Marketplace - Betting on mother nature

Episode Date: March 13, 2024

Catastrophe bonds are a risky bet to make. But they offered returns of nearly 20% last year, Bloomberg reported. In this episode, we’ll cover why climate change makes these bonds more popular �� and more lucrative. Plus: sporting brands have an overstock problem, large group reservations are hard to come by and ads on e-commerce sites make up a $50 billion industry

Government economic data. How do you feel about it? From American public media, this is Marketplace. In Los Angeles, I'm Kyle Risdell. It is Wednesday, today, the 13th of March. Good as always to have you along, everybody. Data is the byword for this economy this week. The Consumer Price Index yesterday, the Producer Price Index tomorrow. Inflation, of course, the all-important measurement there. Our byword on this day between data points is why? Why in this era of data everywhere is federal government data our economic benchmark? So this is actually really, really interesting, right? That's a great question. I think kind of taking it back to, I guess, Statistics 101. That was David Vera. He's professor and associate dean at the Craig School of Business at Cal State Fresno. Nicole Survey is an economist at Wells Fargo.

So here you go. The case for government data releases in four easy pieces. I think your federal surveys, I would think a lot of them do have the ability and the capacity just to have a statistically large and representative sample size. I mean, it's aggregate data, right? It's for the entire economy. Which is to say the government can collect data that does a pretty decent job of representing the whole country pretty easily. That's point number one. Point number two? You also have historical data, so you can make, you know, if you're doing some work, you can make projections based on the data.

Self-explanatory, right? Right. So, point number three. Transparency is, it's very important. The government tells you where the data comes from. For instance, the employment situation, they always have technical notes in there. And then if you, if you dig even more, they have handbooks on like every single calculation that they do. Like my eyes like roll over every time I open one of those up. Oh, me too. Me too. Finally, point number four, the audience. The only thing that is really key, and this is even probably as important, is that other players

in the economy also look at this data. Other players, that's economists and analysts in the private sector and in academia, economists at the Fed as well. Also, you and me, about whom this data point. We did a poll with Edison Research back in 2016. Hillary Clinton supporters, 86% of them completely or somewhat trusted government economic data. Donald Trump supporters, 32%. And then we asked the same question in 2020. Biden supporters, 46% somewhat or completely trusted government economic data. Trump supporters, 84%. Think about that for a minute.

Traders on Wall Street today did not really know what to think. We do, though. We'll have the details when we do the numbers. Macy's is, of course, a giant retailer. Less giant than it was a month ago, though. of course, a giant retailer. Less giant than it was a month ago, though. The company says it's going to close about 150 of its stores as it tries to reinvent its business. That includes, we learned this week, hiring a former Walmart executive to head up its media network. Macy's growing ad business by name, selling advertising for third parties on its website and other channels. That's becoming an increasingly important revenue stream across the retail world, about $50 billion worth important,

as Marketplace's Megan McCarty Carino explains. Even before the internet, retailers were selling advertising, says media consultant Tim Hanlon at the Bratere Group. Couponing or end cap display features, shelf talkers, these are all to incentivize a consumer to make a purchase literally at the moment of decision. But now they're doing it digitally and collecting a lot more of our personal data. What is the first thing you do when you are on the internet? Type in a search query. Nikhil Raj worked on Walmart's retail media network and now leads the practice at ad platform Maloco. He says e-commerce platforms know what we're searching for, clicking on, putting in our carts,

and when we actually hit that buy button. It really predicts what people would do based on what they're doing right now. He says ads can take the form of sponsored search results, traditional banner displays, or increasingly video promotions. Amazon dominates retail media, taking in about three quarters of all ad dollars. But almost every competitor with a digital footprint is getting in on it, because it's often worth more than a company's core business,

says marketing professor Kuhn-Powles at Northeastern University, who has also worked with Amazon ads. Advertising has a margin of something like 30 to 40 percent, so at least 10 times as much as they earn on the products they sell. A recent eMarketer report found retail media was the fastest-growing advertising channel, predicting it would surpass TV and radio and match social media ad dollars in the next few years. And Powell's ads can feel less intrusive to consumers. I talk to something only on my Gmail, and an hour later I get Facebook ads, which is just very creepy to me. Retailer ads, on the other hand,

get you when you're already in the shopping mood, he says. I'm Megan McCarty Carino for Marketplace. All right, that was retailers. How about some of the brands they sell? Adidas, or Adidas, take your pick, reported its first annual loss in more than 30 years today, and the company said it expects a down year this year in North America. Part of the problem is that there's just too much inventory, and it's not just Adidas either. Marketplace's Elizabeth Troval has that story.

