Spices, Inflation, and Wall Street’s Sophisticated Thievery

Jeff’s Random Words

One of the things I like about this newsletter is that I can write about whatever random topic comes to mind. As we approach earnings season, I’ve been thinking about some trends we might see. These are unsophisticated thoughts, mostly questions I have. But I’ll put them out there and maybe you readers who know more than I do can chime in using the commenting feature below. Or you can use it to harass Jason. Either way, it’s a win for me.

One of the surprises in the first half of 2023 is the strength of the stock market and the fact we’ve not ended up in the recession many predicted (this seems like the place to mention that my reckless prediction for 2023 has been correct so far). What I noticed during the previous two earnings seasons was that many businesses talked about “pricing actions”, which is business-speak for “we took the higher prices we’re experiencing and passed them along to our customers”. What I’ve been wondering is how long that can last.

Take McCormick (NYSE:MKC) for example. They reported their Q2 results a few weeks ago. Removing the impact of foreign currency exchange, the company grew its revenue 10% year over year. However, that 10% growth was due to an 11% increase “from pricing actions” (and a 1% negative impact due to volume and sales mix). Put another way, their revenue was entirely from raising prices on its products.

McCormick sells things like salt, pepper, spices, hot sauces, etc. I have to be honest, I don’t pay close attention to the cost of spices when I buy them. But at some point you would think McCormick can no longer raise prices. Pricing action has its limits for all businesses. And there’s my question. When will businesses no longer be able to pass higher prices along to their customers? What if the second half of this year we start to see margins take a hit as pricing action reaches its limit?

I don’t know the answer to that question, but it is something I’ll be looking for when companies start to report. It’s also a component of a larger question I have. What if the surprising results we saw from companies in the first half of the year was just a 6 month delay of what many thought we would see earlier in 2023. If we get an earnings season of weakening results from companies, maybe the recession predictors were just wrong on the timing.

I hope that’s not the case, it’s been nice to see some green in my portfolio. But all of 2023 has not felt right, which is a sophisticated market indicator, I know. I worry the other shoe is about to drop, and we could start to see if I’m right or wrong in the next few weeks.

Jeff

Jason’s Random Words

First off, Jeff is unsophisticated. He’s not being modest. I know this might be surprising, but I’m not saying that to insult Jeff.

Well. I’m not only saying it to insult Jeff.

I actually believe more and more that we as investors mistake sophistication for expertise or skill. The financial services industry is, if nothing else, incredibly good at sophistication, rarely to the benefit of retail. It’s false expertise that only serves to separate you from your money.

Back to Jeff. He makes some really interesting points and arguments, and they are cogent, if unsophisticated. He’s also not — as most of us should not — making big portfolio or investing strategy changes based on his concerns and observations.

And therein lies the trap of sophisticated models trying to predict complex things. They’re no more useful or precise than Jeff’s simple concerns about pricing power. But they’re FAR more compelling, and if they happen to align with your biases or drivers of your fear and greed, they can lead you down the path of financial harm.

Remember your goals, and use the right tools to reach them. That occasionally means looking foolish in the short term. That’s okay. We don’t own stocks for short term gains. Cash and being a constant contributor are the tools to deal with volatility and short term needs. Remember: pundits don’t predict because they know. They predict because they were asked.

Jason