329 (8 August 2018)

Welcome to week 329!  The articles below caught my attention this week.  What are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  Article titles preceded by [SR] require a subscription to be read in their entirety, although complete articles might be found by an Internet title search.

Please let me know if you have questions or comments.

(4 November 2017): Why builders of big L.A. projects are making concrete with gravel and sand shipped from CanadaThe Los Angeles Times

——–“The 519 miles of L.A.’s freeway system.  Dodger Stadium.  City Hall.  All built with concrete filled with rock and sand washed down from Southern California’s iconic mountain ranges.”  Those materials are still abundant in the area.  “But now, as another building boom rumbles across Los Angeles and a new generation of high-rises climbs skyward, the rock and sand are coming from a much more distant source: Canada’s Vancouver Island, more than 1,400 miles away.”  Nonetheless, “thanks to a combination of materials science, cheap ocean shipping and, some argue, NIMBYism, today’s industrial concrete mixers are often filled with imported rock and sand.”  Regarding the cost, consider that “To ship 1 ton of rock over 1,450 miles of ocean to Long Beach costs about $7.25.  To truck it from Long Beach to downtown L.A., about 25 miles, adds an additional $8.75.  And at $16 combined, that’s less than the $22.75 it might cost to truck a ton of aggregate on the 65-mile trip from a quarry in Palmdale to downtown.”

********I stumbled upon this article while signing up to follow the Twitter account of James Rufus Koren, a reporter for the LA Times.  What was news for me, and what made it relevant, here, is the fact that the quality of the concrete used in construction depends upon the nature of the sand, gravel, water, and cement used in its production.  As project manager Todd Lamberty noted, “If you’re laying down a sidewalk, you can use whatever aggregate you want.  But to make high-performance concrete, the materials matter.  Use lower-quality sand and gravel and you’ll need to add a larger amount of cement. . . . The aggregate that’s locally mined is pretty poor quality in terms of its shear strength . . . You end up putting a ton of cement in the mix to make up for that, and cement is the most expensive component.”  So, in the background, there is what microeconomists call a cost-minimization problem for given product quality involved in construction.  The proper mix of materials depends upon their relative prices.  An interesting case in point is that Qatar and Kuwait “were among the top global importers of sand and gravel in 2015 . . . There’s plenty of sand in both Persian Gulf nations, but of the wrong sort.  Desert sand, formed by wind, is too smooth for making concrete.  Coarser sand formed by rivers and glaciers is preferred.”

(31 July 2018): Patrón Made Tequila Top-Shelf.  Will Bacardi Dilute It?Bloomberg Businessweek

********An engaging article about entrepreneurship in the context of the market for tequila, telling a part of the story of how Patrón came to be the watch word for tequila excellence.  The title indicates the concern that Bacardi Ltd., which purchased “the 70 percent of Patron Spirits International AG that it didn’t already own for $5.1 billion in January,” might erode product quality by introducing a different production process. If you like mules, you will want to check out the photos.

(1 August 2018): Oil Tanker Owners Are Scrapping the Most Ships in DecadesBloomberg.com

——–“Oil tanker owners are giving up.  A 19-month curtailment of OPEC cargoes, and environmental regulations that are proving uneconomical to comply with, have got owners purging the supertanker fleet at the fastest pace since the 1980s . . . While the demolition surge—sending vessels to be ripped apart on the beaches of India and Bangladesh—reflects the worst charter rates for owners in decades, scrapping often helps set the stage for market recoveries.  Morgan Stanly estimates that the global fleet of so-called very large crude carriers [VLCCs] could lack 100 million barrels of transportation capacity by late 2020.”

********This article provides a nice example of how various markets interact when one or more of them has a highly durable good.  Here there is the market for VLCCs, the market for VLCC services, i.e., the leasing of VLCCs, and the market for the steel from broken down vessels.  It is clear from the coverage that those in the related industries are aware of the cyclical nature of them, and how decisions to scrap today or not, has consequences for the market for new VLCCs at a later time.  The element of increased cost due to regulatory change brings in another interesting element.

