Tag Archives: INFLATION



Volatility in the Capital Markets remains a fact of life, as fluctuating interest rates reflect expectations of inflation. At the same time, it is increasingly clear that the Fed not only predicts poorly, but has basically lost its ability to successfully influence (let alone control) the situation. The situation is not as complex as Jerome Powell, assisted by 250 economic PHDs, make it out to be.

Future inflation will be largely determined by whether current interest rates are higher or lower than the expected inflation, which inform the “real” interest rate. If interest rates are higher than inflation (a positive “real” return), capital will be saved rather than spent and inflation will be subdued.  Conversely, If the “real” rate is negative, capital will be spent, fueling ongoing inflation. For 10 years now the inflation (from 2%-9%) has been a lot higher than the interest rates, which were close to zero and now are all the way up to 3-4%. Right now most commentators refer to ongoing negative “real” rates of 4%-5% (inflation of 8% over the last twelve months less the current interest rates between 3% and 4%). Confusion results, though, when certain commentators, including President Biden and some economists, say that real interest rates are now positive, indicating that inflation will abate. The latter conclusion is based on the month to month change in CPI, July being 0.1% less than June, so “there is now no inflation“.

We have consistently made the argument that there is not the political will to raise interest rates sufficiently to reduce the finally unleashed inflation that is basically the result of too much money chasing a relatively fixed amount of goods and services. The change in prices over the last year is primarily the result of almost $9 trillion in the US and close to $20 trillion worldwide being printed out of thin air by central banks since 2008. The Covid and the Russian attack on Ukraine and the supply channel disruptions and the energy shortage are representative of “the tide going out” so we could “see who’s swimming naked”. The margin for error in a worldwide leveraged economy, with lots of capital mis-allocated over a decade of minimal interest rates, was just too small to tolerate relatively short term economic distortions.

US Fed activity has so far been more talk than action. Interest rates are well above the zero bound of the last ten years but still very low historically. The Fed Balance Sheet, at $9T, has been reduced by about $190B from its peak early in 2022. This is far from reversing the $5T of Quantitative Easing in just the last few years. Though actual action has been minimal, stock and bond prices have already corrected materially and there is already a growing chorus of economists and politicians and commentators calling for a slowdown of the Fed activity. Marketplace expectations change materially almost day to day, but the upswing in the stock market and a pullback from the peak of interest rates the last few days seems to indicate a consensus that the 75 basis point Fed Funds Rate monthly adjustments will be scaled back. In essence, the worst is ever and the 2nd derivative of the change in rates is now improving, meaning the rate of change is decreasing. We don’t know exactly what rationale Jerome Powell will provide as the logic behind backing off from the current tightening policy. He might possibly suggest that the month-to-month inflation rate has become the rate to be expected (2% of thereabouts) and a 3.5-4.0% Fed Funds rate is sufficient to control inflation going forward. Keep in mind that Alan Greenspan, Ben Bernanke, Janet Yellen, and now Jerome Powell have consistently demonstrated their lack of foresight.

We expect that inflation, understated, as it is by the CPI, will likely come down, affected by the sharp decline in the housing, autos and other interest rate sensitive industries. Household savings, as a percent of discretionary income, is now running at a new recent low of 3.5% (down from over 30% at the beginning of the Covid) and credit card debt just made an all time high. On the other hand, wages only go up, energy costs are moving up again and the US Strategic Energy Reserve must be rebuilt at some point, utility and insurance expenses are higher (for example), rents are much higher than a year ago and will be firm because young families cannot afford to carry a 6-7% mortgage, and housing represents about 25% of the CPI. Accelerated inflation abroad, caused by recent rounds of easing in Britain, Japan and China will raise the price of our imports, which may or may not be offset by the relative value of the US Dollar.

Overall, we expect the year-to-year inflation rate to come down to 5-7% over the next six months, still materially higher than expected short term rates of about 4%, providing a negative return of about 2%. That is a long way (400 bp) from the necessity of a positive real rate of at least 2% to put further pressure on the inflation rate. Recall that Paul Volcker raised Fed Funds rate to 18% to squeeze out 13.5% inflation. Also keep in mind that sovereign debt around the world is too large ($31 trillion in the US) to gracefully tolerate materially higher rates. Some economists suggest that today’s economy is not similar to the 1970s and they are right. Today’s debt and deficits in the US, adjusted for the size of the economy, are 4-6x larger than in the 1970s (and no better worldwide). A serious recession from 1980 to 1983 was the result of removing the monetary punch bowl of the 1970s. Since the current addiction to easy money is an order of magnitude larger, we can assume that the discomfort of withdrawal would be proportionate.

We expect continuing volatility in the capital markets as influential commentators (such as current and former Federal Reserve officials) express their opinions, but it is (literally) day to day “noise”. The worldwide economy is clearly in the “stagflation” that we foresaw many months ago. We will be fortunate if this period is no worse than in the 1970s.

Our readers know that we have long favored gold related assets to protect purchasing power inn these turbulent financial times. Gold bullion has in fact proven to be a relatively safe haven, very long term, over the last twenty years, even in the last twelve months. Gold mining stocks have not, generally down about 75% from their highs ten years ago, today representing a true “value” play. Both were down modestly until the last few months when interest rates and the US Dollar spiked upward, putting them under even more short term pressure. Over the last ten trading days, both recovered (about 5% for bullion and 15% for the gold miners, as the US Dollar and interest rates retreated from their highs. Yesterday’s price action in gold and the gold mining stocks may have been an important turning point. Interest rates and the US Dollar were strong, and strong and gold related assets went UP. That’s the best relative trading action we have seen for gold related assets in a very long time. Along with the fact the Federal Reserve is so quickly losing credibility, which is also a major plus for the “real money”, the price performance of our favorite asset class may from this point forward justify our long term conviction.

Roger Lipton




The inflation, represented by the rise in prices that the worldwide economy is experiencing, is not the result of supply chain bottlenecks or the war in Ukraine or too little drilling by the oil companies. It is the result of at least twenty years of money printing by Central Banks combined with too much government spending.  The rise in prices is the predictable and obvious result, of the less bothersome dilution of value of the unbacked (therefore unlimited in quantity) supply of colored paper that is used in the exchange of goods and services. When a substantial amount of currency (something like $20 trillion over ten years) is provided by worldwide central bank without a corresponding increase in the availability of goods and services, it doesn’t take a PHD in economics to understand that the price of those goods and services will increase. For the last ten years or so that was mostly represented by an increase in asset prices (stocks, bonds, homes, art, gold bullion, etc.), within the last year finally spreading to energy, food and other consumer goods.

Another important aspect of the unprecedented fiscal/monetary accommodation provided by governments and their central banks has been the suppression of interest rates to near zero levels for more than ten years. Interest rates control economic reward and risk, and when that “regulator” of economic activity is disabled, capital is mis-allocated as investors “reach for yield” in all kinds of risky ways. That is why hundreds of stocks were selling for thirty or forty times estimated SALES, companies were able to raise billions of dollars at virtually no cost and the cryptocurrency market (Bitcoin and Tether and Ethereum and almost twenty thousand others) could amount to over $3 trilllion (that’s a lot of money) at its peak. In short, a multi-faced asset bubble has been created, which has just recently begun to deflate.

Almost every observer agrees that the fiscal/monetary trends of the last twenty years cannot go on. The deficits and the debt and the related economic distortions are too large to be tolerated. At some point the books have to balance. Booms are followed by busts and the longer the party lasts the worse will be the hangover. An overriding corollary is that “you cannot have a sound economy with a sound currency”. If the public does not believe in the medium of exchange paid for their services, they will have less incentive to apply an effort in that direction. This generalization could be playing a part in the lack of work ethic exhibited by so many young people who have become disillusioned with today’s political class.  Because politicians, since time began, are almost always (George Washington being one exception) primarily driven by their own re-election, they do what they can to enrich their constituents. That process has inevitably included creation of as much “support” as possible. This is why there has never been an unbacked (fiat) currency that has survived. It is only a question of time until the politicians of the day dilute their currency into oblivion, and today’s crop of leaders are clearly no different. A US Dollar, as it existed in 1913 when the Federal Reserve was established to control inflation, is worth about $0.02 today, and the future does not bode well.

FWIW to our new readers, this is not a new subject for us. A multitude of previous articles can be accessed by the SEARCH function on our Home Page (“fiscal/monetary”)


The Chairman of the Federal Reserve, Jerome Powell, announced yesterday the largest interest rate increase, 75 basis points, since 1994, twenty eight years ago. The objective of this first step is to reduce the unacceptably high inflation rate, up about 8% year over year, as measured by the Consumer Price Index (CPI). It should be noted that the CPI has been materially adjusted over the last several decades, each time to understate the actual change in consumer prices. We have reminded our readers repeatedly that the 8% number, calculated on the same basis as in the 1970s when it peaked at 13.5%, would be in the mid-teens.

