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FOLLOW THE MONEY by Roger Lipton -1/15/24

Macro Increasingly Drives Micro

Results in the US restaurant industry are increasingly influenced by hurricane-like macro headwinds. Previous generations of operators and investors could concentrate on micro/local considerations, but not so today. Interest rates, money supply and consumer attitudes abroad, not to mention politics, heavily influence a shrinking instantly interconnected world.

The following are incontrovertible principals: (1) Without sound currencies (supply limited to growth in goods & services) there will not be a strong economy. If workers don’t have confidence in the purchasing power of their labor they will work less. (2) A debt burden reduces productive investment. A decade ago, Reinhoff and Rogart wrote “This Time is Different”, with 200 years of worldwide business history indicating that governmental debt more than 90% of GDP (US debt now about 120%) seriously suppresses economic growth. PHD economics aside, it stands to reason that any economic entity (a person, family, business or country) with an increasing debt burden is limiting more productive pursuits.

These two principals have obviously been increasingly abused by governments worldwide over the last 100 years, the USA leading the way with our excessive creation of today’s Reserve Currency.

While we must survive in a short term driven world, long term trends cannot be ignored. There has never been an unbacked “fiat” currency that has survived. It has only been a question of time until the politicians of the day dilute it, with base metals or excessive supply, and today’s politicians are no different.

Two thousand years ago, the Roman Empire collapsed (during the span of 350 years), with their gold and silver coins increasingly diluted with base metals. More recently the USA, on a strict gold standard from the 1790s to 1913, had about 4% real growth with minimal inflation. Unfortunately, the dominant US Dollar, “managed” by our Federal Reserve since 1913, accepted as the worlds Reserve Currency since 1944, has been “abused” in the form of currency creation, especially in the last twenty years. History also shows that, since the Roman Denarius, the French Franc, the Dutch Guilder, the Pound Sterling, have all had their turns as the world’s primary trading “Reserve” currency. Those tenures have recently lasted about 100 years and our time seems to growing short. Our largest economic, political and even military adversaries, China and Russia and Iran, are reducing the US Dollar’s role, in their trade as well as foreign exchange reserves. Central Banks, also watching the US print unbacked currency, since 2009 have been buying gold bullion in record amounts, 1,000 tons in 2023, accounting for about 30% of worldwide production.

“Modern” macro concerns kicked off in August,1971, when Richard Nixon eliminated the exchange of Dollars for gold. This closing of the gold window was necessary because almost two thirds of our gold (from over 20,000 tons to 8,400 tons) had been redeemed. The worldwide bankers knew that the $35/oz. exchange rate was far too low. The US’s post-WWII surpluses were in jeopardy from Lyndon Johnson’s Great Society and the Vietnam War. A decade later Paul Volcker, backed by Ronald Reagan, squeezed out the inflation of the 1970s but the problems today (after adjusting for an economy six times as big) are a different order of magnitude. The total US debt in 1981 was $1T, now $34T. The annual deficit was $100B, now upwards of $2T. Today’s unfunded entitlements (SS, Medicare & Medcaid) were hardly a problem, now tens of trillions. The serious recession of 1980 to 1983 which corrected many of the “distortions” of the 1970s, would be dwarfed as a result of the necessary fiscal/monetary adjustments today.

Many are aware, by now, of the unsustainable fiscal/monetary path the US, indeed the world, is on, but the timing of the pain to come remains uncertain. I suggest that the tipping point has arrived. The US must refinance almost $1T of debt MONTHLY, at interest rates 300-400bp higher, so the interest is increasing $30-40B monthly and will be $360-480B more annually within a year. On a trailing twelve-month basis, the current $650B interest expense will then be running $1T or more, about 25% of the US $4T revenue base. History shows, including in Canada about 15 years ago, that interest expense around 30% “stops the music” in terms of bond market acceptance.

This is where the crystal ball gets cloudy. Nobody can predict what sort of governmental intervention, or lack thereof, will take place and how the consumer/economy will react. Based on the two principles we started with, we believe the economy “can not” gain much strength.

Back in the restaurant industry, the public needs to eat, but dining habits evolve. Prep time constraints dictate the location where the food will be prepared, and discretionary funds affect the frequency of “dining out”. Overall (full week) traffic trends are still challenged, Monday through Thursday, showing the effect of time and money constraints. Companies that can provide the hospitality culture as part of a dining “experience” will win the market share battle, which we will continue to discuss. We suggest, we believe that, based on the discussion above, operators and lenders should, at best, be cautiously optimistic.