September, with some major names like D.R. Horton and Lennar hitting all time highs. Why?

I bought homebuilder stocks in January but I have to say even I wasn’t expecting such a fast recovery (if I had, I would have bought a lot more). I was buying because they were cheap on a price to earnings basis and temporarily out of fashion; I love stocks that are priced like they’re in a secular decline to bankruptcy when its clear they are actually just having a bad cycle and will recover when it turns. But I thought I’d have to wait years for falling interest rates and a recovering housing market for this to happen. Instead these are up 20-100% in 6 months. Why?

The big thing I missed was that high interest rates have hit their competition harder, reducing supply as well as demand. Who is the competition for homebuilders? Existing homeowners. Homeowners with the “golden handcuffs” of a 3% mortgage who don’t want to move if it means switching to a 7% mortgage. I’m seeing this personally in Rhode Island- I’d kind of like a house with a bigger yard on a quieter street, but there are only 5 houses for sale in my whole school district. Between that and interest rates, we’re staying put. But for people who really need to move, new homes are making up a record proportion of the available inventory:

Source: Jeff Weniger

This situation seems likely to persist for at least months, and possibly years. The Fed paused its rate hikes yesterday for the first time since last March, but indicated that more hikes may lie ahead. I’m tempted to take the win and sell homebuilder stocks, but they still have price to earnings ratios under 10, and the “golden handcuffs” on their competition seem likely to stay on for at least another year.

“Good Money at the Time”

Jeremy Horpedahl2 Comments

On summer vacation, I recently visited Mount Rushmore. It’s amazing structure, and the story of its construction is as impressive as the monument itself. Much of the story you learn when visiting is the story of its creation. As an economist, of course seeing the following display with wage data got me very excited:

While the sign says that laborers made 30 cents per hour, searching online it appears that 50 cents was more common. More skilled workers, such as assistant sculptors, made $1.50 per hour. These were, as the sign says, “good wages” for that time. In the economy generally, production workers made around 50 cents per hour our as well around that time period, and most of the construction of Rushmore was during the Depression (some of the workers were WPA funded), so having any job, much less one that paid pre-Depression wages, was certainly a good one.

How does this compare to wages today? This is always a tricky question, as I have documented on this blog several times before, but the most straight forward approach (and good first approximation) is a simple CPI inflation adjustment. Using 1929 as the baseline year, when construction was in full swing, 30 cents an hour is roughly $5 today, 50 cents per hour is close to $9, and $1.50 would be about $26.50. That doesn’t sound too bad!

The best comparison I like to use is BLS’s average hourly earnings for private production and non-supervisory workers. Averages aren’t perfect, but this measure excludes management occupations that will be distorting the average. In May 2023, that wage was $28.75 per hour. So the average worker today earns 3-6 times as much per hour as these “good paying jobs” in the late 1920s and the Depression. And, as the Rushmore signage notes, these jobs were seasonal. Their off-season jobs probably paid even less.

The wage of the assistant sculptor does compare well with average wages today, but that pay was unusual for the time and was likely a highly skilled worker. The only record I can find of anyone making that much at Rushmore was Lincoln Borglum, the son of the main sculptor Gutzon Borglum. Lincoln oversaw the completion of the project after Gutzon’s death, and it was only in later years on the project that his pay was increased to $1.50 per hour.

For the typical laborer on Rushmore, having a good job was indeed good to have, but the wages pale in comparison to a typical worker today.

Analysts’ Systematic Bias Makes Companies “Beating Estimates” Fairly Meaningless

Scott BuchananLeave a comment

A corporate tale

Once upon a time I was enrolled in a project economics training workshop at a certain unnamed (but generally honest) S&P 500 company, taught by a finance guy from corporate. We got on the subject of making assumptions. The planner knew he was among fact-friendly engineers, not corporate toadies, so he unguardedly told us a story. He was part of a team of young up and coming managers who (as often happened at that stage in their career track) were thrown together in a planning role. They were tasked with coming up with a plan for the upcoming year for I think some large division of the company. They worked hard and put their most realistic assumptions into the plan, and found that, as a result of market shifts beyond our control, next year’s earnings were going to decline slightly.