An essential element of keeping inflation under control is to have positive “real” interest rates, defined as the nominal short term (two to five year) rate less the rate of inflation. The consumer believing that prices will rise faster than the low risk interest rate return on capital will be encouraged to spend today, in essence pulling consumption forward and driving the price of goods upward. Conversely, a rate of inflation below the interest rate will encourage savings, because the goods will be getting cheaper over time in real terms. This is why a balanced economy usually has interest rates a couple of points (200 basis points) above the inflation rate. When real interest rates are materially negative, as they have been for most of the last ten years, inflation is inevitably part of the equation, in this case showing up in asset prices, as we discussed earlier. Over the last year or so, as the (understated) CPI provided a rate in the 5-6% area, and interest rates were in the area of 1%, the negative 4-5% real rate was extremely inflationary and that has only gotten worse most recently as the CPI was reported at 8-9%.

Recall that the legendary Paul Volcker, hired by Jimmy Carter in 1979 and backed by Ronald Reagan after his November, 1980 election, moved the Federal Funds Rate to 18.5%, providing 5% real return against the 13.5% CPI inflation rate. It worked, but the US economy had to endure a serious recession from 1980-1983. Based on today’s reported CPI, Jerome Powell would have to move short term rates to at least 10%, a very long way from the just established 1.75% and the two year objective of 3.75%. One can only imagine how serious a recession would result compared to the 1980 experience. FWIW, the annual operating deficit for the US was about $100B in 1980, and the total debt was about $1 trillion, respectively versus $2 trillion (20x) and $30 trillon (30x) today. That is another order of magnitude of a problem, even in an economy that is 5x as large. In addition: social security, medicare,  medicaid and other entitlements were immaterial in 1980 versus today’s long term (and unfunded) obligations.

POWELL IS, putting it charitably, UNCONVINCING

Jerome Powell, at his press conference yesterday, suggested that the consumer, and the economy, are  strong enough to withstand higher interest rates, and there is at least a chance of a soft landing in the economy even as interest rates move up to the range of 3.75% over the next 18-24 months. He didn’t talk about consumer confidence being at an all time low, credit card debt at an all time high while household savings are back to pre-covid low levels. Higher mortgage rates (6.25% versus the low 3% level a year ago) are starting to affect housing values and auto sales are rolling over with higher finance charges.  Trillions of dollars of stock market wealth has evaporated (including $2 trillion in crypto-currencies alone), along with lower house prices so a negative wealth effect now comes into play. Retail sales are weakening while producer prices (a leading indicator) are still hitting new highs. The acceleration (the 2nd derivative) of labor cost may have peaked but are still rising (the 1st derivative) and lots of manufacturers have yet to pass cost increases on to their customers. The Atlanta Fed, usually optimistic, and prone to downward adjustments over time, just lowered their estimate of Q2 GDP growth to zero, from 0.9%, and 1.5% just a couple of weeks ago. A recession is defined as two consecutive negative GDP quarters, which looks increasingly likely and the first half of ’22 will be negative in any event.

Powell’s commentary included his belief that the 3.75% Fed Funds rate objective is essentially a “neutral” rate, based on a long term 2% inflation rate. Do we need to point out that the current inflation rate is a long way north of 2% and will remain so for years to come? There is no chance that 3.75% will put a serious dent in the current inflation rate. We accept the fact that the CPI could come down a bit, perhaps to the area of 5%, as demand destruction from higher interest rates combines with abatement of the supply chain situation and perhaps a cessation of hostilities in Ukraine, but short term rates would still have to be 7-9%, double the 3.75% current objective. To provide some context regarding the real rate of inflation, as opposed to the CPI version: year over year import prices in May were up 11.7%, and export prices were up 18.9%, without including shipping costs. Since US consumers have to buy goods that were made either here or there, the average of about 15% is much closer to the real rate of inflation than the CPI the Bureau of Labor Statistics (BLS) “cooks up”.

Powell did provide a somewhat “dovish” possibility, saying that future rate increases could be reduced if a reduction of the inflation rate persists over a matter of months. That willingness to back off the current tightening plan increases the likelihood that the Fed will back off prematurely, most likely leaving in place only a 5% inflation rate. Five percent sounds a lot better than what we’ve got right now, but destroys 40% of your purchasing power over 10 years.


Capital markets have been resilient for over ten years because investors, both in stocks and bonds, were convinced that the Federal Reserve was providing a “put” which would, as European, Japanese and Chinese central banks have periodically done, “do what it takes” so keep stock and bond markets from going down.

Powell’s stated dedication to calming inflation, even tolerating a recession if that would set the stage for healthy long term growth, might have been expected to calm the stock and bond markets, both of which have been very weak lately. Most stock market pundits were in fact calling for the 75 bp rise which he delivered. Based on the apparent first step in a constructive direction, after his remarks yesterday afternoon both bond and stock markets rallied strongly. Unfortunately, the strength has evaporated today, with the Dow down 700 points on Thursday. Investors are apparently losing confidence in the logic, the timing, and/or the outcome of the Fed’s newest policy.


It’s often been said that the attractiveness of gold related assets is inversely correlated with the credibility of Central Banks. Gold, used to limit the central bankers’ ability to create unlimited amounts of currency, is essentially in conflict with the banker’s career path. Eight or nine years ago, sitting next to Paul Volcker, I asked him: “What do you think of gold?” His answer: “I’m a central banker so I don’t like gold!”

It seems to us that the credibility of Central Banks has steadily diminished over the last 109 years, from 1913 when the Federal Reserve was established,  to 1933 when FDR precluded US citizens from owning gold and 1934 when he changed the exchange rate from $20.67 to $35.00/oz. (devaluing the Dollar), to 1944 when the Breton Woods Conference established the US Dollar as the Reserve Currency (to be backed by gold), to 1971 when Richard Nixon eliminated the Dollar’s convertibility (at $35/oz.) into gold, to 1980 after gold had just peaked at $850/oz, to 2022 while gold bullion sits at $1830/oz.

In our view, gold bullion, should be more appropriately priced at somewhere between $7,000 and $10,000 per oz., and this is relative to the amount of paper currency that is circulating, as well as the amount of “equity”, assets minus debt, that important trading nations own. Gold has protected purchasing power for three thousand years, for 230 years since Alexander Hamilton’s Coin Exchange Act established gold and silver as the only legal tender in the US, since Y2K just before the dotcom bust and the two wars began, and for 13 years since the Obama administration accelerated government spending, While true that stocks and bonds and cryptocurrencies have outperformed gold as an asset class during the last decade, we believe there will shortly begin a dramatic catch-up phase. The amount of gold that sovereign nations own relative to their paper currency outstanding is at a comparable level to 1971, just before gold bullion went up over 20x in value.


The price of gold bullion should be a lot higher, currently four to five times where it is, and even higher over time. Even more compelling is the opportunity in gold mining stocks, with an upside that is a multiple  of  the move in gold bullion itself. Physical gold bullion is largely bought by the Chinese, Indian, Russian, and European public, as well as their Central Banks. The public in those countries understand how fickle paper currency can be, and the central banks can see how the US is abusing its role as a Reserve Currency by creating trillions of new Dollars. Worldwide Central Banks, with the notable exception of the US, have increased their collective holdings of gold bullion every year since 2009, absorbing about 12% of total worldwide production. Central Bankers may not “like” gold, as we pointed out above, but they collectively buy over 400 tons of it each year.

Gold mining stocks, because they are stocks, are largely purchased by North American stock investors, who have not had the personal experiences of Europeans, Chinese, Indians or Russians that demonstrated the utility of gold as a “safe haven”, a “store of value”, and a “medium of exchange”. Since North American Investors have been otherwise distracted in recent years, we anticipate that the current weakness in the stock and bond markets will bring them back to gold and gold mining stocks in particular. While gold bullion is essentially flat in ’22 and the gold mining stocks are flat to down about 5%, this asset class has in fact proved to be a relatively safe haven in a treacherous stock and bond market.

Gold mining stocks, based on their historical price relative to the price of bullion, should be something like two or three times higher than they currently trade. Gold bullion is down about 15% from the all time high, and the gold mining stocks are down over 50%. Moreover, they also represent VALUE by many measures, including a comparison to other commodity producers as shown below. Highly regarded Incrementum, whose charts we have used below, published a 390 page report in late May, making the case that commodity producers in general and precious metals in particular, are just entering a long term expansion of sales and profits.


We have already entered an extended period of Stagflation, which could, depending on fiscal/monetary developments, segway into a serious recession. Jerome Powell and his Federal Reserve have very little chance of maneuvering the US economy into a soft landing as inflation is tamed. Indeed, his approach seems to be overly optimistic, at best, disingenuous, misleading, or ignorant at worst. Viewed more charitably, he did not create this mess, and can’t be expected to control the outcome. Alan Greenspan started the process in 2001, spending the Dollar into oblivion as he tried to protect the economy from the effects of Y2k, the dotcom bust and the economic fallout from waging two wars. Ben Bernanke, Janet Yellen, and now Jerome Powell, have proceeded in turn to “play it as it lies” and “kick the can down the road”, just so….”it doesn’t hit the fan on my watch”.

The precious metals complex, and gold mining stocks in particular, should be an effective way of at least protecting one’s purchasing power in a challenging economy, while at best making 5-10x return on investment. A material (i.e.5-10% of one’s portfolio) invested in this asset class has proved to enhance long term capital returns through an investment cycle. Considering that gold mining stocks (1) have not kept pace with the general market over the last ten years nor (2) kept up with the price of bullion that has doubled over the last twelve years and (3) represent statistical value by many investment measures, they represent the opportunity for very substantial capital gains. The credibility that the Federal Reserve  is in the process of losing is supportive of far more demand for gold related assets as a means of protecting purchasing power and generating exceptional capital gains from current levels.

