🎙️ Funflation

There are still 2 ½ months until 2023 is all said and done, but it’s been an action-packed year 🗓️

If we had told you that interest rates would keep moving higher this year, the war in Ukraine would persist, and a mini-banking crisis would unfold, all while geopolitical tensions in the Middle East spiral, would you have guessed that the S&P 500 would be up nearly 13% still?

💭 Us neither. Markets are complicated. Our job is to help you navigate them.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Fraud at the world’s largest carbon-offsetting firm

• Why it’s getting too expensive to have fun

• Behind Mexico’s $2.8 billion bid to rival the Panama Canal

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🌲 The Cash-For-Carbon Hustle

Carbon offsets are well intended. But as with many well-intended things, they don’t always work well, at least concerning the original aim.

The idea is simple — create economic incentives for either restoring natural ways of processing carbon (i.e., planting a forest) or preventing environmentally damaging activities from happening (i.e., “saving” a forest that was going to be cut down.)

• They’re attractive to environmentalists seeking to avert climate change and natural resource owners, like loggers, who might get paid more for not harvesting their timberland.
  

• But carbon offsets are also appealing to financial engineers. That is, people creating investment products to market, who aren’t always so well intended.

Carbon credits: One popular type of carbon offset, created by financial engineers, is carbon credits, which the financial writer Matt Levine says “involve(s) selling a product that you don’t create (emissions) to people who don’t use it.”

• And there are loopholes. One way to exploit this system is to promise not to cut down trees that wouldn’t be cut down anyway, selling these artificially created “carbon credits” in exchange for real cash.
  

• Carbon credits that prevent planned deforestation are great. Carbon credits that preserve land that was never at risk of disruption aren’t great, especially since those funds are being misallocated away from places where they might actually offset carbon emissions.

Why it matters:

The New Yorker recently highlighted a story about carbon credit fraud from “the world’s largest carbon-offsetting firm, South Pole Holding AG.” As a result, skepticism of the $2 billion voluntary carbon credit industry is once again in vogue.

Greenwashing: South Pole’s former CEO has lost faith in them, too. He commented, “It’s just paper credits…The big majority of what you see in the market, in my view, boils down to a lot of greenwashing, a lot of marketing, a lot of money-making.”

• In 2022, South Pole admitted it considerably overestimated how many trees it saved using a formula provided by the controversial certification agency Verra, meaning 64% of the project’s carbon over a decade didn’t really offset emissions.

Read more

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🎸 Funflation: It’s Getting Too Expensive to Have Fun

Analysts have a new word for us: Funflation.

We’re aware of rising home prices, insurance, electricity, gas, and groceries. But that’s not all. The price of fun stuff like concerts, sporting events, and vacations has also increased — in case you hadn’t noticed.

• Many people are done spending on concerts and trips that break the bank.
  

• Nearly 60% of Americans say they’ve cut back on spending on live entertainment this year due to rising costs, per a Wall Street Journal survey. About 26% of respondents said they don’t spend any money on live entertainment, up from 16% before the pandemic.
   

• Meanwhile, about 20% of Americans said they’re willing to take on debt to afford entertainment activities, like Taylor Swift concerts, tickets to NFL games, and winter trips to warm places.

Through the roof: The cost of admissions and fees — so many fees! — rose faster than the price of food, gasoline, and other staples last year, according to the Bureau of Labor Statistics. The rising prices have continued throughout 2023, mostly because of social media marketing and the globalization of pop music thanks to streaming.

• “Anything live, anything experiential, is just going through the roof,” noted one analyst who labeled the situation as “funflation” last month.

Why it matters:

Spend, spend, spend: This week, the latest retail-sales report showed spending at stores, online, and at restaurants rose more than expected in September, meaning people are still spending on experiences, restaurants, and other goods.

Americans are due to spend just under $100 billion this year on movies, live entertainment, and sporting events, up 23% from last year. The average U.S. concert ticket is now $120.11, a 7.4% increase from last year, roughly in line with inflation.

On one hand, the price increases are difficult to absorb, forcing many families to reduce the number of concerts and games they attend.

• But in many ways, people are part of inflation. When millions of fans buy expensive tickets with fees, hotels, and all, they’re part of the heightened demand contributing to higher prices. The cycle continues.

Read more

MORE HEADLINES

🦃 Walmart and Aldi to offer more affordable Thanksgiving meals

🏈 NFL eyes Brazil and Spain for future games to expand global reach

📈 P&G tops earnings and sales estimates after hiking prices

🖊️ X, formerly Twitter, tests charging users $1 to tweet

🏎 Mahomes, Kelce, and McIlroy lead Formula One investment round

🗳️ Jim Jordan fails to win vote for Speaker of the House, again

🚗 Americans side with autoworkers in ongoing union strike, per CNN poll

🚂 Mexico Revives Century-Old Railway In $2.8 Billion Bid

Mexico is taking a big swing.

As The Financial Times explains, the Mexican government is reviving a 100-year-old railway line, which would span Mexico’s coasts at its narrowest point in the southern part of the country. International freight would get a boost, possibly rivaling the Panama Canal.

• No, freight trains aren’t exactly on the average American’s mind every day in an age of trucks and planes. But rail is still an efficient way to transport goods.
  

• Mexico has signed off on the $2.8 billion project just as Mexico topped China to become the U.S.’s top trade partner. The rail’s revival could begin next year and create 10,000 jobs.

The Panama Canal, Central America’s famous artificial waterway, experienced a drought this year that caused water levels to sink so low that large vessels couldn’t get through. As you can imagine, that led to headaches and shipping delays.

• Climate change likely isn’t going away, so it’s probably not the last drought in the region. Thus, Mexico’s move could be timely and necessary.

To be sure, the railway’s max capacity would only be about 10% of the total goods that go through the Panama Canal in a given year. But you must start somewhere, even with small steps, and think long-term.

Said Mexico’s Economy Minister: “A train isn’t the same as a ship. You have to consider the proportions. But given the changes we are seeing with climate change it’s a real and increasingly important alternative.”

Why it matters:

Mexico is bullish on rail, which could give it proximity to the U.S. and reduce transit time to 6.5 hours rather than the eight to 10 hours it takes to cross the Panama Canal.

• “Mexico right now is one of the most attractive countries, among the top five most attractive in the world,” the economy minister added.
  

• Patience is required, though, for the railway will take years to revitalize. Then, Mexico must attract logistics companies to choose its railway over the Panama Canal.

Questions abound: It’s usually more costly to unload containers from a ship to the train, then back onto a ship on the other coast, rather than just leaving all the containers on a ship the entire journey. Plus, shipping companies, freight groups, and port terminal operators haven’t yet shown interest in the new route.

Said one shipping exec: “The question is always the same. When there’s an alternate routing available, they (importers) will say, ‘Is it reliable?’”

Read more

QUICK POLL

Yesterday, we asked: How much cash do you like to hold in your portfolio?

—About 25% of you are fully invested with no cash

—On the flip side, another quarter of you have 20% or more in cash, and about 20% of you have between 1% and 5% in cash

—Wrote one reader with more than 10% in cash: “Cash is king in this respect, which allows you to take advantage of some special situations where you can deploy it to get an advantage.”

See you next time!

That's it for today on We Study Markets!

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