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Dollar Donuts


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 entirely unfounded.

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 cash register.

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 granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to