Roger Lipton

P.S. Roger Lipton is General Partner, Managing Partner, and the largest investor (Limited Partner) in RHL Associates, LP, an investing Limited Partnership that is 100% invested in gold mining equities.The minimum investment is $500,000, funds can be invested the first of any month, withdrawn (with no minimum holding period) at the end of any quarter (with 30 days prior written notice). The fee structure is “1 and 10” (1% annual fee and 10% of gains).  This notification should not be considered an offering, which can only be made by provision of a full Offering Circular.


FOLLOW THE MONEY with ROGER LIPTON – article published in prestigious RESTAURANT FINANCE MONITOR – 1/15/22

RESTAURANT FINANCE MONITOR – 1/15/22 ISSUE – Follow the Money with Roger Lipton – Roger’s monthly column

Inflation is in fact the real concern, but not necessarily the kind the journalists are talking about. The headlines are all about supply channel distortions that lead to a rise in commodity prices and the increase in minimum wage that drives labor costs up. Those are ripples in the inflationary sea compared to the tidal wave that is lurking offshore. It just so happens that the dangers we are about to describe hang over us just as the economy is already cooling. Open Table data shows indoor dining during Christmas week was down 33% from 2019 and Jeffries’ economist just cut their Q1 Real GDP Growth estimate from 6.6% to 1.5%.  Here’s the problem. A large part of the “recovery” in the economy has been generated by consumers taking their savings rate back to 6-7% from over 30% at the beginning of the pandemic and the wealth effect due to home values and stock market indexes near record highs. Even with household wealth (on paper) at record levels, consumers’ sentiment is the lowest in at least 13 years, the lowest in 40 years by some measures. The “wealth”, however, is largely a mirage. Over half the return in the S&P 500 since April has come from five stocks, the concentration higher than 1969 or 1999, before those bubbles deflated. A number of prominent bubbles have already deflated, including the SPAC universe, and Bitcoin is down 33%. Stock in the Robinhood trading platform is down 50%, amplified by the declines of over 50% from the highs in Game Stop and AMC. All of this is to say that tens of trillions of dollars printed by central banks around the world has had a predictable effect. Until recently it did not impact food prices but asset inflation drove the wealth effect that has kept the music playing for over ten years. We doubt that our Federal Reserve leading worldwide central banks, and the conspiring political class, will have the political will to take the punch bowl very far away. The attempt to do so, however, could be very unpleasant.

Restaurant stocks, on the other hand, have corrected materially from their much higher valuations in the Spring of 2021. Especially since many well-run chains have discovered new profit centers by way of servicing off-premise diners, and could even produce record high profit margins once the pandemic dust finally settles, the fundamentals at the current valuations justify a fresh look. For example, five well established restaurant chains, starting at the top of the alphabet, BJRI, BLMN, CAKE, CBRL and CHUY, on January 5th are down an average of 28% from their highs last May. While it is true that QSR chains are actually up 10-15% over the last two years, that is distorted by the extraordinary performance of Domino’s, Papa John’s, Wingstop and Chipotle, all major beneficiaries of the pandemic. Absent those, the rest of QSR is down as well.  The five IPOs of ’21, DNUT, SG, FWRG, PTLO and BROS are down a similar 29% from their post IPO highs. The two rapidly growing service companies, TOST and OLO, are both down over 50% from highs, more extreme declines no doubt due to the fact that, promising as they are, neither is yet profitable. At this point investment in “best of breed” companies is one way to go, with names like Darden, Cheesecake and Texas Roadhouse in full service, McDonald’s and Starbucks in QSR. Priced much lower, at 6-7x near term EBITDA are mature chains such as Bloomin’ Brands, Brinker and Ark Restaurants in full service. Well established franchising companies, here to stay (and grow), in spite of recent disruptions, are companies such as Ruth’s Chris, Jack in the Box and Restaurant Brands, now trading at near term EBITDA multiples in the low teens. All these valuations are 25-40% lower than just seven to eight months ago.

Over one hundred percent has been made in less than a year in a restaurant stock that has been publicly held for almost forty years, namely Luby’s (LUB). Some of us remember when Luby’s “wrote the book” in the cafeteria business, with highly paid store managers leading a great operating culture. As late as 1999 LUB was paying $.80 per share in dividends. After a $49M loss in ’01, including a $30M write-down, the Pappas brothers, highly regarded Houston based restauranteurs, bought effective control (9% of the Company for $10M). Importantly, at that time the Company owned the land and building under 125 of their 219 restaurants. LUB has lost money in 12 of the twenty years of Pappas ownership. In the course of it, Fudruckker’s was bought in 2010 for $63M in cash, with 59 company operated stores (22 with land and building) and 129 franchised restaurants. In 2012 LUB bought Cheeseburger in Paradise for $10.3M in cash, with 23 full-service restaurants in 14 states. At the end of 2020 the Company consisted of 61 Luby’s (42 with land & building), 24 company operated Fudruckker’s (9 with land and building), 71 Fudruckker’s franchised locations, zero Cheeseburger’s. In late 2018, with the stock at $1.50, an activist investor initiated a proxy contest against 36% Pappas owners, which precipitated a Board decision in May ’19 to “consider strategic alternatives”, resulting in a September ‘20 decision to liquidate LUB with an estimated $3.50 per share value. So far $2.00 per share has been paid out, with an estimated additional $3.00 per share to come. This result illustrated, as this column suggested back in September, that the dirt can be worth more than the operations. It also didn’t hurt that both the Pappas brothers were over 70, likely an incentive to monetize their long-term holding in Luby’s.

Roger Lipton



The world is aghast at the continuing rise in prices, the CPI most recently reported up 6.2% over twelve months ending October, the highest in 30 years. The 0.9% YOY print in October would obviously annualize a lot higher than that and was the highest YOY monthly increase in 40 years. The “transitory” discussion is becoming a joke because, whether or not the rate of increase declines, the CPI is not going to come down. Furthermore, the monthly trend in CPI (0.3%, 0.4, 0.6, 0.8, 0.6, 0.9, 0.5, 0.3, 0.4 and 0.9% from Jan. through October) is unremitting and Producer Prices, which lead the CPI continue to increase.

But it’s worse than that.

While Central Banks want to dilute the currency through inflation to deal with the unimaginable mountain of debt, in the short run there are important incentives to minimize the reported rate of inflation. These include (1) minimizing the inflation rate to show that “real growth” in wages (nominal wage growth less inflation) is encouraging (2) minimizing the CPI adjustments to entitlements  such as Social Security (3) minimizing interest payments to Treasury Inflation Protected Securities , TIPS (3) keeps interest rates (which are normally priced to provide a “real” return) low which minimizes the budget deficit (4) maximizes taxes because brackets are adjusted upward depending on the CPI and your tax rate moves up if your “real wages’ appear to be rising. Far more palatable to voters than an obvious rise in tax rate.

There are a great number of ways that the CPI measuring system has been “adjusted” over the years, and we have provided the details below this summary. Most material, and obvious at this point in time, is the “housing” component (the largest, followed by transportation and food/beverage) of the CPI. Housing is about 30% of “headline CPI” and 40% of “core CPI (headline minus food and energy).

Seems pretty simple, but back in 1999, according to the timeline shown below an “adjustment” was made. Within the 30 points of housing is “Owner’s Equivalent Rent” (23.8 points) and “Rent of Primary Residence” (5.9 points).  The definitions of “OER” and “Rent” follow.

“Owners’ equivalent rent of primary residence (OER)” is based on the following question that the Consumer Expenditure Survey (representing the Bureau of Labor Statistics) asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

“Rent” is based on a survey of consumers who rent their primary residence, who are asked: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?”

So: as the table below shows, the trailing twelve months ending October showed all items up 6.2%. Shelter (Housing) up was 3.5%. Since Shelter is about 30% of the index, the 3.5% held the 6.2% down.


Most of us know, anecdotally, that housing expenses are up a lot more than 3.5% in the last twelve months and the charts we have provided show that a more accurate estimate might be upwards of 12%. If the 30% Shelter component of the CPI were up 12% instead of 3.5%, the resultant CPI would be up 8.7% (not 6.2%). If Shelter were up 14%, the CPI would be up 9.3%. The “reality” of the situation, rather than numbers cooked up by the Bureau of Labor Statistics, is why household income, which mostly tracks the CPI, is not keeping up with the real cost of living. As a consequence, along with artificially suppressed interest rates, investors are reaching for yield and consumers are deal driven.

Roger Lipton

Below is the history of your CPI.  We have underlined “IMPROVEMENTS” and housing related changes. (We don’t make this stuff up!)


