As discussed in the recent macro analysis, the U.S. economy (and certain other parts of the world), is a tale of two economies. With very high fiscal deficits and public debt-to-GDP, higher interest rates put downward pressure on some parts of the economy, while actually stimulating other areas, as higher interest expense and thus larger deficits flow out into the economy.
The U.S. federal government’s fiscal deficit for the first 10 months of the fiscal year (October 2022 through July 2023) was $1.6 trillion. That’s twice what it was for the first ten months of last year. The largest component of that increase was the higher interest expense that the government was paying on its debts. So we have to ask the question: Who’s on the receiving side of those deficits, and mainly who is on the other side of those interest expenses?
Consider an upper-middle-class 65-year-old retiree. They own a home outright with no mortgage, or they’ve locked in a low fixed-rate mortgage. They have plenty of cash, money markets, and bonds/equities. They receive Social Security and Medicare. They’re a mini-version of Exxon Mobil or Alphabet.
As the Federal Reserve raises interest rates, it doesn’t really affect them negatively at all. In fact, their bank accounts and money markets and T-bills start paying them higher yields, while any debts they have are locked in at low rates for long durations. So, they have plenty of money to spend on travel, restaurants, and other things. For some of them, they help their children or grandchildren with expenses as well.
The consensus idea that ageing demographics are deflationary makes sense historically when senior citizens on average tended to be impoverished. But at the current time, that’s where large swaths of the U.S. deficits are going toward: Social Security, Medicare, and Interest Expense (with seniors and their proxies such as insurance companies and pensions on the receiving end of much of that interest). Most U.S. household wealth is still concentrated in the hands of the Baby Boom generation and will be for quite some time.
The travel sector suffered for a while, and so there is still pent-up travel demand. That fact, combined with ongoing fiscal dominance directed at people who have the time and money to travel, is rather constructive for the travel industry and restaurant industry. In other words, a core thesis is to own businesses that upper-middle-class seniors want to spend money on. They’re the ones that have a large portion of the country’s money, and higher interest rates are actually neutral-to-stimulatory for many of them.
I’ve maintained Mexican airport exposure (OMAB) for the past few years, and it continues to be an outperformer. Sometimes it gets a bit ahead of itself but generally, I’ve just let it run:
Two other airport companies, PAC and ASR, complete the Mexican airport trinity alongside OMAB. Compared to airlines, airports have much wider economic moats and more stability.
Booking.com (BKNG) owns many travel websites, as well as restaurant websites like Open Table. In the near term, the stock may have gotten ahead of itself with such a sharp vertical move, and I would like to see a little correction or consolidation, but I continue to view it positively with a 3-5-year time horizon, and continue to be long the stock:
Booking has as much cash equivalents as they have debt, and thus along with decent growth, can sustain reasonably high equity valuations. Most of their debt is at moderately long durations and at low fixed rates, which matures gradually over time. They’re in a position where higher interest rates are likely mildly stimulatory for them from a balance sheet perspective.
Both revenue and bottom-line profitability are back on their pre-pandemic trend.
Here is a table from their 2023 10-k filing that shows their main services:
I am also quite bullish on American Express with a 3-5-year view. AXP continues to have a strong network effect and has an emphasis on the travel industry. I like also Visa and Mastercard, which are two pure-play payment networks. They don’t hold credit, and they trade at higher valuations. American Express and Discover are the two hybrid payment networks, where they hold credit while also operating the payment network, and tend to trade at lower valuations but with more cyclicality to their businesses.
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