The Palm Tree Index

"Never make a prediction, especially about the future." - Casey Stengel

In our efforts to extrapolate an edge over the market we investors and analysts are constantly searching for a predictive index or data points that give us proper insight into the future of the economy.  In the good old days Warren Buffet used to go to Disney movies repeatedly just to see how full the cinema was so that he could estimate whether Disney stock price was undervalued and worth owning.  Nowadays hedge funds often acquire the rights to satellite images of shopping malls during the holiday season to see how full they are and then use this data to try to predict how strong the holiday shopping season will be.

While these efforts may have some validity there are numerous indices that are completely useless such as the football index that has predicted the year's market direction about 80% of the time based on whether an NFC or an AFC team wins.  There is obviously no correlation between the index and the market so the index is a mere coincidence.  With the current market volatility and the questionable reasons being given for the negative sentiment (such as a quarter percent rate hike), it seems to me that it may be time to look at two indices that have some presidence regarding the future.

Before I look at these one needs to understand that assuming the Federal Reserve makes an adjustment to the interest rates the immediate impact on the economy is purely psychological.  There will be minimal difference in the rate charged to home buyers, there will be limited impact on companies borrowing money and you will not see a sudden spike in the interest rate on your credit card.  The initial move is more of a signal to the market that the economy is overheating and requires some cooling down.  This is the first step in a long road to supposedly finding that happy medium between growth and overheated.  An increase in rates takes time to achieve its goal of slowing an overheated economy and as the economy is far from overheated I would expect at most a very gradual controlled rate increase rather than the accelerated pace that we witnessed under Greenspan back in the late 90s when he was fighting a true bubble (by the way one that he created with his loose policies).

The first index that I want to discuss is the price of copper.  As I have mentioned previously, copper is a global product that is driven by the forces of demand and supply.  A rise in the price shows growing global GDP while a sharp drop in the price of copper shows a world where GDP is slowing quickly.  While the price of this commodity is fairly volatile the price has been in a tail spin since May falling from around $3.00 to $2.25, a drop of 25% in 4 months.  This indicator is clearly signalling a sharp global contraction.

The second index that may seem a little on the wild side but is what I am referring to as the Palm Tree Index.  A friend of mine has a palm tree business and each time the economy slows his business feels the heat almost instantly.  The underlying reason is put down to discretionary spending and people and companies will cut out the palm tree for a much cheaper tree when times start to become difficult.  In his words; "When the market tanked last time (2008) I saw the slow down coming in palm trees well before the #@!# hit the fan --the phone stopped ringing -- ironically my business has been crazy busy this year until about two weeks ago -- the phone has stopped ringing -- somewhat similar to back in 2005 without the weird mortgages."

So while the Federal Reserve toys with the idea of slowing the economic growth engine with its first rate hike in years I believe that the rest of the world's woes are doing this job nicely and it may be that we are very close to a global recession.  Certainly not the time to be putting on the brakes and it may be that with hindsight the historians will come to the conclusion that as in the 1930s so again in 2015, the brakes were put on at the exact wrong time.  This certainly would not surprise me in the least but one thing is for sure it is a critical decision for the globe economy.  Palm trees anyone?