The original Consumer Price Index – started in 1919

  • Began publication of separate indexes for 32 cities (1919): Collected prices in central cities periodically
  • Developed weights reflecting the relative importance of goods and services purchased by consumers, from a study that BLS conducted in 1917–1919 of family expenditures in 92 industrial centers
  • Collected prices for major groups: Food, clothing, rent, fuels, house furnishings, and miscellaneous
  • Limited pricing to items selected in advance to represent their categories
  • Began regular publication of a national index, the U.S. city average, in 1921: Based index on an un-weighted average of the city indexes
  • Estimated the U.S. city average back to 1913, using food prices only

The 1940 CPI revision: the first comprehensive revision

  • Used weights based on a 1934–1936 study of consumer expenditures
  • Collected prices in the 34 largest cities

Improvements made between the 1940 and 1953 revisions

  • During World War II: Discontinued the pricing of unavailable items, such as new cars and household appliances
  • Increased the weight of other items, including automobile repair and public transportation
  • Adjusted weights in seven cities, using a 1947-1949 survey of consumer expenditures
  • Adjusted weights based on the 1950 Census
  • Adjusted rent index to remove “new unit bias” caused by rent control
  • Added new items to the list of covered items, including frozen foods and televisions

The 1953 CPI revision: the second comprehensive revision

  • Used weights based on a 1950 survey of consumer expenditures conducted in central cities and attached urbanized areas
  • Added a sample of medium and small cities
  • Updated the list of items that the index covered, adding restaurant meals
  • Expanded the sample of rental units and added homeownership costs
  • Improved pricing and calculation methods

The 1964 CPI revision: the third comprehensive revision

  • Based weights on a 1960–1961 survey of consumer expenditures in metropolitan areas
  • Added single-person households to target population: urban wage earner and clerical worker households
  • Extended price collection of goods and services to the suburbs of sampled metropolitan areas
  • Updated the sample of cities, goods and services, and retail stores and service establishments

The 1978 CPI revision: the fourth comprehensive revision

  • Added a new Consumer Price Index: the CPI for All Urban Consumers, or the CPI-U
  • Renamed the older CPI to the CPI for Urban Wage Earners and Clerical Workers, or the CPI-W
  • Based weights on a 1972–1973 survey of consumer expenditures and the 1970 census
  • Expanded the sample to 85 areas (primary sampling units)
  • Increased minimum frequency for obtaining the prices of goods and services (known as “pricing”) from quarterly to bi-monthly
  • Implemented monthly pricing in five largest areas
  • Introduced probability sampling methods at all stages of CPI sampling
  • Introduced checklists that define each category of spending to clarify what is included or excluded from an item
  • Developed estimates of the CPI’s sampling error and optimal sample allocation to minimize that error

Improvements made between the 1978 and 1987 revisions

  • Began systematic replacement of retail outlets and their item samples between major revisions:
    • Implemented a Point-of-Purchase Survey (POPS)
    • Selected retail outlets with probability proportional to consumer spending therein
    • Eliminated reliance on outdated secondary-source sampling frames
    • Began rotating outlet and item samples every 5 years
    • Began rotating one-fifth of the CPI pricing areas each year
    • Introduced rental equivalence concept (January 1983 for the CPI-U; January 1985 for the CPI-W). Additional information on rental equivalence is available in a factsheet.

The 1987 CPI revision: the fifth comprehensive revision

  • Based weights on the 1982–1984 Consumer Expenditure Survey and the 1980 Census
  • Updated samples of items, outlets, and areas
  • Redesigned the CPI housing survey
  • Improved sampling, data collection, data-processing, and statistical estimation methods
  • Initiated more efficient sample design and sample allocation
  • Introduced techniques to make CPI production and calculation more efficient

Improvements made between the 1987 and 1998 revisions

  • Improved housing estimator to account for the aging of the sample housing units
  • Improved the handling of new models of vehicles and other goods
  • Implemented new sample procedures to prevent overweighting items whose prices are likely to rise
  • Improved seasonal adjustment methods
  • Initiated a single hospital services item stratum with a treatment-oriented item definition
  • Discontinued pricing of the inputs to hospital services

The 1998 CPI revision: the sixth comprehensive revision

  • Based weights on the 1993–1995 Consumer Expenditure Survey and the 1990 census
  • Updated geographic and housing samples
  • Extensively revised item classification system
  • Implemented new housing index estimation system
  • Used computer-assisted data collection
  • Added the Telephone Point-of-Purchase Survey (TPOPS) which allows rotation of outlet and item samples by item category and geographic area, rather than by area alone (this survey was previously conducted in person)

Improvements made between the 1998 and 2018 revisions

  • Developed the Consumer Price Index Research Series (January 1999): an estimate of the CPI for all Urban Consumers (CPI-U) from 1978 to present that incorporates most of the improvements made over that time span into the entire series
  • Initiated a new housing survey based on the 1990 census (January 1999): Estimated price change for owners’ equivalent rent directly from rents (an estimate of the implicit rent owner occupants would have to pay if they were renting their homes)
  • Began using a geometric mean formula for most basic indexes (January 1999): Mitigates lower level substitution bias and reflects shifts in consumer spending with item categories as relative price change
  • Expanded the use of hedonic regression in quality adjustment
  • Directed replacement of sample items in the personal computer and other categories, to keep samples current
  • Implemented 4-year outlet rotation to replace 5-year scheme
  • Implemented biennial weight updates starting in January 2002
  • Added the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) in August 2002
    • Uses more advanced “superlative” index formula (the Törnqvist formula)
    • Corrects upper-level substitution bias
  • Expanded collection of price data to all business days of the month (Before 2004, prices were collected the first 18 business days of the month for the first 10 months of the year and the first 15 business days for November and December.)
  • Began publishing indexes to three decimal places (January 2007)
  • Added CPI-E and published it back to 1982 (2008)
    • Congress mandated experimental consumer price index for the elderly (62 years of age and older)
    • CPI-E has limitations related to the expenditure weights, outlets sampled, items priced and the prices collected







Some of our readers may be wondering why, while focusing intently on restaurant industry fundamentals, we also regularly summarize worldwide fiscal/monetary developments.

It used to be that a restaurant operator, especially a single location operator, could “mind the store”, and pay relatively very little attention to money flows, governmental deficits, and inflationary trends. All you had to do was hold (and build) your market share. The broader economic trends, especially after the stagflationary nineteen seventies, were slow moving, not dramatic in nature, and affected you very little. Those trends were mere ripples in the sea.

These days, that equation still holds true, as long as you are running one or two locations, are personally meeting and greeting customers, and watching almost every meal that comes over the transom.

However, if you are a multi-unit operator, with visions of growth, the local ripples have become a broad based tidal wave, and that has been especially evident the last eighteen months. As Warren Buffet famously suggested: “When the tide goes out you find out who has been swimming naked”.


The growing multi-unit operator cannot afford to be unaware of trends in interest rates, the availability of debt or equity financing, the trends in wages, commodities and inflation in general. That is where the study of fiscal/monetary affairs and restaurant fundamentals intersect. While a great deal of our time is spent advising restaurant companies and institutional restaurant investors, we also feel the need to protect our personal long term purchasing power by way of gold mining stocks.


It also should be noted that while fiscal/monetary developments can affect restaurant fundamentals, the reverse applies as well. Restaurants and the hospitality industry in general provide an effective window, and can (should) affect economic policy. The logic is as follows:

  • Approximately 70% of the U.S. economy is consumer driven. If consumer confidence and spending is soft, the general economy will suffer accordingly.
  • The restaurant industry, in particular, has proven for many decades to be an effective leading indicator on the economy as a whole. Meals, bought and/or consumed, away from home are an entrenched part of our life style. Since the expenditure is a relatively small ticket compared to travel spending, automotive or housing spending, computer purchases, even cell phone expenses, consumers can adjust this spending easily with frequency and average ticket. The typical family will adjust the frequency of an appetizer or dessert well before they will take a vacation (or not), buy a new car (or not) or renovate their home (or not).
  • Transparency within this industry is unique. Inventories turn weekly, so inventory building or drawdown does not affect the results, as opposed to measurement of so many elements of the GDP. An analyst following same store sales, traffic trends adjusted for pricing is not going to be badly misled. If the largest retailers on the planet, WalMart and Target, report  flat same store sales,  and Ralph Lauren or Estee Lauder (on the high end) are also troubled, you can probably conclude that the economy is not in great shape.
  • Approximately 14 million adults are employed by the retail/hospitality industry (80%-90% in restaurants) in the U.S., approximately 10% of the U.S. workforce. Wage trends, health care cost trends, and employment trends (such as adjusting weekly hours to meet ACA requirements) are significant windows into national employment trends, and inflation expectations.
  • Cost of goods (beef, chicken, seafood, paper costs, etc.) at restaurant chains approximates 30% of sales so frequent reporting, and commentary,  by publicly held restaurant chains provides a window into inflation expectations.
  • Corporate transparency is unique. Traffic trends, quality standards in terms of price/value, service at the store level, cleanliness of facilities, etc. are visible meal by meal. A visit to the mall or dinner at a restaurant chain can pay dividends. Every stock you buy may not enrich you, but will not impoverish you if you pay attention.
  • Restaurant industry is relatively recession resistant. Trite though it might be, people have to eat, meals away from home are entrenched as a lifestyle (as suggested above) and will remain so. Traffic trends and average spending fluctuate but not hugely. Well run restaurant chains, and even some that aren’t so well run, can survive over the long term. The good ones can grow spectacularly, like McDonalds and Starbucks (for decades), more recently chains like Shake Shack and Wingstop.  Overall, however, individual investments in restaurants and retail should be monitored, not “put away” long term. More companies suffer serious periodic stumbles than produce reliable results year after year. Parenthetically, our experience is that this is true to an even greater extent in retail, rather than restaurants, where an apparel company can be only as good as their latest “floor set”. Quality standards in a well run restaurant company will not normally change much on a very short term basis.

