There are two major Swiss chocolate producers who have issued short-dated bonds that are currently trading at negative yields in Swiss francs - Nestlé and Lindt. Let’s assume that as an investor you do not find the prospect of a guaranteed loss from these bonds particularly appealing – so instead, how about if you kept your capital under the mattress, and invested the money you would have lost in actual Swiss chocolate? How much chocolate would that buy? And are there any money-like properties or other benefits from holding chocolate?
The Nestlé example here is the 2.625 per cent, which matures on Valentine’s Day 2018 and was recently trading with a yield of -0.812 per cent. The Lindt example is the 0.5 per cent of October 2020, which had a yield of -0.299 per cent that same day. Assuming an investor bought £1m worth of these bonds, the losses would be £24,365 and £16,888 respectively over the lifetime of the bond holdings (assuming no currency gains or losses). For our purposes, let’s stick with the Nestlé example as it means we have more money to spend on our chocolate stash.
Browsing through the 2,000+ brands in their stable, my eye was immediately drawn to two products that had certain words or analogies that resonated with me as a credit investor: Nestlé Crunch and Nestlé Aero (think bubbles).
A quick perusal of an online grocery store resulted in two possibilities for the Crunch option; 49.3g bars made up of chunks, or 100g bars that come as single bar, with the cheapest pricing including delivery I could find working out at 1.1p per gram for the whole bar and 2.3p per gram for the smaller chunk bars. Aero (has to be mint according to the ladies in my household) worked out at 1.97p per gram. Accordingly, it looks like our cash pile can be exchanged for 2,215 kilos of Nestlé Crunch whole bars, or 1,059 kilos of chunks, or 1,236 kilos of minty Aero chunks.
So could either of these products replicate the functions of money?
1. Medium of exchange
Well my exhaustive scientific study of household members suffers from the issue of gender bias – myself versus five females. That said there was a clear 4.5/6 preference for Aero (caveated as had to be the mint variety), with the canine family member indifferent to Crunch or Aero (although a clear preference for chocolate over real cash from her). I think we can safely say chocolate works as a medium of exchange, durability issues aside.
2. Measure of value
Given the easy divisibility and fungibility of the chunk bars I’d have to say it works on this basis too – however the cheapest to deliver chocolate option of the large Crunch bar is clearly less suitable here.
3. Standard of deferred payment
The shelf life of unopened product, plus the rapid deterioration (debasement) of opened product suggests chocolate is not a good option here.
4. Store of value
Whilst it can remain safely stored in dry conditions for a finite period, obviously heat could be an issue. In my house the predatory threat from the canine family member cannot be easily discounted (she has previous form on sneaky chocolate consumption sourced from unopened Christmas presents, handbag snatches, sports bag rifling and carrier bag demolition).
It therefore looks like chocolate could function as a money proxy only in the very short term – so does it have any additional properties that could increase its utility?
1. Zombie apocalypse
Here I think the nutritional benefits of chocolate are manifest. Clearly the best option would be the 2,215 kilos of Crunch bars if the household were locked in a nuclear bunker until that bond matured on Valentine’s Day 2018.
According to the Nestlé website, Crunch has 5,410 calories per kilo, so that gives a total calorific storage potential of 11.385 million calories. That calculates as 1,733 available calories for each family member, each day, until final maturity (almost double the mint Aero equivalent). Ultimately this is doable – even if the shelf life would be surpassed during the period.
2. Familial bartering
Chocolate seems to be especially good here – especially with the younger members of the household.
3. Colleague goodwill
In the 24AM office, frequent drops of chocolate products into ‘the usual place’ as it is known seems to affect a slightly rosier disposition of hard pressed colleagues towards said ‘dropper’.
So what is the trade here? Well if you believe deflation may become entrenched, then buying bonds with a negative yield can still generate positive real returns. Or if you believe that yields will become more negative, capital gains can be generated and then recycled into other assets or other consumption. Or lastly, you may simply want the guaranteed return of your capital from a risk-free store of value, with an insurance cost that is the negative yield (not unlike gold).
Negative yields from a risk-free government investment are one thing – paying a company to probably return your own capital to you in three years with no guarantee is quite different altogether. Default risk and idiosyncratic mark to market risk remain with that investment all the way to maturity. A private sector business has no way to print money to repay debts in extremis, nor any way to control interest rates, nor the supply of money to influence inflation whilst you are facing those risks.
Credit risk on something with a negative yield, where you suffer that loss to ensure the certainty of the capital return, is akin to an insurance premium on a policy that ultimately might not pay out when you need it the most. The opportunity cost in this case seems highly elevated to me, being of course not only the other investments that could be made with a greater certainty of capital return, or the ones with acceptable credit risk but a higher and positive yield - but now, as importantly, the insurance cost that alternatively could purchase enough chocolate to entirely feed a family every day for the life of that investment.
For me, the utility benefits of chocolate now trump the other considerations of owning a corporate bond with an insurance cost and no capital guarantee. Plus, the zombie apocalypse trade is a neat tail-risk hedge don’t you think?
Chris Bowie is a member of TwentyFour's portfolio management team, where his primary responsibility is the management of the Defined Outcome and Corporate Bond funds. The views expressed above are his own and should not be taken as investment advice.