Tuesday, June 25, 2019

The Walt Disney World Barometer - What the Walt Disney World resort can tell us about the economy

The Walt Disney World Barometer

By most estimates’ consumer spending drives more than 70% of the US Economy. This makes the Walt Disney World Resort in Orlando, FL, an excellent barometer of what’s going on with the consumer and implications for US GDP. I have been a Walt Disney World enthusiast most of my life. I’ve watched the resort expand as new parks and attractions have been added, and Disney has grown its inventory of intellectual property. For full disclosure, at the time of publication, I own shares of Walt Disney Company stock and have purchased shares in the accounts of my clients.

Four things make the Walt Disney World resort a great economic barometer.

1.)    Discretionary Expense - Vacations are a discretionary expense. Unlike food, clothing, and paying the utility bills, vacations are a lower financial priority and a luxury for many people.  During times of economic stress, the family vacation is often the first casualty, and rightly so. The advice I give clients, and we use in our own home is to periodically assess all discretionary expenses and decide what needs to be changed or eliminated. During times of economic uncertainty, vacations are a significant budget item that can be cut and have a considerable impact on the family budget. A busy Disney World Resort suggests a healthy consumer.

2.)    Future Expense - Disney World vacations are usually planned far in advance. Looking at crowd levels in the parks, hotels, and restaurants gives us insight into how the consumer feels about their intermediate financial conditions. If a person feels insecure about their job security or their ability to find a job, they are less likely to commit to considerable discretionary future expenses.

3.)    International Audience - Walt Disney World is a global destination. I am always aware of the indications of the number of international visitors. I watch for tour groups whose leaders will carry pennants from their home country. I will quiz the people at the front desk of hotels about their vacancy levels and the percentage of international guests. I listen for the accents of people around me, and much to my wife’s dismay, engage them in conversation to glean insight. The number of international visitors can be an indication of the health of the consumer in other countries. I would also point out that the currency exchange rate between the US Dollar and other currencies also influences tourism.

4.)    Discounts - Disney has their finger on the pulse of the consumer. Watching their marketing, the number and depth of discounts offered can tell us something about the health of the consumer. Walt Disney World is a massive operation. To give some perspective, Walt Disney World is roughly the size of San Francisco. Disney has over 30,000 hotel rooms, over 300 dining outlets, and more than 70,000 employees. In a typical year, over 50M people will visit the Walt Disney World Resort. If Disney anticipates consumer weakness, they are incented to offer discounts to maximize the utilization of their facilities and maintain their workforce.

For a sense of the financial health and attitude of the consumer, there are few better gauges than what’s happening at the Walt Disney World resort. Regardless of when you may be reading this, if you would like to know my take on what Walt Disney World is currently telling us about the economy just ask. I’ve usually been there recently.

For more information on this topic I invite you to watch this 5-minute YouTube video https://youtu.be/GWc6UnLDMzs

Sunday, June 2, 2019

Yield Curve Inversions and Snow Sleds

Historically an inversion of the yield curve has preceded a recession by about 12 months. So, what is a yield curve? Why does it predict a recession? What does this have to do with snow sleds? Stay with me for a minute, and this will make more sense — first a couple of definitions.

Tedious, but necessary background information - A bond is a fixed income investment where one party, the investor, loans money to another, the bond issuer. Bonds are issued for a fixed period of time. The bond issuer may be a government or a corporation. The bond issuer pays interest to the investor at predetermined intervals and then returns the principal when the bond matures.

A yield curve is an imaginary line connecting the interest rates of bonds maturing at different periods. The term or length of the bond is represented on a number line moving from left to right. Above each point on the number line is the corresponding yield of bonds maturing in that term. A typical yield curve slopes up and to the right as the bonds yield increases with its duration.

Consider a mortgage. The interest rate on a 15-year mortgage is generally less than on a 30-year mortgage. That is because the lender wants more compensation for tying up their money for an extended period. The longer the term of the loan, the higher the possibility that a person may default on the loan. The same is true for bonds. Generally, bond investors require a higher yield to commit funds for more extended periods.

The Inversion - An inversion is where the yield on some shorter-term bonds rises above the yield on some longer-dated bonds. An inversion signals that some investors feel there is more economic uncertainty in the near term than farther in the future. As a result, they require a higher rate of return to invest in bonds maturing sooner than they need for bonds maturing later. A significant inversion in the yield curve for some time, signals a substantial number of investors believe a recession is on the horizon.

The Snow Sled – What could this have to do with a snow sled? Before a snowstorm, the sale of sleds increases. The number of sleds sold is an indication of the confidence people have in the weather forecast. But, the sale of sleds doesn’t dictate the weather. Weather forecasts change, and people prepare for storms that never happen.

The number of investors requiring higher yields on shorter-term bonds indicates their confidence in the forecast of a weakening economy and possibly a subsequent recession, one year out. The purchase of any particular security doesn’t control the economy. The yield curve is just one of many important data points I monitor.