August 22nd

Wrap

The market is skittish today. The reason that Briefing.com made up is that people are worried that J Powell will go out of his way to shoot down the “Peak Fed” narrative. Seriously? The market is down because of something the chairman of the Fed just might say in a speech? If the market is that nervous, the rally is probably over. I don’t care if it’s termed a “bear-market rally” or a “bull-market rally”. It’s too much. Of course, the market exists to make a fool out of me, so you should probably go long at this point. This is not investment advice, just in case you can’t tell I am not entirely serious.

Starbucks

Starbucks makes a modest profit from selling coffee from shops. It faces a lot of competition, and is not growing. It bounced back from the pandemic, but as the public’s disposable income is squeezed by much higher prices for essentials like travel and heating and basic foodstuffs, will it continue to want to spend £3 on a cup of indifferent takeaway coffee?

The other problem is labour. Starbucks has been very effective in discouraging any kind of unionization of its workforce, but as its workers see their fellow workers in unionized jobs get big pay increases, there will be strong pressure on $SBUX. The workers may not be successful in unionizing, but if labour costs start to track the breakout in inflation, the effect will be the same. Labour costs are sticky. Wages are not negotiated continuously, but only once a year. With inflation in many developed economies hitting the low teens by the end of 2022, can Starbucks resist wage increases of maybe 5%? With profits only 17% of ‘cost of revenue’, a 10% increase in labour costs is going to a knock a big hole in profits.

Its hard to see that $SBUX has any great technological or regulatory barriers to entry. It’s hard to see their market share, or the total market for takeaway coffee going up very much. Why would you pay 25 times for the stock?

This article outlines a bull case. I remain unconvinced.. To be honest, I forgot how exposed the company is to China. To me, that’s all part of the larger bear case.

Will ticking up rates work to cool the economy and bring down inflation?

Well, colour me sceptical. I just don’t see it. As long as the increase in rate of inflation is (YoY) ahead of the increase in the rate which applies to most people’s financing costs, the interest rate channel is inflationary. Real rates are down. Surely, people have still got spare cash because it’s still very difficult to travel, and oil prices are going down rapidly now (at least spot prices), so people are soon going to be spending less on petrol, which is going to give them more spending power (although not enough to waste money on takeaway coffee!).

In the UK, house prices have rocketed over the last year or so. This gives Brits the option of using their house as an ATM. I simply cannot see them cutting back hard on consumption. Record numbers are in work and wages are rising rapidly.

The real economy reacts to changes in real rates. A 50bp or 75bp in nominal rates when inflation has gone up 800bp is not gonna cut it!