The Japanese Yen, too, is now sinking to new lows.   If you live in Japan, a country that imports massive quantities of oil products, integrated circuits, “coal briquettes”, and broadcasting equipment, “prepared meats,” and processed tobacco, to name a few, this is a serious issue.   Because all those things have become quite a bit more expensive for the Japanese consumer and industry.  

But if you are an American, and plan to travel there, buy real property there, or invest in the NIKKEI 225 — Japan’s stock market — I have some very good news for you:   Japan is on sale!

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? Expanding ….  By the end 2023, in ‘current-dollar‘ terms, US annual economic output rose to an annualized rate of $27.94 trillion.   After enduring the fastest FED rate hike in over 40 years, America’s current-dollar GDP still increased at an annualized rate of 4.8% during the fourth quarter of 2023.  Even the ‘real’ GDP growth rate was strong … clocking in at the annual rate of 3.3% during Q4.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2022.   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.

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.

The Blog:

Yes, Japan is on sale, but be careful.  For example, say you were planning to buy stock in a Japanese company traded on the NIKKEI.   Presumably you would use your US dollars and buy the stock … which is priced in yen.    One year ago, 1 US dollar would buy you 134 yen.   Today, that same dollar will buy you almost 158 yen.    That’s 18% more yen!   Said another way, that Japanese share price is worth about 18% less in US dollars today.  

You may recall that Berkshire Hathaway bought a bunch of Japanese stocks back in 2020.    On the good news side of the ledger, the NIKKEI has just about doubled since Warren and friends bought the shares.   On the bad news side, the yen has depreciated significantly against the US dollar during that same period.   In early 2020, one dollar bought about 104 yen, vs. today’s number of 158.   So while Japan’s stock market value has doubled, the value of the yen in dollar terms is down about 50% during the same period.  

My point is this:   It’s complicated.   Be careful.   BH was smart in that they sold bonds in Japan, receiving yen, to raise the capital to make their stock purchases.  You and I cannot do the same.  We are not Berkshire Hathaway.  So be careful.   Currency relationships change constantly … and investing in another country in their currency means you are assuming two risks:  One, the investment risk itself.  Second is the currency risk from the constantly changing value of the currency against the US dollar. 

The yen is falling due to simple global economics.   Blame interest rates and the FED.    Yes, for the first time in years, the Bank of Japan raised rates in February.  But only by the smallest of fractions:  The BOJ hiked from a negative 0.1% rate to between zero and 0.1%.   The Japan 10-year bond yields only 0.9% today.  Compare that to 4.6% for a ten-year US treasury. 

As a result, money is leaving Japan to find higher yields elsewhere.   And that’s easy to do:  Europe, the UK and the US all have far higher yields available. 

Let the slide begin.   By Monday of this week, they yen had fallen to about 160 per dollar.   Shortly thereafter, it is rumored, the BOJ stepped in to stabilize the yen currency market and bought a whole bunch of yen, presumably selling dollar-denominated assets.   By around lunchtime, the slide was halted.   While the actual intervention has not been confirmed, Bloomberg believes the BOJ spent over $35 billion to support the yen.  

What’s next?   Hard to say.  But as long as Japan keeps their interest rates super low, money will go elsewhere to find yield. 

The problem is exacerbated by Japan’s massive sovereign debt.   Measured as a percentage of their GDP, Japan’s public debt exceeds 260%.   For context, while the US also has a massive public debt, ours is closer to about 120% of GDP.   Without a doubt, the US public debt picture is horrible — Japan is simply much, much worse.  All of which makes their currency, the yen, inherently more unstable in global markets. 

What does that mean for you?   A vacation in Japan is probably super-cheap right now!   🙂

Thru the early 1980s, the Japanese yen was extremely valuable.  But then, for a variety of reasons too lengthy to go into now, their currency tumbled, their economy faltered, and over time both the yen and Japan’s GDP have fallen.   This is unlikely to change any time soon.   And it might be a harbinger of the future for the US.   In 20 years or so … not now.   Hopefully America will course-correct before then. 

Let’s check in with the steakhouses.

Well, this is interesting:  This week’s ‘spread’ is the highest (worst) we’ve seen in the past year.   Reflecting ‘233’ this week, we can’t find a higher reading.   To enhance visualization, I used a ‘conditional formatting’ function, with green being best, and red, worst.   This week is the worst.   Is this meaningful?   Perhaps.   Looking at the trends above, its pretty clear demand for expensive eatery reservations are waning week after week.   If we see a bounce back in the next few weeks, perhaps we can dismiss this lukewarm trend.   However, at its essence, the SHI40 suggests our economy is stable, or, at worse, slipping a slight bit.    Stay tuned…we’ll see how it goes in future weeks. 

Earlier today, two (2) meaningful economic events.   First, the JOLTs report for March, 2024 was released by the US Bureau of Labor Statistics.   Job openings dipped slightly, but not meaningfully.   In February, job openings were measured at about 8.8 million; in March, the number declined to 8.5 million.   Both numbers, of course, remain elevated far above the historic norm near 5 million, suggesting the US job market remains robust and demand for laborers strong. 

The second, the FED decision on rates.   They kept things static.   They said,

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent.”

There you have it.  

<:>  Terry Liebman