I’ve never been inside a Red Lobster. But I know people love eating there.
The first time I heard about it was in the early 1990s. A cab driver told me there was one of these legendary red seafood joints in Rocky Mount, NC, thirty miles up the road.
I wasn’t in his cab at the time. I was selling him a sofa. He wanted to finance the purchase, which meant asking some personal questions about his income.
He told me he needed to make payments at the beginning of the month. That’s when he made all his money. The rest of the month was lean.
I stopped to ask why the first week mattered so much. Our town had virtually nothing to offer, no events, no tourists, and at the time, a massive unemployment rate. The tobacco industry and a large regional bank headquartered there both abandoned the area at the same time. It never recovered.
The first of the month was heaven for this cab driver because of Red Lobster. A huge portion of residents received welfare…by check in those days. They cashed the check, hired a cab, and set off for Red Lobster, thirty minutes away. He’d run the meter while they ate, then drive them back. He told me riders confessed the trip burned up the whole welfare check in one night.
The Fallacy of Endless Shrimp
That was the first time I heard about Red Lobster. The second was from Glenn, who paid subscribers know is the man behind my most recent personal investment.
At the end of the last issue, I explained what I’m doing with Glenn, and what I think about him. That’s when I remembered him telling me about his humble beginnings…waiting tables at Red Lobster.
I found his description of life as a server there fascinating. The best part was the details of how the “endless shrimp” promotion worked.
The restaurant knows it’s too good to be true. Shrimp is a luxury cuisine, especially in the American south. Letting people gorge themselves unchecked would bankrupt even the best operation.
Glenn said management understood this… at least when he was there, in the early 2000s. They’d have a staff meeting before the doors opened. The manger gave specific orders. The secret to staying solvent during endless shrimp was the restaurant’s iconic cheese biscuits.
Difficult to resist, and potentially toxic to the human gastrointestinal system, these biscuits stop even the biggest eaters dead in their tracks. While I’ve never tried one myself, I hear it’s hard to stop eating them.
This is how Glenn described the nightly staff meeting during the endless shrimp promotion. The manager would say something like:
“Listen up people…keep those biscuits flowing. I want to see a full basket on every table. Give them a fresh basket between trips to the shrimp buffet. Slow ‘em down with biscuits so we don’t run out of shrimp.
And while Glenn’s account of the staff meeting might differ from the line in the corporate handbook, the point remains. Advertise shrimp, deliver biscuits.
Selling an Idea
Bill Darden opened the first Red Lobster in Lakeland, FL in 1968. Two years later he sold the franchise to General Mills (GIS). He stuck around to run the restaurant division. It later became Darden Restaurants Inc (DRI) worth more than $20 billion today.
Darden ran Red Lobster like a well-oiled machine. It cranked out profit for decades. Likely due to the focus on advertising expensive seafood, while flooding tables with endless cheese biscuits, at a much lower cost.
The chain invented its iconic biscuit in 1996. The official name is “Cheddar Bay Biscuits.” It’s the type of innovation only possible with a focused entrepreneur at the helm.
Biscuits are substantially cheaper than shrimp. Creating this hard to resist filler food saved the company a fortune by distracting diners between trips to the seafood buffet.
Then in 2014 Darden sold the brand to a private equity firm for $2.1 billion. It loaded up the more than 700 restaurants with a fresh pile of debt. Without a seasoned operator, it was just another average place to eat.
Private equity can be a soulless owner. Its key innovative skill is borrowing against the value of someone else’s creation. It also knows how to make things cheaper.
It reminds me of how the Fed treats the U.S. money system. It’s no coincidence that the current chair of the Fed is a career private equity banker. He talks about shrimp and delivers biscuits.
The private equity way leads to hallowed out mediocrity. Two years after buying Bill Darden’s seafood chain, the indebted owner found a new buyer.
The new sales pitch was, vertical integration. The seller, Golden Gate Partners, convinced seafood supplier Thai Union Group (TU:TB) to buy 25% of the firm for $575 million or ~10% more than the price it paid just two years prior.
In 2020, TU bought the remaining 75%.
Vertical Integration Didn’t Work
Thai Union, maker of Chicken of the Sea canned tuna, underestimated the restaurant business. They should have hired Glenn to run the place. He knows how to keep costs under control.
Earlier this month the Red Lobster owner announced a massive quarterly loss. It went further in announcing a sale of the world’s largest seafood restaurant chain.
