Lots of tennis pros are making bank in 2024.   Today, your kids might be better served (pun intended) picking up a tennis racquet than a computer keyboard.    As AI changes the technology paradigm, tennis could prove to be a better career than computer programming.   Who knew?   🙂

But I strongly suggest you  avoid  investing any portion of your kid’s ‘529 plan’ in publicly traded ‘clothing’ or ‘consumer products’ companies — especially those based in China.   Why avoid China?  

Tennis prize money may be heading to the stars, but China’s economy is most likely heading to the floor.   Down, down, down.   Chinese home values have been falling for years.   Their stock market has moved lower 4 years in a row.  It is my opinion that the second-largest economy in the world is seriously struggling.   So much, in fact, that I fear the unintended downstream human and economic consequences the world might see in the next 12 to 24 months.   No, my fears aren’t keeping me up at night — not yet anyway — but I am quite concerned.

 

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 ….  By the end of Q2, 2024, in ‘current-dollar‘ terms, US annual economic output rose to an annualized rate of $28.63 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 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:

 

About 6 months ago, I wrote this blog (right click, open link in new tab):

 

https://steakhouseindex.com/shi-3-6-24-china-redux/

 

And that was before Canada joined the US imposing a  100%  tariff on Chinese electric vehicles imports.  

That’s right:   100%.   In other words, a $20,000 Chinese EV imported anywhere north of the Mexican border will cost the ultimate buyer $40,000.   Double the price an identical consumer would pay south of the border.   We can debate who a 100% tariff might help, but articulating who is hurt is easy:   Consumers in Canada and the US, and, of course, China’s EV manufacturers.   A 100% tariff will create a huge headwind for China EV sales in North America.   China will be severely impacted by these tariffs.   Severely. 

This couldn’t happen at a worst time for China.   Don’t believe the media reports:   Their economy is struggling.   In fact, I suspect they are deep in the throws of what is called a “balance sheet recession.”    About 6 months ago, in the blog I wrote on 3/6/24, I asked the question “Can China achieve 5% growth in 2024?”  I concluded no.   They cannot.   In fact, I suggested they were already in a recession.

I shared these comments printed originally in the EastAsiaForum at the end of 2023:

 

“That pace of growth is now slowing for several reasons.  Like in many advanced economies, China’s population is getting older — a demographic transition that has been exacerbated by China’s one-child policy between 1980 and 2016. Globally, there is post-COVID-19 resurgence of economic nationalism.

But there is another brake on China’s growth.  Its economy has for many years depended on outsized domestic investment in real estate and infrastructure and those investments are showing sharply diminishing returns. Local governments that rely on land sales for revenue need to service their debt and revenues are collapsing as the real estate boom falters.

Will China’s economy melt down as a result?  Not necessarily — at least not in a financial crisis of the kind the West experienced in 2007–08. But it will not be easy to manage these problems, the remedies may be difficult, and the end result is likely to be much slower trend growth.

In joint research with International Monetary Fund economist Yuanchen Yang, we have estimated how much of China’s economy depends on real estate and associated infrastructure. In 2021, the direct and indirect impact of real estate in China’s economy was 22 per cent of GDP, or 25 per cent when factoring in imported content.  If infrastructure such as roads, mass transit and water pipes that service residential and commercial real estate is included, the total rises to 31 per cent.

The physical transformation of China’s cities over the past three decades has been remarkable. But looking at the cumulative building that has already taken place, it is clear that the construction growth engine cannot power China’s economy as it has in the past.”

 

And things have only grown worse in recent months.   Massive tariffs will take a huge bite out of the China EV export machine.  

And so the  “CCC”  grows worse.  What is the CCC you ask?   It could be a number of things.   Take your pick:   The ‘Chinese Confidence Crisis” … or the “Chinese Consumer Crisis” … or, well, you get the idea.   It’s an economic crisis.    Not only is China experiencing huge home value losses month over month, but the Chinese consumer isn’t consuming enough to prop up the Chinese clothing and consumer goods manufacturers.  

