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Wealth or Inflation

Writer's picture: Eric CinnamondEric Cinnamond

<January 17, 2025>



I recently had breakfast with two old friends. One of them brought up the stock market and how pleased he was with his retirement account. My other friend nodded indicating he too enjoyed large gains. They asked me how I faired after another strong year for stocks. I informed them my only equity investments are in the Palm Valley Capital Fund and that the fund increased 4% in 2024. Needless to say, my response didn’t knock their socks off!


After congratulating my friends on their returns, I couldn’t help commenting on the large cap benchmarks. I said that making money in the popular large cap stocks last year was so easy a monkey could have done it. My friend quipped, “Then what does that make you?” My friends enjoyed a good laugh. While being made fun of during asset bubbles is nothing new, it seems to hurt more early in the morning!


My friends aren’t alone in benefiting from soaring asset prices. Household net worth has reached record highs nominally and relative to GDP. From the beginning of the current market cycle in 2009, household net worth has grown from $56 trillion to $169 trillion at the of Q3 2024. For those with assets, it’s been one heck of a cycle.



Throughout most of the current cycle, the Federal Reserve has paid little attention to asset inflation. As long as inflation created from easy monetary policies was contained in asset prices, it was viewed positively. However, as household net worth has grown, the risk of asset inflation leaking into tangible assets, goods, and services has also increased. This is especially true for things that are relatively fixed in quantity, such as residential real estate.


For many years, the value of household financial assets has increased significantly more than the supply of housing. Specifically, from 2000 to 2024, household financial assets increased 260% while the number of housing units only grew 27%. This has caused the ratio of financial assets to home units to rise sharply, providing owners of financial assets the resources to pay higher prices for homes. We believe rising household wealth is one of the main reasons home prices have continued to increase over the past two years, even as interest rates have risen. In the case of housing, it isn’t necessarily too much money chasing too few goods, it’s too much financial asset inflation.  





We often wonder if homeowners consider rising home prices as wealth or inflation. For instance, the market value of our home has doubled over the past five years. However, we certainly don’t feel any wealthier as a result. The cost to maintain our home has increased considerably, not to mention the price of insurance. Further, if we sell our house, whatever home we move into next would likely have doubled in price as well. Renting is an alternative, but rents have also increased meaningfully. In our eyes, this cycle’s increase in home prices feels a lot more like inflation than wealth. And for potential buyers that currently don’t have inflated home equity, it must feel extremely inflationary. 


Homebuilder Toll Brothers (symbol: TOL) recently reported earnings and provided commentary on the housing market. Results confirm our view that rising wealth is affecting demand and home prices. Management credited wealthy customers for driving growth, saying, “These are exceptional full year and quarterly results, demonstrating…the financial strength of our more affluent buyers.” According to management, it’s not just rising home equity aiding results, it’s the affluent’s “good investments in the market.” These investments likely contributed to the fact that 28% of Toll Brothers’ customers paid all cash for their homes.


Signs of asset inflation leaking into the economy aren’t isolated to housing. We’ve noticed a growing number of companies are taking advantage of rising household wealth. Barbell pricing and premiumization strategies are increasingly common. Companies are attempting to boost sales and profit margins by targeting wealthier consumers who are more capable and willing to pay higher prices.


Brinker International (symbol: EAT) recently discussed its barbell strategy on its drink menu, noting, “On margaritas, our barbell strategy is helping to drive the top line and margins with super premium margaritas…in Q1, we introduced the new super premium Don Julio margarita in our over $10 price tier.” If you don’t have a bloated brokerage account, Brinker has you covered, noting, “On the other side of the barbell, the entry price point, we introduced the October $6 Marga of the Month, the Witches' Brew.”


Carter’s (symbol: CRI) also commented on barbell pricing last quarter, saying “In the context of our good, better and best product offerings, we continue to see a barbell-shaped trend in our U.S. Retail sales in the third quarter. We had over 50% growth in our best product offerings.” Meanwhile, sales of Carter’s mid-tier products declined 10%.


Helen of Troy (symbol: HELE) communicated similar trends with its higher-end offerings outperforming. Management noted, “While holiday spending overall is up year-over-year, it is driven by higher income consumers purchasing higher-priced items, while lower income consumers continue to struggle, prioritizing necessities over discretionary goods.”


