Greg's Note: Mish called me today talking about the "psychology of burgers." Once again, I was initially stunned, and more or less speechless. But also once again, I knew it was going to be an interesting conversation. Mish claims there has been a recent abrupt shift in consumer attitude. No, he was not talking about housing, but, rather, hamburgers. To be more precise, he talked about the restaurant business in general, although burgers were the big tell. Mish also addresses the implications of a sudden shift in consumer sentiment. Yes, the big "D" word came up once again, and when you come down to it, that was what was really on his mind. Please e-mail any responses to your medium-rare managing editor here: greg@whiskeyandgunpowder.com Whiskey & Gunpowder
August 28, 2006
by Mike Shedlock ~ "Mish"
Illinois, U.S.A. The Psychology of Deflation
TODAY'S THOUGHT of the day starts with an idea posted by Kevin Depew at Minyanville. It continues with my thoughts on the implications of the abrupt shift in consumer psychology. Those implications are massive. Read on and see why.
From Kevin:
The Psychology of Deflation
"It begins as a simple standoff. The bidders hold their bids. The sellers hold their offers. Activity lurches to a stop...until someone blinks. Of course, I'm talking about real estate, right? No. I'm talking about restaurants: ~~~~~~~~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~~~~~~~~~
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Here is the article Kevin is referring to: "Restaurants Shave Prices, Plump Menus
"Casual restaurants are no longer taking the national dining slump casually. "In the face of a meltdown in same-store sales and falling customer counts, some of the biggest names in casual dining -- from Outback Steakhouse to Applebee's to T.G.I. Friday's -- are taking serious actions to try to salvage 2006. Some are even chopping prices. "Excluding the weeks after Sept. 11, this is the toughest period the industry has faced in nearly a decade, says Richard Snead, CEO of Carlson Restaurants Worldwide, which owns Friday's. "'This is unprecedented,' concurs Paul Avery, COO of OSI Restaurant Partners (OSI), whose brands include Outback. Beginning in November, Outback plans to cut prices across its menu, he says. "The $68 billion casual-dining sector posted a 1.8% decline in same-store sales in June, the most recent month reported by Knapp-Track, which monitors the restaurant industry... "* Outback. The chain has carved $1 off the price of its popular sirloin steaks in about 40% of its markets, Avery says. "By November, it will lower prices on ribs, side salads, appetizers, and drinks, Avery says. 'We've lowered prices from time to time, but never this magnitude.' "* Applebee's. To lure price-sensitive diners, the chain has a three-course 'Southwest Fiesta' promotion (appetizer, entree, and dessert) for $9.99. "Applebee's today will announce it has hired Food Network chef Tyler Florence. He's creating four 'fresh' entrees, which he calls quality cuisine at value prices. ~~~~~~~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~~~~~~~~
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~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ "'We're adding a whole different category of food to Applebee's,' he says. "* T.G.I. Friday's. Known for appetizers, it has a new appetizer menu with limited-time discounts up to 50%, Snead says. Over the past six weeks, Friday's has introduced 23 items, the most ever for the chain, he says. "* Cheesecake Factory. For the price-conscious, the chain has created smaller, cheaper lunch entrees. The Shepherd's Pie typically sold for $13.95 now has a lunch portion for $10.95. "It also added 16 food items, eight drinks and five desserts. That's the biggest menu change in a decade, says Howard Gordon, senior vice president. "* Bennigan's. Monte Cristos, usually $7.99, go for $5.99 on Mondays. On Wednesdays, half-pound burgers are $4.99 (usually $7.99). Next month, some markets will sell all burgers at $4.99, marketing chief Clay Dover says. "* Ruby Tuesday. It recently added a Triple Prime Burger (tenderloin, sirloin and rib-eye) and will promote it with a $60 million TV budget, its biggest ever, says Rick Johnson, senior vice president." The Changing Psychology Yes the psychology is changing. In Japan. Slowly. The psychology is also changing in the U.S. Much more slowly. It started with housing, but that reality has not really set in yet. It is now shifting to restaurants. Check out the "psychology on burgers." Prices dropped from $7.99 to $4.99. Hmmm, is that a drop of $3 or 37.54%? I am wondering: Is there a bear left on oil, other than perennial oil bears (POBs)? Or did POBs go extinct long ago? Commodities Following are two charts from the August Survival Report. The CRB is flirting with a long-term trend line. A break below will not be good for oil bulls: 
Japanese Yen 
In the August Survival Report, we wrote: "People are excessively worried about a collapse in the U.S. dollar, in our view. We have our eyes on the yen. The market is likely to force Japan to hike. Refusal by the BOJ to do so may cause a currency blowup, and not the U.S. dollar, but rather the last place most people are looking, the yen... "The yen is in a precarious position. A quick look at the yen futures shows the line in the sand for a new downtrend. A break below 86 will likely lead to a new decline that could last many months. From its December low, the yen has traced out a classic A-B-C correction to a high in May, and has since fallen back to its uptrend line (in blue). While this consolidation could have a few more swings left in it (see notes in black), a break below 86 could lead to a decline far below 82." At the time we wrote that section above, the yen was comfortably in the wedge. To us, it broke in the expected direction. Judging from talk on stock market boards I run, it seems most people are dollar bears and yen bulls. Unless and until Japan starts hiking aggressively, that sentiment is more likely to be wrong than right. Discretionary Spending No one (well, just a few of us deflationists) expected to see price drops. Well, here they are, first in housing and now in restaurants. What's next? I expect we will see all kinds of drops in the prices of goods and services. Someone e-mailed me just a few days ago about a price drop at the nail salon from $10 to $9. Hmmm. Is that a 10% drop? Why yes, it is. Discretionary spending in all kinds of things is likely to go out the window. Prices will drop with falling demand, and it will not matter one iota what input costs are doing. Ask yourself if Bennigan's is paying 37.54% less for ground beef than it was last week. Did it matter? Think this through one step further. What will that mean for home prices, the values of businesses unable to pass on cost increases, the stock market, jobs, etc.? It will be interesting to see just how much we overbuilt retail stores, nail salons, Home Depots, and restaurants of all kinds. Watch what happens as the psychology shifts from consumption to saving in the U.S. and from saving to spending in Japan. What we are really talking about is a SECULAR change in "time preference." There is likely to be a lot of pain associated with that change, especially in the U.S. Bernanke's worst nightmare took another big step forward today with these price cuts. If those price cuts do not attract consumers, job cuts will follow. Regards,
Mike Shedlock ~ "Mish" How Gold's "Trashy" Sister Delivered 400% in just 34 days | 
