A Voice of Sanity – RobertRinger.com

Right now, we’re in a deflationary period, which, as I have explained, is a good thing for the economy long term. It cleanses the market of excesses and forces people to be more frugal, more prudent, and more rational in their planning and spending.

As I shared with you in Part I of this article, my friend, Leo the Centimillionaire, believes it will be several years before the government prints its way out of the deflationary hole it has dug for us. He could be right … or he could be wrong. For all the reasons I’ve previously stated, it’s simply impossible to predict the timing of economic events in an economy that is artificially manipulated.

Still, so long as we’re in a downward spiral, certain kinds of businesses will be especially vulnerable, but others will actually do quite well. I don’t make predictions. I only make educated guesses. And following are some of my educated guesses about the near-term fates of a sampling of businesses as living standards decline.

• Middle-priced restaurants, such as P.F. Chang’s, California Pizza Kitchen, and Macaroni Grill, to name but a few, are almost certain to get hammered. Their business models are based on the assumption that a falsely created middle class that eats out several nights a week will be a permanent phenomenon. But when people are forced to spend less, they won’t dine out as often. Instead of three nights a week, they’ll eat out once a week (or, in the case of those who have lost their jobs, not at all) — and these chain restaurants will have difficulty paying their bills. If the past is prologue to the future, many will cut back on both their service and the quality of their food in an effort to survive. And that will bring to an end to the high-quality, medium-priced-restaurant-chain industry as we have come to know it.

• Steakhouses (e.g., Longhorn Steakhouse and Outback Steakhouse) are likely to get hit even harder. Though they cater to the middle class, their prices are generally higher than such places as The Cheesecake Factory, Red Lobster, and Olive Garden. When times are tough, you can be sure that people will eat less steak and more hamburger and pasta. They may grumble about it, but they’ll do it.

• Which brings me to the fast-food industry. Most well-established fast-food chains should at least survive, if not prosper, during this deflationary downturn. McDonald’s, in fact, boasts that it’s “recession-resistant,” and it’s probably right. If Marie Antoinette were alive today, she’d likely be saying, “Let them eat Big Macs.” And the angry masses would probably still be screaming, “Off with her head.”

• People will be flocking to stores like Wal-Mart, Sam’s Club, and Costco as they try to make their paper money go further. Target is a bit pricier, thus a bit more questionable. Kmart is already crippled, and Sears is a mystery to me (though some people swear by the company — especially those who are more than a hundred years old).

• Like the restaurant industry, the travel industry relies primarily on the false prosperity of much of the middle class. I still believe, as I have for more than thirty years, that the airlines, along with railroads, are a good bet to be taken over by the government. Doesn’t it make you feel good to know that great business minds like Barney Frank and Chuck Schumer soon may be running United, American, and Delta?

• Whole Foods is already in trouble, and Wegmans (a Northeast regional chain that specializes in high-quality groceries) could follow suit if the economy continues to tank. Why? Because their prices are astronomical. Who’s going to pay $15 for a cherry pie?I realize that these stores have a cult following, but I’ve always felt that the genius of the Whole Foods business model is that they put a lot of effort into making their merchandise look delectable (to justify their prices, of course). But in my experience, the food is almost never as good when you eat it as it looks when you buy it.

• Home Depot and Lowe’s should prosper as people try to save money by building instead of buying and making their own repairs. That’s going to be tough on guys like me who think that a “screw” is just a verb associated with government actions.

• Specialty shops, the heart of our shopping-mall society, are almost sure to be in big trouble. Some malls may end up looking like ghost towns.

• Department stores, once a fixture of American consumerism, have been dying for decades, and a long downturn may put them out of their misery. Also, keep in mind that these dinosaurs are the anchors of most shopping malls.

• The ultimate discretionary business product is a corporate jet. The used-plane industry has already become a bargain-hunting bonanza for Middle Eastern sheiks and other obscenely wealthy individuals.

• If the ultimate discretionary business product is a corporate jet, Starbucks and other specialty coffeehouses sell the ultimate discretionary personal product — coffee at $3.00 to $5.00 a cup. This could be a real bloodbath for them.

I could go on and on, but you don’t need me to figure this out. Your own common sense will tell you which businesses are likely to live and which are likely to die. The general rule is that the more discretionary a company’s products are, the less likely it is to survive. But while all this deflationary living and dying is going on, never lose sight of the fact that, in the end, Bernanke & Associates are likely to have their way and print, Print, PRINT!

Astronomy professor Marshall L. McCall of York University in Toronto says that if a giant star like Betelgeuse (300 light-years from Earth) should explode into a supernova, the Earth’s atmospheric ozone layer would be burned off by the resulting ultraviolet and X-rays. Then more ultraviolet, either from the supernova or the sun, would fry us. Nice thought, huh?

Well, I view the U.S. economy in much the same way. We may have deflations along the way, but the sociological and political realities of our late-stage democracy will ultimately explode into a runaway supernova inflation. And when it does, we will all be fried.

C’mon now, mate, don’t let my words depress you. ‘Tis the season to be jolly, so let’s eat, drink, and be merry. The only place I draw the line is the part about “Don we now our gay apparel.” Other than that, no worries. To paraphrase John Maynard Keynes, in the long run, we’re all dead anyway. Of course, dying of natural causes would be a lot better than death by frying.

Hmmm … isn’t Keynes also the guy who said, with regard to public debt, “We owe it to ourselves?” Today, the Chinese must be chuckling over that one. On second thought, they may be crying.

Hold on tight. It’s going to be quite a ride.

Previous – Can Inflation and Deflation Coexist?, Part II