Stagflation Is Cutting Into My Beer Budget

Higher costs have hit beer and gambling, and the media just whistle past.
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The joys of modeling.

Wall Street firms can apparently use any form of model they wish to price securities. Economists go with models that run from the arcane to the obscure, provided their results are indecipherable. The business media gets to use rotating models, writing different predictions depending on how that day's sun is shining (or not) and the alignment of random moons.

But The Business Press Maven gets all his predictive powers by looking at the economy one way: through the eyes of the small pleasures in life. And readers, there is trouble in simpletown: The Business Press Maven's Small Pleasure Index is officially illin'. After two years of bullishness, I have to declare us as close to a recession as possible.

First the bad economic conditions -- signs of stagflation -- appeared in chocolate and pizza, and nobody said anything but me. Now it's beer and gambling.

I ask you: Is nothing sacred?

Two weeks ago, I pointed to

certain signs of stagflation -- that most toxic mix of slow growth and inflation -- in the earnings reports of

Hershey

(HSY) - Get Report

and

Domino's

(DPZ) - Get Report

.

Worse: virtually no one had picked up on it publicly. No reporter made this link or declared a trend, though God knows the business media normally declare trends on wings and prayers.

Here's the thing. Bad conditions are bad. But bad conditions that are not yet recognized publicly (read: priced into securities) are worse. Well, the business media have started to follow my lead in making the link ... but now there is more.

Beer volumes have slowed even as beer industry costs -- for everything from hops to freight -- appear to be in the hold of the inflationary demon. Look at this from the recent

Boston Beer

(SAM) - Get Report

(maker of Sam Adams)

report and you'll see how enveloping the inflationary pressures are and how they box in companies:

Looking forward to 2008, we are facing significant cost pressures due to barley and hop markets tightening, which could impact cost of goods in 2008. We are attempting to mitigate these increases, but given our craft brewing roots and commitment to the highest quality traditional ingredients, we are likely to experience higher cost increases than the larger brewers with whom we compete. This, coupled with continued increases in glass, freight and utilities costs, and the costs of executing the Lehigh Valley, Pennsylvania brewery acquisition, will likely create some further gross margin erosion in 2008 from the underlying levels of this year. Fortunately, we are experiencing a healthy price environment and have set targets for 2008 for 5% net price improvement to partially cover these cost increases and to allow for continued brand investments. Of course, there is no guarantee that we will be able to achieve these increases.

The only positive, The Business Press Maven must note at this juncture, is that you will probably be less in need to drink your gambling losses away, because it appears Americans have finally slowed down their gambling, even as casinos are still being built with debt.

If Tropicana, for example, were a publicly traded company, it would be an interesting short candidate, and The Business Press Maven is normally someone who would never dare short an addictive product. But take a look at the

EBITD line itemized by casino -- the declines don't look good. .

Although there is a bit of humor to be mined in examining the economy through the eyes of Belgian chocolate and barley, I do not mean to be trite.

Trouble in the economics of small pleasures are emblematic of larger troubles and typically lead to a self-fulfilling cycle of bad economic trouble. Forget the corrosive effects of your weekly gassing of the car. If you can't enjoy a six-pack or flank of chocolate, what sort of purchase can you enjoy?

Moreover, it is easy to be consistently bearish, and I've always held particular disdain for columnists (like Alan Abelson of

Barron's

) who are famous for predicting 35 of the past three recessions. Writing like Groucho Marx -- who once sang: "Whatever it is, I'm against it" -- leads readers to miss out on all the good times on which fortunes are built.

So though I have been quite bullish and don't take such bearish declarations lightly, the Business Press Maven Small Pleasure Index is pointing toward trouble.

Can we avoid it?

I doubt it, but if do we see recovery in the nick of time, we will see evidence of it in you and I being able to scarf down a slice of pizza, crack open a beer or shoot some craps without the fear of inflation, debt and worse lurking behind every sip, nibble and throw of the dice.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

A journalist with a background on Wall Street, Marek Fuchs has written the County Lines column for The New York Times for the past five years. He also contributes regular breaking news and feature stories to many of the paper's other sections, including Metro, National and Sports. Fuchs was the editor-in-chief of Fertilemind.net, a financial Web site twice named "Best of the Web" by Forbes Magazine. He was also a stockbroker with Shearson Lehman Brothers in Manhattan and a money manager. He is currently writing a chapter for a book coming out in early 2007 on a really embarrassing subject. He lives in a loud house with three children. Fuchs appreciates your feedback;

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