For these reasons, and more, the restaurant/retail industry is not just about burgers, tacos, or even apparel, furniture, or smart phones.  The study of retail consumer trends gives us a window into far more general economic trends.

With that backdrop, we will tomorrow provide a Fiscal/Monetary Update

Roger Lipton



We wrote a month ago about the labor crisis within the restaurant industry.  Today, the business press, in writing and on TV, has more than discovered the situation, with a continuous din. Our discussion below is intended to provide more insight as to how it plays out. Since something like 20 million Americans are employed within the hospitality industry, encompassing restaurants, retail and hospitality, the implications for our overall economy are significant.

The restaurant industry is now forced to pay anywhere from $12 to $16/hr. for starting crew members and, even at that wage, it remains difficult to find candidates to interview. Some companies are offering referral bonuses to existing employees, $50 to just show up at an interview and many other enticements. On a recent trip to South Carolina, I saw signs to this effect in the windows of almost every restaurant on the commercial strip. The most striking offer was at McDonald’s, a willingness to pay $28,000 as a starting wage to a trainee who would be a manager within 90 days. We don’t know what the “qualifications” would be to get that job, and the prospect might be slated to be a “shift” manager, rather than general manager. However, no matter how well “qualified” that person would be, is seems a sign of clear desperation that a store owner is now required to hand over the keys to a $3M restaurant, for even a shift, after only 90 days of training. Parenthetically, almost all the management teams of publicly held companies have recently reflected the labor “challenge”, though the longer term margin ramifications haven’t been explored.

The debate about the cause of the crisis unfortunately, as most policy discussions do these days, comes down to a political divide. The left suggests that it is the fear of interacting with the public while Covid-19 is not yet eliminated, even $15/hr is barely a living wage, some potential recruits still have to stay home with children that are not yet back in school, and recruits are just looking for the right opportunity. Conservatives suggest that extended and enhanced unemployment benefits amount to more than a full time employee would earn while working and “if you pay people to stay home, they will stay home”.

The enhanced unemployment benefits are slated to remain until September 6th, and it seems unlikely that the Biden administration will modify that. However, South Carolina and Montana announced last week their plan to withdraw from the Federal Program at the end of July, at least a few other states will likely follow,  and the US Chamber of Commerce announced its support of stopping the extra $300/week.

THE RESULT –some obvious, some not so obvious – including some unintended consequences.

  • Crew wages are taking a major step higher, and what goes up will not, in this case, come down.
  • Store level managers and other field supervisors will also receive wage increases over time.
  • Staffing will remain a challenge, at least until September, because only half the country is Red, and Blue states will mostly keep the unemployment programs in place.
  • Store level service will likely suffer and/or training costs will increase materially for raw recruits.
  • Menu Prices will move higher, and customers, with inflation news rampant, will understand.
  • Store level and corporate margins will be hard pressed to move higher (than in ’19), since manu prices can only be raised with great caution. The other “prime cost”, namely Cost of Goods Sold, is likely to trend higher, affected by higher beef, chicken, etc.

Roger Lipton



The capital markets traded to the upside in April, as the Biden administration lays out their agenda and the Federal Reserve assures everyone that they continue to have everything under control. We suggest that you come to your own conclusions. Ben Bernanke had no clue that the financial crisis of ’08-’09 was coming, though there were quite a few warning bells ringing. You never know which snowflake will start the avalanche.


For those of you that like to know the latest deficit and debt numbers look like, the US deficit for the month of March was $660 billion, up from $119 billion in ’20, just before the pandemic related spending took off. The deficit for the first six months of the current fiscal year has therefore been $1.7 trillion, up from $741 billion in ’20. Since the comparisons from here will be up against the huge spending from April through September of the fiscal year ending 9/30, the comparisons will be “tougher”, depending on what stimulus programs are implemented.

Safe to say that the deficit for the current year ending 9/30/21 will be substantially more than the $3.1 trillion of last year. No doubt the total debt, not including unfunded entitlements, will be in the area of $30 trillion somewhere in the fourth calendar quarter of 2021. This continues to be of prime importance because heavy debt burdens the recovering economy and enormous spending, mostly financed by our Federal Reserve’s currency creation, will be necessary to keep the economy from collapsing. With the 2022 very important congressional election season beginning in just a matter of months, you can bet that the Biden administration will spare no expense to make the economy look good.


There is an increasingly active debate developing as to whether inflation, or possibly some form of deflation, is in our future, and when. Keep in mind that both can happen, just as we have already seen higher prices in assets such as stocks, bonds, real estate and others. On the other hand, general income levels have not moved by much and “core inflation”, excluding food and energy, is still subdued.

Both inflation and deflation can be good for gold. The miners did very well during the deflationary 1930s, in spite of a fixed gold price, because their costs were coming down as the worldwide economy collapsed. Gold did even better in the inflationary 1970s, moving from $35 when Nixon eliminated convertibility in 1971 to $850 early in 1980. On balance, we prefer inflationary trends and that is what central banks around the world are desperately trying to provide.

There are some very obvious short term trends that point to inflation. There is major upward pressure on the minimum wage, with an apparent shortage of workers. There have been shortfalls in supply, and higher prices for semiconductors, lumber, copper, agriculture, gasoline, used cars, and housing. Interest rates, while still low, have moved upward, which could signal the bond market’s expectation of higher inflation. The M-2 money supply has moved up by 24% in just the last year, the most rapid rate in 150 years, and economics 101 dictates that more money chasing the same amount of goods should be inflationary at some point. Most importantly, consumers increasingly expect inflation to accelerate, and that expectation alone can be a critical ingredient. Lastly, the weakness in the US Dollar points to higher domestic inflation.

On the other hand, some of the most intelligent observers, including Lacy Hunt, Gary Shilling, and David Rosenberg, believe that the likely inflation coming out of the pandemic, over the next six months, will be modest. Fed Chairman, Jerome Powell, calls it “anchored” and “transitory”. Hunt and Schilling have had three decades of accurately calling for low interest rates, a sluggish economy, and subdued inflation, largely as a result of the debt burden. David Rosenberg, perhaps the economic commentator with the most well documented view, is looking for a short term economic bounce, accompanied by a modest uptick in inflation, but a return to economic malaise within six months.

Powell believes the Fed can control inflation by reversing the accommodation, allowing interest rates to rise, just as Paul Volker did in from 1979 to 1982. Hunt and Shilling and Rosenberg believe that the economy will go nowhere because of the debt and the aging demographics. The debt, in their mind, is a huge problem over the long term, but the Fed activities preclude a full scale  economic collapase. It seems to us that one of the most important ingredients in the reasoning of Powell, Hunt, Shilling and Rosenberg is that inflation is been “anchored” for the last ten years, even though the deficits and debt have gone through the roof. Therefore: the same beat can go on for the foreseeable future.

Though these are very smart people that we are trying to interpret and “second guess” to a degree, we are inclined to think that inflation will be higher, and longer, than is suggested above. Historical precedents may not apply because this monetary experiment is of a different magnitude than has ever been seen before.

Firstly, the Fed can’t “pull a Volker”, if inflation takes off, because the $28 trillion of debt now compares to $1 trillion in 1980, and today’s many trillions of unfunded entitlements were of little concern forty years ago. The annual operating deficit was only about $100 billion in 1980 compared to perhaps $4 trillion today. Even with an economy that is 6-7 times larger today, the problems are of a different order of magnitude. Raising interest rates, as Volker did, would trigger a massive decline in asset prices and a terrible depression.

The assumption by Powell and the others is that, based on the lack of inflation the last ten years, as deficits and debt built up, there is reason to believe that further monetary accommodation will, similarly, not create an inflation problem. We have seen that, though the Fed took its balance sheet from $1 trillion to $8 trillion in the last ten years, financing most of the annual deficit with newly printed dollars, the “velocity” of the monetary aggregates collapsed at the same time so the new currency did not pressure the CPI upward.

The Fed wants 2%+ inflation, and $7 trillion of new currency did not get the job done. In an extreme example, do you believe that $100 trillion of new currency, chasing the same amount of goods and services, would drive prices higher? We would say: highly likely. Seven trillion dollars didn’t get the job done. One hundred trillion dollars probably would.

The only remaining question becomes: What amount of new currency, between $7 trillion and $100 trillion, would kick off inflation? We think we are going to find out. Nobody knows how the above discussed elements will interact, but we expect a stagflationary period during the foreseeable future, likely with an even weaker economy and higher inflation than in the 1970s.  We also expect gold and the gold miners to be among the very best asset classes to own in the turbulent period ahead.

Roger Lipton.



Inflation is Coming and My Thoughts on Franchising

By Roger Lipton


The U.S. Federal Reserve Bank was formed in 1913 to control inflation and manage the economy so as to avoid severe economic cycles. It has clearly failed in terms of controlling inflation, since a 1913 U.S. Dollar is worth about $.02 today.  More recently, since the U.S. went off the gold exchange standard in 1971, the Dollar has declined by about 85%. In terms of controlling business cycles, the U.S. has ad: the Roaring Twenties, the Great Depression in the 1930s, World War II, which had to be financed with debt in the ‘40s, inflation running to 12% and the Fed Funds Rate at 18% in the ‘70s, the dotcom bubble and burst of 1999 to 2001, the financial crisis of 2008-09, and the monstrous debt buildup and suppressed interest rates over the last 10 years.