Before your favorite sneaker gets to the shelf, it's already gone on a drawn-out journey through the international supply chain, says Sonia Lipinski with Alex Partners. The cycle to kind of make and buy and ship footwear is usually, it's quite a bit longer than typical apparel category. Adidas and other companies have to choose what shoes to make and how many of them way ahead of time, all while trend cycles are speeding up. By the time that I've got all this product domestically, the consumer trends have shifted. We've had some softening in the market and they're just stuck with too much stuff and often the wrong stuff.

And there's also an Adidas specific problem afoot, says Sean Green Carter with the Fashion Institute of Technology. It has to do with merchandise by Ye, the artist formerly known as Kanye West and his anti-Semitic rant. It impacted their gross margins, it impacted their revenue and it impacted their profitability. the artist formerly known as Kanye West and his anti-Semitic rant. It impacted their gross margins, it impacted their revenue, and it impacted their profitability immediately. They still are trying to unload the Yeezy branded merchandise. And consumer demand for footwear and other sports apparel just isn't what it was compared to, say, 2021, says David Swartz with Morningstar. Their spending has shifted towards other things like travel. If you're spending money on going to Disney World or something,

maybe you're not spending as much money on running shoes. There are some bright spots for Adidas. Some of the brand's shoes are on trend, like the Sambas. But there's only so much one shoe can do. For a company like Adidas that does over 20 billion euro a year in sales, it needs a lot of different products to be successful. He says competition is fierce in this large global industry. I'm Elizabeth Troval for Marketplace.

Adidas, Adidas, Adidasler founded the company, right? Look it up. Anyway, I don't know what kind of shoes David Brancaccio wears, but I do know what he does really well. Host the Marketplace Morning Report. Gives you all the business and economic news you need to start your day. Check it out. We were talking government data a minute ago. We are now going to turn to government spending and the part it plays in this economy. We launched our series Breaking Ground a couple of months ago with this as the premise, that with the CHIPS Act and the infrastructure law and the Inflation Reduction Act, the Biden administration is trying to change what government money can do in this economy. So we're going to spend a little time on that last one, the Inflation Reduction Act right now.

It became law in 2022. It's got some health care and some tax provisions in it, but really it's a climate bill. So we got John Beislein on the phone. He's at the Electric Power Research Institute where he's done a lot of analysis on how the IRA is going to affect our energy economy and how much it is going to cost, which is important because forecasts of that bill's cost are really, really variable, in large part because of something that's called uncapped tax credits. Dr. Beislein, welcome to the program. Good to have you on.

Thanks for having me. Help me set the scene here. Congress and the White House are writing this law. They want to incentivize a certain set of climate favorable behaviors as much as possible. They come up with these tax credits and they say, hey, let's make them uncapped. What does that mean? Yeah, so IRAD was described, I think, initially in terms of not just its investments for lowering emissions, but also for growing jobs, enhancing energy security. growing jobs, enhancing energy security. And so those tax credits across several areas, you know, really aim to contribute toward those different goals, right? Making the clean energy transition not just more affordable, but also more equitable. So in the sort of detail of IRA, and of course,

it's very complex, about 300 pages with hundreds of additional pages on guidance is intended, I think, to address those many simultaneous objectives. Right. So let's say I'm building, I don't know, a wind farm and I hit all the targets that the Inflation Reduction Act wants me to hit. the Inflation Reduction Act wants me to hit. I could keep getting tax credit upon tax credit upon tax credit for hiring X number of workers or, I mean, pick your parameter, right? Yes. So the power sector tax credits in particular have quite a bit of flexibility and they're stacked, meaning that you could have these additional bonuses that may start at a base rate of 6% for the investment tax credits. Those can be about five times larger or 30% off for meeting these labor requirements. There's also 10 percentage points for siting in a so-called energy community, and then another 10 on top of that for using domestic content. So that could mean that a wind project or a solar project gets a 50% tax credit in total.