When they presented this result to management, they were told, “No, go back and bring us a plan for how we are going to grow earnings by [say] 8% next year.” The quick-witted young planners got the message and went back and tweaked their assumptions until they got earnings to grow the required amount. They weren’t exactly lying, but they all knew their “plan” was not straight down the middle realistic. However, the managers were happy, and that was what mattered. Such is the corporate mindset. If analysts or planners want to succeed in their careers, they have to produce what is desired by the layers above.

Earnings “beats” are often pointless

According to FactSet, with the vast majority of S&P 500 companies having reported their first quarter (Q1 2023) earnings, 78% of them reported actual earnings per share (EPS) above the mean average of analysts’ estimates. So nearly 80% of companies “beat estimates”. Woo hoo! What a great quarter for earnings!

But… the actual S&P 500 earnings declined by  2.1% from the previous (actual) earnings. Hmm, maybe not such a great quarter after all. And this is on top of a decline in the previous quarter, as well. But nobody talks about that.

This is another example of the systematic bias in “earnings estimates”, which makes the quarterly hurrahs over “beating” estimates somewhat silly. We have complained about this earlier. Here is the problem: most published analysts are employed by investment banks or similar “sell-side” institutions which are always courting the favor of large companies, since they want the companies to do business with them. What sorts of earnings estimates do the corporate brass want to see?

Well, for earnings that are due to be reported a year or more in the future, they want to see high estimates, which would justify high stock prices now. And for earnings that are due to be reported in a few weeks, the managers want to see low estimates, which they can then (tah-dah!) “beat.” And so, we see a reliable pattern of analysts starting with unrealistically high estimates, and then ratcheting down, down, down in the year before the actual reporting date.

Bring on the charts

A recent article by Seeking Alpha author Lance Roberts illustrates some of these trends. I pulled a couple of his charts here. First, here is a plot showing the decline in Q1 2023 estimates over the past 18 months or so, as analysts do their usual dance:

The blue line in the figure below shows the percentage of S&P 500 companies which “beat” their final (lowered) estimates. If the estimates were fair and unbiased, we would expect this number to be around 50%. In fact, in the past decade it has been around 70%, and growing with time.

Earnings beats or misses do get headlines and contribute to near-term stock price moves, but from a fundamental point of view there is more sizzle than steak here.

“Sportswashing” is a byproduct of the end of oil

mdmakowsky2 Comments

Oil money has flooded into soccer/football, golf, and a host of sporting events. The prevailing term is “sportswashing” i.e. the attempt to reinvent the public image of the Saudi Royal Family, United Arab Emirates, Qatar, and anything petro-state adjacent. Partners in these endeavors can be found regularly providing sound bites praising parties whose records in human rights are less than sterling.

I just want to point out one thing: when your extended family’s net worth is $1.4 trillion (with a `T’, not a typo), your public image remains important, but nonetheless a potentially second order concern. What is a first-order concern is maintaining that wealth for the generations to come. When it comes to the oil-based wealth, the sun is setting. Not in terms of calendar months (not yet), but certainly in terms of generations. Oil, as the fulcrum of geopolitical history, is in it’s final period. Which is simply a long-winded way of saying that if a petro-state magnate cares profoundly about the global standing of their grandchildrens’ grandchildren, they’re looking for ways to move away from oil.

Oil is one of those special commodities that is of interest to economists because it enjoys high demand, has few substitutes, and it’s supply is relatively inelastic. You can’t merely will oil into existence. So if your family happened to enjoy high status and power over a previously low-value plot of land that an ocean of oil randomly happened to exist beneath, you could parlay that into tremendous wealth and power in the world. And they did.

With solar power setting the sun on oil (I am so sorry), you can’t blame oil magnates for looking for the next thing to tie their wealth to. What’s interesting is that the lesson they appear to have learned is the importance of hard-to-reproduce commodities. They fell into the first, now they are actively looking for the second.

