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Over the past year I've suggested shorting the for-profit education stocks,
muni bonds,
US Treasury bonds,
and junk bonds.
And so far, not so good. Asset prices just keep floating on the tide of
liquidity pouring out of the Fed. As the saying goes, it's all one market
these days, with even inversely-correlated assets like stocks and gold rising
together.
But damn it, in a dysfunctional system like this the short
side is, eventually, the place to be. Just as it's all one market on the
upside today, it will soon be all one market in reverse, as everyone dumps
paper as fast as their brokers can process the trades. The above shorts will
work, and they'll be joined by lots of others including, almost certainly,
the big restaurant chains.
This particular story begins with me bumping into a friend
who owns a popular local restaurant and has spent the past few years buying
junior silver miner stocks. Being guys, we skip the pleasantries and go
straight to trying to top each other with tales of doublings and triplings
and profits taken way too soon. Then he says, 'Good thing for silver too
because food prices are killing me.' It seems that the wheat flour, potatoes,
and tomatoes that his cooks turn into hash browns, toast and sandwiches are
through the roof. 'Damn,' I say, 'maybe we should be shorting the restaurant
stocks!' We both laugh, and then stop and look at each other as the
realization dawns that we really should be shorting these companies, since
they seem to be caught in a classic margin squeeze.
Imagine, for example, that you're running an Italian chain
like Olive Garden (DRI). Pasta is your core product and wheat, its main
component, has doubled since June. You have no choice but to raise menu
prices, squeeze your labor costs and/or downgrade your entree quality -- or
just eat the higher prices. Depending on what you choose, the result is
either diminished customer experience or lower profits.
Now pretend you're running Chipotle Mexican Grill (CMG),
which sells a lot of corn tortillas and taco shells. With the price of corn
soaring, that part of the menu is getting more expensive and, because cows
and chickens are fed mostly on corn, meat prices will eventually have to rise
commensurately. (See Record US cattle, hog
prices seen on shrinking herds, China.) So inputs across the
board either are or will be way up. Same problem as Olive Garden, and same
eventual result.
Meanwhile, the stocks of the major restaurant chains have
held up pretty well, with most on the chart below still close to their
12-month highs. There are three reasons for this: First, consumers have been
spending a bit more lately, giving restaurant chains pretty good
year-over-year comparisons. Second, most big chains -- and the wholesalers
that supply them -- probably use futures contracts and long-term sourcing
deals to lock in prices months in advance, so these guys are still working
with relatively cheap inputs. And third, like I said, all asset prices are
up, so it shouldn't be surprising that restaurant stocks are as well.
But at some point food prices will work their way through
to the menu, while rising interest rates or some other catalyst will suck
some liquidity out of the stock market. Then they'll be talking about a
perfect storm for the restaurants and today's prices will look like a short-seller's
dream.
John Rubino
DollarCollapse.com
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