FOLLOW THE MONEY – 12/15/25
Happy (macro) days are here again! The legendary money manager, Marty Zweig, in the 1980s famously counseled “Don’t Fight the Fed”. Accordingly, last Wednesday’s dovish tone and renewed Quantitative Easing (QE) (at $40B per month) that accompanied the anticipated 25 bp rate reduction has taken the equity market to new highs. The $38 trillion US debt burden, accompanied by interest payments of over $1 trillion annually cannot be seriously reduced, so the only way to keep kicking the can down the road is nominal GDP growth at a faster rate than the increasing debt growth. Since the debt will grow at more than $2T (5.2% of $38T), the current inflation rate of 2.5-2.75% will combine with the modest 2.5-3.0% “real” GDP growth rate to create a standoff. Unfortunately, the renewed QE will support higher inflation, burdening the consumer spending that represents 2 /3 of the US economy and sustaining the lately termed “affordability” crisis. Let us not forget what a supposedly acceptable 2%, let alone 3%, inflation rate represents. Over 20 years (which flies by) 2% inflation moves prices 51% higher, reducing purchasing power by 34%. The 3% rate, closer to the current reality, moves prices higher by 80%, lower purchasing power by 44%.
Gold and gold mining stocks have been among the major beneficiaries of the economic policies put in place by our “real estate developer” CEO. He likes lower interest rates, is not afraid of leverage and both he and Treasury Secretary Bessent repeatedly refer to a new “golden age”. Though there is no important trading country that has enough gold (30-40% of M2) to back a sustainable currency, investors and savers have taken the matter into their own hands. In the process they have moved gold bullion up by over 60% this year with the gold miners higher by about 150%. Moreover, individuals and institutions have begun putting themselves on a “gold standard” by purchasing securities backed 100% by gold holdings. While the 20 year old “GLD” ETF has been a useful vehicle in this regard, more companies using the blockchain technology similar to that made famous by Bitcoin (backed by nothing) are now backing their securities with gold. GLD, Tether Gold (XAUT) and PAX Gold (PAX) have so far attracted only a small fraction of Bitcoin’s $1.8 trillion market value, at $142B, $2.3B and $1.5B respectively, but GLD has huge liquidity and XAUT, PAX and others are growing. The price of gold and the gold mining stocks continue to reflect public confidence, or lack thereof, in Central Banks’ ability to provide a sound currency.
The chain restaurant industry continues to be a story of the “haves and have nots”. Companies like Wingstop, Dutch Bros and CAVA continue to produce impressive store level margins and high returns on capital. At the same time, there are many more “workout” situations, easy examples being Cracker Barrel, Dave and Buster’s & Jack in the Box. It’s worth considering why the stock of all six situations, “best of breed” as well as “troubled” are down so substantially from their highs. We suggest that danger lurks for the stock buyer who thinks unit growth can continue at a minimum rate of 20%, that same store sales can compound at mid to high single digit real rates indefinitely and that store level EBITDA margins (which almost everybody falsely calls “profit” these days) can move up from almost 30%. Especially CAVA and BROS, which were selling at 75-125 TTM Adjusted EBITDA, including Kura Sushi and Chipotle at only modestly lower valuations, were vulnerable to even a flattening of performance parameters. Analysts and money managers like simple stories with all cylinders firing and even one lagging element gives serious pause. The really great restaurant investments take place when you get aboard before the results have skyrocketed, can hold on while everything is improving, with no need to wonder quarterly whether already very high unit growth, same store sales or margins have even begun to flatten, let alone decline. At a high valuation, it depends, for better or worse, not on the rate of growth but the “second derivative”, the change in the rate of growth.
Similar conservatism can pay dividends in these unforgiving times to an operator who is searching for a new franchise opportunity. The typical twenty-year franchising partnership will navigate challenges long beyond the initial courtship, likely even including changes within the franchisors’ C-suite. There are far more franchised brands that have stumbled within the last twenty years than have steadily succeeded. Mod Pizza, Blaze Pizza and Pieology come to mind in just one fast casual segment, with many more examples than space here allows. Especially if you are considering a hot current brand, control your understandable tendency to expect your location(s) to generate at or above system averages, due to your site selection and operating skills. Build your cash flow projections at 25% below system averages, without back-breaking minimum occupancy expenses. All the stakeholders, including your franchisor, local suppliers, real estate broker, landlord, etc. may well share your enthusiasm, which feels good, but your name is the only one at the bottom of the lease.
Roger Lipton
