What the ‘Restcator’ Can Tell You about the Australian Economy

Dear Reader,

Well, there you have it.

So far, 42.6 million people in the US have lost their jobs in the last 11 weeks.

In Australia, 600,000 people are out of work, even with JobKeeper.

GDP figures for March quarter are also out.

GDP dropped by 0.3% after the summer fires. With most of the coronavirus effects happening in the June quarter, there isn’t much hope out there that panic buying will spare us from a recession.

We are likely already in it. A recession is usually defined as two consecutive quarters of negative growth.

Meanwhile, the Dow Jones has mostly recovered from the 35% drop it suffered in late March, and edging higher. Even with talk of recession, the S&P/ASX 200 also ended on a higher note yesterday.

The economy is in shambles but markets keep rising. Of course, all this economic data we’re getting is from a few months back.

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Are we already in the beginnings of a recovery?

Do markets know something we don’t?

It’s hard to tell where the economy stands today when the data coming in is so old. It’s why we need to rely on other less formal indicators around us to see.

As I told you a while back here, one of the things you can look at for signs of liquidity is the art market.

Or, look at restaurants. Restaurants can be a good indicator — or Restacator —of the economy’s health because they deal with customers every day.

In the boom times when there is money flowing in the economy, people will splurge, they will go out to eat and restaurants thrive. It’s a sign of liquidity, especially if you look at fine dining restaurants.

You see, restaurants are already complicated businesses, but running a fine dining restaurant ain’t cheap.

Even when you have customers paying a high price for their meal and the restaurant is packed, fine dining has a lot of costs. You need to source high-quality products which diminishes your margins and you also need staff to provide good service. High-skilled chefs, sommeliers, waiters…

The Spanish restaurant El Bulli (which won world’s best restaurant five years in a row) raked in 2.5 million euros every year…but was still running at a loss — even with most of the staff there on internships — as it spent much of its budget on research and development.

After the crisis in 2008, many high-end restaurants in Spain had to adapt, or close. They slashed prices off their menus, opened for lunch or became more informal venues. They replaced truffles and foie gras with cheaper cuts like pork belly and beef cheeks, all to survive.

In skinny cow time, liquidity dries up.

Of course, this crisis is different in the sense that it’s a pandemic and has come on very fast, so people are likely wary of going to eat out. Also, the fact that people have realised they can cook at home and spend less on restaurants will also have an effect.

But back to my point, observing things around you, like looking at how restaurants are doing, is a way to see if we are really on the verge of a recovery.

There were a couple of articles on the restaurant industry in the press recently.

One was on restaurant suppliers struggling to sell their produce. As Bloomberg reports:

Every year, John Gregson sells his autumn and winter truffles, carefully sourced from places like Italy’s Sibillini mountains and Teruel in eastern Spain, to restaurants for as much as 6,000 pounds ($7,400) a kilo. Not this year.

His biggest restaurant customers brought their shutters down during the coronavirus lockdown, and many may not be raising them anytime soon — if ever. The unprecedented disruption in the food chain, with worst-case estimates showing 80% of restaurants going bust in some parts of the world, is leaving people like Gregson grappling with an industry that may take years to untangle itself.

“Those orders came mostly from Michelin-star restaurants,” said Gregson, head of U.K. wholesale deals at TruffleHunter Ltd. “It’s now a question of whether those restaurants will be around come autumn and winter when those truffles come into season.”

The other was an interview with Chris Lucas, from the Lucas Group owners of several restaurants including Chin Chin and Kisume. The group had a busy year ahead since they had planned to open five new restaurants in the next 12 months. Now their year is turning out to be quite different.

As Lucas told the Australian Financial Review (AFR):

We were having our busiest year in a decade. We had 1200 employees and were in the process of hiring another 800. Chefs, sommeliers…they were all raring to go. And then it all just stopped.’

The only thing that matters now is survival. The era of the self-obsessed, insular, Instagram- and influencer-focused business is dead. It’s all over. It won’t be about the chef’s ego or the sommelier’s ego any more; we won’t hear so much about the chef’s ‘philosophy’ or the “narrative”. We’re getting rid of all that bullshit. Our venues are going to be totally focused on hospitality.

Restaurants have reopened but it doesn’t look like people are rushing in. Keep on watching your surroundings…

But for now, the markets are running with one story, yet the economy is living another.

Best,


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Selva Freigedo
Editor, The Rum Rebellion


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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