Red Lobster lost control of the customer experience. The promise of endless shrimp filled the parking lot. But private equity and corporate owners couldn’t run the business. Eventually the customer experience becomes so degraded, it loses the special value that fueled growth from one store in Lakeland, FL to more than 700.
Bamboozled By Facts
A good story is more powerful than facts…until it’s not.
Stories make people feel comfortable. They make a big idea believable. Once people have conviction, they’ll defend the idea. When fully bought in, trying to talk them out of it is useless.
Worse yet, they’ll hang on to belief even when the facts deteriorate right in front of them. They can’t see it. They’ll stick around until the bitter end. At some point they give up on the idea and find something new to believe in.
It’s human nature. And nobody knows it better than the central planners running the U.S. financial system.
They realize if you don’t believe in the system, the whole thing collapses. If you don’t sign a loan for a home, car, or credit card, you’ll stop working. You won’t need new money to repay the loan. That means you’ll pay a lot less tax. If you get too carried away, you’ll stop playing the game entirely. And that can’t happen.
Instead, the Fed has to keep the system stable. You won’t be willing to sacrifice time and effort for a system you don’t believe in. You’d never go to a pricy restaurant for endless biscuits…
While the Fed needs to keep you believing, the same goes for foreign countries who need dollars. Faith in the system is more important than the system. These days, faith is the system.
And the Fed pushed faith to the brink in 2020. Everyone knew it. To keep the system growing it injected ~$2.2 trillion of freshly minted money.
That injection caused prices of everything from lumber to luxury watches to skyrocket. Overnight, people turned into rampant speculators. And that money needs to come out, or the system fails. It’s essential that people need dollars. It creates artificial demand. That keeps dollars scarce.
But not too scarce, or people begin to hoard dollars. Managing a centrally controlled economic system is a tough task. If this happened in a free market, people would have run for cover a long time ago.
For instance, almost everyone agrees the price of groceries is way up. This chart shows the cost of food cooked at home going back to 2000. As you can see, it’s up 85% during that time. More importantly, it’s up 26% since just before the flu panic.
Meanwhile, the Fed says it’s at war with inflation. It aims to protect you from this horrible threat. And good news, it’s winning the war. Here’s proof.
Like a thief who steals your wallet then helps you find it, the Fed created the inflation, and now fights against it. That’s the story it tells at least.
And you believe it. You accept higher prices, while the Fed celebrates victory over inflation.
Inflation is good for a system loaded with debt. But not too much inflation. Too much too fast breaks the system. Slow, steady, consistent inflation is what the Fed wants. And it needs to keep you distracted while it gets the job done.
The Newest Narrative
Getting the job done means removing the ~$2.2 trillion injected into the system without breaking anything in the process.
So far, so good. This chart of the repo market is the best indicator I know of for tracking Fed progress.
During the injection phase the it ran a program called Quantitative Easing. This meant using freshly printed cash to buy treasury bonds and mortgage-backed securities. That kept government coffers full, and home prices low.
To remove that money from the system it used a program called Quantitative Tightening. This happens as those treasury bonds and mortgage-backed securities mature. The Fed bought those bonds with freshly printed cash. On maturity it retires the money repaid when the bonds mature. The theory is, it’s a temporary injection.
Those bonds issued during the flu panic largely hung out in the reverse repo facility. That’s an overnight lending pool used by banks and large financial institutions. Lenders and borrowers agree to swap cash for bonds overnight at a rate of interest controlled by the Fed.
As you can see, the ~$2.2 trillion of injected money piled up in 2021-2022. As the Fed began its withdrawal process, that money came out of the repo facility in an orderly fashion.
This pace looks set to continue until the repo pool is down to near zero. Even close to zero would imply a more normal level.
And it’s almost there. The Fed knows it can’t juice the economy with this slush still lingering around the financial system. That means it needs to keep you distracted just a little longer.
This charade ends soon. The era of warped interest rates goes down as the most obtuse period of capitalist history. If you can still call it capitalism.
And when it ends, we’ll be ready.
Adding to Our Winners
Our portfolio has a split personality. As much as everyone talks about tech mania heading off a cliff, they rarely mention the sector that gave us a ~56% gain in three months.
Think about that for a minute… annualize it. It’s massive.
I’ll be the first to tell you I had no idea it would be that big. In fact, as much as I liked the sector, and felt it was a must-own for the Trustee Portfolio, I never thought it would run like that.
At the time, I had six names picked out. I thought we’d add three of them over the following months. Further, I thought we’d do that on pullbacks. It didn’t work that way…
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