That Shrinking Feeling

Ever notice how many more things come in clear packages at the grocery store? Gone are the days when juices, granola, and frozen pizzas languished in those opaque cardboard containers; now we can see right through most packages to the delicious goodness inside.

Why reveal so much all of a sudden? As Sarah Nassauer recently wrote in the Wall Street Journal, it turns out that brand managers discovered in testing that transparent packaging promoted the perception of better taste and fresher ingredients among consumers. Tropicana used to dominate orange juice sales, but it lost share to Simply Orange once the challenger was first to market with a clear bottle – Tropicana has not recovered its fallen sales, but perhaps to prevent further attrition it has adopted the clear jug approach. How significant is see-through packaging to sales? Kind Healthy Snacks has actually sued Clif Bar for copying its transparent wrappers on granola bars!

Extra transparency sometimes comes with a material price tag, though. Quaker experimented with multiple plastic films before finding the right one, then worked to coat its newly-exposed Warm & Crunchy granola pieces with a special barrier so they wouldn’t lose their crunch in transit. Dannon colored its visible fruit-on-the-bottom chunks with vegetable dye so that the color would “pop,” and tested half-a-dozen different material combinations before finding something sturdy enough. While the transparency is admittedly selective – windows are usually strategically positioned to avoid showing the very top (where all the empty space is) or the very bottom (where all the crumbs gather) – consumers are definitely voting with their wallets for visible food.

But increased packaging clarity has been accompanied in the broader market with another trend disturbing to consumers – shrinkflation. Without drawing attention to it, food producers from cheese to chips have steadily reduced the consumable quantity of food they deliver. Their stealthy methods include changing the shape of chocolates from square to oval, putting less beer in each bottle, or shrinking the ice cream container size. While consumers (and central banks) notice a price hike much more readily than a quantity decrease, the impact on buying power can be just as painful even if it isn’t as transparent. With packaging transparency and packaging shrinkflation working toward opposite ends, it’s tough to know if consumers are actually better or worse off.

Transparency is a hot topic in today’s financial markets as well – with everything from financial benchmarks to derivatives transactions to regulatory capital under scrutiny. Where might this transparency be beneficial, where might it be costly, and where might it be overwhelmed by surreptitious actions that undermine it – the financial equivalent of shrinkflation?

Helpful transparency The defeasance market – comprised of service providers that facilitate the prepayment of securitized loans – used to be the kind of place where advisors would profit from borrower’s limited knowledge of these complex financial transactions. Rather than simply prepaying a securitized loan, borrowers are required to replace the collateral (i.e., a building) with treasury and agency securities that make loan payments sufficient to cover remaining principal and interest payments. In order to move the loan off of the borrower’s books, they contribute the loan and securities into a “successor borrower” entity. The hidden profits used to come from timing mismatches between when the securities mature and when the loan payments are due – mismatches that allowed the owner of the successor borrower entity (i.e., advisors) to earn interest off of sometimes substantial balances sitting in the account during these periods of mismatch. Chatham was the first defeasance advisor to disclose the full value of the successor borrower entity and to share this value with clients. Other defeasance advisors have copied this approach – much like Simply Orange drove Tropicana to clear bottles – and the real estate market is much better off from the transparent disclosure and the economic value shared.

Costly transparency New European derivatives laws require all market participants – both swap dealers and end users – to report their swaps to a trade repository. In a perfect world, this would allow regulators to have better visibility into the markets so that they could better monitor and control sources of systemic risk. But the decision to have both parties report the same trade has only confounded transparency aims. Most trades remain unmatched, meaning that the dealer’s report has not been paired with the end user’s report. This creates an incredibly muddy picture for regulators, while also saddling end users with a significant regulatory burden. US regulators are also struggling to make sense of the reams of data pouring into swap data repositories, but they are a step ahead because they required only the swap dealer to report the trades. EU regulators are thus taking unnecessarily costly steps in the direction of a transparent derivatives market.

Faux transparency Many significant institutional and municipal investors elect to do all of their FX spot conversions at a publicly known fixing rate for a certain day and time. These rates are incredibly transparent; unfortunately, they are also incredibly ripe for manipulation, and historical data repeatedly show large moves right before fixing that typically reverse themselves just after. This is shrinkflation brought to the FX markets, in which the traded rate is the publicly known benchmark rate (transparency), but the benchmark has been rigged (faux transparency). It’s much better to trade at a market rate at an off-peak time not systematically manipulated.

I’ll never forget that shrinking feeling I had when my favorite half-gallon of ice cream (mint chocolate chip) diminished to 1.75 quarts, then 1.5 quarts, without any price drop! To avoid the shrinking feeling of not getting the most out of your risk management decisions, give us a call at 610.925.3120 or email us.