This is issue number #091 of our weekly WTF is going on with the Economy?! x abroaden weekly insights newsletter.
Are companies price-gouging us?
Over the past couple of months, stories about companies making record profits during high inflation have appeared regularly in the news.
While the sources vary, the argument (many times, the topic appears on the opinion page and not the business section) goes like this:
Companies are making record profits by rising prices during high inflation, worsening the problem. They blame supply chain issues, but in reality, they could just lower prices and fix the problem.
Sounds pretty clear-cut, right?
Like everything else in the economy, there’s a lot more to the story, and maybe not what you think.
Who’s really in charge?
At first glance, it’s tempting to draw a connection between higher price tags and companies reporting greater earnings.
However, this assumption is a bit flawed. Outside of monopolies and cartels, markets, not companies, set prices.
When demand goes up faster than the cost of making goods or providing services, profit margins increase, too.
When supply chain issues are happening simultaneously, the laws of economics will drive up prices.
These forces combine to turbocharge profits, all while inflation sits on the mind of many consumers.
Companies with higher returns are also adept at financial planning and resource management. Corporate treasuries use futures contracts and hedging techniques to lock in costs and avoid market pressures.
We actually do the same thing when we buy stuff on sale for later or, for many of us living abroad, make strategic currency transfers.
In either case, the more efficient companies tend to come up on top (which is why we invest in them).
The hot yet weird economy is also playing a role.
We tend to forget about it (since it doesn’t get reported enough), but our current economy is hot and weird.
Most of us in the developed world are witnessing the fastest economic growth we’ve seen in our lifetimes.
What’s more, employment is up to levels also rarely seen since the 1960s.
Both of these factors contribute to inflation and profit increases which, in the end, is an overall positive. If we saw record profits in a stagnating or shrinking economy, the root cause wouldn’t be more sinister.
Let’s also not forget that the economy is still feeling the effects of the pandemic. It’s going to be a few more years until that normalizes.
The investors making money probably live next door
Usually, the narrative about corporate price-gouging consolidates and descends into a class warfare-esque debate, where the rich investors line their pockets from the working class.
This argument, though, ignores how broad and circular investing really is.
Individual investors make but a small fraction of direct shareholders. Instead, most capital comes into companies through pension plans and investment funds.
In the case of the former, pension funds use the higher returns to pay retirees their benefits. People of all stripes benefit when they invest in these companies via mutual funds and ETFs.
In both instances, the beneficiaries are decidedly middle class. Pension plans are a crucial source of income for many retired workers. For them, record profits right now are welcome.
There are still some points worth listening to from team price-gouging.
Even if economics and context weaken the price-gouging argument, those who espouse it have valid points.
First, some firms have bigger market shares in their sector than others. That, in turn, enables them to increase prices.
Smaller firms need to undercut them on prices to stay competitive. That’s easier said than done, especially when bigger firms have more firepower. For example, a firm with higher profits could price match a competitor since they have that financial buffer.
Second, there’s been a lot of consolidation over the past few decades. As firms merged, the number of smaller competitors shrank. With consumers having fewer choices, companies can charge more for goods and services.
Finally, monopolies and cartels do exist and can absolutely control supply. One of the core pillars of economics is that markets work best when efficient.
Monopolies and cartels are sadly a reality that won’t ever disappear. When there’s only one provider of goods or services, that creates market inefficiency as one party calls the shots. These groups can profit while setting whatever price they want; market economics be damned.
We’re in unfamiliar territory as we continue to chart our way out of the pandemic economy (never mind the war). Given our fatigue, it’s tempting to blame a single source for our many woes.
Yet, blaming one source for a multifaceted problem won’t solve it, let alone give us an accurate understanding of what’s going on. That causes us to make worse money decisions, which can go far beyond today’s alleged price-gouging.
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Tech continues to tumble.
Last week, we covered this story a bit, but tech stocks continued their downward slide. By Friday, the tech benchmark NASDAQ finished off its worst losing streak since 2011. The meltdown spread to other corners of the market, taking global indices down with them.
There are a few different reasons for the fall, including inflation fears and the shifting economy.
As long-term investors, though, we shouldn’t be too panicked. Markets don’t “always go up.” Instead, they move upward but with many bumps along the way. Unless you’re day trading or have some short-term goals, this market downturn is nothing to lose sleep over.
Luna goes to the moon (by taking the long way down)
What is worth losing sleep over is if you’ve been invested in a cryptocurrency called Luna.
We’ll cover this story as a feature in an upcoming issue. In short, a “stablecoin” cryptocurrency (that is, a crypto pegged to the US dollar’s price) called TerraUSD lost its stability and, subsequently, almost its entire market value.
If that wasn’t enough, TerraUSD got its peg by matching another crypto called Luna. Over the past week, as the peg disappeared, the value of luna cratered.
Sadly, many people who got too worked up on the hype saw their wealth wiped out overnight. If there’s one clear message here, diversification is absolutely key to investing without getting completely burned.
The Californication of Portugal
The LA Times recently published an article about Californians leaving their home state for Iberia’s 2nd largest country.
Interesting. We’re fans of Portugal (many of us were going there before it was cool). That said, we see a lot of our hometown Barcelona in the article.
For example, there’s a growing sense of deviation between the relatively wealthy newcomers and the native population. There’s even a debate over the word “expat” in there, too.
Also, many of the people featured in this article are in their first year of living abroad. We guess that they’re in for some (maybe not so pleasant) surprises as time goes on. *cough* FATCA *cough* citizen-based taxation *cough* a condition we call “Porto-belly,” which comes from drinking the stuff morning, day, and night *cough.*