FISCAL/MONETARY UPDATE – HOW DO WE DEFINE “TRANSITORY”? – RESTAURANT OPERATORS TAKE NOTE!
There has been a great deal of recent discussion, in the press and among Fed officials, debating whether the current inflationary price increases are “transitory” or not. If you listened to this past week’s press conference by Fed Chairman, Jerome Powell, you would have good reason to question his logic. On one hand, he expresses confidence that the inflation is “transitory”, but he admits that prices are not going to be rolled back from this year’s increases. He expresses his “hope” (our interpretation) that the rate of inflation will moderate, perhaps retreating from the 4-6% rate this year to a 2-3% rate in subsequent years. If prices go up by these amounts this year and next, prices will be almost 10% higher in eighteen months or so, and go higher from there. The rate of increase, will have moderated, perhaps, but the price rise will not have been transitory.
August 15th coming up is the fiftieth anniversary of Richard Nixon “closing the gold window”, eliminating the convertibility of the US Dollar into gold at $35/oz. This kicked off the stagflation of the nineteen seventies, with inflation peaking at about 12% annually and the Fed Funds rate at 18%. The lack of a spending discipline by politicians has run the annual deficit from $100B in 1980 to $3-4T today and the accumulated deficit from $1T to $28T (without considering unfunded entitlements). The economy is six times larger but the deficits are still 5-6 times bigger in constant dollars. If you don’t consider that this lack of monetary discipline is important, consider that, in the last fifty years, the cost of a first-class stamp has gone from $.08 to$.55, a loaf of bread from $0.25 to $2.50, a gallon of regular gas from $0.36 to $3.05, an average car from $2,700 to $40,206, annual healthcare spending from $353 per person to over $10,000, and Harvard tuition from $2,600 to $54,000. It is equally interesting that the Harvard tuition in 1971 was 13 weeks worth of the median household’s annual income of $10,285. The 2020 tuition is 36 weeks of the median household income of $78,500, demonstrating how wages have not kept up with the Dollar’s loss of purchasing power.
Gold bullion has gone from $35/oz. in 1971 to over $1800/oz. today, up 51x in value. You would have increased your purchasing power to whatever extent you had capital invested in gold bullion, even more so in the gold miners. There are admittedly other ways to protect oneself against inflation, but gold bullion and the gold miners that produce it, will continue to be effective. This has worked for 3,000 years, 200 years, 100 years, 50 years, 20 years, admittedly not the last six or seven years. The catch-up phase is ahead of us. So much for the appeal of gold mining stocks.
The good news for restaurant operators is that people have to eat and menu board pricing can change, carefully, as often as necessary. One piece of advice to growing restaurant chains is to make sure your rent escalation clause allows for no more than the rise in the government’s Consumer Price Index, CPI, (hopefully somewhat less). The CPI is consistently understating the real inflation (and the rise in menu prices) so your operating margin should “leverage” your sales increase by way of lower occupancy expenses, if nothing else.
Roger Lipton