The cost of fast food has exploded.
No, I’m not doing field research. While I’ve got nothing against fast food, it’s generally incompatible with getting in boat shape (ever harder as I get older), riding bikes, skiing, etc. And I’d rather take my empty calories in beer than happy meals.
We do have the occasional McDonald’s bacon, egg and cheese biscuit when out road-tripping across the fruited plain with Clyde the hound dog (and probably some Utz Boulder Chips).
The folks on CNBC Squawk Box were ruminating on fast-food inflation Monday with an analyst from Bank of America. Why is inflation in fast food outpacing general consumer inflation, they wondered?
Nobody really answered. Underlying commodity costs – beef, bacon, eggs and so on – are up, yes. But are they just gouging the poor, the principal constituency masticating in the drive-through lane?
I can’t speak to corporate strategy. But fast food uniquely in food service sees high correlation between rising minimum wages and other input costs.
In sit-down establishments, tips are key to compensation. At the drive-through window, there are few tips, and rightly so. You’re taking the bag handed out the window. But governments have mandated big increases in compensation.
There are two principal inputs per output. People and money. Labor and capital. In fast food, the capital goes mostly to supplies for things like Big Macs. So if the mandatory cost of labor also rises along with commodity costs, fast food gets pricey.
There is ever to me a bemusing sense of irony in policies that try to put more money in people’s pockets but instead take more from them. And nobody is hurt worse by inflation – your money doesn’t go as far as it did – than the folks on the bottom economic rung.
Meanwhile in the equity capital markets, margins are running around 12%, says John Butters from Factset, in line with long-run averages. With half the S&P 500 reporting, earnings are up about 3.5% in the first 2024 calendar quarter, rising in line with inflation.
Here’s a curiosity. The highest profit margin is in Real Estate – 35%. What’s the worst-performing sector YTD in 2024? Real Estate. The best-performing sector in the SPX thus far is Energy, one of six sectors with declining margins.
The point? Unless one understands the relationship between the value of money and inflation – which governments alone control – divining the origin of declining purchasing power is hard.
The maligned Javier Milei in Argentina, he of the wild hair and bachelor lifestyle who surprisingly rose to power in the last presidential election there, has cowed inflation and made the Argentinian peso the world’s best-performing currency of late.
He’s done it by slashing government spending, he says, by the greatest amount in the history of humankind.
I can’t speak to the veracity of that statement. But governments try to disclaim responsibility for inflation. Jay Powell will be holding forth today on inflation and monetary policy. The Federal Reserve lifted the cost of borrowed money to, ostensibly, combat inflation.
Well, Mr. Milei just demonstrated in the real world that what causes inflation is governments.
What’s that got to do with the stock market? Because you know it’s coming!
My favorite phrase after nearly 30 years as a professional in the US equity market is that to understand it you must know what the money is doing, and how the market works.
You can’t correlate broad financial measures to its performance. No matter how much we pound that orthodoxy. You can correlate the market’s performance to size and liquidity and low volatility. And rebalances.
The money consumes US stocks as a product, not as discrete stories, something I write about often. You can beat and raise, and your stock can decline. You can miss and surge.
And, I submit, the volatility increasingly inherent to each quarterly earnings cycle is undermining its mechanics. Because companies and analysts alike don’t understand how the stock market works, or what the money is really buying.
If money buys silence, would you shout and scream? It’s just an analogy. If money buys size, low volatility, liquidity, why wouldn’t the executive team focus on promoting those? All you have to do is look at the trends in your 13Fs to see it’s true.
Instead, companies bleat a bunch of data that howls through the market’s machinery.
To understand inflation, you have to know how money works. Copernicus said, paraphrasing, that if the government devalues money, people will hoard assets. And then governments will have to take stuff and break stuff to get it back.
I keep returning to it because again I find it sadly humorous that Copernicus knew more about money than Jay Powell.
If you look at the world through that lens, everything makes sense. Governments are engaged relentlessly in giving money to people and taking it away from them. It’s asinine and destructive (like giving guidance). But because we don’t see it for what it is, it persists, to our peril.
And in the stock market, the quarterly earnings cycle is a wrench hucked on a repeating cycle into well-oiled market machinery. At some point, the machinery will thus break.
But not today.
