SHI 09.05.18 Investors Agree with Trump

… at least, that what equity market investors are saying:

Or, said another way, as you can see by the red line in the image above, China has already been the bigger loser.  Year-to-date Chinese stocks exposed to the US are down almost 30%.   US stocks with China exposure are only down about 5%.

The US stock markets are pretty much ignoring the skirmish.   Both countries, of course, claim they will not budge.   But rhetoric aside, both will.  And probably fairly soon.

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.   This has been the case for decades … and will continue to be true for years to come.

Is the US economy expanding or contracting?

According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is about $80 trillion today.  US ‘current dollar’ GDP now exceeds $20.4 trillion.  In Q2 of 2018,    We remain about 25% of global GDP.    Other than China — a distant second at around $11 trillion — the GDP of no other country is close.

The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released. 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:

Both countries have a lot to lose from a protracted trade war.

But investors think China will lose more.   The Shanghai Stock Exchange Composite Index peaked at 3,558 back on January 26th.  Today, that index is down near 2,750 — a 23% decline.   Chinese stocks are one of the worst performers in 2018.   Per Bloomberg, the index has lost more than $2.4 trillion in value since the peak.   Finding a trade solution must be high on China’s list of “things to do.”  The alternative is simply too expensive.  And painful.  And potentially incendiary.

Incendiary?  Absolutely.  Here’s what happened in Leiyang, China, according the the Wall Street Journal, when “financial” problems caused officials to rethink local school issued:

“The city’s plans to deal with overcrowded public-school classrooms by sending students to more expensive, often inferior private schools drove hundreds of parents and others to protest. On Saturday, some threw bottles, bricks and firecrackers at local officials and police, who, by official accounts, then dispersed the crowds, detaining 46 people.”

Ouch!  When was the last time American parents threw bottles and bricks at local officials to protest school funding issues?   Imagine what might happen across China if they experienced widespread financial distress?   I shutter to think.  I have no doubt there is a lot of Chinese “behind the scenes” effort focused on solving the trade dispute with the US.

Changing topics back to the US, here’s a very interesting graphic:

The moving blue line shows the GDP reading each quarter.   The vertical bars show the contribution of each segment of our economy to the quarter’s GDP reading.  Above zero is positive; below zero reduces GDP levels.   Business investment has been a big contributor in recent quarters, but consumer spending remains the big dog in the picture.

All right, lets jump over to the steakhouses.

Our week-over-week trend suggests little change in consumer spending habits this week.  Reservations at our pricey eateries remain in strong demand.  Chicago seems exceptionally hungry for a thick prime rib this weekend.  Their SHI jumped up to a positive 39.    But what Chicago gained, it appears NYC lost.   Interesting.   Here’s the SHI10 grid:

I can tell you one thing with certainty:  I wouldn’t open an expensive steakhouse in Philly.   Cows in Philly are safe and happy.  🙂

• Terry Liebman