The Digest #193

Dynamic pricing, Greenback emissions, Berkshire Hathaway Energy, Working too hard, Ozempic's effect on the brain, Race and cardiovascular disease, Inflation's effect on insurance pricing, and more ...

Dynamic Pricing

Wendy’s made news last month when CEO Kirk Tanner mentioned that the company would begin implementing “dynamic pricing” in 2025, enabled by investing $20 million in digital menu boards that incorporate “AI” capabilities.

“We expect our digital menu boards will drive immediate benefits to order accuracy, improve crew experience and sales growth from upselling and consistent merchandising execution. Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day part offerings along with AI-enabled menu changes and suggestive selling.”

The comment was made during a quarterly earnings call for the investor community, a group likely to appreciate the incorporation of “AI” to optimize pricing. In the real world, inflation weary consumers are less enthusiastic about the idea of seeing a combo meal suddenly jump from $7.99 to $10.99 just as they pull up to a drive thru, even if this theoretically reduces demand and speeds up service.

Restaurants have implemented “dynamic pricing” for decades without the use of “AI” or anything digital. “Early bird specials” and happy hours are examples of dynamic pricing in action. So are lunch specials at restaurants that typically do most of their business in the evening. The key point is that this sort of dynamic pricing is implemented by discounting rather than marking prices up at peak hours.

Psychology cannot be ignored. If a restaurant implements dynamic pricing by offering discounts at non-peak hours, consumers are likely to view this as a benefit without grumbling about paying regular prices at peak hours. Dynamic pricing, implemented by ever-changing digital menu boards driven by “AI,” might make sense in an academic paper but it seems dystopian, especially in inflationary times.

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Berkshire Hathaway Energy

I am working on an article about PacifiCorp which will be published later this week.

PacifiCorp is a subsidiary of Berkshire Hathaway Energy (BHE) which has been the target of numerous wildfire-related lawsuits in recent years. In December, I wrote an article about a recent presentation made by BHE’s management. I have removed the paywall for that article so it is now free for everyone to read:

Berkshire Hathaway Energy

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Greenback Emissions

On August 18, 2009, Warren Buffett wrote an op-ed for the New York Times in which he warned about “mushrooming” debt. Politics was far less toxic fifteen years ago, but Mr. Buffett still expressed skepticism that tough political choices would be made when money printing was a far easier “solution”:

“Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: ‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.’”

I commented on the op-ed at the time it was published, concluding that expecting responsible fiscal policy in Washington D.C. would be like an adult believing in Santa Claus or the Tooth Fairy. The country’s fiscal situation has obviously deteriorated much further in recent years. The following chart tells the story very well:

Source: St. Louis Fed

Inflation, as measured by the consumer price index, continues to come in far higher than the Fed’s conjured “target” of 2%, with prices rising by 3.2% over the past year according to the February inflation report.¹ “Core” inflation rose by 3.8%, although economists and politicians eager for rate cuts focus on “super-core” inflation which excludes housing-related costs. According to the BLS CPI calculator, it takes $122.77 to purchase a basket of goods that cost $100 five years ago.²

Washington is dysfunctional and there is no reason to suppose that this will change anytime soon. The Federal Reserve seems determined to cut rates by mid-year even if inflation remains far above its target of 2%. Money illusion can be a useful, albeit unethical, political tool when inflation has been low for a period of time, but Americans weary from years of high inflation are not likely to be fooled.

Inflation at the Fed’s target of 2% per annum will destroy half of the value of the dollar over thirty-five years. This halving will occur in just twenty-four years if 3% ends up becoming the new de-facto target. Compounding makes the outcome far worse at even higher rates of inflation. The Fed can claim that it is apolitical, but rate cuts this year will send an important signal that should not be ignored.

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Articles

CEO of Brooks Running will step down by Gabrielle Fonrogue, March 12, 2024. Brooks Running is a subsidiary of Berkshire Hathaway. “Weber, who brought Brooks back from the brink of bankruptcy, steered it through four different owners and built it into a $1 billion-plus brand, told CNBC he’s sad to step down and leave what he called the ‘best job in the world.’ But after he recovered from cancer several years ago, he said he is looking to ‘dial back’ and find more balance in his life.” (CNBC)

Behind the Brand with Andrew Wilkinson by Bryan Elliott, March 1, 2024. “While Wilkinson credits his success partially to luck and the iPhone launch, he also points to new technology like the Vision Pro opening up new markets in VR & AR, and the growing impact of AI. Yet, his own story, punctuated by a memorable dinner with legendary investor and Warren Buffett's business partner, Charlie Munger, illustrates that adaptability and a fresh perspective can blaze trails to success unimaginable to those before us.” (Inc. Magazine)

The Ultimate Edge in Investing by Ian Cassel, March 7, 2024. 🎯 “My best advice to young people is work hard. Be positive. Be intense. A positive attitude and extreme intensity produces a gravitational force that pulls great people into your orbit. Winners want to be around winners. They want to be around that positive energy.” (MicroCapClub)

The Indiscipline Of Overwork by Ryan Holiday, March 5, 2024. Work hard but always know your limits. “I’d worn myself out so much that I got mono, which took me two months to recover from. Talk about the falsest of economies–skipping a day or two of rest here and there cost me months. I wore my immune system down. I worked too hard for too long, and it ended up being a problem for me. I couldn’t write. I couldn’t think. My mind was all messed up, and it was really hard.” (RyanHoliday.net)

