In the past two Federal Open Market Committee meetings, in stark contrast to previous Fed policy setting confabs, there have been three dissenters. Probably the most vocal and fiercest among them has been Richard W. Fisher, President of the Federal Reserve Bank of Dallas. Fisher’s inflation fighting credentials are extremely well known; he believes the mission of a central banker is, above all, to control inflation.
So we have to believe that this is the reason he dissented from recent Fed moves, which included Operation Twist and the Fed’s promise to keep short-term interest rates at or near zero until 2013.
With this in mind, we took note of recent comments from Fisher on October 6th, in which he said, “I’m somewhat sympathetic [to the Occupy Wall Street demonstrators].” He went on to say, “We have too many people out of work,” and the part that struck us the most: “We have very uneven distribution of income.”
A central banker talking about uneven income distribution as being a worrisome sign for the economy is almost like a pig recommending that you eat pork. The reason we say that is not so much that we believe that whatever the distribution of income may be a consequence of capitalism itself. Rather, a brief look at history strongly suggests that the only condition, at least in modern history, that has led to a more even distribution of income had been inflation – especially high inflation. In the past 40-plus years, it was only during the inflationary 1970s that income distribution disparities narrowed.
Admittedly, it would be a long stretch to say that Fisher is all of a sudden arguing in favor of inflation; we doubt it. But it is possible that his remarks reflect a recognition that the economy is balanced on a razor’s edge, with one side representing some form of Armageddon (in the form of depression, with very dire political and societal consequences not out of question), and the other side being inflation – with a side effect of a more equitable distribution of income.
History supports the notion that nations can go through periods of high inflation and live to tell the tale. The U.S. alone, in the past 150 years, has experienced three bouts of 20 percent plus inflation, not even counting the 1970s. We can also mention Japan, which has gone through its own period of high, 40 percent inflation. In fact, every major war has led to massive inflation.
If we undertake the spending required for the development of a renewable energy-based economy – as China is doing – it will require a wartime-like effort, and high inflation would seem inevitable.
Fisher’s comment taken by itself would be less important if we couldn’t relate it to remarks made recently by Charles Evans, head of the Chicago Fed, who said much more explicitly that the Fed should give up inflation targeting for a while and focus on unemployment.
We think slowly but surely the powers that be are recognizing that, at least for a short period of time, inflation and even relatively high inflation would not be a death-knell for the economy.
To us that’s a potential point of inflection. And, once inflation does start to rise, the more than decade-long bull market in gold will look like a mere appetizer compared to what’s to come. But we promise you, we’re not going to spend time talking about gold for a least a little while longer. Our position in that area certainly hasn’t changed.
So let’s talk about of the investment consequences of the kind of income distribution we have today – income distribution, again, that’s so disparate that it attracts the attention of the most conservative of monetary economists.
The upper 10 percent of the economy carries almost all the weight, whereas the bottom 90 percent has an average household income of around $32,000 a year. That pre-tax number, by the way, is not enough to pay for most private schools in New York City (not colleges, but high schools); it also isn’t enough to pay for a semester of a private college by a mile.
Investment-wise, how do you take advantage of this extraordinary spread in income? One way, at least in the retail patch, is to follow a barbell approach.
As the rich continue to get richer, luxury items should continue to do very well. Though it’s hardly the largest of the luxury retailers, Tiffany & Co. (TIF) certainly comes to mind. If there’s any relatively small company that fits the definition of a franchise, it has to be Tiffany. This is reflected by its mention in artifacts of popular culture from Breakfast at Tiffany’s to the lyrics of “Diamonds Are a Girl’s Best Friend,” immortalized by Carol Channing and Marilyn Monroe, respectively, in the Broadway and film versions of Gentlemen Prefer Blondes. Clearly, when one thinks of luxury, the name Tiffany comes to mind. Financially speaking, the company’s fundamentals are strong, and it being in the business of gold and silver does not hurt either.
Though its history may not be as culturally celebrated or as long, Coach (COH) in a relatively short period of time has also established a world-wide luxury franchise.
We’ll stick with those two as representing the high end of the income distribution barbell. At the other end would be companies serving the lower income bracket, and as more individuals fall into this unfortunate group, the companies with the best (i.e., lowest) pricing have the best chances of showing gains.
Our favorites here would be Wal-Mart Stores (WMT), which is the clear leader (though as we pointed out recently, Amazon (AMZN) is coming up fast), plus two small ones that stand out in our mind: The TJX Companies (TJX), which owns T.J. Maxx, Marshalls and other brands, and Dollar Tree Inc. (DLTR), a chain of U.S. discount variety stores where items sell for $1 or less.
In conclusion, it’s no coincidence that these sets of stocks at both the high and low ends continue to outperform a range-bound stock market. Until Fisher and the other Fed chiefs decide in earnest to opt for inflation, we expect these trends in the retail sector to continue and the corresponding barbell approach to retail investments to be your best bet.
Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.