So as you, as I'm sure you did, because this is your job, as you read the headlines a number of weeks ago saying that these tax credits were going to, actually, that's not what the headline said. The headline said the Inflation Reduction Act is going to be much more expensive than we thought. And you had to read to the 17th paragraph to figure out that it was about the tax credits in part. Were you surprised that that's the way it's getting billed in the reporting on it? The debate about how much the Inflation Reduction Act could cost, I view as really a debate about how effective it

might be in accelerating clean energy adoption. But I would say it wasn't a surprise to hear of those changes, given how much has also changed in the market environment since IRA was passed. Well, so say more about that market environment, actually, because these changes, you know, the law is only, what, a couple of years old, but these changes in the marketplace are actually happening already. That's right. Yeah. In the year and a half since IRA was passed, we can sort of take stock of progress, even though it's still early to unpack which trends are due to the Inflation Reduction Act versus other factors. But last year, we had a record number of clean electricity capacity installed, about 32 gigawatts nationally. But IRA projections tend to suggest something like two to three times that on average over the next decade. And likewise, electric vehicles, I think in that analysis, suggest that those are on track and are actually trending a little bit higher relative to the

projections. So all of those contribute toward sort of refining our understanding of what IRA could do. One hates to inject politics into what has been a data-driven conversation, your data and your analysis specifically. But I'm obliged to point out here that this is an election year and the Biden administration's efforts in green technology and all of these bills has not been universally popular. What happens if there's a new Congress and a new president and some of this all gets reversed? say that I can't speculate on the political future of IRA, but there are a range of policy developments at both the federal level and state levels that could shape IRA's impacts. And it's possible that energy costs for households might be higher without IRA, even if the fiscal costs are lower. But I think more broadly, one of the things that we see with Aira is that it can help to narrow this decarbonization gap, but won't likely meet the U.S. climate targets by itself. That, of course, raises these questions about what additional actions might contribute toward that in the future and how that's sort of shaped by the market environment.

Dr. John Beislein at the Electric Power Research Institute. Dr. Beislein, thanks for your time and your expertise. I appreciate it. Thanks for having me. Coming up. By 8.30, I guess most of us are starving. I mean, that is a pretty late dinner time, right? First, though, let's do the numbers. Dow Industrial is up 37 points today, about a tenth percent, 39,043. The Nasdaq down 87 points, went the other way, half percent, 16,177.

S&P 500 shed nine points, two-tenths percent, 51,65. In Japan, Toyota Motor has agreed to give factory workers their biggest pay increase in 25 years. The company did not give percentages. They said they would agree to a monthly wage increase of as much as 28,440 yen. That's about 193 American. Toyota down two and a tenth percent today in New York. We heard from Elizabeth Troval that some sporting good brands are having some trouble with slack sales. So in some sporty stocks, Nike sped up 1.2% today. Columbia Sportswear rose almost 3.0%. Under Armour put on 1.1%.

Heard from Megan McCarty Carino that a number of retailers have a media and advertising arm. That includes Macy's up 4.0% today. Bond prices went the other way down. The yield on the 10-year T-note up 4.19%. You're listening to Marketplace. This is Marketplace. I'm Kai Risdell. Okay, here's the setup for this next story. And it's not one that puts capitalism in its best possible light. There is money to be made, sometimes big money to be made, when bad things happen. According to reporting from Bloomberg this week, one of the best bets that big investors could have made in 2023,

we're talking returns of nearly 20% best bets, were wagers on the probability of natural disasters. We're talking here about something called catastrophe bonds, cat bonds for short, issued typically by insurance companies so that they can bank extra capital in case a hurricane or an earthquake or some other kind of natural disaster winds up generating a lot of claims. And as the risk of catastrophic weather events has been growing, global warming, so too has the cat bond market, as Marketplace's Henry Epp explains. Cat bonds became a thing in the 90s, after Hurricane Andrew exposed just how expensive

the aftermath of a natural disaster can be. Robert Hartwig, a professor of risk management at the University of South Carolina, says insurance companies realized... There simply wasn't enough capacity in the U.S. insurance system alone to be able to manage the value of properties that were expanding at an

ever-increasing rate in places like Florida or California. Places more at risk of hurricanes, fires, and earthquakes, which could drain an insurance company's coffers if tons of claims come in all at once. So those companies started issuing cat bonds. The investors who buy them are putting up capital that an insurer can tap into if a disaster is bad enough. Hartwig says the bond buyers are making a bet. That there will not be an event large enough to trigger losses in the catastrophe bond in which they are invested. If a disaster does strike. They will potentially lose the interest, the principal, or both.

But if there's no disaster, they get a pretty hefty return because they ran the risk of losing everything. And that rate of return is why demand for cat bonds is growing. Meanwhile, insurers are increasing the supply of bonds for a couple of reasons, says Karen Clark, who runs a weather, climate, and catastrophe modeling firm. One is, of course, climate change. Two is just property values. And the cost of replacing those properties. The costs of labor and construction materials are up. Finally, there are the places where people are choosing to live.

