By Justin Spittler, editor, Casey Daily Dispatch
The Cheesecake Factory took a beating last week.
On Monday, the restaurant’s stock fell 3.5%. On Tuesday, it sunk another 2.2%. Then, the company shared its second-quarter results after Tuesday’s closing.
This caused the stock to plunge 13% on Wednesday—its worst day since December 1, 2008.
By the end of Friday, the stock was down 16% for the week.
The sell-off was so bad, it wiped out four months’ worth of gains. See for yourself.
That’s the last thing you want to see if you own The Cheesecake Factory’s stock. And there’s likely more pain to come.
Of course, you may not care about this if you aren’t a shareholder. But trust me, you’ll still want to read today’s Dispatch closely. This news still affects you…
• That’s because it’s important to understand what triggered last week’s sell-off…
The Cheesecake Factory is coming off a rough quarter. On Tuesday, the company reported a 26% drop in net income for the second quarter.
This happened, in part, because the company’s labor costs are rising.
All told, its labor costs were 1.9% higher last quarter than they were a year ago. And that’s largely because its hourly wage costs are rising at 6% to 7% per year.
That’s a problem. You see, labor is a huge expense for The Cheesecake Factory. About 36% of its revenue went to its workers last quarter.
But The Cheesecake Factory isn’t the only company feeling the pinch of higher labor costs. Costco, Target, CVS, and Walmart have also seen increases in their hourly labor costs.
There’s a reason for this.
• Wages are rising across the country…
Last week, the Labor Department reported that labor costs jumped 2.8% year-over-year. That’s the biggest annual increase since September 2008.
This is happening for a couple reasons: 1) the U.S. economy’s doing well and 2) the unemployment rate is near its lowest level since the 1960s.
So, there’s a lot of demand for workers… but not many spare workers to go around. That puts upward pressure on wages. But those aren’t the only reasons wages are rising.
• The minimum wage is climbing…
Now, I’m not talking about the federal minimum wage. That hasn’t been lifted since 2009.
I’m talking about state minimum wages. You see, 18 states effectively raised their minimum wage rates on January 1 of this year. Those measures impacted about 4.5 million workers nationwide.
In other words, it’s a big deal. And I wouldn’t be surprised if we see more measures like this.
• After all, there’s a “Fight for $15” movement happening in the United States…
This movement began in 2012 when fast-food workers walked off the job in New York City. Since then, the movement’s gone nationwide with the aim of raising wages for “underpaid workers everywhere.”
At first, the movement looked like it had little chance of gaining traction. After all, $15 per hour is more than double the current federal minimum wage of $7.25.
But the “Fight for $15” has made some serious headway. Its website even claims that it’s already won raises for 22 million people across the country—and says 10 million of those people are on their way to making $15 per hour.
• To be fair, I understand why this is happening…
The average American worker has largely sat out the current economic recovery.
When you account for inflation, most Americans are making just barely more money than they did two decades ago.
So, raising the federal minimum wage feels like the right thing to do. But you must understand something…
Raising the minimum wage will have consequences. For one, it will make it much more expensive for companies like The Cheesecake Factory to do business.
Their labor costs will rise even faster than they are right now. But these companies won’t sit back and let their profits dry up. They’ll raise their prices. The Cheesecake Factory is already doing this. Here’s what CFO Matthew Clark said during the company’s Q2 earnings call:
With our history of continuous improvement, we will also seek additional efficiencies in our restaurants to help offset pressure on the labor line, while also continuing to utilize a market-based pricing strategy that concentrates pricing in higher wage geographies.
And that’s just one company. Other companies will do the exact same thing if labor costs keep rising.
• That’s the last thing the average American can afford…
Inflation in the U.S. is already on the rise.
The Consumer Price Index (CPI), a broad measure of inflation, is now rising at its fastest pace since 2012. And the Producer Price Index (PPI), another popular measure of inflation, is also climbing fast. In fact, it just had its biggest yearly jump in nearly seven years.
Of course, companies can only raise prices so much before it hurts their business. At some point, they’ll have no choice but to lay off workers.
Even the federal government understands this. In fact, the Congressional Budget Office estimates that 500,000 jobs would be lost if the U.S. government raised the federal minimum wage from $7.25 to $10.10. A bump to $15 per hour would do considerably more damage.
Now, I’m not saying that the federal minimum wage will be lifted under Trump. But I can practically guarantee that whomever the Democrats put up against Trump during the presidential race will be calling for a higher minimum wage.
That’s simply how the winds in the U.S. are blowing. But don’t take my word for it.
Here’s what Chris Lu, former Deputy Secretary of Labor under President Obama, wrote in a recent opinion piece for CNBC.
…many Americans feel like they’re treading water. Their paychecks are unchanged, while everyday costs like housing, health care and gas have gone up.
But there’s an easy way to improve the lives of millions of Americans: raise the federal minimum wage.
[…]Raising the federal minimum wage would be a much more effective way to help millions of workers and level the playing field for those companies that have stepped up to pay higher wages.
In short, I expect minimum wages to keep rising in the coming years. And that could seriously harm millions of everyday Americans.
• The good news is that you can protect yourself…
One of the best ways to do this is with physical gold.
Gold is real money. It’s held its value for thousands of years. And it has survived every kind of financial crisis imaginable.
That’s why at Casey Research, we think every investor should own a little gold.
But don’t worry if you’ve never bought physical gold before. We have a “Gold Investor’s Guide” that tells you everything you need to know about owning gold, including where to buy it and how to store it. Click here to access it for free.
August 7, 2018
Today, high praise for Doug Casey and his recent piece on Donald Trump…
What a fantastic analysis by Doug Casey. The voice of reason and sanity is too seldom heard or read in American analysis. I agree with everything he writes. It takes a strong man to face all that dirt in Washington and The Deep State. I love Casey Daily Dispatch.
If you have any questions or suggestions for the Dispatch, send them to us right here.
Last month, world-renowned cryptocurrency expert Teeka Tiwari made the boldest prediction of his career during a live broadcast from Glenn Beck’s Dallas studios: Bitcoin is going over $65,000.
It was the largest event in our firm’s history, with nearly 50,000 people tuning in. As you can imagine, we were overwhelmed with questions—more than 16,000 from across the world.
Due to the demand, Teeka has agreed to do a live follow-up Q&A briefing tomorrow, August 8, at 8 p.m. ET.