I have some further thoughts for you.   Read on. 

 

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/

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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?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

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.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

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.

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The Blog:

 

“Where’s the beef!”    On the ceiling might be the answer.   Look up.     

My older readers probably remember that commercial.   Well, the answer today is sky high. Beef costs for our expensive eateries is way, way up.   The typical beef steak costs Mastros about 1.4X the price in January of 2020.  

Treasury yields seem to be doing the same thing, confounding stock and bond investors alike:

 

 

FED funds rates fall … yet 10-year Treasury yields rise.    Ironically, by about the same amount.   1 percent.   Frustrating. 

Some of the folks over at Bloomberg attribute the move to the “expected terminal rate” for the Federal Funds rate.    As seen below, that terminal rate was previously expected to fall into the high 2s.   No longer.   The FFR is currently about 4.5%, and now, many forecasters expect only about another 50 basis points in cuts during 2025.   In other words, the market expectation a few months ago was, say, 2.75%.   Today that ‘terminal rate’ is forecasted to fall to only 4%.  

Right or wrong, the chart below makes a compelling visual argument that the 10-year yield is highly correlated with this metric:

 

 

         

 

Many economic experts attribute the 1% lift in the 10-year Treasury to the growing disappointment over future FED rate cuts. 

 

However, I don’t believe this is the only cause.    Other forces, too, are at work here.

 

Inflation progress has stalled in the United States. 

 

The FEDs target inflation rate is 2%.    But it seems stuck between 2% and 3%.    Will it move down to 2%?    Probably, but it will probably take a while.   Here are the comments from our omnipotent financial leaders:

“The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the Committee’s 2% goal. But given the lack of continued progress on lowering inflation and the ongoing strength in economic activity and in the labor market, I could have supported taking no action at the December meeting.” – FED Governor Michelle W. Bowman

“Several observed that the disinflationary process may have stalled temporarily or noted the risk that it could. Almost all participants judged that upside risks to the inflation outlook had increased. As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy.” – FOMC Minutes

“Price increases have cooled notably over the past two and a half years, but, despite this significant progress on disinflation, there is still further to go before reaching our inflation target of 2 percent” – FED Governor Lisa Cook

 

Even so, the Fed will probably continue to lower the FFR rate over time.    At 4.5%, the federal funds rate is probably too high, too restrictive.   But in the FEDs own words, that is not a fact given all the variability in data.   They are likely to lower rates further during 2025, but with caution:

“Since September, the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time. Thus, I think we can afford to proceed more cautiously with further cuts.” – Federal Reserve Governor Lisa Cook

“My bottom-line message is that I believe more cuts will be appropriate. As always, the extent of further easing will depend on what the data tell us about progress toward 2% inflation.” – Federal Reserve Governor Chris Waller

“I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data. With inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral.” – Kansas City FED President Jeff Schmid

But here’s the interesting thing:   10-year sovereign bond yields are spiking across the globe.   To quote the UFO enthusiasts:  “We are not alone.”

 

 

 

The chart above compares movement on the 10-year government security in Germany, the US, France and the UK.    Clearly, as we all see, they are in unison.  Since the beginning of December, all 4 of these sovereign bond yields is up significantly.

Why?  

Are all 4 of these ‘developed’ nations deeply in debt, running a large annual deficit?

No.  Germany is the outlier.   Their debt-to-GDP ratio is the lowest at only 63%.    And while they are also deficit spending at present, they are expected to finish 2024 at about 2.2% of GDP.  Compare this figure to the US — 6.4%, France — 6.1%, and the UK — 4.4%.  

Are each of these 4 countries experiencing a super strong economy?  

No again.     German GDP likely fell by 0.1% during 2024.    France likely saw minor ‘real’ growth of around 0.8% … and the UK will likely finish the year at maybe 0.5%.    Only the US is experiencing rapid, robust economic growth.     And robust it is:   While we have to wait until January 30th for the actual number, forecasts are strong and expectations are high:

 

Remember:   A 2.70% ‘real’ GDP growth rate is likely equal to a 4.5%   or more  ‘nominal’ or current-dollar growth rate.   That is sizzling growth, my friends.   Sizzling. 

Clearly, high inflation and strong GDP growth is not the only answer.   Sure, that’s the case in the US, but not in other developed nations.   Yet, in all 4 cases, the 10-year yields are up about a full percentage point.   So, then, why are ALL rates, in all sovereign nations, increasing across the globe simultaneously?

I commented on this in last week’s blog.    Just about everything in economics is ultimately explained thru the lens of supply and demand.   And this story is, too.   The supply of sovereign 10-year bonds is at an all-time high.   And with the incoming administration talking about tax cuts, many forecasters fear the deficit and debt will grow larger still.   This, I believe, is responsible for much of the yield increase.

Shall we head to the steak houses?

 

 

Interesting.    This week, the SHI10 is back in the black, on the backs of a big improvement in reservation demand in both the OC and Atlanta.   ‘Vegas is looking pretty strong too.   Take a look at the longer term chart:

 

 

 

Because of expensive beef and other input costs, expensive eateries are more pricey than ever.   Even moderate restaurants are expensive these days!    Thru that lens, as I said above, its surprising reservation demand has held up as well as it has.    Sure, one year ago demand was higher than today … but the price for a sizzling filet was quite a bit lower a year ago.

Crazy times.  

By the time my next blog drops, the US will have a new President.   Grab a seat, a nice bottle of wine and settle in my friends.   We’re all in for quite a ride. 

.:<>:.   Terry Liebman