SHI 3.11.20 – Out of an Abundance of Caution

For good reason.  Much remains unknown about this deadly virus.  And we all fear the unknown. ‘Out of an abundance of caution.’  I heard this phrase last night, for the first time in a long time, from Joe Biden’s deputy campaign manager, Kate Bedingfield:  “In accordance with guidance from public officials and out of an abundance of caution, our rally in Cleveland, Ohio tonight is canceled,” she wrote. “We will continue to consult with public health officials and public health guidance and make announcements about future events.”

Shifting to financial markets, we see everyone with a 401K or stock portfolio is now gripped with financial fear, as trillions of dollars in value have evaporated from global stock markets in the past few weeks.   And then reappear.  And then vanish again.

And how about the Steak House Index?  Are expensive steakhouse reservations vanishing as quickly as our 401Ks?  If you head out to Mastros this weekend, will you find it empty?

So let’s take a few moments and talk about what we know about this horrible disease … what we don’t know … and how fact and fear are impacting US and global financial markets today, and perhaps in the coming months or years.     

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?

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.

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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 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.

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The BLOG:

Out of an abundance of caution.  I get it.  On one hand, it makes sense, right?  After all, why take ANY risk you don’t have to take?  “Social distancing,” out of an abundance of caution, makes sense from an asymmetrical viewpoint.  Think of it this way:  You have a choice to do, or NOT do, something:  Go out to dinner with your wife … go to a party … see a play or concert … travel to San Francisco or NYC … etc.   Or you could stay home.  Eat at home.  Go nowhere.  What’s the best choice?  The problem is one choice has unknown risk … the other, in theory, has no risk.  So why take the risk, you ask yourself?  Many will decide to take the no-risk option. 

How worried should you be about contracting Coronavirus?  Great question. 

To answer, let’s go to one reliable source, the World Health Organization (WHO), and their daily “Situation Report.”  As China is the epicenter of the crisis, the WHO is carefully tracking the health of China’s 1,428,230,000 citizens.  In the past 24 hours they have discovered 22 new cases.    On March 1, the number of daily new cases was quite a bit larger:  579.  More than 20X.  Every day, it now appears, new cases in China are declining.  This is good news.   Of course, in the ‘unknown’ bucket is what will happen after everyone in China gets back to work … and the country is fully operational again.  Will the virus flair up again?   Unknown. 

Here’s a link to the WHO daily situation reports:

https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/

Johns Hopkins has developed a fantastic website, too.  It’s worth a look.  Here’s the link:

https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

The first thing I notice between the March 11 (today) WHO Situation Report and the JHU ‘Coronavirus’ website is the numbers are inconsistent.   The WHO data suggests the number of confirmed cases and deaths is lower.  I don’t know why.  Regardless, both data sources are excellent.   Take a look at the hyperlinks at the bottom of the page.  Some of those may interest you. 

Oxford University has also compiled a fantastic, detailed website on the topic.  Here’s the link:

https://ourworldindata.org/coronavirus

The entire report is worth reading, but I direct your focus to two (2) sections:

Cases of COVID-19

• • What we would want to know
  • What we do know

Case fatality rate of COVID-19 by age

Two (2) take-aways I personally found interesting: 

1. Based on the visualized data from China, 14.8% of those who are 80 years and older who were infected by COVID-19 died as a result. As explained above, these figures represent the share of people diagnosed as having the disease who die from it. This does not represent the total share of people in a population who die from it.
2. The case fatality rate for children is much lower. There were no reported deaths in children under 10 years old; 0.2% of those aged 10 to 19 years who were diagnosed with COVID-19 died from it according to the early Chinese data.

As we all know, Italy has been horribly impacted by the virus.  Italy has their own version of the United States CDC, called the Istituto Superiore di Sanità, also known as the ISS.  The information below came from a recent ISS press release:

ISS, 5 March 2020   ”The average age of deceased and positive patients at COVID-2019 is 81 years, they are mostly men and in more than two thirds of cases they have three or more pre-existing pathologies. This was stated in an analysis of the data of 105 Italian patients who died on 4 March, conducted by the Istituto Superiore di Sanità.”

I attempted to read more on the Istituto Superiore di Sanità website, but I ran into a language barrier.  Not medical.  Italian.  Perhaps you’ll do better: 

https://www.epicentro.iss.it/coronavirus/trasmissione-prevenzione-trattamento

In conclusion on this topic, it’s important to note that these figures represent the share of people diagnosed as having the disease who later die from it.  They do not represent the total share of people in a population who die from it.   For example, according to the most recent WHO numbers, 0.00767% of the Chinese population has contracted the disease.  Of course, China took extraordinary measures to contain the virus.  Measures, frankly, that most other countries are unlikely to replicate.  Thus, on one hand, it is likely a larger portion of the population outside China will contract the virus.  On the other hand, China offered an early warning to the rest of the world.   It spread for many weeks before anyone took it seriously in China.   So, once again, we simply don’t know what percentage of the population will contract the virus. 

My opinion:  If you are over 70 years old, you should take very serious precautions to avoid contracting this virus.  Above 60?  Again, take serious precautions.  But if your age is below 50, and your health is good, the numbers suggest you have very little to be concerned about.  Even if you contract the virus.  But, of course, remember that this is a rapidly changing landscape.  The data changes daily. 