More “money” has been created by the Fed in the last 18 months (adjusted for inflation) than was needed to pay for five years of World War II, and the debt as a percentage of GDP is above where it was in 1945. The M2 money supply in the US has increased by 24% over the last 12 months, the highest within recorded data over 150 years, and 27% most recently.

Fed Chairman, Jerome Powell, says there is a need to raise interest rates and reduce the Fed balance sheet, but adds “There will be a time, but not now.” However, the US debt has increased every year since 1957. There was a budget “surplus” in the last three years under President Clinton and the first year under President George W. Bush, amounting to just under $800 billion over four years, but the debt still increased each year due to “off-budget” items. (Only in D.C. can this happen.) Powell has reiterated the Fed’s objective to generate inflation of 2%+, indicating potential rampant inflation can be controlled, but the current financial experiment is unprecedented in time and magnitude. Our bet is that inflation is coming, higher than the Fed expects and it will be difficult to get the genie back in the bottle. Manage your business accordingly.


We wrote here last month that almost all of the mature publicly held franchising restaurant chains are hardly growing their U.S. units. We pointed out that, for a number of reasons, the unit level economics are just not attractive enough for franchisees to encourage unit expansion. Needless to say, higher sales would be transformational. The less obvious, and potentially contentious “adjustment” that could help a great deal is a revision of the franchise structure.

When Ray Kroc started franchising McDonald’s more than 60 years ago, the royalty rate was 1.9% By the 1960s, franchisors had started charging 2%-3%, by the 1970s 3%-4%, and 5% seems to be the standard today, plus at least 2% for advertising and other fees.

Some franchisees, at chains such as Dunkin’, Burger King and Jack in the Box are still making decent returns at  the store level because the store leases were signed 10 or 15 years ago and occupancy expenses are lower  than today’s economics would allow. While single unit franchisees who personally manage their stores can still make a living, a multi-unit owner, who  is the best prospect for unit expansion, paying a non-family store manager, is typically fortunate to be making 17-18% store level EBITDA, of which depreciation is not free cash  flow in the long run. Subsequently, rebating 7 points or more out of 17 or 18 points starts to feel like a pretty big load, and there is still local G&A to be carried. Even if store level EBITDA, before royalties, is in the low 20s, rebating over 7 points is a heavy price to pay. Considering the changing economics over the last two to three decades, there are no material operating expenses that are lower as a percentage of sales, certainly not occupancy or labor, and food costs are unpredictable commodities. The biggest single negative trend that nobody would debate is the intensive competition that has become commonplace.

The time has come for lower fees, especially ongoing royalties. We understand that this suggestion will be resisted by existing large chains, most especially those publicly held, because it would be an obvious reduction of the current royalty stream. However, well established franchisors could, and should, absorb more of the additional systemwide needs, such as technology upgrades. “Mid-cap” franchising companies could put some part of the following suggestions in place.

If I were running an early stage franchise company, I would put in place a sliding scale royalty system, charging 2.5-3.0% at a modest sales level, higher if the franchisee does better. Give them a little room to make money if the store doesn’t do quite as well as everybody hopes. If the store clicks, everybody is happy and the 4-5% on the higher sales won’t seem like such a burden. For my multi-unit franchisees, I would charge lower up front fees for additional stores and this is sometimes already being done (whether  admitting it to Wall Street or not). This is logical and appropriate because less franchise support is required as a franchisee builds local infrastructure.

It seems to us that a young franchise company adopting this strategy would have a huge competitive edge and the total royalty stream is likely to build more rapidly using this progressive approach. Profitable franchisees, and a more appropriate sharing of store level profits, considering today’s economic realty, make for a successful system in the long run.

Roger Lipton has followed the restaurant industry for four decades. Founder of money management and investment banking firm, Lipton Financial Services, Inc., he publishes regularly at www.rogerlipton.com.   He can be reached at lfsi@aol.com and 212 600 2266.



The capital markets in January were dominated by the action in Gamestop and other heavily shorted stocks, so the Russel 2000 and Nasdaq indexes were up. The larger indexes, the Dow and S&P were down. Gold bullion was down about 3.2%.  Gold mining stocks, to be expected, were down about double that. However, the year has just begun, the dollar printing presses are preparing to print trillions of stimulus dollars, and the broad background, as discussed below, is moving in favor of the “real money” (i.e. gold, and it’s “little brother”, silver) on almost a daily basis. Additionally, the populist revolution of Robinhood traders, the last few days spilling over to silver, demonstrates how quickly and dramatically mass psychology can turn. It will take more than a group of young traders to move the gold and silver markets sharply higher but the institutions and computer driven trading programs are odd lotters at heart, chasing momentum rather than fundamentals. Gold related securities have had positive fundamentals for a long time now, so it’s just a question of time until the psychology turns. We discuss just below the analogies between Gamestock and the precious metals  before providing an update on the broader fiscal and monetary developments.


Recent short term trading developments seem far removed from precious metals but there are similarities that could come into play.

First, the buyers of Gamestop, from the trading platforms such as Robinhood, were out to punish the fat cat hedge funds that, as they see it, have gotten rich by shorting low priced stocks into oblivion. The new buying from the “little guys” forced the hedge funds that were short to limit losses by covering at increasingly high prices. A critical technical aspect of this situation is that the total short positions had been allowed (by hedge fund custodians such as Goldman Sachs) to be well over 100% of the shares outstanding, called “naked” shorting, and there was no way, until Robinhood suspended trading, that all the shares that had been shorted could be bought back. It should be noted that, while many commentators expressed concern about the price volatility, almost everyone is sympathetic with the little guy, nobody feeling sorry for the hedge funds that took huge losses. At least a couple of multi-billion dollar hedge funds closed their doors in the wake of the unprecedented upsurge.

Here is the application to the gold and silver markets.

First, the prices of gold related securities are thought by many (including ourselves) to be suppressed similarily as Gamestop. In the case of gold, the suppression is by worldwide politicians and their affiliated bankers, who don’t want a rising gold price to bring attention to the huge dilution of the unbacked paper currencies. Gold related securities, especially the gold mining stocks, for no apparent fundamental reason, have therefore participated very little in the asset inflation of the last seven or eight years. The fact is that several large market makers in gold and silver related securities, including futures and options, have paid fines amounting to hundreds of millions of dollars for manipulation of precious metal markets. There has, therefore, been a distortion in the “price discovery” of precious metals, just as we have described for years.

The other important similarity between Gamestop and Gold is the use by the Gamestop short sellers of “naked shorts” as described above. This “paper” that was over 100% of the total “underlying” created a potential demand, once the stock started going up, that was impossible to satisfy except at much higher prices. The term you will hear is “short squeeze”. The number discussed, relative to Gamestop, is that the total short positions amounted to 140% of the shares outstanding, a ratio of 1.4 to 1. NOW GET THIS !  In the gold market, the “paper”, that is composed of derivatives such as options, futures, ETFs, etc., that reside on top of the physical trading of the “underlying” gold is thought to be something like 100 to 1, that’s ONE HUNDRED TO ONE. We don’t mean to suggest that all of that “exposure” is on the short side, but a great number of positions are built on borrowed money, and no doubt a substantial amount is “short”. In addition, buyers (like the “little guys” at Robinhood) in the gold or silver futures market could require “delivery”, rather than a cash settlement, and the short seller would obviously have a bigger problem than just buying back the paper short and taking the loss. They would have to find a seller of physical metal.  It has been reported by dealers of physical gold and silver that there has been a huge increase in demand by retail buyers who expect delivery, not settlement in cash.  This spills over into the derivatives market as physical dealers buy options and futures contract to protect their profit between the time they give a customer their “report” and when the dealer receives, then delivers against payment the physical product.  A final simplistic point is that it takes ten years to bring on stream a newly discovered gold mine. In the stock market, Gamestop could issue more shares at some point and satisfy some of the demand. As it applies to gold, nobody can “issue” new gold bullion overnight. In fact, there are no new large gold mines scheduled to come on stream for years. If potential physical demand is to be satisfied, it has to come from an existing physical holder, and they will likely require a very much higher price.

As always, the timing of a large move in gold related securities continues to be uncertain, but some of the critical catalysts are similar in nature to those that drove Gamestop so dramatically higher. Everyone agrees that there are no possible fundamentals that could justify the recent price of Gamestop, even at $90, up from $20, let alone at a high of $500.  In the case of Gold, we are not suggesting that it should be trading  20-30 times higher, but somewhere between $6,000 and $10,000 an ounce  can be rationally jusified. That could take gold mining stocks up by least 10x and would be adequately satisfying.

With that review of the most current events in the capital markets, below is a continuation of our longer term broad fundamental perspective.


It’s becoming a common refrain: “don’t fight the Fed”, originally coined by the late and great market strategist, Martin Zweig back in the 1980s.

Jerome Powell, Fed Chairman, has made it clear that he will do “whatever it takes” to get back to relatively full employment and balanced economic growth, “balanced” referring to a narrowing of the wealth gap. He has reiterated that he is “not even thinking about thinking about raising interest rates”, signaling that the Fed will continue to expand its balance sheet, keeping interest rates very low, bond markets and the stock markets still supported by the “Fed put”. The Fed’s largesse has no doubt been an important contributing cause of the weakness in the US Dollar, which supports exporting US industries.

