Category: Economics

For those not familiar with the noun scrip, look at the Wikipedia article.

Historically scrip was issued by large companies to physically remote workers, for usage in their own facilities. The Hudson’s Bay Company was a classic example of this. In some cases, company scrip was nearly as good as money.

Today in our 21st century, we have digital scrip in the form of Apple and Google Play cards, in addition to more generalized gift certificates and the like.

Cryptocurrency is another innovation which is functionally the scrip of those that voluntarily choose to engage in the transaction of such digital tokens.

Sovereign currency, such as the US dollar and UK Pound, historically used to represent a certain amount of gold or silver, but those days have long since passed. The fiat currencies we use are backed with a single promise, and that is the ability to pay taxes to the government. Other than this fundamental value, fiat currencies trade on the perception of value conveyed by their participants. While scrip definitionally is referring to non-sovereign currency, functionally speaking, the green, red and brown pieces of polymer we hand around is a form of scrip, albeit with more legal authority.

However, with the digitization of everything, we are witnessing the fragmentation of various scrip. We see increasingly sophisticated schemes by scrip issuers to incentivize various behaviours of the recipients.

One 20th century invention was the Air Miles concept – spend in a preferred manner and eventually receive enough to purchase a commodity “for free” that otherwise would be wasted – an empty airline seat.

On the advent of this came a whole plethora of reward schemes.

However, all of these schemes are subject to the issuer’s fiat. We have seen this in the sovereign context when a country decides to devalue a fixed-peg currency (just look at the Argentina Peso as a great example).

Also, nominally valued scrip is subject to the ravages of inflation. A Costco gift card purchased a couple years ago most certainly purchases a lot less today than it did when it was originally purchased.

It is interesting to note that strict gift cards (money for store credit) have legislative protection (at least in British Columbia) and must be held as a liability to the issuer in perpetuity.  Only monetary inflation of the underlying currency degrades the value of this scrip.

However, the story is different with reward schemes.  Similar to sovereign currency devaluations, owners can be spontaneously diluted. An airline seat costs more miles to purchase, or perhaps the availability of seating is less desirable.

Reward schemes are everywhere now, to the point where nearly every single major corporation out there with any retail presence has these annoying and low value (to the consumer) schemes to incentivize certain behaviours. The promoter of the program wants to pull off an Aimia (the payday is selling the accumulated customer data on the points program), while the end retailer wants to drive certain types of sales using scrip as incentive. It is nearly always to the detriment of the consumer.

In Canada, most recently I noticed the Freshco/Safeway/Sobeys chain (owned by Empire (TSX: EMP.A)) is subscribing to “Scene”, which was originally a creation of Cineplex (TSX: CGX) and Scotiabank (TSX: BNS) to give people free movies.

Other grocery stories, such as Save-on-Foods (Save on More) and Superstore/Shoppers Drug Mart (Loblaws/George Weston) (L.TO/WN.TO) have their own scrip schemes – PC Points.

Suncor (TSX: SU), via Petro Canada, runs a popular “Petro Points” scheme.

McDonalds (NYSE: MCD), and all the other fast food operations, which are “appifying” themselves, have their own arbitrary points system.

It goes on, and on and on, and the hapless consumer is plagued by the administrative burden of figuring out if any of this is worth the time/energy hassle to functionally get minor discounts off their aggregate purchases.

What’s great from the company perspective is that you can effectively be your own central bank and decide to pull the rug on your customers whenever you want without any recourse by those holding the scrip.

Nothing illustrated that better than Starbucks (Nasdaq: SBUX) pulling off a “Christmas surprise” on their rewards program.

Their original scheme was that for every dollar you purchased stuff at their stores, you would receive two stars. Accumulate 50 stars and get a free coffee. Accumulate 150 and get a free fancy drink.

Effective in February, they announced that this will now be 100 stars (a 100% inflation) and 200 stars (a 33% inflation), respectively.

What’s funny is that when the inevitable blowback came on Twitter, the generic response was:

Hello, we continually want to update the Starbucks Rewards program so that we’re meeting the changing needs of our members while ensuring we’re still able to deliver some of the benefits members know and love.

Learning the language of corporate-speak is a reason why I would perish in a corporate communications role. The dishonesty would drive me insane.

The reality is that I am sure there was a cottage industry of people banking Starbucks scrip and this liability (in addition to future liability) needed to get whittled down in the face of a rapidly escalating cost environment.

Fortunately, I do not subscribe to many of these schemes, but as scrip systems continue to get more and more fragmented, there may be less of a stimulatory effect on the consumer, resulting in a dimunition of such schemes as they aren’t going to be nearly as lucrative as the original scrip schemes were.

However, for now, definitely the lesson is if you’ve been accumulating scrip, it’s generally good to spend it as you get it.

The ultimate test of this theory will be when sovereign nations start to centralize currency distribution via the speculated central bank digital currency (CBDC) scheme. It will be politically inevitable that CBDCs will eventually be tinkered with in a manner similar to corporate reward schemes. “Buy ESG-compliant product XYZ for 20% less CBDC dollars!”, or “Donate to Ukraine and receive a 10% tax credit off of your capital gains tax on your next disposition of Russian corporate debt!”, etc.

