They parked in the small, downtown lot, expectantly setting off for the Blue Plum Festival they’d discovered the previous day on their bi-weekly trip to the Public Library. As they had climbed the stairs to the library the day prior, the green-yellow-purple-pink Ferris wheel and newly-constructed stalls selling Italian ice and other goodies captured their attention and stirred excitement for the newly-formed summer gang.
For the adult in the group this seemed like the perfect opportunity to start connecting locally, something she had promised herself she would do since moving to the smalltown last Fall. For the three young children who had dubbed themselves the Musketeers for the summer, this felt like one of the adventures they had recently been reading about thanks to the shiny new library cards they each sported.
On this particular day, the deep blue skies of this mountain town were awash with heavy, ocean-like clouds. They walked with a pep in their step, thinking about what they might discover on their adventure. First stop, the Ferris Wheel.
The mountain views one could find simply from driving around town were pretty spectacular, so our adult adventurer was excited by what she might see from the top of the Ferris Wheel.
Surprisingly there was hardly anyone in line, so the children grabbed a spot as she ambled over to the two gentlemen selling tickets. The first thing she noticed was the words “Cash - only,” scribbled on the bottom of the sign. The second thing she noticed was the amount - $8. Simultaneously she felt gratitude for remembering to bring cash and thought that the $8 must be for a pack of tickets. But, as she got closer, she realized that it said “$8 - per person”.
“Is this for charity,” she asked?
“No,” one of the gentlemen said.
“$8?” she asked in disbelief.
“Yeah, sorry,” he said.
As she turned to look at the children - one a niece and the other two, children of family friends - standing in line, waving at her, she almost caved, would have caved a few years ago. The poor kid in her wanted these children to have every experience they possibly could, no matter the cost. But that poor kid who had permanent residence in her psyche operated from lack or scarcity and made a lot of really bad decisions. The ride itself looked to last less than five minutes, and one of the other promises she had recently made was to vote with her dollars for the future she wanted. Most of the people standing in line were young adults in their twenties, out with friends for the day who seemingly had $8 to spare. Perhaps they recently saved some cash by using Buy Now, Pay Later for groceries? Who knows. What she did know - this was not the reality she wanted - one where the haves can throw their dollars around while the have-nots sacrifice their future for costly, cheap thrills.
“Yeah, no,” she said to the two gentlemen manning the booth. The lesson she wanted to impart overrode the guilt she felt. Experiences are important, but not an end unto themselves. She walked back toward the Musketeers, preparing herself for their disappointment. But when she explained the fee for admission made no sense, they hardly seemed to care, running off to see what else they could see. The view would have been fantastic, she thought as she hurried to keep up with the Musketeers. She then remembered the book she checked out the day prior which listed stunning views around the city. There would be more magnificent views to discover, free of charge, on their summer hikes….or even, for that matter, in her own backyard.
Forgive me that indulgence, but this recent trip out and about in my town brought home just how ridiculous things have gotten, and I struggled with how to illustrate the point. It’s bad enough Starbucks expects you to pay $5 for an iced tea that you wait ten minutes for, but when ridic inflation worms its way to the smalltown Ferris wheel…..well, that to me signaled something a little more sinister. I understand that if I called this hyperinflation about a thousand people would tell me that it is not technically hyperinflation, but what should we call this?
Since we are illustrating points, let’s pause on the Starbucks comment for a moment. On Amazon, you can buy 20 Tazo iced-tea bags which will make a gallon of iced tea for $21.71. Or, in other words, you can get a one-gallon tea bag for $1.09.
A Trenta black iced tea is 31 fluid ounces. There are 128 ounces in a gallon, meaning you can make 4 Trenta iced teas from one tea bag. Compared to most other beverages at Starbucks, the iced tea takes the least amount of time to make. Brewing the tea takes less than a minute of labor while the preparation (or shaking) time is far shorter than a latte for instance. At my local Starbucks a Trenta, black iced tea is $5.15 without tax. The average Barista there makes $12.27 per hour according to Indeed. For funsies, let’s add the typical overhead we used when doing staffing models in my time in Corporate America - 33%. This brings the per hour cost to about $16.31 understanding that most Starbucks employees don’t use the Starbucks insurance or other benefits. Since Starbucks uses its baristas to clean their stores, let’s add in the time it would have taken to clean the pitchers as well and generously say that one Trenta iced tea probably takes about 3 minutes of labor at 27 cents a minute, or 82 cents total. Labor and material for the Trenta iced tea in this simplistic analysis would be $1.08, giving this a sales margin of over 78%. According to Macrotrends Starbucks most recent profit margin was 11.38%.
So, where does it all go? The only thing I can tell you for sure is that it is not going to their employees. In looking at store operating expenses in the Starbucks 10Q there is a large “other” category they do not break out, but in the end the people benefitting from your purchase of an over-priced Trenta iced tea are the executives and shareholders. How do you feel about enriching them? Just a little thought exercise for the next time you shove that credit card into the reader being held by the overworked and (these days) overwrought barista.
From small purchases to large ones, the why of our purchases matters as well as the what.
A whopping 90 percent of millennials have regrets about their first home purchase, according to a new report from the Real Estate Witch. That's a slight increase from last year's report, which saw only 82 percent say the same thing.
Eight percent is a slight increase? Anyhoo, the difference between that iced tea purchase and a home purchase is of course one of scale. Many will find themselves regretting this one purchase decision for the rest of their lives. The YOLO-FOMO reality distortion field has fueled manic buying even as the music started to slow for our more affluent buyers while the government has ushered in those less fortunate, locking the doors behind them, through its downpayment assistance programs, rate buydowns and low credit score requirements. We can see early signs of trouble in the statistics that Black Knight publishes as the most recent vintage years are already seeing delinquency, while also being a much higher share of active mortgages:
This is of course for the market we know about, driven primarily by government-backed mortgages which last quarter made up 84% of all origination according to Inside Mortgage Finance. But, what of the shadow markets and private notes? Surely, you say, that market must be miniscule compared to the larger market? What if I told you it is material and has been feeding at the sidelines of the mainstream market since at least 2014? Based on my recent visit to Nashville there is much that we are missing. Additionally, I have a treat for you this week as Mr. Awsumb has agreed to share a brief history of the 80’s to put a pin in the recent resurrection of that time period as an argument on FinTwit as to why home prices will not go down this cycle. The 80s have important lessons for us about election politics, government intervention and securitizations and their role in the mortgage market.
Let’s discuss.
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