A historical footnote: This disillusionment with the US Dollar is similar to 1969 and 1970 when the Europeans, led by France’s Charles DeGaulle, exchanged their predictably diluted Dollars for the US Gold. In the course of just a couple of years, the US Gold holdings were reduced from over 20,000 tons to the 8,400 tons that we still own today.  Richard Nixon famously “closed the gold window” in August, 1971, inflation took off, taking Fed Fund Rates to 18%, and the price of gold went from $35. to $850/oz. by January, 1980. An important corollary is that the amount of gold that  the US, as well as collective worldwide central banks, own, relative to the paper currency outstanding, is today at roughly the same (7-8%) level it was in 1971.

Back to the current situation:

Enter Powell’s predecessor, Janet Yellen, likely to be confirmed by the Senate as new Treasury Secretary. While the Fed and the administration’s Treasury Secretary are theoretically independent of one another, it has long been the case that the Fed is responsive to political concerns. Interest rates have firmed up a bit in the last two weeks, and the dollar has also bounced off its lows since early January.  Some headlines have said that “Yellen does not seek a weaker dollar for competitive purposes”, implying that she will favor a stronger dollar, likely accompanied by higher interest rates. Not exactly. She also said she is in a favor of a “market driven dollar”. All of her remarks indicate that she is agnostic as to where the Dollar trades.

Now let’s see what is going on in the economy and how Fed/Treasury policy will play out.


Retail Sales Are Weak – December sales came in weaker than expected, down 0.7% YTY and November was revised to down 1.4% vs. originally estimated negative 1.1%. Further breakdowns of the overall numbers look even worse. Restaurant sales were down 4.5%, electronics -4.9%, appliances and furniture -0.6%, online sales -5.8% after -1.7% in November.  In essence, aside from restaurant sales, “stuff” in demand due to the Covid seems to have run its course. While we don’t doubt that a certain amount of demand will be released when the Covid-related cabin fever breaks, a case can be made that a traumatized consumer, who have saved or paid down credit balances with stimulus checks may well spend less and save more than was the case before the pandemic. From March through November, 2020, American households saved $1.6 trillion more than a year earlier, while credit balances collapsed at a record 14% annual rate.


Jobless claims in December were 965k, versus an estimate of $790k, in spite of Christmas retail hiring, much higher than November which was revised lower by 3k to $784k.


US real GDP is improving relative to the disastrous 2nd and 3rd quarters, but still down very sharply from a year ago. While it is well accepted that 2020 will be a lost year, economists and commentators are quoting “growth of something like 6% in 2021. Goldman Sachs just raised their forecast from 6.4% to 6.6%, fueled by $1.9 trillion (or something close) stimulus’ effect on disposable incomes and government spending. The reality is, however, that the US economy has been growing at a tepid low to mid 2%+ range for twelve years now. It grew at an average of about 2.3% for eight years under President Obama. In the four years of the Trump administration, with the tailwind of lower taxes, major government deficit spending, less governmental regulation, a trillion dollars of repatriated overseas capital and interest rates very close to zero, GDP grew at an average of about 2.5%. This can fairly be called “the law of diminishing returns”, a lower “marginal return on invested capital” or, less charitably a “misallocation of capital”.

At the same time that economic signals are weakening, inflationary signals are more apparent.

The deficit so far this fiscal year, the three months through December, show a deficit 58% higher than a year ago. Unfortunately the new fiscal stimulus package, proposed at $1.9 trillion, will inflate the government spending again this year. Though the amount is negotiable, President Biden has stated that it is only a “downpayment” on future plans. It seems reasonable to expect this fiscal year’s deficit to at least approach the $3.1 trillion of last year, perhaps even exceed it.

We point out again that the debt increases almost every year at much more than the annual deficit would suggest. This is due to “off budget” spending, and those dollars are in large part borrowed from the social security fund.  The deficit shown above in ’19 was $984 billion but the debt went up by $219 billion more, $1.2  trillion higher in total. The deficit in the Y/E 9/30/20 was $3.1 trillion but the increase in debt was $4.2 trillion. People….these are not  trivial differences, and this huge accelerating debt load will further drag on our economy.

INFLATIONARY SIGNALS ARE APPEARING, though it still may be a way off

First, the parabolic increase in the M2 money supply has to be some cause for concern.

Secondly, reported import and export prices for December are cause for inflationary concern, and this could be one contributing factor to the rise in interest rates and the US Dollar. December import prices were up 0.9% instead of the expected 0.6%. November was revised slightly upward, from 0.1% to 0.2%. Export prices were also up much more than the expected 0.6% in December to 0.9%. November was also revised upward by 0.1% to 0.2%.

Lastly, the seemingly inevitable move to a nationwide $15 minimum wage could also contribute. While it is true that perhaps only 3 or 4 percent of the workforce earn the $7.25 minimum wage, with the lowest paid sector (leisure/hospitality) earning $17/hr, a higher minimum could well provide upward pressure. That $17/hr worker might not be happy earning just over the acknowledged subsistence level, and expect a bit more.  Its also true that employers will attempt to hold the pricing line by absorbing labor increases by way curbing expenses elsewhere, but a great deal of that may already be in place. In any event, we haven’t seen any arguments that a higher national minimum wage will be deflationary.

In spite of the factors provided above, the month to month CPI report doesn’t show much yet, up 0.4% in December but up just 1.4% for the twelve months ending December. The so called core-CPI, less food and energy, was up just 0.1% in December, up 1.6% for twelve months. The Fed, of course, has clearly stated a policy to allow inflation to run higher than 2% annually for a while because it has been under 2% for so long. Keep in mind that, while prices of goods and services (except for major expenses like education and health care) have been stable, asset price inflation has been huge. There is a reason why very rich people are paying over $100M for a residence or a rare painting. They want to own anything but cash. They don’t know what that Van Gogh or oceanfront property will sell for, but they know their cash will lose a lot of purchasing power. As always, inflation is the cruelest tax, affecting the rich the least. They have their land, homes, art, stock and stock options, gold, etc. It’s the lower and middle class that gets hurt, left to wonder why they are making more in nominal terms but have to work harder to make ends meet.

Inflation is in our future, guaranteed, with governments around the world printing currency at an unprecedented rate, with a stated goal of creating of something over 2% for a long time. Short term, however, there is a lot of under-utilized manufacturing capacity, consumer spending is still restrained, and rents (“rent equivalent” is over 25% of the CPI index) are stagnant as city dwellers move out. Education and Healthcare, two of the largest family expenditures, are not in the CPI that is most often quoted by officials. The CPI, also, does not reflect the inflation in asset prices, including speculations such as Bitcoin and Gamestop. For these reasons, the reported CPI may not take off for a while but inflation in the real world is inescapable.


The Federal Reserve and the supposedly independent US Treasury, as a result of at least forty years of fiscal/monetary promiscuity have incompatible masters to serve.

On one hand they are supposed to keep inflation at a tolerable level, these days no higher than a “symmetrical” 2%, At some point that will call for higher interest rates, and normalization to 150-200 bp above the rate of inflation, a range of 3.5-4.0%, providing a “real” return to savers. Unfortunately that would add an unacceptable $800-900 billion of annual interest to government expenses, blowing the deficit even higher, exacerbated further yet because tax receipts would contract as businesses cope with higher interest rates. So….interest rates might edge up, but not by much.

On the other hand the Fed’s second mandate is to foster full employment. This requires relatively low interest rates and continued government fiscal stimulus, which along with a weaker dollar will support US business activities. These policies problematically foster the inflation that they don’t want to get out of control.

The objectives are inconsistent.


When in doubt, the policymakers will pursue the inflation every time. The public, especially the lower and middle class, doesn’t quite understand why they have to work harder and longer to make ends meet.  It is very apparent, on the other hand, when interest rates and/or taxes are going up and unemployment is rising. Far better for the incumbent politicians to stimulate the economy by way of government spending, low interest rates, and a lower dollar. Somebody else can deal with the inflation later on. Paul Volker came along in 1979 and Ronald Reagan stuck with him, enduring the higher interest rates of the early 1980s to squeeze out inflation, but there is no Paul Volker or Ronald Reagan these days and the problems (the deficits, the debt, the tepid economy, the already very low interest rates) are an order of magnitude larger.

The recent runup in speculative securities such as Gamestop could be a forerunner of a similar explosion in gold and gold mining stocks. As discussed above, the disdain for “the fat cats” is driving a populist revolt (with sympathy from both sides of the political aisle) that has driven heavily shorted stocks up by ten times and more in a matter of weeks. The stage could well be set, for a lot of the same reasons as discussed above for precious metal related assets. The Gamestop crowd, at the end of their recent run, broadened their focus to silver and silver miners, and gold rose in sympathy a couple of days ago. As attention is drawn to fiat currency alternatives, the price action of gold, silver, and the miners could start to reflect the compelling fundamentals.

Roger Lipton



December, and the fourth quarter, continued in the same vein as the first three calendar quarters.  The operating leverage for the miners is starting to be recognized, since the move in mining stocks in December was more than double the 3.7% that gold bullion moved. It was a similar case for the year, with gold bullion up 17.9% and the miners up about double that. The most impressive relative move of the month was the last two days when the miners were up  2-3% with bullion up only 0.4%, so it is possible that this is the beginning of the still very depressed mining stocks catching up to the bullion price. The performance of our investment partnership, almost entirely invested in gold mining companies, mirrored that described above.

