9 min read

Fed Up With Inflation

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Erin go Bragh!

In case you missed it and are in danger of being pinched for not wearing green, it’s St. Patrick's Day 🍀, and we are all hoping the outlook is as green as the Chicago River will be today. Investors are adjusting to the new normal of whiplash and volatility as their attention is pulled in many different directions. Talk of progress on a Russia-Ukraine peace deal has boosted spirits and indexes, while cooling commodity prices (oil, gold, wheat, metals). However, shortages are still at the core of many new investing ideas bouncing around Wall Street, including raw materials needed for the green transition and…fertilizer? Add in further stress on the supply chain, the devastating impact of the war on the people of Ukraine, the continued reconfiguring of the world’s economy due to the Ukrainian invasion, and new Covid lockdowns in China, and watching the markets feels like being on an endless roller coaster.

That’s a lot of news to keep up with, and a good neck massage is in order for everyone, but the main financial focus of the week has been the decisions taken at 2051 Constitution Avenue NW in Washington, DC. The US Federal Reserve has finally raised interest rates by 0.25%, the first hike since 2018, to tackle inflation. (We explain how this works further down!) It said several more hikes will be necessary this year, and markets are on edge because the central bank has to be delicate as it pulls the levers of the economy. If it’s too aggressive and tries to reign in prices too quickly, it could tip the country into a recession. The Fed tried to keep investors calm, expressing confidence that the economy is strong enough to withstand these hikes. We will see if their tone had the intended soothing effect over the next few weeks.

ESG continues to be in the spotlight as investors wonder if the reaction to the Russian invasion is the kick the movement needed or whether it exposes it to greater scrutiny. FWIW subscribers learned a lot about ESG last week, but how it should be applied in practice with ESG-labeled and sustainable funds is being debated on several fronts. Among the issues analysts are debating: whether ESG funds should have had little/no exposure to Russia before the invasion and how the divestment from Russia and fossil fuels can create more ESG investing opportunities. Sustainable investing is evolving and the discussions we’ve seen lately are heartening signs that the community is getting closer to what it truly means to align your investments with your values. We’ll be following closely.

News you can use

Graphic of newspaper with magnifying glass

Searches for new and used electric vehicles on Cars.com accelerated 112% from Feb. 24 to March 8 as the Ukraine war escalated. A new Berkeley Haas study says a 40 cent per gallon increase in the price of gasoline increases the demand for EVs by 57%. Despite considerable savings at the pump, they’re still expensive upfront, with some producers, like Tesla and Rivian, announcing price increases.
Would you want a chocolate milk or a box of cereal delivered to your doorstep in minutes? Ultrafast grocery delivery — with low fees, no minimum order size, and full-time employees instead of contractors — is the new courier business model being explored by heavy hitters like DoorDash, Uber, and Grubhub. But the demise of two startups in a week, not to mention the environmental and social costs and the many who have failed at this before (anyone remember Kozmo.com?), is leading many to question expansion plans.
Strawberries are getting more sustainable and local just in time for springtime salads. Two vertical farming startups – Plenty and Bowery Farming – separately announced plans this week to add the berries to their offerings. Plenty is backed by Walmart and SoftBank, and Bowery Farming counts celebrity chefs Tom Colicchio and José Andrés among its investors. Indoor and vertical farming has attracted over $1.4 billion investments in the past year, according to Crunchbase, with strawberry production seen as lucrative, but hard to do.
Starbucks (which is looking for a new CEO) is adding EV chargers and coming up with new ways to ditch single-use plastic. In a few years, US and Canadian customers will be able to use their own personal reusable cups or be provided one for every visit. It’s also testing a 10-cent fee for single-use cups and washing stations. The iconic disposables and lids make up 40% of the company’s packaging waste, and it’s been an uphill battle to phase them out. Volvo-branded fast chargers will also start appearing outside a limited number of stores in the Pacific Northwest.

Net Zero. What Is It? Why Should I, As An Investor, Care?

In many ways, Net Zero has become one of the corporate buzzwords of our time. But interestingly, many don’t really understand what the term means or why, as investors, we should care about a company’s aspirations or actions on this front.

The science around global warming is clear enough for a TL;DR – the planet is currently around 1.1°C hotter than it was in the late 1800s, and scientists say the only way to stop this warming to 1.5°C is to reduce or eliminate “greenhouse gas emissions“ that come from many sources and to do so by 2050. But what has often been overlooked is the economic cost of not taking action. Deloitte estimates that “if left unchecked, the economic cost of climate change in the United States could reach $14.5 trillion by 2070.”

That’s why governments and companies promising to tackle climate change usually announce plans to reach “net zero carbon emissions." The term itself is complicated but the idea behind it is clear: these steps are being taken as an economic imperative for the future, not only to avoid disasters and related costs or impacts to countries and companies, but also to usher in new innovations and solutions that could deliver $3 trillion gain to the US economy in the coming decades, according to Deloitte.

So why “net zero” and not just “zero” emissions? Put simply, there are two ways to reduce emissions: stop or reduce by lowering the output of emissions to the greatest extent possible, or take actions to offset the release of emissions, such as buying or investing in things that “eat” or offset these emissions, such as investing in protecting forests to capture carbon or investing in biogas digesters that capture methane before it escapes and turn it into energy so other sources (like coal) are not burned. Another term for net zero is “carbon neutral” since any carbon released is said to be neutralized.

