Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. How anti-competitive, anti-small business, and anti-consumer can Apple get?
So this was an interesting development in digital advertising land:
Apple is now offering users the option to have personalized ads served to them…but only from Apple. All while running daily TV ads with the tagline “privacy: that’s iPhone” or some other hypocritical messaging. The audacity of this move, right after killing targetted advertising for third parties like Facebook (severely hurting marketing effectiveness for small businesses in the process) and with regulators around the world breathing down its neck, is astounding. And let’s not forget that Apple takes in between $15 billion and $20 billion a year from Google so it can be the default search engine on iOS devices and…track and serve up targetted ads to users.
Epic Games founder Tim Sweeney (who is suing Apple) summed it up nicely:
I have no doubt this will be financially beneficial for Apple in the short run, but I believe it makes the business more fragile in the long run. Alienating your constituents is rarely a smart move.
At some point, I think the chickens will have to come home to roost. This is not how you play a non-zero-sum game and create healthy relationships for all your stakeholders.
2. Managing a restaurant during an inflationary period.
This tweet got some intriguing responses:
The answers seemed to form a consensus “yes” with some different theories of why:
Yes, same with a lot of restaurants.
I think the quality of a all “fast food” has gone down Supply chains and hiring challenges seem like probable culprits
Since the E. coli breakout they are prepping less on-premise locally which means food’s less fresh
Every >1 box restaurant's quality has gone down over past two years. Not by insignificant amounts.
Big time. They also like to periodically make certain locations go online only for the day in order to pump the “digital sales” in their earnings.
Even if all of these theories are not precisely true, I fear Chipotle is ruining its brand value with customers. The chain (at least in my mind) claims it is a healthy, fresh alternative at a reasonable price. If it is making less food in stores, cutting corners in preparation, and inconveniencing consumers while also raising prices aggressively to combat inflation, that is a recipe for a terrible customer experience.
The right move for restaurants right now is to pay up for quality employees, maintain preparation standards, and raise prices at a slower pace than inflation. Portillo’s is a good example here (podcast link). This will no doubt crush profit margins in the short run, but if you have the balance sheet to weather the storm, you’ll come out with customers that still love your product and a healthier business in the long run.
As an investor, I think the answer is to just avoid any stocks (except maybe grocery stores) that sell food altogether. Or at least make sure you are getting a proper discount to account for these current uncertainties. 26x trailing EBITDA (source: Koyfin) for Chiptole doesn’t seem like a proper discount to me.
3. People earning $250k a year living paycheck to paycheck.
LendingClub and PYMNTS.com came out with some data that shocked me this week:
Close to two-thirds of the U.S. population — approximately 157 million adults — currently live paycheck to paycheck, making it the main financial lifestyle in the U.S. Though lower incomes generally correlate with financial distress, 36% of consumers who annually earn $250,000 or more live paycheck to paycheck. Our data finds that, in April 2022, 36% of consumers earning $100,000 to $150,000, 31% earning $150,000 to $200,000, 26% earning $200,000 to $250,000 and 24% earning more than $250,000 were living paycheck to paycheck without issues paying their bills. Between 10% and 12% of consumers in these higher-income brackets lived paycheck to paycheck with issues paying their bills in April 2022.
The most astounding estimate here is that 36% of people who earn more than $250k a year are not building up savings. What are these people spending money on? Yes, I understand if you are a single parent, have a young child, or have large medical bills. But that does not account for 36% of the high-earning population.
According to Upwardli, the average monthly expenses for a single person in the USA are $3,189. Let’s be conservative and multiple that by two for the cost of living in expensive cities, where the majority of these high earnings are likely living. That comes out to $6,378 a month, or $76,536 a year. Even if $100k of that $250k salary goes out to taxes, that still leaves around $75k in cushion a year for people to spend money on stuff. And yet…36% are living paycheck to paycheck?
Maybe the data is wrong, but it amazes me how much pull consumerism has in the United States. But the funny (or scary) thing is, if this stopped, the stock market would probably get cut in half. What a strange economy we live in.
“When you're born you get a ticket to the freak show. When you're born in America, you get a front-row seat.” - George Carlin
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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Catch up on Our Shows From Last Week
3 Good Reads
Can buy now, pay later survive the cost of living crisis? - The Financial Times
Amy Gavin, senior strategist at fintech consultancy 11: FS, says that in general buy now, pay later providers are reporting much higher bad debts than credit cards. She cites data from payments intelligence company Fraugster estimating that for every $1bn of transaction volume, the buy now, pay later providers have to write down an average of $19.2mn in bad debt, compared with $270,000 for credit card companies.
Who Killed Nuclear Energy? - American Affairs Journal
But when nuclear power moved into the civilian world, it merged with an already elite-run institution: the investor-owned utility (IOU), which enjoyed regulated monopoly status. Samuel Insull won this status for his industry in the early twentieth century. Negotiating the Scylla and Charybdis of chaotic competition and Chicago aldermen, Insull saw a huge opportunity in regulation. The wildness of competition would disappear while neutering the threat of municipalization.
In part, Insull won the day because his desires matched the moment. Recognizing utilities as regulated monopolies jibed with Progressive Era thinking that saw big business not as an enemy, but a force to be contained and harnessed by the government in service of the people. Importantly, this also meant consolidating power into the hands of utility elites and their regulators, a problem that would mushroom down the line.
Clouded Judgement 6/3/22 - Jamin Ball
Hot topic of the week is consumption pricing vs a more classic subscription model, and which is more resilient in a downturn / recession. This topic was debated even further after Snowflake reported earnings and called out lower than expected usage in a couple digital consumer businesses. Consumption models have recently become more commonplace, and have never been tested in a downturn. The main knock against them is they're less predictable, and more prone to volatility (either up or down).
1 Good Listen
Michael Green: The Active Impact of Passive Investing - Flirting With Models
In this episode I speak with Michael Green, Chief Strategist as Simplify ETFs. In a first for the Flirting with Models podcast, we recorded this episode live at the ETF Exchange in Miami in early April 2022.
Given Michael’s eclectic background, our conversation is wide ranging. He has traded everything from small-cap value to commodities to housing derivatives to long volatility, and so we try to find the common elements and themes across his career. One that sticks out is his quote that “it’s not enough to do the analysis: there needs to be a trade there as well.”
Michael has become well known for his view that passive investing may now represent a systemic risk to markets. We discuss the origins for this view, how it has evolved, counter-points, and the trade that pairs with the analysis.
Finally, we discuss the Simplify High Yield PLUS Credit Hedge ETF, the first strategy from Simplify that really has Michael’s fingerprints all over it.