Lassoing the Economy
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The economy is reopening, and it’s going as smoothly as our readjustments to office life and non-elasticated pants – so, not great. Supply chains are a mess and seaports are severely congested, causing long waits for goods like cars, furniture, and even the color blue. There’s a labor shortage across the country as workers reevaluate their options and quit or go on strike. The housing market is still too hot for many buyers due to low inventory.
These are some of the reasons why last month consumer prices jumped the most since January 1991 — and investors are not convinced it’s a temporary blip. The prospect of persistent inflation makes the stock market jittery because it lowers the buying power of returns and pushes the Fed to make borrowing more expensive for businesses.
Experts suggest that if you have money invested, it’s a good idea to protect your portfolio by diversifying to include some inflation-fighting assets. This chart from Wells Fargo illustrates how different asset classes reacted to periods of rising inflation in the past. As a consumer, you’re probably feeling the pinch already, especially at the gas station where the average price per gallon is at its highest point since 2014.
This brings us to a major contributor to inflation right now – a global energy crunch. The cost of oil, natural gas, and coal is skyrocketing everywhere. Since the first reports of shocking electricity bills in Europe back in August, China and India have faced power cuts for a lack of coal and British petrol stations have run dry.
Here in the US, President Biden has sought an increase in oil production while simultaneously seeking greater emissions cuts in negotiations with Capitol Hill as he heads to COP26 in Glasgow.
What are natural asset companies?
Your house plants may be constantly dying, but wouldn’t it be cool if you could keep a forest alive? What if you could invest in a piece of nature and its goodness? Soon you may be able to.
The New York Stock Exchange (NYSE) and Intrinsic Exchange Group (IEG) are developing a new class of publicly-traded assets called Natural Asset Companies, or NACs. Investors buying these “natural equities” will hold rights to the benefits a piece of land offers, which are known as “ecosystem services.”
Ecosystem services are all the ways nature supports human life and economic activity. Going beyond the obvious examples of food and raw materials: coastal wetlands provide protection from storms, forests capture and store carbon, wind pollinates flowers, scenic landscapes drive the tourism industry, etc. In recent years, scientists have worked to assign these services value in monetary terms. A 2011 estimate cited by the WWF pegged their worth at $125 trillion each year, which is more than the global annual GDP.
The NACs will earn revenue via ecosystem services that can be monetized, like carbon sequestration credits, tourism, agricultural produce, and timber. The money raised in the IPO will go towards maintaining the asset’s health and maximizing the production of ecosystem services.
By converting nature from just a cost to a financial asset, NACs aim to direct more money to its protection and growth. The government in Costa Rica is currently working on a NAC pilot project to protect 400,000 hectares of forest and marine land, and another NAC from a multinational corporation is expected to be announced later this fall. Other examples of potential NACs are farmlands shifting to regenerative agriculture methods that increase profitability or bay areas in need of infrastructure like stormwater and sewage systems.
It’s going to be complicated. A whole new type of asset class will require new listing requirements and new accounting methods. The proposal still has to be approved by federal regulators, and if it is, we’ll have more clarity on what NACs will look like in a few months when these “companies'' go public and trade on the NYSE. Spin the globe and stay tuned.
#LeadershipGoals
Looking for leadership? We are too. That’s why we’re shining a spotlight on senior executives and companies that are making an impact. We hope these profiles help you better understand the role leadership can play in the path to sustainability and stakeholder capitalism.
Hamdi Ulukaya — Founder, Chairman and CEO, Chobani
Who? Raised in a dairy-farming family in Turkey, Hamdi Ulukaya moved to the US in 1994 and started Greek yogurt market leader Chobani in 2005. The company’s annual sales reportedly exceed $1 billion and it has filed for an IPO.
Why? Ulukaya has shaped Chobani to be a mission-driven and impact-focused firm. Besides working to offer Americans a healthier alternative to the “disgusting— too sugary and watery” yogurt he found here, he has also set goals for environmental sustainability, animal care, diversity and inclusion, worker well-being, and supporting local communities.
Ulukaya is especially known for his efforts to help new Americans like himself. He founded the Tent Partnership for Refugees, and immigrants and refugees accounted for 30% of Chobani’s workforce in 2019. Employees have been promised a 10% stake if the firm is sold or goes public, a practice we’ve previously covered.
Ulukaya has won the Oslo Business for Peace Award, was named by Time magazine as one of 2017’s 100 Most Influential People, and Chobani is a frequent snack for our team. Key lime flavor, anyone?
Raising the roof
If you’ve ever maxed out your credit card and realized you didn’t have enough money in your checking account to pay it off, you might be familiar with how Congress is feeling right now. After a protracted debate, the House agreed to a short-term increase of the federal debt ceiling.
The debt ceiling often becomes a pawn in debates about government spending. Each year, Congress approves a budget to pay the nation’s bills, from interstate highway maintenance to military salaries to civil rights litigation and everything in between. The Treasury Department pays those national bills and borrows whatever is not covered by taxes alone. The catch: Congress, not Treasury, determines how much can be borrowed — and, as we saw recently, that amount may not be enough to pay off everything that Congress approved in the budget as well as the costs incurred from unexpected emergencies (like, say, a global pandemic).
How does this affect investors? If the Treasury Department can’t pay the bills because they breach the debt ceiling, the US government gets dinged on the institutional equivalent of a credit score, a move that will spike interest rates, reduce the value of the dollar, and generate what could be a catastrophic selloff of stocks in US companies. Of course, borrowing without limits also creates a path to a default; there is only so much that the government can borrow without raising interest rates, resulting in federal interest payments that eclipse spending on government programs and crowd out private investment.
The US national debt is about $28 trillion (and counting), and while there’s a bipartisan consensus that this is too high, there is no consensus when it comes to solutions. Federal budget experts often point out that the debate needs to get away from the debt ceiling, where the question is whether America will pay its existing bills, and center on the annual budget process, where the question is how much money should be spent — and borrowed — in the future. Keeping an eye on the debt limit debate and the size of the overall US debt is important as it can have an impact on the markets and the specific stocks and bonds that you hold.
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