I contend that by now we all must acknowledge the shift away from globalism is undeniable.   Pre-pandemic, the world resembled an open-air bazaar where borders blurred and goods flowed freely and cheaply to any buyer ready to buy. 

No longer.    Road-blocks are up.   Rhetoric is up.  Anxiety is up.  And borders are closing to free trade. 

So what’s next?   If globalization is old-news, what term and philosophy do I believe will replace it in the coming years? 

 

Geonomics. 

 

 

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:

 

Welcome to the age of “geonomics” — a concept recently crafted by the London Financial Times columnist Gillian Tett.  To be entirely accurate, geonomics is not a new term.   Jeffrey Smith is credited with coining the term back in the 1990s, but he used the term to articulate a concept more aligned with a viewpoint I would define as a utopian, Marxist ideal that society could equitably share “land” to the benefit of all, as opposed to the capitalist system that permits “private landlords” or speculators keep that benefit.   As my six long-term blog readers know, I don’t subscribe to any such beliefs.   So, no, today we’re not talking about Jeffrey Smiths’ world view or definition of geonomics.

Tett and I use the term as a post-globalism condition where supply chains no longer exist independent of national and international politics.   Today, geopolitics and economics are no longer separate and distinct concepts but are now deeply interconnected and influence each other.  They are intertwined on a single pathway, a more expensive pathway.   Because cost is no longer the most important metric in the supply chain.

If globalism thrived on “just-in-time” inventory management and delivery of goods and services, the mantra of geonomics is “just-in-case” with a primary objective of security and survival.  Gone are the days when many American factories were moved to Guangdong to reduce labor costs and increase profitability.  Instead, today, many are returning home, escorted by subsidies, defense clearances, and a renewed sense of national urgency.  And if they don’t do it voluntarily, the heavy hand of the Trump Administration helps give them a shove in the “right direction.”

Today let’s dive deeper into Tett’s vision of geonomics and explore how this paradigm shift is reshaping the global economic landscape.

I believe Tett would suggest her view of geonomics centers on the transformation of economic policy into an instrument of national security, sovereignty, and survival.  In her words, this “new age of geonomics” sees “Tech, trade, finance, and military policies mingling in a manner not seen during the neoliberal era.”

Gone is Adam Smith’s – yes, yet another Smith! – often quoted “invisible hand” as a foundational concept for societal economic prosperity.  No, unfortunately the halcyonic days of free trade between people and nations, enriching society as highlighted in Adam Smith’s book, “The Wealth of Nations” is now a vague memory.   Governments are no longer passive players in the global economy but active strategists in a game that blends economics with national defense.

Perhaps this result was inevitable.   Perhaps Covid was merely the accelerant, ramping up the speed of an inevitable outcome.  Regardless, here’s where we find ourselves today.   No longer will developed nations sit on the sidelines and watch as large multinational corporations dictate and decide all global supply chain choices in order to maximize corporate profits without regard to the US citizen, economy, or security.   Notice I highlighted the word “all.”   That’s because many of the choices will remain in the hands of the multinational corporation.   This is America after all.   🙂

But some of those choices will not.  Today, as we see in the headlines here and across the globe, national security and protection of a nation’s sovereign economic strengths have both taken the front seat on the bus.   Today, politics and geopolitical positions matter.  This new and evolving doctrine is not theoretical — right before our eyes, it’s playing out in policies and actions worldwide. Here are some prominent examples:

 

Rare earth elements like gadolinium and yttrium have become geopolitical tools. China has ‘em.  We need ‘em. These minerals are critical for the manufacturing of certain types of magnets, electric vehicles and advanced fighter jets.   After the Trump Administration’s implementation of “Liberation Day” in early April, imposing significant tariffs and other import duties on China (among others), China “responded” by restricting the exportation of their rare earth elements.   Hmmm … that’s not good for the US.   Regardless, the Trump Administration has made their intentions clear:   They seek to shift production of high-tech and other systemically-critical components and materials to US soil.   Unfortunately, when it comes to rare earths, this may take a while.   There is no better demonstration of geonomics and the power of resource control.

Crude oil and gas exploration is “so last year”:  In the new geonomic worldview, on-shoring semiconductor manufacturing is a primary linchpin of long-term national resilience.  Through the $280 billion CHIPS Act, the US is ‘investing’ $52.7 billion to promote domestic chip production.   This is not a cost efficiency choice but is intended to safeguard against supply chain vulnerabilities that could cripple key industries.   The US was hoping to leverage this $50+ billion to kickstart another $200 billion or so of private capital investment – and in fact, according to the Brookings Institution and the New York Times, so far the CHIPS funding has catalyzed about $235 billion of private investment into new US semiconductor plants.   American companies like Intel and Texas Instruments have committed to invest $160 billion; Micron has announced a New York ‘fab facility’ and possible further expansions that may eventually total $100 billion; TSMC and Samsung, combined, have announced more than $200 billion in Texas and Arizona. 

The European Union (EU) was not pleased with the Biden Administrations’ Inflation Reduction Act (IRA).  In response, to counter the impact on their economy, the EU launched its own Net-Zero Industry Act. This initiative blends industrial policy with green objectives.   This is a dramatic shift from the “laissez-faire capitalism” typical of the globalization era.   No longer are all the people in nations across the globe smiling, holding hands and singing Kumbaya.   Well, that didn’t actually happen – it’s a metaphor.   But that’s what globalization was like!   Today, the EU plans to use state-led innovation to expand their geopolitical edge in Europe.

