There Was Shrinkage

Gold and the precious metal miners have been rising consistently over the past three months (GLD +9%, GDX +17%). This has been a very interesting move, especially considering recent government reports suggest inflation remains in check (most recent core CPI 2.2% and core PCE 1.9%). Furthermore, the dollar has been stable during this period. So if it’s not inflation and it’s not the dollar, why is gold increasing?

Explanations vary, but some of the more obvious reasons include the Fed’s decision to temporarily halt rate increases. The possibility of quantitative tightening winding down earlier than expected is another logical explanation. And with central bankers turning more dovish, the amount of bonds trading with negative yields are on the rise again. Other less objective catalysts include the growing publicity and consideration of socialism and Modern Monetary Theory (MMT). While some or all of these explanations could be responsible for the rise in gold, I subscribe to a lesser known theory. I call it Tiny Toilet Paper Rolls (TTPR).

TTPR can be explained through the experience and actions of an imaginary hedge fund manager named Ricky. Ricky runs his portfolio the old-fashioned way – performing thorough bottom-up analysis and valuation. Over the past several quarters, Ricky has noticed rising corporate costs and pricing power within his opportunity set. Ricky has also observed a larger percentage of sales growth has been coming from higher prices, lower promotions, and increasing average tickets. Wal-Mart (WMT) is a good example. Of its +4.2% positive comp reported by U.S. operations last quarter, +3.3% was from higher ticket and +0.9% was from traffic.

After another quarter of rising corporate costs, lower promotions, and higher average unit prices, Ricky was growing increasingly confused. Ricky asked himself, “Why aren’t these trends spilling over into the government’s inflation data?” Stumped, Ricky decided to step away from his Bloomberg to take a restroom break.

While using the restroom, Ricky noticed a tiny roll of toilet paper. He became fascinated by its small size. Had the roll been used, or is a new role also this small? Ricky looked for the toilet paper package and discovered the new rolls were similarly small. To save money, Ricky believed his office was using a toilet paper supplier that practiced lightweighting, or in this case, mastered the art of manufacturing tiny toilet paper rolls. Ricky took the toilet paper home and compared it to a more traditional roll. This is what he discovered.

Ricky went back to his office and wrote a white paper on shrinkflation and tiny toilet paper rolls. He concluded measuring inflation is complicated and is not as simple as measuring the changing prices of goods or services. Based on his experience with toilet paper, Ricky understood when it comes to measuring inflation, quality, quantity, and size should also be considered.

Based on his quarterly analysis of his opportunity set, Ricky knew suppliers, distributors, and retailers were currently in the process of determining how to pass on rising costs to their customers. With this in mind, and with his tiny toilet roll in hand, Ricky returned to his office and implemented a trade to hedge against TTPR, or the risk of receiving less (shrinkflation) for more (higher average prices).

The shift in corporate strategy away from promotions and towards higher average prices continues. It’s a trend I’ve been noticing and documenting over the past year. I plan to continue monitoring how businesses and consumers respond to this relatively new trend. In the meantime, when you’re shopping for value (in the economy and markets), watch closely for product and service shrinkage – it may be tough to see, but it’s there!


The following was sent to me by a reader shortly after I published this post. I suppose I could have also labeled my theory Tiny Paper Towel Rolls (TPTR). 🙂

Source: WSJ (article link)