Trash Talk: Economic Clues From a Place You Wouldn't Expect.
What They Don't Teach You at Harvard School of Economics
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Dear Investor,
Economic indicators are statistical measures that reflect the current state of the economy or try to predict future economic changes.
They are used to understand and analyze the performance of an economy, helping policymakers, investors, and businesses in decision-making.
These indicators can be broadly categorized into three types: leading, lagging, and coincident indicators.
Lagging economic indicators are statistics that follow an economic event. Their key characteristic is that they change after the economy as a whole does.
This means they are useful for confirming patterns or trends already identified by other indicators.
They are not useful for predicting future economic trends, but they provide important information about the health and stability of an economy.
Here are some common examples of lagging indicators:
Unemployment Rate: Typically, unemployment rates do not start to fall until after an economy has begun to recover.
Corporate Profits: Companies often report higher profits after the economy has started to improve.
Gross Domestic Product (GDP): The GDP is a broad measure of economic activity, but it's a lagging indicator because it's calculated after a period has ended.
Consumer Price Index (CPI): Inflation rates, as measured by the CPI, are typically lagging, reflecting changes in prices after broader economic shifts.
Interest Rates: Central banks often adjust interest rates in response to economic conditions, making them lagging indicators.
Leading economic indicators are statistics that provide insights into the future health and direction of an economy.
These indicators can precede the general economic activities, reflecting potential increases or decreases in economic momentum.
Some common examples of leading economic indicators include:
Stock Market Returns: Often considered a leading indicator, as stock prices incorporate investors' expectations for the future of the economy and corporate earnings.
Manufacturing Activity: Indicators such as the Purchasing Managers' Index (PMI) reveal the health of the manufacturing sector, often predicting industrial production and economic performance.
Consumer Confidence Index: Measures how optimistic or pessimistic consumers are regarding their expected financial situation, reflecting their propensity to spend or save.
Building Permits: An increase in building permits indicates construction growth, suggesting developers are confident in future economic conditions.
Coincident economic indicators reflect the current state of economic activity within a particular area.
Some examples are:
Retail Sales: Indicate the total receipts of retail stores, reflecting consumer spending patterns.
Industrial Production: Measures the output of the industrial sector, including manufacturing, mining, and utilities.
Personal Income: The total income received by individuals, often used to gauge consumer spending power and economic well-being.
Some problems
Complexity and Overload: There are numerous economic indicators available, and they can sometimes provide conflicting information. This complexity can lead to analysis paralysis, where an investor is overwhelmed by data and unable to make a decision.
Inaccurate data: Consider inflation as an example: it's a metric that affects everyone as we all observe changes in our daily expenses. There often exists a discrepancy between the official inflation rates and the actual costs consumers face daily. Anyone who shops regularly can attest that the actual increase in prices frequently diverges from the reported statistics.
Market reaction: Even if you could precisely forecast where the economy will be in the next months you still don’t know how and when the market will react. Markets may react differently to economic indicators than expected. For instance, good economic news might lead to a fall in stock prices if investors fear interest rate hikes. Predicting these reactions can be challenging.
This is why I consistently advocate for paying attention to the insights of company management with skin in the game, as they can provide guidance about the future, rather than getting swayed by prevalent sensationalism.
To assist you in identifying competent management teams, I have written a previous article:
But what’s a better solution regarding economic analysis? Is there something like a better unofficial indicator? Do we know someone at the forefront of economic activity who could give us insights?
Picture this: You're friends with someone working at a harbor, tasked with unloading shipping containers. He could provide insights into atypical shipping activity from specific countries (before the data becomes public), offering valuable, actionable intelligence for optimizing your investment portfolio and being ahead of trends.
Your friend mentions observing a notable surge in container shipments from Taiwan recently. Recalling that Taiwan is a global leader in semiconductor and electronics production, you realize the significance of this trend and decide to investigate further…
This would be my style of analyzing the economy.
Unfortunately, most of us don’t know anyone who works at a harbor and could tell us about economic trends early on.
However, there exists an even more valuable source - an individual often unnoticed yet at the epicenter of economic activity.
This person, absent from economic textbooks, possesses some of the most dependable and actionable data available.
Unaffiliated with Wall Street and overlooked by macroeconomic analysts, this individual holds a unique vantage point on the market's workings.
Intrigued, you ponder, "Who could this be?"
It’s this guy:
The Trash Collector
This might sound funny, but the logic behind this approach is simple:
Trash is an indirect indicator of economic activity.
More economic activity = More trash to pick up
Less economic activity = Less trash to pick up
The trash in this context is of course not only what you daily throw away, but especially industrial waste.
And the trash collector in this context is of course not the guy who comes weekly to empty your trash bin, but the management team of one of the public waste management companies like:
Waste Management WM 0.00%↑
Republic Services Inc. RSG 0.00%↑
Waste Connections Inc. WCN 0.00%↑
Therefore, let’s take a look at some earnings calls to see what those companies have to say about the state of the economy:
Republic Services Earnings Call Q3 2023:
“…there’s tons of uncertainty in the economy. You can look back 18 months. And then even if you think about 2 wars going on and lots of different dynamics, election coming up next year…but I think we’re closer to a soft landing than we certainly were a quarter ago, if you look at the outlook, and we’re planning on a positive year next year, and you heard that in our numbers and forecasts with a lot of humility baked into that…the recycling and solid waste business, the underlying volume growth in that business is kind of 50 to 100 bps. We’re on the lower end of that with where construction’s at…and we saw that with residential and commercial starts even last year and then earlier into this year slowing down…”
Waste Management Earnings Call Q2 2023:
“…some customers seem to be taking a more cautious wait-and-see approach regarding the timing of large jobs given the economic backdrop with many anticipated projects moving into 2024. Our pipeline remains strong, so we view this as a temporary shift in project timing…a lot of these companies went into somewhat of a holding pattern here until they get better visibility on the economy…still strong pipeline still really good customers that are still there, but the just put a lockdown on some of these projects.”
Waste Connections Inc. Earnings Call Q3 2023:
“…the economy is okay. I wouldn’t say it is by any way strong. I would say it’s sort of a flattish environment from a growth standpoint. You have pockets of strength. I wouldn’t say really that there’s many pockets of weakness just flatness…and it sort of appears to be a soft landing scenario. But there’s certainly no underlying real growth in the economy. Not at this point. If some infrastructure spending occurs, the way it is planned to occur in ‘24 and ‘25, I think that could certainly accelerate development.”
Voila! There you have it. It’s noticeable that all three of them share the same tone:
The economy is cooling down and in a wait-and-see position.
That’s it.
Final thoughts
In the investment world, there is a lot of conformity regarding researching methods, analyzing stocks, and building portfolios.
I believe that to succeed on Wall Street, you need to look for atypical information sources that offer you facts that are either hard to find or get ignored because they are hiding in plain sight.
The next time you listen to economic experts like Paul Krugman who likes to exclude food, shelter, energy, and used cars when calculating inflation, think again, maybe the humble trash collector is a more credible source of information.
To sum up today’s lesson:
“The (investing) world is full of obvious things which nobody by any chance ever observes.”
- Sherlock Holmes -
I hope you learned something new today.
Until the next issue. 👋
(In the next article, I’m going to show you why Netflix NFLX 0.00%↑ is NOT a streaming company.)
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.