The Market’s Waffle House Index

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.