SHI Update 11/23/16: Happy Birthday Kelly!

Today is my daughter Kelly’s birthday!  Which you may find mildly interesting … but you must be questioning the economic significance.

There is none.  I’m simply killing two birds with one stone:  Not only am I wishing her a ‘Happy Birthday!‘ in a public forum … but I’m going to find out once and for all if she reads my blog.  She tells me she does … but I have my doubts.   Let’s find out.  🙂

Welcome to this week’s Steak House Index update.

As always, if you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/)

Why You Should Care:   Is our economic expansion continuing?  Or are we on the brink of recession?

The objective of the SHI is simple:  To predict the direction of this behemoth.   But while the objective is simple, the task is not.

BEA publishes GDP figures the instant they’re available. Unfortunately, it is a trailing index. The data is old news; it’s a lagging indicator.  We know how the economy is doing in advance of the GDP release.

Personal consumption expenditures, or PCE, is the single largest component of the GDP.  In fact, the majority of all GDP increases (or declines) usually result from consumer spending.  Thus, this is clearly an important metric to track.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been.  Thereby giving us the ability to take action early.  Not when it’s too late.

Taking action:  Keep up with this weekly BLOG update.  If the index moves appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:   Consumer confidence is the wind in the SHI sails.   Without confidence, those with money will not spend it.   Speaking of money, I’ll bet you’ve never seen one of these:

In his new book,  The Curse of Cash, Ken Rogoff (2001-2003, Chief Economist for the IMF) makes the case that “advanced-country governments” will start phasing out paper currency.   He states there are two compelling reasons:

1. “First, making it more difficult to engage in recurrent, large, and anonymous payments would likely have a significant impact on discouraging tax evasion and crime; even a relatively modest impact could potentially justify getting rid of most paper currency.”
2. “Second, as I have argued for some time, phasing out paper currency is arguably the simplest and most elegant approach to clearing the path for central banks to invoke unfettered negative interest rate policies should they bump up against the “zero lower bound” on interest rates. Treasury bill rates cannot fall much below zero, precisely because people always have the option of holding paper currency, which at least pays zero interest.”

While India would probably not be included in Dr. Rogoff’s collection of “advanced-country governments” it appears they read his book and took action:  On November 8th, Prime Minister Modi declared war on crime, counterfeit currency and corruption!   In four hours time, he told his TV audience, 80% of the Indian currency in circulation would start down a path that would render it worthless!

Folks in India now have 50 days to swap the roughly 23.2 billion high-denomination notes in circulation for new, redesigned 500 and 2,000 rupee notes.

According to CNN Money, 90% of all transactions in India use cash.  Which, makes tax collection difficult.   Apparently, only about 2% of Indians pay income taxes, resulting in hundreds of billions in lost government revenue.

A bold move, to be certain … but will it work?

According the The Time of India, corrupt bank managers are swapping old currency for new in “backdoor note exchanges.”   As lines grow at the front door …

… some banks are claiming they’re out of currency.   All gone.  Sorry.  Go home.

But for a commission of 25-35%, at the bank’s back door, managers will help their rich clients swap out old for new.

Per The Times, “The Bangalore Turf Club ran into trouble with income tax for illegal exchange of old notes.  Operators at the betting cash counters were caught exchanging old notes for a commission of 25%.  On Saturday, based on a tip-off, the I-T sleuths went as decoys and trapped two bookmakers.  Even though the club had decided not to accept old notes for betting, the rule was not being followed.”  Oops. 

No, it appears the PMs plan will not be as successful as he had hoped.

Imagine impact on folks holding rupees outside the country … and unable to exchange them within the 50 day window?   Hmmm…

There’s a lot of cash out there.  Here in the US, according to the FED, on October 20, 2016 we had “approximately $1.48 trillion in circulation.”   The Census Bureau – on their ‘Population Clock’ website, states the US population is 324,982,048 people.    Hold on … the 8 is moving … OK … we have one more person as I’m writing!  🙂

(Watch people being created:  https://www.census.gov/popclock/)

Let’s do some quick math.   On the assumption this cash is sloshing around within the US borders, dividing $1.48 trillion by our 324 million population suggest every man, woman and child in the US possesses over $4,554 in cash.

Per person?   Almost $5,000 in cash?  I don’t know many people with this kind of cash lying around … I know for a fact my grand-daughter Lucy doesn’t have $5,000 in cash.  She doesn’t even have a purse!  This certainly makes me wonder where all this cash is?

Probably in the steak houses.  Right?   After all, those filets at Mastros don’t appear on your plate for free!

Which, once again, brings us full circle to consumer confidence.   And according to this morning’s “Survey of Consumers” from the University of Michigan, consumers are indeed confident.   Take a look:

Per Richard Curtin, the U of M Chief Economist, consumer optimism has been buoyed by the election:

“The initial reaction of consumers to Trump’s victory was to express greater optimism about their personal finances as well as improved prospects for the national economy.  The post-election gain in the Sentiment Index was +8.2 points above the November pre-election reading, pushing the Index +6.6 points higher for the entire month above the October reading. The post-election boost in optimism was widespread.  The data indicate that consumer spending will advance by 2.5% in 2017.”

OK…great.  Let’s see if the SHI agrees.

Well … this is interesting.  This week the SHI comes in at a negative (-9) because – GADZOOKS! … there are open tables at Mastros Ocean Club on Saturday!

Look at our chart for 11/23.    A table for 4 is available at 6:45 … at 7:15 … and again at 8:15!  Wow … this hasn’t happened for months!

As you’ll recall one will spend a minimum of about $100 per person at Mastro’s.   And that’s with mediocre wine.   And without splurging on the ‘Lobster Mashed Potatoes‘ or the ‘Warm Butter Cake.’    Could that lofty price tag finally be impacting demand?   Or is this simply a Thanksgiving aberration?

Here’s our trend matrix:

There’s no doubt the recent SHI readings cast a negative shadow.   But it’s more likely  Saturday’s low demand is due to Thanksgiving than something more sinister.  Our financial markets and the U of M “Survey of Consumers” both suggest the consumer is positive … optimistic … and I’m in agreement.  So, if demand bounces back next week … I won’t be concerned.   If not … well, that would be an interesting development.   Stay tuned!

Finally, a quick comment on the FED.   The minutes from the November 2nd meeting were released today at 11:00 am (CA time.)  Here’s what they said:

• Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. 
• Although the unemployment rate is little changed in recent months, job gains have been solid.
• Household spending has been rising moderately but business fixed investment has remained soft.
• Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective.
• Most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Happy Thanksgiving to you, your family and friends.   Please enjoy this uniquely American holiday and as a good friend often comments to me, remember we are all “lucky and blessed.”

Thanks again for following my BLOG.  Happy Holidays.  Take care.

🙂

• Terry Liebman