Initially, the rollout of CBDCs will be a straight replacement for currency, but just like how the Income Tax Act has been perverted beyond all reason, the currency itself will be tinkered around with for political reasons to incentivize certain behaviours.

The difference between adding complexity to the Income Tax Act and adding complexity to your nation’s sovereign currency is that a currency derives value from being fungible and universally accepted.  A “rewards scheme” CBDC will inevitably chip away at this, which will ironically depreciate the value of such currency.

It makes me wonder if barter is going to make some sort of comeback.

In today’s edition of “everybody has to be a closet macroeconomist to invest in this market”, we have the following speech from the Fed with the following payload in the last paragraph, and the bold-font is my own:

“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

This is the so-called “pivot” that everybody was waiting for and markets exploded in reaction – the fed funds curve shot down, long-term bonds went up (yields down), “risk-on” stocks ramped up (check out AMC!), etc, etc.

This likely means that the December 14 Fed announcement will involve a rate hike from 3.75-4.00% to 4.25%-4.50% and perhaps another quarter point up on February 1st. At this point, the statement of “moderate the pace” does not really matter since January 2022 to today has been the sharpest interest rate acceleration for nearly 40 years.

In Canada, the December 7 announcement will likely involve a quarter point increase to 4% from 3.75%.

There is this implicit notion that stamping down on demand through the monetary policy levers will result in decreased inflation.

My question is on the supply side. Skilled labour, land titles, and imports of stuff from China (aside from the common discretionary goods that you typically see at the entrance of Costco – let me tell you those 60 inch televisions are damn cheap!) are not increasing in quantity.

You can actually infer this from a couple places.

One is walking into the dollar store. While $1 is now a distant memory of the pre-Covid era, what you can get now for $1.25 at the local Dollarama (TSX: DOL) is even less than before. Mind you, there is a reason why they’re trading at nosebleed valuations – customers will still pay up because they can’t afford it anywhere else!

The second place to make some inferences is Amazon. I’ve noticed the typical bulk re-marketed imports from China (ones that aren’t destined for Dollarama, an amazing retailer that Amazon-proofed itself) becoming significantly more expensive than a few years ago. A good example is reasonable-quality bike lights. There are plenty of others.

Of course, going through Costco or Amazon is not representative of a whole economy, but they are two small data points to consider. It leads to the narrative-breaking question of – what if monetary policy cannot cure consumer price index inflation? What if the central banks level off their interest rates, and wait for the effects to come in, and inflation does not wane?

I’m not saying this will happen, but rather that the narrative of the central banks once again going into a loosening mode to cause the markets to skyrocket in value might be premature.

There are a few other cross-currents I would like to illustrate.

One is challenging the assumption that higher interest rates will stomp down on demand, especially on consumer goods. The Bank of Canada has made considerable efforts as of late to try to avoid ‘entrenched inflation expectations’, especially around avoiding the wage inflation spiral. However, if the mentality of inflation is already in the minds of many, logically speaking this would mean to purchase real goods before the price of it increases… due to inflation. Every time I walk through Costco (always a mad-house), I wonder how much purchasing goes on with this psychology in mind.

Another item missing from the equation is the effect of quantitative tightening. While banks still have plenty of reserves stored up in central banks, there is a slow and steady liquidity withdrawal from the market. One positive tailwind is that government fiscal situations have improved with the inflation and hence there is less competition for financing when the governments to go the bond market to roll over their debt.

Finally, the omnipresent yield curve inversion. It is extremely inverted.

30-Year Canadian yields peaked at 3.7% back in October. Today they are at 2.9% (an investor in a long-term bond ETF like XLB would have made a quick 15%). However, today, a fixed income investor has to decide whether to get 4.3% out of their 1-year money (or even higher if you go GIC shopping) versus a lower long-term rate.

This reminds me of the scenario in the early 80’s where an investor had a choice of taking 20% for 1-year money, or 15% for 30-year money. Emotionally it feels very difficult to take the lesser 15%, but these people would have made out very, very, very well with that decision.

Something makes me think that today is a similar situation.

However, 2.9% is a really low, and nominal, rate of return. The game has fundamentally changed since the early 80’s and we are forced into the asset market casino to keep up with inflation instead of being able to rely on fixed income for sustenance. In the early 80’s if you invested a million dollars in those 30-year government bonds, you have a $150k cash stream for 30 years, plenty enough to live on even after taxes. Today, that same investment yields $29k/year, which in terms of purchasing power, can’t even buy you a Toyota Corolla these days.

This is not a good sign. It is a sign of an economy that is really struggling to make returns on capital. It is why banks have such gigantic reserves at central banks at the moment – it is too risky to lend.

There are a lot of cross-currents and this is confusing me. Normally for investing you want to ensure that your sails are facing the macroeconomic winds and right now I have a limited read on the situation. In terms of portfolio action, I am comforted that cash once again is giving something, but my appetite for risk at the moment is quite muted.