SHI 3.18.20 – Wow. The World Shuts Down.

One week ago, in my blog post “Out of an Abundance of Caution,” I touched on the Coronavirus (CV-19) impact on America’s health and business.   Today, just one week later, the world is a very, very different place.  Borders are closed.  Airports are so quiet you could hear a pin drop.  Business are shuttered.  Schools are empty.  And the Dow Jones keeps falling … having now lost every cent of gain realized during the Trump administration. 

Wow.  Once again, wow.  When will this insanity end?  What does the Steak House Index tell us right now?

Before I begin my economic and financial commentary below, permit me a a momentary digression:   These are unprecedented times.  Like you, my greatest concern at this moment is the health of my family and public safety.  Business, economics and finance are all meaningful to me … but they becomes far less important if health is at risk.   Remaining healthy is paramount.  Please do all you can to keep yourself and your family safe and healthy during these exceptional and turbulent times.

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is about $85 trillion today.  According to the most recent estimate, US ‘current dollar’ GDP now exceeds $21.7 trillion.  In Q4 of 2019, first estimates suggest nominal GDP grew by 3.6%, following a 3.5% annualized growth rate in Q3.  The US still produces about 25% of global GDP.    Other than China — in a distant ‘second place’ at around $13 trillion — the GDP of no other country is close.   In fact, the GDP output of the 28 countries of the ‘European Union’ has fallen behind, collectively now almost $2 trillion less that US GDP.   Together, the U.S., the EU and China still generate about 70% of the global economic output.

The objective of this blog is singular.

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:

Wow.  Oh, did I say that already?   Right.  Sorry.

But it bears repeating.  Because a world that was functioning adequately, just a week ago, no longer is.  It’s pretty much shut down at the moment.  The restaurants in the SHI10?   Mostly closed.  Some expensive steakhouses are open in Dallas…”The Palm Chicago” is open in, well, Chicago… and, NYC has a small smattering of open restaurants, but checking availability on opentable.com, I see “booked 1 time today’ for only a handful of the open pricey eateries.  Most have not taken a reservation all day.   Here in the OC and up in San Francisco, the SHI restaurants appear to be 100% closed.   So, clearly, today the SHI10 won’t tell us anything more today than the news.  It’s ugly out there. 

How ugly you ask?  Should I consider buying high-quality stocks at the moment?  Or should I simply purchase and hoard toilet paper … knowing I’ll be able to resell each roll at a HUGE profit!  🙂

Above, I mention global GDP is about $85 trillion per year.   Pre CV-19.  Seasonal variations aside, that’s about $7.1 trillion per month in economic activity.   And about $233 billion per day.   Said another way, if everyone in the world stayed at home, watched Netflix, the BBC or Aljazeera, and bought nothing for the entire day (STEP AWAY FROM THAT TP!), about $233 billion of economic activity would be lost.  Permanently.  Once the day passes, the majority of the lost economic activity cannot be recouped.  It’s gone. 

Sure, when the world comes out the other side of this crisis, the trip I cancelled, the plane flight I didn’t take, the restaurant I didn’t enjoy, etc., will all be rescheduled.  But once rescheduled, those activities will be part of day when they happen – and, as a result, they will be part of that day’s $233 billion of economic activity.  The day they didn’t happen remains a lost day of economic activity. 

Of course, the world is not shut down.  We’re all consuming food, drinking drinks, enjoying ice cream, hummus, Oreos, and wine.   Lots of wine.   Which, once again, suggests we’d better have a WHOLE BUNCH of toilet paper nearby!   And people are shopping on-line, picking up their new cars (I got my new 2020 Tesla a few days ago!), buying gasoline, purchasing take-out or delivery foods, etc.  Economic activity does continue, albeit at a much reduced level. 

Sadly, some industries are decimated right now.  Airlines.  Hotels.  Restaurants.  Broadway.  Cirque du Soleil.  All empty.  The have all lost money they are unlikely to recoup. 

Our US gross domestic product is about $22 trillion per year.  Again, seasonal variations aside, that’s about $1.8 trillion per month in economic activity … and about $60 billion per day.  Much of that economic activity, of course, has ceased.  How much you ask?  Well, it’s hard to say.   Certainly not 100%.   So …how does 1/2 sound to you?   In my opinion, that’s a pretty good assumption:  Every day, the US is losing around $30 billion in economic activity.  Every day.  Thus, thru March 31, US GDP will shrink by, say, $360 billion.   Thru tax day — April 15 — we will have shaved about $800 billion off the top.   Let’s round it up to a $1 trillion loss in the next 30 days.   If our GDP were to shrink by $1 trillion in 2020, this would be a decline of 4.5% from 2019 levels.   A contraction.  A recession. 

Will the US economy remain at “half speed” for the next 30 or so days?   My opinion:  No.  I think that’s a week too long.  My opinion only.  But if we do remain 1/2 open for the next month, we will certainly be in a recession.  

Why do I believe the US will be back to work by mid-April at the latest?   Consider this content below, from ‘Creditntell‘, a financial analyst:

“Today, H&M Hennes & Mauritz AB announced it will temporarily close all its stores in the U.S. (590 stores) for two weeks effective March 18, 2020. In addition, the Company is also closing all its stores for two weeks in Germany (460 stores) Canada (96 stores), Portugal and Belgium. The Company has also temporarily closed all its stores in Switzerland, Greece, Slovakia, Lithuania, Peru, Ukraine, the Philippines, Malaysia and Cyprus.

In China, 500 stores out of 516 have now re-opened.”

H&M is a global fashion retailer. Global.  They have over 5,000 stores in 74 countries.  They are huge.  Their market cap, today, is about $200 billion.  At the worst, they closed 334 of their 518 Chinese stores.  And they are now almost all re-opened.  This week, I’m using a fashion retailer as my economic barometer.  Forget those steaks!  🙂

If I’m right, the US is about 3- or 4-weeks behind China.  I believe America will be open for business, once again, by mid-April.   Fingers crossed. 

Stay healthy out there. 

– Terry Liebman