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Cantillon Effect and the case for the Chicken Nuggets trade
The Cantillon Effect is the observation that when new money is created, the goods and services that first touch that new money see the rise in prices more than goods and services that are distanced from the new money injection by more transactions.

Since the US and EU each seem to be on track to do about 10% of their GDP in stimulus I think it is valuable to think about where that money will be injected. I don't think that markets are weighing that this support could continue for many more months which means more upside to a Cantillon Effect trade. This effect still applies in a deflationary environment as well since even as general prices would decline, the goods and services closest to the injection would see gains relative to the general market.

By far the largest interventions have been to backstop the bond market. At the margin bond holders have more purchasing power than they otherwise would and since in the US it is unlikely nominal interest rates go below 0% there is a low income, low potential for appreciation and non-zero risk. Furthermore bonds will have less of the previous inverse relationship to equities due to the limited further reduction in nominal yields. It would be reasonable to expect alternatives like gold $GLD to receive more marginal bids in this environment.

Income replacement is and will continue to be a key point these dollars are injected. This means money in the hands of low and middle income consumers. I believe restaurants that have proven to be able to grow in a 'take-out-first' environment to have pricing power. $WING is a good contender having grown same store sales by 31.9% yoy in Q2 and increasing net income by 134% yoy. Wingstop is like Chipotle 15 years ago with plenty of room to grow ahead. It has proven to be able to adapt to the COVID environment, and stands to benefit from fiscal stimulus.

I believe you can take advantage of the Cantillon Effect by buying Chicken $WING and Nuggets $GLD

These 24K chicken wings redefine golden - CNN Video

More On Wingstop:

Forbes
Not Even The Coronavirus Can Stop ‘Tech Stock’ Wingstop
While much of the restaurant struggles for survival, Wingstop's April sales were up more than 33% year over year thanks to its digital ordering platform.

Nate Pabrai's avatar
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