Vice personifies the economy

August 28, 2015 09:00 AM

Have money, will vice. It’s as simple as that. Gambling and the broader economy march together. Compare U.S. GDP figures and Atlantic City gambling revenues and the coincident quality of gambling is obvious (see “Board walking together”). Gambling is a cash-based activity, and it depends on free cash. Gambling is affected by the same factors that drive Personal Consumption Expenditures, and by extension the GDP.

The zero-interest-rate policy and quantitative easing (QE) turbo-charged gambling revenue in Atlantic City.  Proximity to Wall Street made Atlantic City the casino to the casino. But the end of QE has ended that run.

Gambling works as a window into today’s economy because of its broad and deep appeal. It covers virtually every demographic, and every year tens of millions of gamblers indulge.

And gambling is very much a practical guide for investing. Why should you care? Because gambling leads interest rates and equities by one to two years (see “Where to next?”).

According to the slowdown in gambling revenues, the Fed is far behind the curve in raising rates. In fact, the Fed would normally be cutting rates at this point. And the stock market should be headed for 0% growth in 2005.

Las Vegas was packed this recent Fourth of July weekend. Crowds milled around the strip even in the desert heat. In typical Vegas spectacle fashion, fireworks went on for two nights. My limited observation was that most folks were American. Families came on vacation and pools were crowded with kids. 

Vegas as a vacation destination is a key reason to focus on other gambling hot spots like Atlantic City.  Vegas includes foreign tourists and business convention attendees. Not exactly the snapshot of Middle America. Vegas is remote from population centers. If someone has $100 burning a hole in their pocket and they want to gamble on a whim, they can do that it where they live.  That’s where locals can enjoy drive-by casinos.

And Middle America loves to gamble. One new casino in Maryland boosted state gambling revenue 30% (+$300M) in 2014. Seven new casinos built in Ohio since 2013 have boosted state gambling revenue 50%+ ($500M). In 2014, total U.S. casino gambling revenue hit $38.8 billion, up from $37.9 billion the previous year.
Latest gambling data remains mostly positive. 

Our preferred cross-section of Middle American gambling includes Detroit, Connecticut, Pennsylvania and Atlantic City. Together they account for 55% of all U.S. gambling revenue.

And it’s very sensitive to real-time economics. For example, revenues surged late last year as the gas pump dividend sank in. They also plunged early this year as storms cut the means and opportunity to vice.

Today’s growth in gambling signifies continued growth in consumer spending.

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