Japan has tightened its rules on foreign investment or acquisition of some Japanese companies in industries such as machine tools, robotics, semiconductors and 3D printing, to name a few.  In May, the Japanese Ministry of Finance tightened the regime in these “core business sectors” and now requires foreign investors to obtain prior approval from the government before making any investment.   Their goal is to curb technology transfer to companies outside Japan to keep tight control and prevent foreign influence in their advanced manufacturing industries.   Attempts to hide foreign ownership through shell companies are now met with rigorous scrutiny, underscoring how Japan’s current economic policy is being weaponized for national security.   They seek to safeguard their supply chains – not integrate them. 

 

Today’s geonomic policies mark a clear departure from the ideologies of globalism.  And it’s important to note this is not a unique American position.  This is global.  Consider these key shifts:

 

Governments now stress that optimal supply chain design no longer targets ‘efficient’ but whether the chain is ‘defensible.’    Globalism prioritized cost minimization and speed.   “Get it cheap; get it from anywhere” was the mantra.   Geonomics stresses security and proximity – if that drives up cost, so be it. 

During the globalism era, governments pretty much sat on the sidelines as multinational corporations did their thing.  Corporate leaders adhered to the theory of comparative advantage; financial markets dictated the winners and the outcomes.   No longer.  Today, they are being nudged — or outright mandated — to act with national interests in mind, of course, while remaining profitable!   Profit still matters!   Critical operations are “re-shoring” as we speak, aligning with geopolitical strategies, and safeguarding critical technologies.  As geonomics takes center stage, government hands are clearly deep in the mix, crafting industrial policies, erecting tariffs, and incorporating social and defensive strategies into economic and trade policy. 

 

To be clear, the age of globalization is not entirely over, but its rules have changed dramatically.  Gone are the days where governments will tolerate another country’s ideologic bend in a direction opposite their own.  So as geonomics takes its seat at the head table, today’s message is clear: a country’s survival in this new world mandates more than corporate profits and a robust stock market — it requires strategy, resilience, and a keen understanding of shifting global relationships.

If geonomics means the era of cheap goods is over, is geonomics inherently inflationary?  No, I don’t think so. 

I would say more accurately that globalism was inherently deflationary.  For decades, consumers in the US and other countries feasting on cheap goods imported deflation.   That effect will now diminish over time.  In its place will be a combination of a multinational corporate desire to maintain profitability while, at the same time, holding prices as much as possible within government economic and security guide rails.   It’s going to be interesting. 

Shall we check in with the steak houses?   Here’s the long-term grid:

 

 

This week’s SHI40 at a negative 77 is the lowest reading of the year.   This is a weak week.   So what’s going on out there … economically speaking?  

 

I believe the US economy is slowing.  

 

Why?   Well, let’s start with SHI40.   Take a look at the “guts” of the algorithm I use to create the index.   I’ve clipped two sets of data for our Orange County restaurants — one from 2/21/24 and then the grid for this week.   Take a look:

 

 

Back in February of 2024, Mastros and Bourbon Steak were fully booked on Wednesday for the upcoming Saturday.   

Not today.   Today, both have openings later in the evening.  The Ranch had only late evening slots open back in February of ’24.  Today, most reservation slots are available.   I believe this is quite telling.   Reservation demand is clearly trending down.   Widening the lens, it’s been a long time since either ‘Mooo’ in Beacon Hill, Boston or ‘Gallaghers’ in Manhattan, New York had any time slot open between 5:45 and 9:00 pm, for a party of 4, on Saturday.   Today, both have the 9pm time slot open.   

I’ve been to both restaurants.   Both are magnificent.  And both are extremely expensive.   Gallaghers is a super traditional steakhouse:  A superb and deferential staff are beautifully augmented by rich, dark wood throughout; burgundy leather seating; polished brass railings, ornate moldings and wainscoting; and, of course, dim chandeliers and indirect lighting designed to ensure an intimate and private feeling for all guests.  Mooo in Boston is its modern equivalent with more glass than brass, but the same intimate and delightful experience.   

So what’s going on out there?   Sure the SHI10 is reflecting weak demand for our expensive eateries … but the unemployment rate remains near a 50 year low — people are working!    And further, while the latest FED Z.1 report reflected a small decline in the aggregate American balance sheet in the prior quarter, American ‘net worth’ remains near all time highs — almost $170 trillion!  And a slug of this net worth is in housing.   Home prices are at or near all time highs.  

So Americans, in the aggregate, are both working and wealthy.  American cash flow is good … asset values remain strong.   So what’s the problem?   

I think higher interest rates are finally tugging against many wallets and spending.   Borrowing money right now is extremely expensive.   And it’s been extremely expensive for a really, really long time.  In my opinion, the FED is once again waiting too long to move.  They should have reduced rates by now.   Short term rates should be 50 basis points lower now … and probably 100 basis point by the end of the year.   Yet they remain stubbornly high.   

But with the “tariff thing” and all the other “noise” out there, the FED has thus far proven resistant to lower rates.   And I think it’s finally adversely impacting economic activity.  Which is precisely what the Steak House Index is telling us.   My 2 cents.  

<:  Terry Liebman:>