While bullion (at $1525/oz.) is down about 20% from its high of $1900/oz. (in 2011), the miners are down 50-70%, so the mining stocks could go up 100% or more with bullion rising 20-25% to the previous high. Since we believe that bullion will sell for something like $5,000/oz. within the next few years, you can see how our portfolio could multiply by many times the current price.

There is no reason to change our longstanding view that gold mining stocks have the most upside potential of any liquid asset class we know of. All the reasons we have been discussing for the last six years are only intensifying, and the potential reward for our patience has increased with time. You can review at your leisure our article written in August  of this year: THE CASE FOR GOLD – we are gratified that a true giant of the gold mining industry, Rob McEwen, who built Goldcorp, one of the largest and successful mining companies (recently merged with Newmont Mining),  has re-published (with our permission) our article on the website of his young company, publicly traded McEwen Mining (MUX). . Maybe we know something, after all 😊

Our many articles on this subject, largely summarized in THE CASE FOR GOLD, are hereby augmented with the following thoughts regarding Inflation, Central Bank Gold Purchasing, US Deficits and Cumulative Debt, Interest Rate Expectations and Worldwide Economic Trends.

INFLATION, which is supportive of the gold price, is not dead, as widely assumed. The apparent absence of inflation, as measured by the Bureau of Economic Statistics, has provided comfort to the PHDs at central banks. However (1) the price indexes that are quoted, inexplicably excluding food and energy which are consumed daily, have been manipulated periodically to put a false face on reality. Among other benefits to our government, understated inflation provides an insufficient increase to entitlements such as social security payments (2) Though certain imported apparel prices and some consumer electronics have not increased in price, asset prices (explicitly targeted by central banks), including stocks and bonds and prime real estate and collectibles have made the rich richer while the middle class strains to make ends meet. Inflation is with us when a Van Gogh painting sells for $240M or a NYC coop sells for over $100M. The super rich are purchasing iconic items which they know will command a premium price long into the future, as opposed to holding the colored paper that they know will have a tiny fraction of its current purchasing power. Even an understated 2% annual inflation rate destroys 50% of your purchasing power in 35 years. A 1971 dollar is worth about $0.15, a 1913 dollar is worth less than $.03. That Van Gogh or Central Park South penthouse will do better than that. The chart below shows how big ticket items, where the money is spent, have inflated over the last twenty years at rates well above those reported by our Bureau of Economic Analysis.

CENTRAL BANKS INCREASE GOLD BUYING, and the inevitable ramifications are becoming more obvious. Central Banks, most notably China and Russia, are buying physical gold at a record rate in 2019, at the same time reducing US Treasury Securities as a percentage of their reserves. Central banks collectively, even with China’s understated purchases, are now absorbing more than 20% of annual worldwide gold production. Furthermore, an increasing amount of trade is taking place between China, Russia, and the Mideast, conducted in terms of Yuan and Rubles and Gold, and the ounces of Gold it takes to purchase a gallon of Oil may indeed be a very important guidepost that determines the future relationship between various currencies. With geo-political-trade tensions so high, nothing would please the Chinese, the Russians, or the Saudis more than an ability to conduct more of their business in something other than US Dollars. Well connected sources are increasingly suggesting that China, combining the gold ownership of its many government agencies, likely owns upwards of 20,000 tons of physical gold, rather than the 1,900 tons owned by the Peoples Bank of China, which they report. This dwarfs the 8,100 tons the US has owned since 1971. Russia, with their rapidly increasing 2,200 tons, is the largest owner relative to the size of their economy and currency and most able to implement some sort of a gold related monetary system if they were so inclined.

There are reports of international discussions relating to a new “reserve currency”, joining or even replacing the US Dollar. The Bretton Woods Agreement of 1944 assumed the US would maintain the “value” of the US Dollar by backing it with gold. The USA has blatantly abused its trading privilege during the last 75 years by “closing the gold window” in 1971, generating annual operating deficits in 35 out the last 39 years, running up $23 trillion of debt (excluding tens of trillions of unfunded entitlement)  and printing $4 trillion of fresh (fiat, i.e.unbacked) money by our Federal Reserve Bank. International monetary circles are starting to consider a new monetary “approach”, and worldwide central banks may be anticipating that likelihood by way of their physical gold purchases.  We believe that China could announce, almost any time, a new form of currency, perhaps a so called crypto-currency, backed by upwards of 20,000 tons of gold. At the same time, a new base price for gold bullion at $5,000/oz. or more would be supported by the Chinese.

The current worldwide fiscal/monetary “promiscuity”, unbacked paper currencies being diluted into oblivion by the politicians of the day, cannot go on indefinitely without predictable ramifications. When a trend cannot go on, by definition, it will not. We view gold as re-emerging as the true currency, the store of value and unit of exchange it has been for 5,000 years. Central banks, including our most direct political and economic adversaries, get it. The public in China and India get it. Investors in North America hardly at all, some might say “whistling past the graveyard”. It’s going to be interesting.

THE FEDERAL DEBT is north of $23 trillion in the US, also growing rapidly in the other largest trading nations in the world. We’ve pointed out many times that the debt is increasing even more than the annually budgeted operating deficits would imply. This can only happen with governmental accounting. The difference is due largely to the federal government borrowing from the social security trust fund. In the fiscal year ending 9/30/19, for example, the operating deficit was $984B but “off budget” spending, financed by the social security system which is itself approaching insolvency, took the cumulative debt up an extra $206B, from $21.97T to $23.16T. This is not “one off”, it happens almost every year and is to be expected. Therefore, we can expect the total deficit in the fiscal year ending 9/30/20 to be something like $24.5T, on its way to $26T by the time the newly elected president takes office in January,’21. This assumes that there are no economic disruptions, and a recession, with lower tax revenues and larger deficits are out there somewhere. All of this is very important because, the larger the debt the more difficult economic growth becomes. Whether we’re talking about an individual, a family, a company or a country, the more effort it takes to service debt, the less investment can be made in productive pursuit. Our economy and other major worldwide economies will therefore continue to be kept afloat by central bank financial creativity. It will work until it doesn’t, and will inevitably be accompanied by many unintended painful consequences.

INTEREST RATES are not going to change much in the foreseeable future. Interest payments on the debt are barely tolerable only because rates are so low. Every increased point (100 basis points) of extra interest equates to $230B of extra interest as current bonds mature, and over 50% of our outstanding debt is under 5 years. This extra interest would be a material increment and would squeeze out potentially productive government spending. Higher interest rates, which the US Fed tried briefly a year ago, stopped our economy and the stock market in its tracks, and the policy was quickly reversed. The US economy has stabilized currently but GDP growth is projected to be no more than a tepid 2% this year, even less than it was a year ago when slightly higher interest rates took their toll. The only way interest rates could rise by much is if the Federal Reserve, and other central banks, lose control over the situation and this would be a sign of impending financial chaos. Lower interest rates are possible, but the 10 year treasury note is under 2%, and the marginal benefit of lower rates from here is debatable. Negative interest rates on something like $13T of sovereign debt is a fact of life, but that approach has its own set of unintended consequences, and adoption by the US Fed would clearly be a sign of desperation. Give or take 50 basis points, we believe interest rates are “range bound” for the next year or two.

WORLDWIDE ECONOMIC TRENDS support our contention that worldwide central banks, in support of local economies, will maintain low interest rates interest rates, which provides a major tailwind for our portfolio. Headlines in the Wall Street Journal today, January 2, include (1) Asian Economies Must Brace for Chill Wind From China (2) Japan’s Lost 30 Years (with debt going to 250% of GDP) Give Pause to Those Looking at U.S. (3) Japan Has Gone from Growth Market to Bargain Rack (4) ‘Japanification’ Haunts Slow Growth Europe (5) Latin America’s ‘Oasis” Descends Into Chaos. As Wendy’s put it, thirty years ago: “Where’s The Beef”.

PUTTING IT ALL TOGETHER, we’re certainly pleased that our gold mining oriented investment partnership provided positive results in December, the 4th quarter, and the year.  The mining stocks have just begun to gain investment traction. It seems that, until now investors and analysts have not believed that gold at $1400-1500 per oz. is here to stay. They have been therefore unwilling to adjust upward their estimates of gold reserves, mine lives, earnings and cash flow expectations for the gold mining companies. Gold bullion prices have now clearly broken out on the upside from their six year “consolidation” and the possibility (we call it a likelihood) of a big upside move now comes into view. We can therefore expect upgraded expectations and higher valuations.

There have been virtually no major new gold reserves discovered in the last ten years, and new mines take many years to get permitted. Higher prices will allow expanded mining of some lower grade reserves by established companies but will not allow new mines to come onstream for many years. Existing miners have made major progress in cost control over the last few years and are in a position to improve cash flow and profits dramatically, even at current prices. Operating results for the quarter ending 9/30/19, the first quarter in eight years that the gold price was something like $200/oz. higher than a year earlier, have begun to demonstrate the operating leverage that is in place. We believe that the bull market in gold and gold mining stocks has resumed and the upside potential is very substantial.

Roger Lipton