You can check if a company has a net zero commitment on its official website, but it’s easy to miss the fine print this way. If you’ve ever wanted to learn a new language, order less takeout, travel more, or get your finances in order, you know the difference between resolutions made during the heady first week of January and a good, solid plan to reach a goal. Creating emission targets is a great way to kickoff a campaign to make an impact, but without decisive action, science, strategy, and transparency, they run the risk of only being publicity stunts and may not have the impact on the bottom line (or the planet) that you may be looking for.

So how can you tell if a company you are thinking of investing in has its eye on the climate change ball and is taking real action to position themselves correctly? Unfortunately, there’s no official definition yet, but there’s certain minimum requirements and things to look for. Third parties are analyzing and grading these plans based on this criteria. For example:

Are targets detailed and broad? Does the company calculate and disclose emissions across the value chain? It’s not enough to be net zero in your office building, factories, and vehicles. Other indirect emissions also need to be considered, like the electricity they buy and the use of their products. This is known as Scope 1, Scope 2 and Scope 3.
How fast is it? Good plans have a quick time frame to reduce significant emissions with near-term targets (5-10 years) and clear interim targets that show if a company is on the right track.
Carbon removals? Net zero plans with significant dependence on carbon offsets may not represent real company-wide changes.
Updates? Companies should be reporting on their progress every year and you should be able to identify clear progress toward their stated targets.

If you want to check if a firm’s net-zero target is really all that, here are some resources. You may be in for some surprises *cough* Tesla *cough*:

The Science Based Targets initiative (SBTi) launched the world's first Corporate Net-Zero Standard last year. Nearly 400 US companies (no fossil fuel and financial firms) are currently working to get their commitments validated, and you can track their progress using this dashboard. Two companies that have met SBTi’s standard for their entire net-zero agenda: retailer CVS and real estate giant JLL.
The Net Zero Tracker covers the world’s 2,000 largest public companies and tells you whether their plan is detailed, uses carbon credits, and covers the full value chain.
The Transition Pathway Initiative (TPI) assesses whether over 400 publicly-listed companies across 16 high carbon sectors are prepared for the low-carbon transition by looking at their emission targets.

While there are few companies that have landed perfectly on the path to net zero, looking for those that have made quantifiable progress that represents a real commitment and track record may be the best option at this point. As with many things in this space, we will keep an eye out for updates and progress.

♫ The interest rate’s connected to the… inflation ♫

If you’re confused about how the expected Federal Reserve interest rate hikes this year will interact with rising prices, you’re far from alone. We’ll file this under Things They Should Teach You in School (a Feducation?!) and New Song Ideas for Broadway Play Hamilton.

What does the Fed do? The Federal Reserve, or “Fed,” is the US central bank, and it regulates the economy to maintain maximum employment and stable prices (meaning inflation stays around 2%). It has certain tools to do this, including increasing or decreasing the federal funds rate. This is the interest rate commercial banks use to lend money to other banks and it directly influences the rate they charge their customers (read: companies and people like you). When the Fed thinks the economy needs help (like 2 years ago at the beginning of the COVID outbreak), they lower the rate and when they think inflation needs to be slowed, they raise the rate.

Prices aren’t “stable” right now, are they? The government’s inflation measure, a basket of goods and services called the consumer price index, was up 7.9% in February from a year ago. This is the highest jump we’ve seen in 40 years (not like the 1970s, but that is what the Fed is trying to avoid), and is driven by a lack of access to goods, government spending, and the reopening, among other factors. While news reports often focus on rising gas prices, inflation can be seen everywhere from grocery stores to medical bills to restaurant menus. It even comes in the form of shrinkflation, where your Doritos package shrinks, but the price does not.

So how do these hikes help? Higher interest rates make it more expensive for businesses and consumers to borrow, thereby slowing the amount of money entering the economy. As consumption and investments drop, the hope is prices will also eventually fall as supply and demand get more balanced. The Fed’s actions also have a psychological impact: when people are confident it will reduce inflation, they make different economic decisions (shopping, raises, etc.) which may actually contribute to reducing inflation in a self-fulfilling prophecy.

What are the risks? The Fed has to be careful not to raise interest rates too fast because it could slow economic growth and send us into a recession (typically defined as two consecutive quarters of economic decline). The war in Europe complicates the picture, and there’s rumblings about stagflation, which is the combination of slow economic growth, high unemployment, and high inflation.

How do rising interest rates affect me? If you have debt (a credit card, car loan, adjustable rate mortgage, or privately-held student loan), you may have to pay a higher interest rate. On the other hand, the interest on your savings and certificates of deposit are likely to inch up and your federal student loans should remain stable. What will the stock market do? As you know, predictions are foolhardy, but historically, the stock market has short-term knee-jerk reactions to news about rate hikes, but long term investors weather this volatility and often see gains down the road. On average the S&P 500 has delivered positive returns of around 11% for periods of rising rates going back to World War 2, says LPL Research.