🎙️ The YOLO Economy

Where would you invest $10,000 right now? We asked that yesterday, and nearly half of you said you’d go with equities (S&P 500) 📈

“Always good to buy when the market is down,” one reader said. “Being greedy when the market is fearful,” wrote another.

Bitcoin and 10-year Treasury bonds came in a near-tie for second, while gold was your least attractive investment. A few wise readers pointed out that their answer depends on the time horizon.

💭 Meanwhile, we’re keeping an eye on the trial of FTX founder Sam Bankman-Fried.

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

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

• Why Americans are spending like there’s no tomorrow

• Why Japan could be the most exciting market right now

• Inside the complicated, risky, lucrative cannabis market

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

CHART OF THE DAY

IN THE NEWS

💸 Americans Are Still Spending Like There’s No Tomorrow

YOLO: “You only live once.”

Given the rise in interest rates, persistent inflation, decreasing pandemic savings, and a slowing labor market, it's logical to expect consumers to reduce spending.

Yet Americans keep swiping their credit cards for travel, concerts, handbags, and restaurants, even as prices stay high.

In August, Americans' spending increased by 5.8% compared to the previous year, significantly surpassing inflation, which was under 4%.

• The "experience economy" surged this summer. Delta Air Lines posted record revenues in the second quarter, and Ticketmaster's ticket sales climbed nearly 18% year-over-year to over 295 million in the first half of 2023.
  

• The proportion of households claiming to have made at least one big purchase in the last four months rose to 64%, its highest level since 2015.

Pausing the American Dream: A challenging housing market has pushed many to forego traditional savings goals, while the pandemic highlighted the uncertainty of health and employment.

• In short, Americans are investing in experiences, knowing they might not have the same opportunity later, reports The Wall Street Journal.
  

• One consumer spoke for many when he said: “I just hit a point where the thing that we had been talking about maybe hopefully doing someday, we’re going to do it now. I’m not going to worry about money anymore.”

Why it matters:

Consumer splurging won’t last forever, but it does make the Fed’s job to cool inflation harder. It also raises questions about how effective interest rates are in manipulating peoples’ purchasing decisions.

• Still, student loan repayments, persistent inflation, or a spike in job layoffs will eventually cause individuals to curb spending, among other reasons.

Takeaways for the Fed: Pushing rates up across the economy is a ‘blunt force’ tool for policymakers to fight inflation, not a scalpel.

• The question, then, is when people don’t respond to the economic logic of blunt-force tools like raising interest rates nationwide, do you continue to lean into them?
  

• By and large, for the Fed, the answer remains “yes,” perhaps because few viable alternatives to conventional monetary policy exist.

Read more

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🇯🇵 Japan’s Stock Market is on a Hot Streak

Japan is the place to be. Well, yes, for great sushi and ramen, but also stock investing: Japan’s stock market has produced the best returns of any major, advanced economy in 2023.

Land of the rising sun: The Oracle of Omaha, Warren Buffett, gave the country his investment blessing earlier this spring in a series of comments, and foreign cash has poured in since — Japanese stocks are up 20% since late March.

Investors have long maligned Japanese stocks for the country’s slow economic growth and for having less shareholder-friendly regulations, stock exchanges, and corporate structures.

• There’s growing optimism that these headwinds are fading, though.

Sinking yen: Japan’s collapsing currency value creates a mirage, making Japanese stocks (as priced in yen) appear to perform better than when translated into U.S. dollars.

• As the Wall Street Journal reports, “when the yen’s moves are stripped out, the Japanese market has matched the U.S. almost perfectly.”
  

• While the yen’s exchange rate has declined against the dollar, that’s offset some of Japan’s incredible stock market gains for American investors.

Put differently, when you invest outside your home country, you take all of the risks inherent to regular investing, but you also take currency risk — fluctuating exchange rates can either work in your favor or detriment.

How it works: Suppose an American investor owns shares in a Japanese company valued at 1 million yen.

• If the exchange rate is initially 100 yen to the dollar, those shares are worth $10,000.
  

• But if the yen depreciates and the exchange rate becomes 110 yen to the dollar (meaning it takes more yen to buy one dollar), the same shares are now worth about $9,090, even if their yen value hasn't changed.

Why it matters:

The yen’s depreciation has been a big domestic issue, prompting policymakers to intervene several times to prop up its value in foreign exchange markets, especially as inflation has picked up for the first time in decades.

Geopolitical advantages: Despite having tradeoffs for foreign stock investors, a depreciating yen is good for manufacturing (Japanese goods become cheaper to purchase thanks to the weaker exchange rate.)

• This comes when many Western companies want to diversify supply chains outside of China to nearby hubs, which naturally draws more investment to Japan, accelerated by the yen’s languishing exchange rate versus other major currencies.

Read more

MORE HEADLINES

🕶️ Companies race to make AI you can wear

🎤 Beyonce’s Renaissance Tour film is coming to save the day for the weak December box office

💰 Musk, Bezos, and Ellison top 2023’s list of wealthiest Americans

🙏 Biden cancels $9 billion in student debt for 125,000 borrowers

🍪 Krispy Kreme puts Insomnia Cookies brand up for sale

QUICK POLL

🌿 The Complicated, Risky, But Sometimes Lucrative Cannabis Market

Markets are rarely as simple as X leads to Y. OK, so once in a blue moon, a pandemic comes along, and amateur traders do a quick calculus: Stay-at-home stocks will perform well.

That worked for many, but it’s seldom so simple. Take the widespread legalization of cannabis, widely considered a doorway to success for many cannabis companies. That’s been the case for some. But for many entrepreneurs in the space, it’s not that easy.

The reality? Cannabis is much less profitable than imagined. Many businesses are shedding money, thanks largely to heavy taxes and regulatory costs. Prices have come down, too.

• “Overall, the industry is running on fumes,” says one economist who advises cannabis firms and investors. In the near term, “it’s going to be a challenge to have any profitability.”
  

• In the past 12 years, 23 states have legalized adult recreational use of marijuana. But federal law classes marijuana with drugs such as heroin and LSD. As you can imagine, this can leave cannabis businesses in a legal mess.

Good news: The Drug Enforcement Administration recently began reviewing whether to reclassify marijuana as a less dangerous substance. The not-so-good news: The timing of such a reclassification is unclear.

That’s important because many banks would rather not finance cannabis companies if it means legal headaches.

• Nor does it help that credit-card companies are wary of marijuana-related transactions. That’s why most cannabis shops have ATMs to accept cash, which adds risks and expenses.
  

• Loans and grants from the Small Business Administration are unavailable to marijuana-related businesses.

As if that weren’t enough, legal cannabis companies must compete with illegal dealers who avoid taxes and regulatory costs.

Why it matters:

Gold rush: Prices have plummeted amid all the competition, driving down revenue for growers and retailers. At least one store hangs a sign that says, “Buy low, get high.”

• Said one cannabis store owner: “Everyone jumped in on this gold rush.” And, as in every gold rush, there are plenty of losers along the way.

Still, many in the industry believe the hard times won’t last. Federal prohibition could end, and the operators who survive will be able to benefit from cannabis’ soaring popularity for decades. Many are counting on it to be a big market, perhaps close to that of alcohol.

Read more

See you next time!

That's it for today on We Study Markets!

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