A weekend Top 5: Ripping you off, what high-net-worth individuals are investing in, gold Gangnam style & more

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This Top 5 comes from interest.co.nz’s Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you’re interested in contributing a guest Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

1)  Ripping you off in the age of recoupment.

With inflation surging as the worst of the Covid-19 pandemic passed, debate emerged over what contribution profit-led inflation, that is companies raising prices, was making. Isabella Weber,  Assistant Professor of Economics at the University of Massachusetts Amherst, did some interesting work in this area, which she calls sellers’ inflation, and featured in a previous Top 5. 

In our Of Interest podcast I also spoke with UBS Chief Economist Paul Donovan on what profit-led inflation is, how it happens and how to combat it. And in another podcast, Reserve Bank Governor Adrian Orr told me profit-led inflation had been happening in NZ, just as it had overseas.

Now, in The American Prospect, David Dayen and Lindsay Owens have an interesting article arguing increasing prices is the new corporate mantra, replacing cost cutting.

Dayen and Owens say starting in the late 1970s institutional, or professional, investors began demanding companies cut costs to boost profits for shareholders. Mass layoffs followed with, for example, one out of every four General Electric employees laid off between 1980 and 1985. Unions were busted, jobs and manufacturing were shipped overseas and supply chains were outsourced.

Zero-based budgeting studied every sheaf of paper, every thumbtack, and slashed budgets annually. This was seen as an unavoidable strategy to become “competitive” in corporate America.

Even after the Great Recession, companies didn’t try to make up for lower overall demand by raising prices, instead viciously suppressing wages. Between 2009 and 2012, labor costs fell, and corporations maintained their margins by reducing workers’ share of the profits.

The results can be seen in ruined industrial ghost towns across the [US] Midwest, and businesses strip-mined by leveraged buyouts. But there is a tipping point to all this cost-cutting. There’s only so much fat to cut before you hit bone. The strategy eventually had diminishing returns, and without a new strategy, profits would hit a plateau. That wouldn’t cut it on Wall Street.

Enter the age of recoupment. Instead of cutting costs, the new mantra is raising prices.

Price hikes are old as dirt. But today’s companies have reinvented them. They’re using a dizzying array of sophisticated and deceitful tricks to do something pretty darn simple: rip you off.

The new tricks have fancy new names. Charging you more for less is a corporate practice known as “shrinkflation.” Revealing part of the total price up front, only to tack on all manner of ridiculous-sounding fees and service charges: Industry insiders call that one “drip pricing.” Stealing your online shopping data to predict the maximum price you would be willing to pay for your next e-commerce purchase: That’s personalized pricing. Using software to coordinate pricing with other companies to make sure they don’t undercut each other: That’s algorithmic price-fixing (or plain old-fashioned collusion). And charging you more for an item when supply is limited: That’s Jay Powell’s favorite, dynamic pricing.

Three critical factors have come together to make recoupment work. None of them are necessarily new, but they have become more finely honed, more ubiquitous, and importantly more interconnected, achieving what you might call a perfect storm for pricing.

Dayen and Owens give a range of examples from specific industries and individual companies. Technology, they say, is playing a not insignificant role.

Landlords are quietly utilizing new software to band together and raise rents. Uber has been accused of raising the price of rides when a customer’s phone battery is drained. Ticketmaster layers on additional fees as you move through the process of securing seats to your favorite artist’s upcoming show. Amazon’s secret pricing algorithm, code-named “Project Nessie,” was designed to identify products where it could raise prices, on the expectation that competitors would follow suit. Companies are forcing you into monthly subscriptions for a tube of toothpaste. Banks have crept up the price of credit, so customers who cannot afford price-gouging in their everyday transactions get a second round of price-gouging when they put purchases on credit. Expedia is using demographic and purchase history data to set hotel pricing for an audience of one: you.

I’d love to hear what readers are noticing, especially here in New Zealand. Are you being ripped off in the age of recoupment?

2) How corporations learned the maximum amount they can charge for a product.

Bloomberg’s excellent Odd Lots podcast has a new episode that follows on nicely from The American Prospect article. That’s because in it, hosts Joe Wisenthal and Tracy Alloway speak with Dayen and Owens.

Dayen and Owens raise numerous interesting issues including about data privacy, the burgeoning industry of algorithmic pricing companies, consumer rights and whether law changes could be needed, competition and market power, personalised pricing, using confusion and complexity as marketing tools, and a return to haggling.

Here’s the description of the episode.

What’s the price of a hamburger? Well, it depends. Are you making the purchase on the spot? Did you order ahead using an app? Are you a frequent customer of the burger chain? With inflation having surged at the fastest rate in roughly four decades, there’s suddenly a lot more interest in how companies figure out the most that they can charge you for a given purchase at that moment in time. As it turns out, much of the economy is becoming like the airline industry, where there is no one price for a good, but rather a complex range of factors that go into what you’re willing to pay. Thanks to algorithms, apps, personalized data, and a bevy of ancillary revenues, companies are increasingly learning how to not leave any pennies on the table. So how did this come about? What exactly is happening? And when did everything become gamified? On this episode we speak with Lindsay Owens, executive director of the Groundwork Collaborative, and David Dayen, the executive editor of The American Prospect. The two of them have put together a special episode of the magazine that’s all about the world of pricing strategies, the tools companies use, and the industries that exist to help companies figure out what they can charge. We discuss what they learned and the impact this is having on the economy.

3) What high-net-worth individuals are investing in.