We have more people moving into hazardous areas. So there are a lot of factors that are pushing the risk up. So, she says, the outlook for investors in cat bonds is pretty good, as long as they spread out their risk. Maybe you want to buy some northeast, some Florida, or maybe severe convective storm in the Midwest. Because even the best weather modeling gets the forecast wrong sometimes. I'm Henry Epp for Marketplace. We were talking the other day on the program about bars and restaurants doing more hiring these days. Beyond just staffing, though, there is something else happening in the world of dining out. More restaurants saying, nope, no thanks, we do not want your big birthday dinner or group outing.

Reservations for six or more people, it seems, are a lot harder to book these days. Alina Dizik wrote about it for The Wall Street Journal. Welcome to the program. Thanks so much for having me. I will say at the outset here, and I think I've said this on the program before, I have a family of six. And what I read in this article is that if we want to go out together, all six of us, they're not going to take us or it's going to be really hard to get a table. What's going on? they're not going to take us or it's going to be really hard to get a table? What's going on?

So if you do have a family of six and you decide to go to a busy city restaurant or something a little bit more trendy or on some sort of list, they will be probably more reluctant to take your party. They really prefer tables of two or tables of four. Again, I'm not objective on this, but that seems kind of unfair. What's the business model thing going on here for restaurant owners and managers? So when I spoke to restaurant owners, they say that taking smaller tables really allows them to speed up service and deliver better service. And so people are more likely to have a good experience and they're more likely to leave sooner than, say, a table of six or a table of eight. Also, it has to be a labor force thing, too, right? I mean, everybody's jammed for staff

these days. And if they haven't got enough people, you know, it's a challenge. That's right. A lot of the a lot of the restaurants I spoke to said that they don't want to stress out their existing employees by having to wait on a very large table. Larger tables really back up the kitchen and require more wait staff that some of them are unable to even have in a single evening. some of them are unable to even have in a single evening. I read in this piece that if I really want to get my party of six in there or more, to be clear, I should do it before five or after 8 p.m.? If you have a larger party, restaurants are more likely to seat you at a time when there are fewer other tables that are dining. So at 5 p.m. or after the rush around 8 or 8.30. Which I suppose I get. But first of all, who eats dinner at 5? And by 8.30, I'm starving, you know? That's right. By 8.30, I guess most of

us are starving. Right. Are there any tips or tricks you can offer me and the listening public out there? If we got, you know, me and my wife and two other couples and boom, they're six. What do we do if we want to go out and have a nice time? So in terms of tips and tricks, I think most people said that they had the most luck really just calling the restaurant and leveling with them. And they said that they are accommodating up to a point. Some of the folks I talked to said that they actually make reservations for a smaller number and then call the restaurant saying, we already have this reservation. Can we expand it by a couple of people? Oh, so you throw yourself on the mercy of the maitre d', right, basically?

That's right. You're basically throwing yourself at the mercy of whoever picks up the phone. Last thing, getting us back to where we started. You specifically said if you were going to a city restaurant. So big cities, this is an issue. Out somewhere, maybe in suburbia, you're going to get away with it? I think in some suburban restaurants and outside of the larger cities or outside of the most popular restaurants, they can't dictate as much in terms of table sizes. They'll take whoever comes through the door because they need the business. Right, right. So when you go out, is it like part of you too, or are you out with a big group? I feel always very hopeful that I can dine out with a big group. So I'm always that person calling or coming in to talk to them earlier to see if there's any sort of workaround to eat with more than just a few people.

You and me both. You and me both. Alina Dizik, she's a contributor at the Journal. Alina, thanks a lot. I appreciate your time. Thanks so much for having me. so much for having me. Party of two, party of six, we don't care. We just want you to listen. Check out our podcast if you missed something on the air, marketplace.org, or of course, the platform you prefer. This final note on the way out today, this one goes in the, yeah, people are still feeling squeezed in this economy, so companies are too. Dollar Tree said today it's going to close 1,000 stores this year, split between its Family Dollar and Dollar Tree outlets. It's going to boost its grocery offerings to get more people in the door and it's going to offer more products in the three to five dollar range.

Our media production team includes Brian Allison, Jake Cherry, Justin Dooler, Drew Johnstatt, Gary O'Keefe, Charlton Thorpe, Warren Carlos-Torado, and Becca Weinman. Jeff Peters is the manager of media production. I'm Kyle Risdell. We will see you tomorrow, everybody. This is APM. And it's happening because of a podcast. I think your podcast has changed my life. And I'm going to share this podcast with everyone I meet. Sold a Story investigates how teaching kids to read went wrong.

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