Which brings us to fear inspired by the unknown.  Find below a quote from an article that in the London Times on March 8 entitled “Coronavirus:  Boris Johnson keeps calm but Whitehall plans for worst,” printed on March 8:

“Ministers are preparing for a potential coronavirus death toll as high as 100,000 as they try to brace the country for months of upheaval without spreading panic.” 

This is them trying to avoid spreading panic?   Really?  Sorry, too late for that, Ministers. 

Sure, it’s possible the UK could see this number of deaths.  Anything is possible … and much remains unknown.  So, let’s do some math. Using the “age cohort” mortality numbers in China thru 2/11/2020, taken from the Oxford University ‘ourworldindata.org’ site above, if 100% of all UK citizens contracted the virus, and the exact same mortality rates applied as shown in that site, 1.2 million of the 66 million living Brits could die.  But while this is possible, is it probable?  I don’t think so.   Consider the actual (current) results in China:  According to the WHO, of the 80,955 confirmed cases, the country has experienced 3,162 deaths.  Remember:  The WHO is tracking 1,428,230,000 China citizens — 22X the number of British citizens — and in China (to date) only about 1/10 of 1% of the population has contracted the virus. 

Since the London Times March 8 article, other countries seem to be competing to see who can make the most inflammatory, fear-inspiring comment:

• Per German Chancellor Angela Merkel:  ‘When the virus is out there, the population has no immunity and no therapy exists, then 60 to 70% of the population will be infected.’
• NBC News reported Wednesday, citing two sources:  Dr. Brian Monahan, the attending physician of Congress and the U.S. Supreme Court, said he expects 70 million to 150 million people in the United States will become infected with COVID-19.

Wow.  That’s not overly comforting. 

I’ve commented in prior blogs that economic expansions don’t die from old age.  Most of the time, an exogenous event – like this one – is the trigger.  Might this be the trigger? 

It could be.  This is a valid concern.  If the financial disruption extends thru, and includes, Q2, 2020, then I feel the US expansion will be over by Q3, 2020.   Why?   We’re all seeing it at the corporate and large event level: 

• Corporate travel has cancelled.
• Major music events have cancelled.
• Universities closing class (moving to on-line classes) after spring-break. 
• Sporting events are being played without fans in the stadium.
• Has anyone booked a cruise lately? 
• etc.

The response by people and governments is causing both global supply chain stress and a building global negative demand shock.   The resulting shock and disruptions, if left unchecked over time, will likely cause dramatic declines in economic activity.   The longer, and more widespread, this impact, the larger the negative effect on the global economy.   

Which brings us to this week’s SHI charts.   What do you think:  Are reservations down this week?   Has “fear of the unknown” exceeded “fear of my credit card melting,” causing patrons to stay home this Saturday?  I think you might be surprised.   Here is the trend report:

Nope.  People are hankering for a good steak.  This week’s SHI10 is consistent with both this week last year and the YTD trend.  I find this fascinating.  Many folks are cancelling plane flights … but those same people appear to be planning to head to their favorite expensive steakhouse this weekend.   And not just here in the OC.  Across the 10 SHI markets and 40 pricey eateries we track, behavior is consistent.  People are heading to the steakhouses this weekend.  Below are the weekly SHI results:

Watching CNBC Tuesday morning, they highlighted the loss of business activity at Chicago’s “McCormick Place” convention center, one of the largest convention facilities in the “western hemisphere.”  It’s effectively closed.  Almost all corporate conventions have been cancelled.  In all, CNBC reported, 92,000 people who would have been in Chicago are not … costing local businesses a minimum of $184 million just in the month of March.  And this is just in Chicago.  I’m a bit surprised the Chicago steakhouses are almost fully reserved this Saturday. 

The collapse in oil prices, too, will have a downstream impact on energy exploration and employment.   The US is now the leading producer of oil in the world.  According to a 2018 report produced by the National Association of State Energy Officials, entitled “Energy Employment by State,” here are a few of the employment figures for people employed in the creation of production of “fuel.”

• California: 63,973 in fuels
• Pennsylvania: 54,019 in fuels
• Texas: 326,667 in fuels

Today, Texas employs almost 13 million people.  So only about 2.5% are employed in fuels.  Their current unemployment rate mirrors the US, right around 3.5%.   If 40% of the “fuels employees” lose their jobs, this rate would lift to 4.5% in Texas.   But it would have fall out impacts to other industries, too.  A negative feedback loop.  But, so far, expensive steaks are still on the menu in Dallas.

Permit me two final comments.   First, it any of my comments above suggest disrespect or dispassion for the severity of this disease, the brave men and women fighting it on the front lines, or the poor unfortunates impacted by it, rest assured this was not my intention.  This is a horrible disease; caution is in order.  I apologize if I gave you a different impression. 

Second, as this is an economic and financial blog, my focus and comments are intentionally oriented toward these topics.  A few times in the past week or so, I’ve been asked if I believe COVID-19 might be the proverbial straw that breaks the 10+ year US economic expansion’s back.  We will closely monitor developments.  But I fear one victim of the Coronavirus may be our longest-ever economic expansion.  

Time will tell. 

• Terry Liebman