You know what’s hard to reproduce? Status. Prestige. History. Identity networks. You know what characterizes those exact things? Sports teams and luxury brands. I fully expect oil money to keep pouring into soccer teams and handbags. Watches and sports cars. The kind of products that are grown and historically selected for across multiple generations, in processes that often take more than a century. Production processes that are less engineering than social geology.

Petro states and families have been tied to oil for 100 years, but now they want out. And we should let them, encourage them even. The fewer forces there are in the world working to continue fossil fuel dependence, the better. The more they tie themselves to products where labor holds more leverage than capital i.e. sports, the better. If you’re waiting for fossil fuel money, or human rights abusers, to get their come-uppance, prepare yourself for disappointment. But if you’re excited to the see a better world with cleaner air and a better climate future, then don’t be surprised if it’s first harbinger isn’t solar farms in Texas, but princes in stadium press boxes sponsored by Rolex.

You Cannot Cut Nominal Wages: Weavers in 1738

Joy BuchananLeave a comment

I’m reading The Fabric of Civilization (see my AdamSmithWorks on specialization). This is a fascinating story about cloth and markets:

In November 1738, clothier Henry Coulthurst informed weavers that he was cutting their piecework rates and would henceforth pay them in goods rather than cash. Needless to say, they were upset. Food prices were rising, and lower wages meant hunger and want.

Over three days in December, the weavers rioted. They smashed Coulthurst’s mill, wrecked his home, and “drank, carried out, and spilt, all the Beer, Wine and Brandy in the cellars.” They returned the following day to demolish Coulthurst’s house…

Wow. Our paper on cutting nominal wages is called “If Wages Fell During a Recession” We ran an experiment in which workers could retaliate if they experienced a nominal wage cut. They did! They couldn’t smash their employer’s house, but some of the slighted workers dropped their effort level down to the minimum level which meant that their employer made no more money in the experiment.

In my talk at IUE (show notes here and YouTube video), I connect the wage cut paper to another experiment on beliefs. One wonders, considering how serious the consequences turned out to be for Henry Coulthurst, why he was not able to anticipate the backlash against wage cuts. Being wrong was costly for him.

People are not always good at appreciating how strongly others have become attached to their own reference points. That’s why the paper on beliefs is called “My Reference Point, Not Yours“

Unpopular Grocery Opinions

Zachary BartschLeave a comment

You needn’t stop at stop signs in parking lots.

Road signs on private land are often not legally enforceable by the police. You can ignore right-of-way and most signage in a parking lot or a parking-lot-adjacent path. I’m not saying that signs don’t serve a useful function. The stop in front of a Target or Publix is there to help coordinate drivers and pedestrians. It’s mostly a prudential matter. If it’s crowded, then those signs act coordinate us where norms might differ. But, if it’s late and no one is around, then you can safely run all of the parking lot stop signs with impunity. Be careful, however. The police can’t get you. But if you harm someone or something, then you can still be liable for neglect in a civil suit. That’s because neglect is contextual and expectations matter. If people treat parking lot signs like there are real road signs, then flaunting them can be construed as neglect.

You Can Park in Handicap Spaces.

If you’re *really* anti-social, then you should look up your local or state handicap accessible parking rules. Usually, police do have the power to ticket vehicles lacking the proper disability tags. BUT, the handicap parking space must conform to specifications. Where I live, for example, there must be an minimum sized sign that stands completely above 5 feet high in order to clearly demark the space. Therefore, if you see a handicap spot that is only noted by asphalt paint, then you’re free to park there.

Return your Shopping Cart… Or Don’t

Nothing says that you must return your shopping cart to an outdoor, covered, or indoor corral. People say that they have strong feelings about this (it’s not clear to me that they actually do). I say it’s not a fruitful exhortation. Let’s consider multiple perspectives and set aside the issue of civil liability due to neglect that I outlined above.

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