For example, consider what happened to the publicly traded stock in PDD on Monday: 

 

 

 

 

TEMU revenues in Q2 were far below forecast.  PDD’s public stock was slaughtered by investors, losing over 28% of its market cap on one day!  And fully 1/3 of PDD’s market cap has been wiped out in just 1 week!

PDD is the parent company of TEMU.   You may remember TEMU from their flood of Superbowl advertisements earlier this year.   TEMU exploded onto the American scene, quickly grabbing market share from local consumer goods companies like Amazon and Walmart.   But their initial glory must have faded.  

In their earnings call, the CEO warned that “increased competition will challenge its run of rapid revenue growth.”   Ouch.   Then adding the comment, “Profitability will also likely to be impacted as we continue to invest resolutely.”   According to a Bloomberg report, their CEO mentioned at least 8 times that revenue and profits must “inevitably” decline as economic growth (in China) slows.   Shortly thereafter, the bottom fell out for the stock price.  Presumably TEMU came to the US earlier this year to gain global market share and overcome revenue losses resulting from the Chinese consumer slowdown.  Their bet may work long-term, but so far it’s a bust. 

No, consume spending in Chinese is definitely slowing.  When combined with the massive housing slump, weakness in their financial markets, and the growing number of international tariffs pummeling China’s manufacturing industry, China is definitely hurting.   They must be in a recession.   GDP must be shrinking year-over-year.   And their pain is likely to increase in the months to come.  

Japan experienced something similar back in the 1990s.   Consumers chose to spend much of their disposable income, and savings, to reduce debt instead of buying products or services.   As a result, consumer spending shrank precipitously and their economy suffered for decades.   This type of recession is often referred to as a ‘balance-sheet’ recession — because consumers chose to reduce debt over spending — and this type of recession can linger longer.   It certainly did in Japan.   Will China experience the same?   It’s too early to tell.  

What impact might a Chinese balance-sheet recession have on the US and global economies?

One likely impact is the price you pay for gas at the pump.  I believe gasoline prices are heading lower.

The international oil price is heavily impacted by changes in the supply/demand conditions.  Around 100 million barrels are produced daily.   And consumed daily.   However, if the supply is not consumed in short order, a growing inventory can quickly push oil prices down.   As China’s economy weakens, the demand for petroleum products is likely to fall further.   Prices are likely to follow.   The US ‘Energy Information Administration‘ agrees:   As you can see below, both the EIA and the futures markets are forecasting some downward movement in oil prices thru the end of 2025.  

 

 

The other impacts of a slowing China are harder to predict.   Increasing world-wide Chinese exports are likely.   A slow-down in Chinese investment in Africa, Asia and Australia are likely.   And increased geopolitical challenges are likely.   Here at the SHI we will continue to monitor developments as they occur, but the implications of a slowing China are difficult to predict.   Between 2000 and 2020 Chinese GDP growth was staggering.    In 2000, Chinese GDP was reported at $1.2 trillion.   Last year, it reached almost $18 trillion.   The next 20 years, unfortunately, will not be a repeat.   China’s GDP is likely to decline from here.   How much … and for how long … we’ll have to monitor. 

All right.  Shall we head over to the steak houses? 

 

 

Not much of a change here.   This week’s SHI10 is in line with the reading from a couple weeks ago.   The markets that were weak before remain fairly weak; however, expensive steak house reservations declined fairly significantly here in the OC.   I’m not sure that means much of anything, but it’s worth watching. 

Here’s the longer term trend chart. 

 

 

I’ll finish today’s blog with these two comments. 

First, the FED looks almost certain to begin their rate-cut cycle on September 18th.    Good.  It’s time.  Expect a 25 basis point cut. 

Second, I’ll be out of town for a few weeks.   So here’s some good news for you!   You don’t have to read my blog until the end of September?   Woo Hoo!   🙂

Be well.  

<.:.> Terry Liebman