When I was a student at Duke, Waffle House restaurants (I use the term “restaurants” loosely) were ubiquitous along the interstates of North Carolina and elsewhere in the South. Their yellow-and-black signs haven’t changed in the 30+ years since, and their laminated menus with color photos are an intentional throwback to the heyday of the highway diner. Comedian Jim Gaffigan jokes that the Waffle House “makes the IHOP seem international.”
The Waffle House Index is an informal metric used by the Federal Emergency Management Agency (FEMA) to understand the impact of a severe storm and the likely scale of assistance required for disaster recovery. The standard is based upon the reputation of the restaurant chain for staying open during extreme weather and for reopening quickly, even if with only a limited menu, after very severe weather events. For example, Hurricane Irene knocked out power in Weldon, North Carolina on a Saturday evening, but as the sun rose on at 6:30 the next morning, the local Waffle House, still without electricity, was cooking up scrambled eggs and sausage biscuits with a limited (gas) “grill only” menu (see below). The company fully embraced its post-disaster business strategy after Hurricane Katrina in 2005. Seven of its restaurants were destroyed and 100 more shut down, but those that reopened quickly were swamped with customers and generated a lot of goodwill.
The index was created by FEMA Administrator Craig Fugate in May 2011, following a major tornado in Joplin, Missouri. At that time, the two Waffle House restaurants in Joplin remained open despite the EF5 multiple-vortex tornado. According to Fugate, “If you get there and the Waffle House is closed? That’s really bad. That’s where you go to work.”
The Index has three levels, based on the extent of operations and service at the restaurant following a storm.
- Green: the restaurant is serving a full menu, indicating the restaurant has power and damage is limited.
- Yellow: the restaurant is serving a limited menu, indicating there may be no power or only power from a generator or food supplies may be low.
- Red: the restaurant is closed, indicating severe damage.
The VIX — which is the trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index — is a popular measure of the implied volatility of S&P 500 index options and, for many, operates something like the Waffle House Index for the markets. It is often referred to as the fear index and it represents a key measure of Mr. Market’s expectation of stock market volatility over the next 30 days. Something like the VIX was first envisioned here. However, it has been subject to severe criticism. Moreover, it isn’t nearly simple or straightforward enough to be used in the way the Waffle House Index is used.
The public would surely benefit from simple red, yellow and green indicators to estimate market risk. Such indicators would be far less accurate than the Waffle House Index. What say you? Obviously, I make this proposal (at least mostly) in jest. But how might we structure a simple Market Risk Gauge? We can have some fun this this.
Above the Market 
I think the government tried to implement a color coding alert following the 9-11 attacks, but I have heard nothing but jest of it afterwards. Any kind of color coded and simplified indicator for anything as complex as political or market risk would be simply too idealistic. At the very least it would make good stand up comedy material. But, the public might not benefit from it either for then market swings and trends based on public fears and emotions would become more volatile as both institutions and the public would rely on the indicator for their buys and sells and soon enough, long term buyers hearing red and green and red and green every day from the indicator would end up day trading. Oh, wait, I’m sorry, I think we already have three widely publicized on the news– the DOW, the S&P, and the Nasdaq. It almost makes you wonder how much day trading and market volatility is resulted from the publicity of those three indexes.
Perhaps we can use the Shiller Cyclically-Adjusted Price-Earnings Ratio (CAPE): http://www.multpl.com/
Or the ratio of current earnings yield relative to the yield on the U.S. 10-year note compared to the historical average of the same ratio.
But seriously, the adage is that the market can stay irrational a lot longer than you can stay solvent. And we’d hate to encourage investors to avoid the market because some indicator was red, only to have the market go on a five-year bull run (or to crash immediately after the indicator flashed green). After all, that would just be attempted market timing, wouldn’t it?
The best advice is to save early, save lots, put as much of your money in tax-advanaged and low-fee investments as possible, rebalance periodically, get checkups on your portfolio allocations upon key life events or key milestones, and otherwise ignore the market.
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Merrill’s GFSI. Global financial stress index.
St Loius Fed Financial Stress Index.