For the Love of Money

Like most holidays, Valentine’s Day has a distinct effect on the global and American economy. In fact, it can even be a good marker of American consumer confidence: people are more willing to spend on gifts and celebrations in a good economy. In 2018, the National Retail Foundation found that the holiday contributed $19.2 billion to the U.S. economy, $1.4 billion more than the year before and the second-most since 2013 (Valentine’s Day 2016 contributed $19.7 billion).

Participation in the holiday has dropped to 54 percent from 63 percent in 2007. However, this has been offset by an increase in average spending among celebrants. Trends in gross contribution to the economy strongly correlate with average spending, which was about $145 per participant in 2018. Men spendnearly twice as much on average as women, at nearly $200 to women’s $100. The most popular gift is candy; more than half of those that celebrate the holiday according to a Financial Industry Regulatory Association (FINRA) survey report that they buy it as part of their holiday shopping.

The price of cocoa rose steadily from 2012 to 2015 even as other commodities cheapened thanks to growing demand and unusually dry weather in West Africa. More than 60 percent of the world’s supply of cocoa comes from Ghana and Ivory Coast, where cocoa plants thrive in the equatorial climate. This also means there are few countries that are suited to grow the plant, so droughts and poor crops in a few countries often cause serious price fluctuations for the commodity. Moreover, China has increasingly come to enjoy the product, leading to an increase in demand.

Cocoa reached a recent peak monthly price of $3,346 per ton in December 2015, after which ts price fell precipitously to $1,989 per ton in July 2017. It then increased to $2,660 per ton in May 2018, right in time for Easter, before falling once more. Even with holiday demand, the average price in January 2019 was just $2,263 per ton. The main reason for the low price was the oversale of cocoa in the short term. However, long-term cocoa prices look stable.

The story of chocolate, Valentine’s Day, and economics would be nothing without mentioning the largest global brand in the business, Hershey’s. Overall, the company has been hurting recently, due to tougher competition and trends toward healthy eating. The company recently had a widely publicized production issue when the Hershey’s Kisses intended for the winter holidays were missing their tips. A change to the recipe for the solid chocolate kisses (the most popular variety) resulted in the new appearance, which lead to a fierce customer backlash. Thankfully for customers, the Kisses on store shelves by the time of publication should have their tips back.

Meanwhile, the snack foods market has seen rapid growth in competition, and shipping costs have increased as well. These increased costs have forcedHershey’s to raise prices, but the company believes that the market is inelastic enough that sales will not decline significantly. Hershey’s will also introducethinner peanut butter cups to appeal to calorie-conscious customers. The company is confident that annual sales will increase by one to three percent and annual earnings per share by five to seven percent in the first quarter of 2019. Sales in the fourth quarter of 2018 stood at $1.99 billion.

A Look Back: 1997 Asian Financial Crisis

In recent years, frenetic economic growth throughout East and Southeast Asia has blurred the memories of the catastrophic 1997 Asian Financial Crisis. Two decades later, with the benefit of hindsight, the roots of the crisis are crystal clear.

Dr. Stephen Radelet, the chair of Georgetown University’s Global Human Development program, identifies three causes: the rapid increase in short-term national debt; falling current ratios, which measure the ability to cover short-term liabilities; and the unforeseen, domino-like pulling back of foreign direct investment (FDI). It did not take long for anxiety among creditors to escalate into a self-fulfilling crisis of economic confidence.

Calling the 1997 crisis a “crisis of success,” Radelet explained the reasoning behind the unanticipated economic disaster: economic growth, he argued, had outpaced institutional development. Unlike in the 1980s Latin American solvency crisis, Asian economies booming in the late 1990s had no red flags regarding long-term or total debt. To finance domestic infrastructure projects, countries like Thailand and Malaysia accumulated large short-term debts in foreign currencies (usually in dollars), in many cases greatly exceeding their foreign exchange reserves. From a theoretical perspective, even if current assets are less than short-term debt, the path can be sustainable as long as the economy grows enough to maintain creditors’ trust.