Delta Airlines (symbol: DAL) recently reported strong earnings, crediting its strategy of offering more higher-priced seats.  Bloomberg wrote, “Delta Air Lines jumped the most in more than four years after reaping the benefits of robust demand for its lucrative premium seats, a trend the airline said shows no signs of slowing.” Management credited demand from baby boomers. Considering 73% of wealth is controlled by those 55 years and older, it’s not surprising the boomers are driving premium bookings.


Since its September 2024 meeting, the Federal Reserve has cut the fed funds rate 100 bps even with stock and home prices at record highs, and inflation remaining above the Fed’s 2% target. Considering its actions, we believe policy makers are unconcerned about the risk of asset inflation and the potential for it spilling over into consumer prices. This is a mistake, in our opinion. With household net worth soaring, there are numerous signs that asset inflation is no longer contained and is leaking into the economy.


When the wealthy get wealthier, they’re able to compete more aggressively for limited resources. Further, as they trade in their paper gains for real things and services, high-net-worth consumers are less price sensitive, producing higher margin sales. Based on our bottom-up view, a growing number of companies are taking notice and are increasingly targeting the wealthy. In fact, we believe corporate pricing strategies targeting high-net-worth consumers are partially responsible for this cycle’s stickier than expected inflation and growing accumulated inflation.   


Assuming financial assets remain inflated, we expect more companies will discover the rewards associated with higher-margin premium offerings. As businesses shift their mix to accommodate the higher end, we believe wealthy consumers will increasingly become the economy’s price setters. Moreover, additional gains in household financial assets could lead to further increases in home prices and shelter inflation. If the bond market didn’t have enough to worry about, we believe the days of booming asset prices coexisting with tame consumer prices are long gone. Asset inflation is leaking.

 

Eric Cinnamond

 

The Palm Valley Capital Fund can be purchased directly from U.S. Bank or through these fund platforms.


Index performance is not indicative of a fund’s performance. It is not possible to invest directly in an index. Past performance does not guarantee future results. Current performance of the Fund can be obtained by calling 904-747-2345.


There is no guarantee that a particular investment strategy will be successful. Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.


Fund holdings and allocations are subject to change and are not recommendations to buy or sell any security. Current and future portfolio holdings are subject to risk. Click here for the fund’s Top 10 holdings. 


Mutual fund investing involves risk. Principal loss is possible. The Palm Valley Capital Fund invests in smaller sized companies, which involve additional risks such as limited liquidity and greater volatility than large capitalization companies. The ability of the Fund to meet its investment objective may be limited to the extent it holds assets in cash (or cash equivalents) or is otherwise uninvested.


Before investing in the Palm Valley Capital Fund, you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. The Prospectus contains this and other important information and it may be obtained by calling 904 -747-2345. Please read the Prospectus carefully before investing.


All management commentary and quotes are from most recent earnings calls and press releases.


The Palm Valley Capital Fund is distributed by Quasar Distributors, LLC.

 

Definitions:

Housing Unit: Housing unit is a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters.

Household Financial Assets to Housing Unit ratio: A ratio that measures the amount of household financial assets relative to the available housing stock in the United States. A higher ratio indicates there are more financial assets relative to the available housing stock.

Basis points (bps): One one-hundredth of a percent, used especially in measuring yield differences among bonds.

 

 

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© 2025 by Palm Valley Capital Management

Mutual fund investing involves risk.  Principal loss is possible.  The Palm Valley Capital Fund invests in smaller sized companies, which involve additional risks such as limited liquidity and greater volatility than large capitalization companies.  The ability of the Fund to meet its investment objective may be limited to the extent it holds assets in cash (or cash equivalents) or is otherwise uninvested.

 

The Palm Valley Capital Fund is offered only to United States residents, and information on this web site is intended only for such persons. Nothing on the web site should be considered a solicitation to buy or an offer to sell shares of the Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

The Palm Valley Capital Fund is distributed by Quasar Distributors, LLC.

Availability of Additional Information

The Palm Valley Capital Fund's investment objectives, risks, charges and expenses must be considered carefully before investing.  The prospectus contains this and other important information about the investment company, and it may be obtained by calling 904-747-2345, or clicking here.  Read it carefully before investing.

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