(1 August 2018): [SR]America’s Long Love Affair With Beer Is on the RocksThe Wall Street Journal

——–“U.S. drinkers, particularly young ones, are having relationship problems with the national beverage [beer].  It’s no longer true they start out favoring mild pilsners and low-calorie beers, then graduate to harder stuff later in life, if at all.  Now they are thinking about other things: taste, value, beer bellies. . . . According to the Beer Institute, a trade group, drinkers chose beer just 49.7% of the time last year, down from 60.8% in the mid-‘90s.  Among 21- to 27-year-olds, the decline has been sharper.  Anheuser-Busch InBev SA, Budweiser’s owner, found that in 2016, just 43% of alcohol consumed by young drinkers was beer.  In 2006, it was 65%.”  As further evidence of decline, per capita beer consumption “in the U.S. fell to 73.4 liters last year, from 80.2 in 2010 and 83.2 liters in 2000.”  To compensate for the decline in volume, the beer industry has been “increasing prices.  That has helped make whiskey and wine relatively more affordable.  Beer prices rose 42% between 2000 and 2017, compared with 11% for wine and 19% for spirits, according to a Brewers Association analysis of data from the Bureau of Labor Statistics.”

********It seems, then, that changing tastes and changing relative prices have contributed to declining sales volume of beer in the U.S.  What might be called “Big Beer” has suffered the largest declines, with the craft beer segment still growing, although that growth rate has slowed in recent years.  (Large growth rates can never persist.)  Budweiser is experimenting with a variety of new types of beers, which seem like a mashup of beer and spirits, e.g., “a new Budweiser beer, aged with bourbon-barrel staves.”  Taking another approach, Molson Coors “is turning to cannabis drinks in search of growth . . . The company said it is forming a joint venture with the Hydropothecary Corp., a Canadian cannabis producer, to develop non-alcoholic, cannabis-infused beverages for the Canadian market.”  You can learn more about this in [SR]Molson Coors Turns to Marijuana as Beer Sales DropThe Wall Street Journal.  On a somewhat related matter, check out “Wrigley Billionaire Moves From Chewing Gum to Medical MarijuanaBloomberg.com.  Evidently those with experience in the marketing of traditional products like beer and gum see an opportunity to transfer their skills into the development of new products that connect with marijuana.  As the article notes, “the transition of billions of dollars into the legal U.S. economy from the black market is drawing a lot interest from investors.”

(4 August 2018):Specter of America’s Growing Fiscal Deficit and Debt Load LoomsBloomberg.com

——–“America’s worsening fiscal outlook and mounting government debt are hiding in plain sight, but that troubling mix may not get a pass from investors for much longer.  President Donald Trump’s tax cuts and new federal spending have fueled a budget deficit that the Congressional Budget Office predicts will reach $1 trillion in 2020.  With the Federal Reserve also winding down its debt holdings, that’s  forced Treasury Secretary Steven Mnuchin to lift note and bond sales to levels last seen in the aftermath of the recession that ended in 2009.”  Harvard University’s Martin Feldstein, who was a top economic aide for President Reagan has noted, “We are heading to $1 trillion annual deficits and therefore $1 trillion annual borrowing . . . That will push up long-term interest rates.  That could depress the equity prices that are already very much overvalued.”  Economist Jeffrey Frankel, also of Harvard University, adds: “We are currently experiencing the most radical pro-cyclical polity outside of war-time, perhaps ever . . . This is an especially bad time to raise the budget deficit not just because of business cycle timing, but also because of the demographic timing: the ongoing retirement of the baby boom generation means huge deficits in Social Security and Medicare are coming.”

********The size of the federal deficit should be a story of continuing importance over the next few years.  Running huge deficits at full employment can only make one wonder how the current administration would manage a mild recession, much less something like the Great Recession.  This question is raised in the context of a review of Crashed: How a Decade of Financial Crises Changed the World in The Economist.  The author of the book, historian Adam Tooze, “takes on the financial and economic history of the last decade in a monumental tome of nearly 700 pages.”  In doing so he develops four big themes: immediate response to the crisis of 2008, the euro-zone crisis, the shift in the developed world to more austere fiscal policy, and populist politics in Europe and America.  The changing mood, especially in the U.S., “raises fears about what will happen when another storm hits the world economy.  The level of co-operation that occurred in 2008 and 2009, such as when America’s central bank made dollars available to its cash-strapped European counterparts, may not be easy to achieve next time around.”

(4 August 2018):John Stuart Mill: Against the tyranny of the majorityThe Economist

********This is the first of six Philosophy Briefs on liberalism’s greatest thinkers.  (The introduction to the series appears is one of the leaders for the issue.)  Like most great thinkers, his ideas were multifaceted and not always appealing.  A writer on scientific method, political economy, ethics, and political philosophy, his most famous book is On Liberty.  In it he stated the “harm principle,” i.e., “the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.”