Capgemini issued the 28th version of its annual World Wealth Report this week. In it Capgemini’s Anirban Bose says high-net-worth individuals (HNWIs) are reaching unprecedented numbers and wealth levels. And as their wealth grows, their risk aversion is subsiding, as they “slowly rebalance between safety and growth.”

New Zealand doesn’t get a mention in the report, which surveyed 3,119 high-net-worth people around the world. Two out of three are planning to invest more in private equity this year. Private credit is “highly sought” to meet long-term return expectations while overcoming short-term market fluctuations.

HNWIs are people with investable assets of US$1 million or more, excluding their primary residence, collectibles, consumables, and consumer durables. “Ultra HNWIs” are those with more than US$30 million in investible assets.

Capgemini says those surveyed have a growing interest in crypto-assets.

HNWIs are becoming more interested in digital assets, especially cryptocurrencies. Half of the relationship managers we polled reported a surge in client interest and investment in crypto. Wealth management firms are taking notice; too: our global survey of wealth management executives found that over 77% either maintained or increased digital asset investments. A significant rise in business activity within the digital asset space backs the trend. There was a 2.7x increase in inflows related to digital asset investment products in 2023 when compared with 2022 levels.

4) The axis of upheaval.

Writing for Foreign Affairs, Andrea Kendall-Taylor and Richard Fontaine outline increased cooperation between China, Russia, Iran and North Korea over the past few years, which they say is helping Russia’s war against Ukraine, and undermining Western efforts to isolate Russia. This alignment they refer to as a new axis of upheaval.

Since Russia’s invasion in February 2022, Moscow has deployed more than 3,700 Iranian-designed drones. Russia now produces at least 330 on its own each month and is collaborating with Iran on plans to build a new drone factory inside Russia that will boost these numbers. North Korea has sent Russia ballistic missiles and more than 2.5 million rounds of ammunition, just as Ukrainian stockpiles have dwindled. China, for its part, has become Russia’s most important lifeline. Beijing has ramped up its purchase of Russian oil and gas, putting billions of dollars into Moscow’s coffers. Just as significantly, China provides vast amounts of warfighting technology, from semiconductors and electronic devices to radar- and communications-jamming equipment and jet-fighter parts. Customs records show that despite Western trade sanctions, Russia’s imports of computer chips and chip components have been steadily rising toward prewar levels. More than half of these goods come from China.

The support from China, Iran, and North Korea has strengthened Russia’s position on the battlefield, undermined Western attempts to isolate Moscow, and harmed Ukraine. This collaboration, however, is just the tip of the iceberg. Cooperation among the four countries was expanding before 2022, but the war has accelerated their deepening economic, military, political, and technological ties. The four powers increasingly identify common interests, match up their rhetoric, and coordinate their military and diplomatic activities. Their convergence is creating a new axis of upheaval—a development that is fundamentally altering the geopolitical landscape.

The group is not an exclusive bloc and certainly not an alliance. It is, instead, a collection of dissatisfied states converging on a shared purpose of overturning the principles, rules, and institutions that underlie the prevailing international system. When these four countries cooperate, their actions have far greater effect than the sum of their individual efforts. Working together, they enhance one another’s military capabilities; dilute the efficacy of U.S. foreign policy tools, including sanctions; and hinder the ability of Washington and its partners to enforce global rules. Their collective aim is to create an alternative to the current order, which they consider to be dominated by the United States.

Too many Western observers have been quick to dismiss the implications of coordination among China, Iran, North Korea, and Russia. The four countries have their differences, to be sure, and a history of distrust and contemporary fissures may limit how close their relationships will grow. Yet their shared aim of weakening the United States and its leadership role provides a strong adhesive.

Kendall-Taylor and Fontaine argue all four countries want greater status and influence than the US-dominated global order gives them.

The growing cooperation among China, Iran, North Korea, and Russia is fueled by their shared opposition to the Western-dominated global order, an antagonism rooted in their belief that that system does not accord them the status or freedom of action they deserve. Each country claims a sphere of influence: China’s “core interests,” which extend to Taiwan and the South China Sea; Iran’s “axis of resistance,” the set of proxy groups that give Tehran leverage in Iraq, Lebanon, Syria, Yemen, and elsewhere; North Korea’s claim to the entire Korean Peninsula; and Russia’s “near abroad,” which for the Kremlin includes, at a minimum, the countries that composed its historic empire. All four countries see the United States as the primary obstacle to establishing these spheres of influence, and they want Washington’s presence in their respective regions reduced.

Definitely an “axis” to keep an eye on, as is any US-led response.

5) Gold, Gangnam style.

On holiday in Japan last year my kids were quite taken with the huge number of vending machines they came across. The weather was hot and they were thus only really interested in the ones selling cold drinks. You can certainly find vending machines in Japan selling other stuff though. But I’ve not seen one in Japan selling gold. As Bloomberg’s Jaehyun Eom reports, you can find such vending machines in South Korea.

Apparently this is part of a global micro-investing boom whereby young people will even invest in fractional shares, i.e. less than one share in a company. Eom writes about a vending machine at a convenience store in Seoul’s Gangnam suburb that sells gold.

The machine at GS Retail Co.’s convenience store sells gold bars from as big as 37.5 grams (1.32 ounces) to as small as less than 1 gram. Prices change daily, reflecting wider market movements, but start at about 88,000 won (US$64) for a 0.5-gram bar.

The machines operate in 30 stores in the company’s retail franchise across the country, six times more than the service started with in 2022.

“Currently we are seeing about 30 million won of sales per month,” said a GS spokesperson via text message. “The gold vending machine draws customers’ attention due to increasing demand for safe haven assets and the spreading trend of micro-investing.”