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   Investment Thoughts - Beyond Finance

Cotton Candy Economics
Sugar, a staple commodity, has taken on a growing share of our diet over the past century. But it wasn’t always like that.


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“Everything is a miracle, it is a miracle that one does not dissolve in one’s bath like a lump of sugar”
Pablo Picasso (1881-1973) Famous Spanish painter, sculptor, printmaker, ceramicist and stage designer



Sugar, a staple commodity, has taken on a growing share of our diet over the past century. But it wasn’t always like that. There was a time, around the first half of the 19th century, when sugar was considered more of a “precious” commodity, in the same league as gold1.


Unlike gold, however, sugar could theoretically be produced in unlimited quantities (the boundaries were technological). So when industrialization and other technological advances swept the major economies of the world, sugar became commoditized, leading to a sharp drop in its price and making it accessible to the masses.


As sugar was eventually added into almost all processed foods, the average daily amount of sugar consumption per person went through the roof, causing severe health related problems. Obesity, diabetes, cancer and cardiovascular diseases reached epidemic levels. All this because our bodies require very little amounts of sugar to get by. At significantly higher amounts, sugar becomes toxic to our organism.


That wasn’t always the case: our ancestors that roamed the lands before the last ice age needed high quantities of sugar in their diets. When the ice age began, forests receded, and this in turn led to a sudden scarcity in fruits, the main source of sugar intake of our ancestors. Right around that time, a critical genetic mutation occurred: the carriers of that mutation could survive on vastly lower amounts of sugar.


With the ice age in full swing, all those that did not carry this mutation were basically wiped out. Present day humans are all carriers of this mutation, which means that we only need a small amount of sugar in our diet. No wonder then that the sharp rise in sugar consumption is so strongly correlated with the rise in a number of diseases.


Let me share a startling anecdote regarding sugar in the form of cotton candy. Cotton candy can be traced back to Europe in the 18th century, but it was not before a fellow named William Morrison invented machine-spun cotton candy in 1897 that it became widely available2. What is less known about Morrison was that he was also a practicing dentist who took his work very seriously. So here is a guy that invents the very thing that in the long run will make his core business more profitable. Sounds familiar?


In economics, debt is a good analogy for cotton candy. An economy cannot function without some debt and a small amount of it is actually a good thing, acting as a lubricant for the “cogs” of the economic engine. Similarly, a small amount of sugar in your diet is necessary, but what happens when you get carried away and go on a binge? As mentioned earlier, the consequences can be dire. Likewise, when you start to incite consumers to take on a significantly greater amount of debt than they are likely to pay over their lifetime, you are just inviting trouble.


It is a well known fact that debt driven recessions tend to be the most challenging ones to pull out of. What began as the subprime crisis is still plaguing the world economy today. Part of the reason for this is that lenders tend to get badly hurt when “wholesale” defaults occur, taking time for the “psychological” wounds to heal.


When an economy is healthy, lending is provided mainly from the private sector (i.e. banks). When a debt driven crisis erupts, the lending can sometimes come to a complete standstill. This dangerous situation, known as a “credit crunch” threatened the world economy during the ’07-’08 crisis, prompting massive government interventions in an attempt to normalize the situation. But what followed was not anticipated: the “rescuers” themselves were perceived to be standing on shaky ground. These in turn necessitated further rounds of intervention, fueling a negative feedback loop and extending the crisis over a much longer period of time.


Trust is slowly being restored; household debt is finally dropping, whilst the housing market seems to be picking up. If there were any lessons to be drawn from this experience, it would be that, as with sugar, too much debt can be a time bomb waiting to explode. You don’t know exactly when it will happen, but when it does, the damage will be extensive. Now try to reconcile this thought with the investor mind, which is in a perpetual tug of war between fear and greed.



And Where Do We Go From Here?


The global recovery continues to chug along in a delicate counterbalancing act between hope and despair, brought about by the burden of debt that shows no end in sight.





1 Sugar production required highly labor-intensive plantations in regions where the climate was suitable to the cultivation of sugar. Land needed to be conquered and slaves had to be captured or bought and subsequently shipped from West Africa to the West Indies, making the whole business of producing sugar a very costly endeavor.


2 Before machine-spinning technology was introduced, spun sugar was costly, labor intensive endeavor which was not available to the average person both because it was expensive and was not widely distributed.


Lobnek Wealth Management, August 2013-Altug Ulkumen, CFA, Independent Contributor







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