The Science Behind Ozempic Was Wrong by Sarah Zhang, March 5, 2024. This is an interesting article. There is so much we do not know about the long-term effects of consuming these drugs. “The drugs work as intended: as powerful modulators of appetite. But at the same time that they have become massive successes, the original science that underpinned their development has fallen apart. The fact that they worked was ‘serendipity,’ Randy Seeley, an obesity researcher at the University of Michigan, told me.” (The Atlantic)

Oppenheimer Couldn’t Run a Hamburger Stand. How Did He Run a Secret Lab? by Ben Cohen, March 8, 2024. Perhaps only a scientist can successfully lead other scientists. “Many of his brainy recruits didn’t love the idea of uprooting their lives and moving to a military post in the desert for who knows how long. But he could be as patient as he was relentless when he really wanted someone, pursuing some for months, leaning on mutual friends to persuade others and even researching the local medical facilities.” (WSJ)

• Book Review of American Prometheus, October 24, 2023. (The Rational Walk)

Targeting Taxes by Adam Grossman, March 10, 2024. Tax planning for retirees can be complicated, particularly because minimizing taxes early in retirement can have the effect of landing in a higher tax bracket later in retirement. This article has tips on how to make strategic tax planning decisions with retirement accounts to minimize taxes over many years rather than taking a myopic short-term view. (Humble Dollar)

Removing race as a risk factor for cardiovascular disease? by Peter Attia, March 9, 2024. “I certainly look forward to an era in which we have a perfect, thorough understanding of both social variables and genetic variants as they relate to disease risk and in which everyone has equal access to perfectly accurate genetic risk assessments. But in the absence of the ‘perfect,’ we can’t afford to thumb our noses at ‘the best we have right now,’ regardless of what’s politically in vogue at the moment. Race is far from perfect, but it is currently our best proxy for a complex set of genetic variables – and yes, socioeconomic and cultural variables – that impact disease risk and treatment.” (Peter Attia MD)

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Podcasts

Cornelius Vanderbilt (Tycoon’s War), March 11, 2024. 1 hour, 11 minutes. Show Notes. “Vanderbilt's approach to business was often marked by a sly concealment of his intentions, keeping information close while simultaneously gathering intelligence on competitors. This strategic obfuscation allowed him to make moves that others often couldn't predict or comprehend until it was too late” (Founders Podcast)

Outsider CEOs: John Malone and TCI, March 12, 2024. 34 minutes. Video. Geoff Gannon and Andrew Kuhn discuss the chapter covering John Malone’s career in The Outsiders by William Thorndike. (Focused Compounding)

D.R. Horton: Building a New Model, March 13, 2024. 1 hour, 4 minutes. Transcript. “Since the shortage is 3 million or 4 million housing units in the United States and the normal demand is 1.5 million, if you could get to 1.7 million [housing starts per year], you'll be reducing the shortage by 200,000 a year, it would take 20 years to eliminate the shortage. So this is a very different and optimistic scenario for the homebuilders. They really have a long runway ahead of them, where demand should exceed supply.” (Business Breakdowns)

Inflationary Insurance, March 8, 2024. 33 minutes. Jim Grant, Steve Virgili, and Steve Shapiro discuss the effects of inflation on insurance pricing. (Grant’s Current Yield)

The Jefferson-Adams Correspondence, March 11, 2024. 1 hour. Between 1812 and 1826, Thomas Jefferson and John Adams exchanged 158 letters. Through this correspondence, they repaired their friendship and wrote about a wide variety of topics. Jefferson and Adams died on the same day: July 4, 1826. (Listening to America)

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The Building of the Trojan Horse

From The National Gallery:

The Building of the Trojan Horse illustrates an episode from one of the most famous stories in Greek mythology – that of the Trojan War and fall of Troy. Soldiers in armour prepare for battle while workmen build the giant wooden horse in which Greek soldiers will hide, allowing them to secretly enter the city of Troy. Most labour tirelessly with hammers and chisels but one sits on a plank and raises a brush to paint the rump. The horse’s glossy coat, powerful pose and flowing mane give the impression that it is alive and moving.

Giovanni Domenico Tiepolo, 1760 (public domain)

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1. The Fed does NOT have a mandate to destroy 2% of the value of the dollar annually. The text of the 1978 Humphrey-Hawkins Act includes the following text indicating a goal of achieving zero percent inflation (stable prices) by 1988, provided that this could be done consistent with the reduction of unemployment: “Upon achievement of the 3 per centum goal specified in subsection (b) (2), each succeeding Economic Report shall have the goal of achieving by 1988 a rate of inflation of zero per centum: Provided, That policies and programs for reducing the rate of inflation shall be designed so as not to impede achievement of the goals and timetables specified in clause (1) of this subsection for the reduction of unemployment.” [Emphasis added]. Also see: https://rationalwalk.com/death-taxes-and-inflation/

2. The CPI is an economic model, not an actual representation of the cost of living. The CPI’s methodology is constantly altered (most recently for the cost of health insurance and used car prices), and many elements simply do not pass the smell test. For example, the February CPI report claims that the cost of “food away from home” has increased by 4.5% over the past year. This would imply that a restaurant entree that cost $15 a year ago now costs $15.68. The “food at home” category has increased by just 1% over the past year. With many government spending programs and tax brackets indexed to the CPI, it is surprising that the financial media does not spend more time examining how the index is constructed.