SHI Update 4/18/17: Floating in Debt

SHI Update 4/12/17: Chickens and Eggs
April 12, 2017
SHI Update 4/26/17: Spend More!
April 26, 2017
Debt is a four-letter word.

 

No one hated debt more than President Andrew Jackson.  And in 1835, he pushed the US to completely pay off the national debt.   In January of 1835, the who’s who of Washington celebrated as the US became debt free.

This was the first – and last – time the US has been debt-free since Alexander Hamilton, in his role as the Secretary of the Treasury, ‘nationalized’ individual state (colony) debts back in 1792.   With the stroke of the pen, our newly formed United States was $77 million in debt.  But it did serve a purpose:   It bound the states together, cementing the union.

And our new national debt came with a stern warning from President George Washington on December 3, 1793“No pecuniary consideration is more urgent, than the regular redemption and discharge of the public debt:  on none can delay be more injurious, or an economy of time more valuable.”

Truly words to live by.   Unfortunately, we seem to have forgotten them ….

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: The US economy and US dollar are the bedrock of the world’s economy.  This has been true for decades…and notwithstanding plenty of predictions to the contrary, it will continue to play this role for years to come.   Fear not.

Nominal global GDP is about $76 trillion.   US GDP is almost $19 trillion.  Is it growing or shrinking?  If it’s growing … how rapidly?   How might this information impact our daily financial and business decisions?

The objective of the SHI is simple: To predict the GDP direction ahead of official economic releases.  While the objective is simple, the task is not.  BEA publishes GDP figures the instant they’re available.  Unfortunately, the data is old, old news; it’s a lagging indicator.

‘Personal consumption expenditures,’ or PCE, is the single largest component of the GDP. In fact, the majority of all US GDP increases (or declines) usually result from (increases or decreases in) 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 SHI 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:   Of  course, we know the US didn’t remain debt-free.   Today the US – and the world – is awash in debt.   It sloshes like water in the oceans, leaving no corner of the globe uncovered or unaffected.

Central banks, countries, companies and individuals are all saddled with mountains of debt.   Too much, you ask?  That, of course, is the million dollar question.  I would argue yes, global debt exceeds what I consider to be “safe” levels.   But this is another conversation for another time.

According to the NY FED, by the end of 2016 US household debt has almost reached the previous high water mark set in Q-3, 2008.   They believe this level will be surpassed later this year.  I agree.  It will.

On the ‘good news’ side of the ledger, people are paying on time:  Then, about 8.5% of the outstanding $12.68 trillion was delinquent.   Today, the figure is only 4.8%.   Better … but by no means good.

The composition of the debt is different now, too.   Housing liabilities make up a smaller portion of the total.  But auto, credit card and student loan debt combined exceeds $3 trillion.   I’m not sure that’s a good thing, as auto and credit card debt are both typically more costly than housing debt.

But student loan debt is growing like a weed.  Not only have US student loan balances ballooned to $1.3 trillion, but delinquency is growing uncontrollably:  11.2% of all debt is ’90+ days’ delinquent at year-end.   This graph tells the story:

The red line appears to do nothing but go up, up, UP!   (Note the auto loan trend.   Could this be the next problem area?  Very likely.  This bears watching.)

On the other hand, US household net worth has never been higher:

Yes:  That’s over $92 trillion dollars of “household net worth” at the end of 2016.

Earlier this month, the IMF released two mammoth reports:  The “World Economic Outlook” and the “Global Financial Stability Report.”  Hundreds of pages long, filled with data and graphs, they are riveting reading.   🙂

If you have a penchant for that sort of thing, let me know, and I’ll forward you the links.  The reports really are quite interesting.  But let me summarize their findings with this graphic:

The “Great Recession” time-frame is represented by the darker gray area.  As you can see the IMF believes monetary and financial conditions have improved measurably, and risks have subsided.   So, in the aggregate, conditions are better and risks are smaller.

The problem back here in the US, however, is not the “aggregate.”  It’s the fact that the folks with crushing debt load are not the same folks with the burgeoning net worth.   And one day – probably not soon, but one day – this problem will come home to roost.   But, again, we’ll save this discussion for another day.  Today, we have sizzling, savory, USDA prime beef  to enjoy!   Pull out your knife and fork, and let’s dig in!

Once again, I’m sorry to report, the 4/19/17 SHI index is far less exciting than the prospect of dining at Mastros Ocean Club.   This week, our SHI is a negative (-10).    Very much in line with the reading from 4/20/16 of a negative (-16).     Take a look:

 

While the SHI readings are very similar, the reservation patterns are not:

 

Is the fact that today Mastros Ocean Club – easily the priciest of our exclusive eateries – is almost fully booked meaningful?    When compared to the reservation patterns from one year ago?

Probably not.  Much like our “debt” conversation above, in the aggregate the SHI is measuring consumer spending, not where or how the consumer spends.   Thus, once again, the SHI suggests our economy is on a solid foundation and far cooler than the 500 degree plate upon which Ruths’ Chris serves their Filet Mignons.

  • Terry Liebman

1 Comment

  1. I loved your blog article. Fantastic.