(5 August 2018):Need a loan?  Forget the corner payday lender—your boss has you coveredThe Los Angeles Times

——–“Your employer might contribute to your retirement account or help pay for health insurance.  But will it help you set up an emergency fund?  Or offer you a loan of a few thousand dollars when your transmission breaks downs?  If you work for Comcast Corp., yes. . . . Founded this year by Comcast’s venture-capital arm, benefits firm Brightside announced last month that it would offer loans through San Diego firm Employee Loan Solutions.  The loans of $1,000 to $2,000 will be available to most employees, do not require a credit check and are paid back through payroll deductions.  With an interest rate of 24.9%, the loans are more expensive than the typical credit card but are dramatically cheaper than other types of debt available to borrowers with bad credit or little credit history.  Payday loans in California, for instance, come with annual interest rates topping 400%.”  This is an example of so-called “financial wellness benefits” that are becoming “increasingly common parts of corporate benefits packages.”  The loan program offered by Employee Loan Solutions, “called TrueConnect, is already offered through nearly 1,000 employers, many of them public agencies.”

********As the article notes, 24.9% interest on a loan is enormous, but pales in comparison to payday loans with annual percentage rates in the hundreds.  Thus these employer loans are occupying a space between credit card rates and payday loans for those in financial trouble.  Why are the rates so much lower than those for payday loans?  Presumably the costs of origination and collection are much less.  It has helped, too, that employers have become aware that their workers are among those who have been borrowing at high payday rates.

********You can learn more about Employee Loan Solutions from the 2016 article “Offer payday loans as an employee benefit, this start-up saysLos Angeles Times.  What I noticed is that these loans, too, are called payday loans, which is sure to lead to confusion.  Some terminology to differentiate between conventional payday loans and those that originate through an employer seems desirable.

(5 August 2018):Steel Giants With Ties to Trump Officials Block Tariff Relief for Hundreds of FirmsThe New York Times

——–The imposition of “25 percent tariffs on steel and 10 percent on aluminum” has led the Trump administration to “establish a process for companies to request ‘exclusions’ for any product they could not otherwise buy in the United States . . . But the Commerce Department, which is overseeing the process, also allowed American companies to argue against an exclusion request. . . . Since May, companies have filed more than 20,000 requests for steel tariff exemptions.  As of the end of July, the Commerce Department had denied 639 requests.  Half of those denials came in cases where United States Steel, Nucor or a third large steel maker, AK Steel Holding Corporation, filed and objection . . . Department officials said on Friday that they have not granted a single steel exclusion request that drew an objection.”  Critics of the exclusion process have said that it has “overwhelmed Commerce Department staff members, who do not have the resources to sift through thousands of complicated requests and objections and judge them on their merits.  They say the default position is to simply listen to a company that objects, regardless of whether the objection is legitimate.”

********This is a clear example of how the imposition of tariffs move an element of decision making from market participants to a government bureaucracy.  As a result, there is a little bit less invisible hand and a little bit more invisible foot affecting prices and quantities.  An editorial in The Wall Street Journal expands on these thoughts: [SR]Trump’s Political Tariff Bureaucracy.”  For an ironic twist on the tariff story, read “Alcoa Requests Reprieve From Trump’s Aluminum TariffsThe New York Times.  It turns out that Alcoa “imports much of its aluminum from its facilities in Canada, which is among the countries subject to Mr. Trump’s metals tariffs.”

********Another tariff story that caught my attention this week pertains to dried beans: [SR] “Kidney Beans Piled to the Rafters: Tariffs Are Biting in Farm Country” The Wall Street Journal.  The story originates from Menomonie, Wisconsin.  It tells the story of how Chippewa Valley Bean Co., whose president is Cindy Brown, has been affected by the EU response to the steel and aluminum tariffs imposed earlier this year.  As a result of the tariffs, “Cindy Brown is running out of room to store . . . beans.  One-ton bags of them cover the floors in her cavernous warehouses. . . . Chippewa Valley Bean Co. had been on track to ship to Europe 60% of its beans traded internationally this year, worth $25 million.  Now, ‘we’re just sitting on our hands’ . . . Businesses reliant on a single product are especially exposed.  Focusing on a specialty crop . . . paid off for Chippewas Valley for years . . . Now, specialization is magnifying the tariff pain . . . Ms. Brown . . . said the company last month shipped nearly 40% less than what is typical for this time of year.”  It is not known what benefit, if any, processors like Chippewa Valley will receive from the Trump administration’s promised $12 billion of emergency aid to support producers of agricultural commodities.  There is a nice four-minute video interview with Cindy Brown on CNBC.  She makes her position very clear when, toward the end of her interview, she calls for “Trade not aid.”

May you have a good week!

Bruce

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