Risk-averse creditors have proved such theories insufficient over the intervening years. In South Korea in the late 1990s, for example, the administration decided—out of political considerations—to let a government-subsidized conglomerate go bankrupt. The incident quickly sparked anxiety among foreign investors, many of whom then demanded immediate repayment of all short-term debt. When Asian countries started depleting their foreign exchange reserves, local currencies depreciated rapidly and GDP growth turned negative.

Radelet explained that Taiwan’s abundant foreign exchange reserves saved it from the crisis, inspiring mainland China to emulate it and build up its reserves to over $3 trillion today.

But, building up foreign exchange reserves is not the only lesson of the 1997 crisis. The crisis also made the role of institution efficiencies—lenders of last resort, prudent oversight, and adequate legal jurisdiction over private banks—clear. Growing economies buoy investor confidence, but when they outgrow institutional development, Radelet explained, confidence soon comes to look like arrogance.

A Requiem to Dockless Bikeshares

In 2014, within the ever-expanding gig economy, there emerged a new form of transportation for commuters in big cities: dockless pedal bike-shares. It was distinct from past transportation systems for two reasons.

First, it provided an affordable mode of transportation and exercise for residents and tourists in urban areas. To rent a dockless bike-share for 30 minutes cost anywhere from 50¢ to $1. Second, it allowed for greater convenience than docked bike-shares, such as Washington, D.C.’s Capital Bikeshare and New York’s Citi Bike, because the bikes did not have to be returned to designated stations when riders were finished and because bikes could be located using GPS.

The industry soon exploded in China and the United States, with companies such as Ofo, Spin, Mobike, and Lime offering such services at home and abroad. According to China’s state-run Xinhua News Agency, there were over two million bikes available from bike-share companies in Beijing in 2017. In the U.S., cities like Seattle, New York, Dallas, and Washington, D.C. saw the industry expand rapidly in late 2017.

The industry, however, ran into problems very quickly. Public officials from cities around the world complained of bikes blocking sidewalks and streets, which resulted in specific areas of the sidewalk being marked for bike parking in Seattle. The bikes themselves were frequently vandalized, and the cost of maintaining the value of the bicycles against depreciation soon became untenable.

No company captures the rise-and-fall of the industry better than Ofo (whose name is supposed to look like a bicycle), the Beijing-based startup founded in 2014. Known in Chinese by the name Xiao Huang Che (literally, “little yellow bike”), it was started by a young entrepreneur named Dai Wei during his time at Peking University. He quickly raised cash from well-known companies and venture capitalists, including tech-giant Alibaba, ride-share company Didi Chuxing, and Russian billionaire Yuri Milner.

With the backing of both wealthy investors and big Chinese state-owned enterprises, Ofo seemed destined to succeed. It soon dominated the market across China alongside major competitor Mobike, offering 2.2 million bikes in 43 mainland cities. Ofo also expanded to cities in the United States and Europe, making the company a global operation.

Ofo embraced a business model of predatory pricing aimed at driving competitors out of the market so it could capture more consumers, effectively creating a monopoly. Hypothetically, Ofo would plan to raise prices on its customers in the future, an abuse of its market power. The one obstacle the business model ran into was that the market itself was oversaturated with bike-share companies, and the demand simply was not there from Chinese consumers.

Ofo and Mobike discontinued operations in the U.S. and Europe in late 2018, ending their pilot programs. Ofo was on the verge of declaring bankruptcy in December 2018 as the company’s capital dried up and millions of customers demanded refunds on their deposits. Mobike was rebranded as Meituan Bike after its parent company, Meituan-Dianping, in January 2019 amid financial struggles. In the United States, Spin announced that it would discontinue its dockless bike-share pilot program in August 2018 and was soon purchased by Ford Motor Company in November 2018. The company later transitioned to electric scooter-sharing and moved away from dockless pedal bike-shares.

The demise of the industry offers a few lessons for investors around the world. First, in China’s business climate, the moral hazard attached to state-owned and state-backed enterprises is significant. Such businesses have little fear of high-risk bets because of the implicit guarantee of government financing and protection. Second, temporarily subsidizing consumers in gig economy industries through predatory pricing may not make sense, especially considering that consumer subsidies are more common among essential goods such as food, electricity, and water. Finally, it illustrates the volatility of the gig economy and how difficult it is to predict consumer behavior in its incipient industries.

Writing contributed by Jackson Gillette.