Back in late 2008, the Phillies were in the World Series. And it was right around that time that the economy was imploding. Banks were failing. The stock market was in a free fall.
I remember one particular game after the Dow dropped something like 8,000 points in a day, I was sitting in Citizens Bank Park and thinking to myself, 'How could all these fans be so happy when we're all so poor?' Is it possible that these millions of Phillies fans (and the four fans following the Tampa Bay Rays at the time) knew something that I didn't know?
Were they familiar with the Baltic Dry Index? They must've been.
Because at the time, a few smart bloggers were saying that the Baltic Dry Index was bottoming out. And that, even though the economy seemed terrible and we were certainly in a recession, things were going to be looking up over the next six-to-nine months. There was going to be a light at the end of the tunnel. We were not headed into a severe depression. Oh, that must be why the Phillies fans were so happy in light of the events of the day.
That, and pitcher Cole Hamels.
WHAT IS IT?
The Baltic Dry Index is a freight index. It measures the cost of freight through the Baltic Sea. Who knew? I honestly can't even find the Baltic Sea on a map. And yet (so I'm told) it's one of the world's largest shipping channels, connecting Asia with Europe or something like that.
But the index is important. Because as freight costs go up, so does the index. And if freight costs are going up, that means that there's more shipping demand. True, I received a C+ in freshman economics, but I know enough to understand the basics of supply and demand. What the economists and bloggers were telling me at that time was that shipping was holding steady - in fact, it was picking up just a little in the Baltic Sea. The world was not imploding. Except for the Rays, that is.
Smart advisors I know, like CPAs, follow certain key metrics like that Baltic Dry Index. Sure, it's important to watch the numbers internally. Like gross profit and inventory turnover and quick/current ratios. But our job is more than that. We've hopefully figured out how the bills will be paid over the next 60-90 days. The real challenge, the one that's met by the people who truly succeed, is figuring out how the bills will be paid over the next 12-18 months.
We are not just business owners. We have a responsibility. To our employees and our families and to anyone else who depends on us. We're supposed to be looking forward and understanding where the world is heading. We're supposed to be making decisions now that will affect the direction of our businesses over the next few years. That's what smart CPAs do. And that's why they look at certain key macroeconomic metrics to guide them.
Like the Baltic Dry Index. And Expedia, too. Expedia? Yes. Expedia.
Because if you go to Alexa.com, you can track the activities of any Web site in the world, including Expedia. (It's a travel Web site, in case you've been living near the Baltic Sea for the past 10 years.)
On Alexa.com, a free service, you can see how many visits any site receives (including your own, by the way). You can see how that site is ranked among all others in the world (please don't type in my Web site, it's kind of embarrassing). Like Expedia. You can see how active the site has been over the past few months and years. When Expedia is active, it's because more people are booking travel. It's all graphed out.
And what do you see? When Expedia's traffic is rising, it's an indication of a rising economy. And when it's falling, the opposite is going on. Some bloggers and economists say that tracking Expedia is a good way to track where the economy is going. And I guess that makes sense. I'm a prime example. When things are going good, I'm taking the family to Disney. And when things are slow? Yeah, you guessed it: the Jersey Shore.
Another interesting metric to watch? How about the Dow Jones Economic Sentiment Meter? This one doesn't use numbers at all. At least not at first. Instead, there are a group of Dow Jones economists, huddled together in a cave somewhere under Wall Street chewing on raisins and sleeping in nests, who do nothing but track words in the media about the economy and how often they're mentioned. Up. Down. Bulls. Bears. Highs. Lows. Recession. Recovery. Lady Gaga. Charlie Sheen. They then take this data and feed it into what must be some kind of kick-butt spreadsheet. Because out comes that month's Economic Sentiment. And, amazingly enough, it pretty much tracks the economy. Just Google this index and you'll find graphs tracking how the economic sentiment of the country and our media parallels recessions and recoveries. It's an indicator that tells us a lot about where we've been and where we're going.
THE HOMETOWN FED AND SOME ARCANE INDEXES
I couldn't be writing about economic metrics without giving a shout out to my hometown boys: the Philly Fed. Yo, Fed ... what up with you? The Philly Fed has the mother of all metrics. The Aruoba-Diebold-Scotti Business Conditions Index. That's right, fans - these guys made up the infield of the Philadelphia Athletics back in the Connie Mack days. Just kidding; they're just another group of economist dudes. But their index is worthy of the Hall of Fame. The Philly Fed says that their index "is designed to track real business conditions at high frequency. Its underlying (seasonally adjusted) economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data." Basically, it's an index of indexes. And, like the others, it tracks the economy pretty closely.
Want another? How about the Men's Underwear Index? Oh yes, this exists. Just look it up on Investopedia.com. And it's real enough that former Fed Chairman Greenspan keeps an eye on it. In his bathrobe, I'm sure. The theory is that sales of men's underwear mirror the economy. When things are good, men buy more underwear, and when things are slower, we ... well ... adjust. Guys, I think you know what I'm talking about.
Or the Divorce Index? Some economists and bloggers swear by that one too. The theory here is that as the economy rises, so does the rate of divorces. And when the economy slows, so does the number of people wanting to split up. I can see it. She says to herself, "This guy is a total loser, but I'm going to wait for his portfolio to get back up there before I zing it to him!"
The point is that smart business people don't rely on internal metrics alone. They're always looking at factors outside of their businesses to get a gauge on where the economy is going. And they need to know this so they can make decisions affecting their companies. If things are expected to turn south, then it may be time to circle the wagons. If the metrics are pointed up, then it may be a good time to expand or take a few more risks.
The numbers we hear in the media are sometimes skewed by ... the media. Gross domestic product, unemployment claims, the Consumer Price Index. These are important to note, but are often revised and slanted to meet the agenda of the guy (or the cable news channel) interpreting the news. Most of the metrics I noted above don't get much attention from the mass media. But they're all just as important when trying to understand the direction of the economy. And the numbers are out there for you and (hopefully) a few non-partisan economists to interpret. No one I know is following all of these metrics. But the smart guys I know are picking a couple and watching them closely.
I just want another World Series championship for the Phillies. And this time, I hope, will not be in the midst of an imploding stock market.
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