Ross M. Miller
Miller Risk Advisors
October 23, 2006
My personal boycott of Dunkin' Donuts (DD) is now in its
second year. It began when I attempted to purchase a new and improved
breakfast bagel combo for which I was overcharged and then, hoping to use
it as grist for one of these commentaries, tried in vain to get matters
rectified. Furthermore, I did not require the American Heart Association
to tell me that continued patronage of DD could put a serious crimp in my
quality of life down the road, if not end it prematurely. (The big donut
makers when given the choice between healthy and unhealthy fats and sugars
always go with the unhealthy ones.)
Well, the clueless French company that used to own DD
and did not know how to program its cash registers properly sold it to a
bunch of "private investors." I figured that it might be worth a
sneak visit to look in on the operations. (We call this
"rationalization.") The new owners, which undoubtedly include
some old classmates of Jeff Skilling who have yet to be barred from the
business, have taken the overpricing strategy of the old owners and
expanded it across the menu.
This tale begins on a beautiful October afternoon when
after a less-than-entirely-satisfying vegetarian lunch, I figured what
better way to cap things off than with a lard-dipped donut. I would have
gone over to the local Krispy Kreme (KK or KKD) joint—the subject of a
commentary so controversial that it has been exiled
to my "fiction" site—but it is no longer in business. My
concerns that KK consumption might be self-limiting, it appears, were not
So as not to expend calories unnecessarily, I patronized
DD through the drive-up window. Unless I missed something, Eliot Spitzer
is not yet our governor; however, the young man who took my order had
seemingly gotten his hands on some medical marijuana. Between his giggles,
he informed me that my two donuts would cost be a grand total of $1.98.
That's $0.99 each or nearly one dollar a donut. Donuts are considered
"food" in New York State, so none of the $0.99 is tax.
The DD store in question is not a deluxe affair, so one
is not paying for the atmosphere. Indeed, this
store is in a particularly low-rent district close enough to main
runway of Albany (N.Y.) International Airport that the risk of a plane
falling from the sky or skidding off the running and immolating the entire
stores rates some concern. I suspect that in better venues, donuts have
already topped a dollar.
Like many baby boomers, I lived through the Sixties and
like even more of them, I do not remember a whole lot about them beyond
what occasionally pops up on VH-1. But one thing that I do remember is
that someone I knew would use the expression "I bet you dollars to
donuts" a lot during my formative years.
This trite saying derived its meaning from the fact that
a donut once cost a whole lot less than a dollar. As I documented in my personal
history of the golden age of Wall Street, I could get donuts fresh out
of the grease pit for five cents apiece back in the late 1960s, which made
the dollars-to-donuts bet a 20-to-1 proposition. Now, thanks to Ben
Bernanke and the international donut conspiracy, dollars and donuts are
virtually even up.
Even more disturbing than donut inflation, however, is
that some stores, such as the Norwalk, Connecticut Costco, have already
geared up for German-style hyperinflation. They employ electronic
"shelf stickers" that display and item's price in bright red
LEDs. Wirelessly linked to the store's central computer, these stickers
theoretically enable the store to raise the price of an item repeatedly
between the time you place it in your cart and when it is scanned at the
Well, I hate to break this to you, but this commentary
is not about donuts, it is about macroeconomics. I could say "I told
you so," but a peek back at my commentaries (completely unedited
since the time that they were posted), indicates that I was well ahead of
the inflation curve.
Over the last month or two there can be no question that
energy costs have declined considerably and have farther to fall. This
plunge has already surfaced in the PPI and CPI numbers for September, and
October is set to follow suit. Other prices, however, do not appear to
have fully gotten the message. Now it really has been a good part of a
year since I last drove by a DD, so I cannot tell you just when donuts
nudged up against the dollar barrier, but I can tell you anecdotally that
lots of people, especially in services businesses, have not gotten the
message that the inflation binge is over. Services are important because
they are a big (and growing) chunk of the CPI and they are not directly
represented in the PPI.
With energy prices retreating, other prices now have the
opportunity to move up. This is, in fact, exactly what one would expect if
inflation is a predominantly monetary phenomenon. It could also be that
some price increases occur with a lag. In either even, I would not be
surprised to see core inflation not roll over and play dead just yet.
Some of Ben Bernanke's minions at the Fed (and to a
lesser extent Ben himself) understand that they may have failed to plunge
the stake through inflation's heart. Anyone who has played serious golf
(or, better yet, serious miniature golf, with or without vampires) can
understand the problem that inflation presents.
What does golf have to do with inflation? It is simple.
When putting, one has the best chance of making a putt if one aims to get
the ball past the hole rather than to get the ball as close to the hole as
possible. That is because the ball cannot go into the hole unless it
travels a minimum of the distance to the hole. The downside of the
intentional overshoot strategy is that when one misses, the next putt
will, on average, be longer. Interestingly enough, this means that the
most critical part of one's golf game is the ability to make putts in the
three to six foot range. Not coincidentally, this is one category in which
Tiger Woods truly excels. If you are going to be a Tiger, you cannot
always expect to have a tap-in for par.
Ben Bernanke is not yet in Tiger mode. He appears to be
going for the perfect putt that makes its last rotation as it falls into
the hole. The problem that he faces is that if the putt does not reach the
hole, it may well roll all the way back to his feet and he will have to
do things all over again. During the present pause, everyone is watching
the ball roll toward the hole and we are waiting to see it if goes in. If
the ball does not go far enough, Ben may have a much tougher second putt
than he bargained for, windmill or no windmill.
Copyright 2006 by Miller Risk Advisors. Permission
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