Friday I was in Kansas City for a meeting of economics bloggers held at the Kauffman Foundation. My claim to being an economics blogger is slim, I know, but it was a chance to hang with some interesting people and learn something so I went for it. And in honor of that event, then, I’m making this column entirely about how we can tell when the economy is finally turning. There’s a strong argument that time is right now.
Yet the economy doesn’t feel any better to me. Does it feel better to you? Probably not. But what we’re looking for is the bottom, or rather that moment just past the bottom when things start to head north again. The question on every investor’s mind, then, is “have we hit bottom?”
What we are looking for is a leading economic indicator, something we can easily measure that reliably rises in advance of the overall economy. That’s easy, you say, just wait for the stock market. And it’s true that the market always leads the economy by six months or more at the end of every recession. So economists look for that unambiguous turn in the market indices to guide their own predictions that the overall economy is about to improve.
But what if you are an investor and aren’t interested so much in the economy, itself, but in the markets, where you want to make some money? I keep reading that the market is so over-sold that this is going to be one of the great long-term buying opportunities ever, that trillions of investment dollars are waiting, stuffed in money market funds, ready to buy-up depressed shares ONCE THE MARKET TURNS.
That’s the problem: the investors don’t want to buy now in case the market drops another 10 percent. See how stupid even Warren Buffet is looking this week. Remember Warren was the guy telling us all to buy stocks (and leading with his company’s money) last fall when the market was 30 percent higher than it is today.
What we want, then, is not just a leading economic indicator but an indicator that LEADS the traditional leading indicator – the stock market. Well George Morton thinks he has one.
George is a double Cisco Certified Internetwork Expert or CCIE. In the world of network techs earning a CCIE is as high as you can go and being a multiple CCIE (more than one subspecialty, like routing and switching, security, storage, voice, etc.) is like being an MD-PhD or, in Germany, a “doctor-doctor.” It’s a big deal and George is a smart cookie.
Just as an aside, notice that the “E” in CCIE stands for “expert,” not “engineer.” Cisco learned a lesson from Novell’s Certified Netware Engineer program that ran afoul of licensing boards in several states that said only they could declare anyone to be an engineer. So while nearly all CCIE’s are engineers, they only claim to be experts.
Cisco has taken to publishing statistics on how many CCIE’s of what type there are in various countries and regions and George pays attention to this stuff and sees wisdom in it where others see only Cisco PR. It was George who suggested to me a couple years ago that CCIE’s were a good proxy for 21st century economic leadership – that the nations showing the most CCIE growth were likely to be the most powerful for their size moving forward. If that’s true, and I have no reason to doubt it, then China will be a LOT more powerful than India this century and Singapore will be a technology power to be reckoned with.
George’s new idea is to look for flux in CCIE numbers to use as a leading economic indicator. Specifically the number of CCIEs in the U.S. has lately been going DOWN and the number of new CCIEs has stagnated. This could be for many reasons and Cisco in its statistics makes no effort to educate us. By the way, you can see George’s compiled numbers on the effect here.
The numbers may have dropped because companies aren’t willing to spend the money to send their people for CCIE training, because CCIEs who aren’t U.S. nationals may be going home, because CCIE’s who ARE U.S. nationals may have been recruited overseas — any number of reasons. George doesn’t try to figure that out, he just sees the change in CCIEs as a leading indicator of sorts that suggests the market is about to turn.
“An interesting event took place this month (when) the number of CCIEs grew at a greater pace than any time over the last six months,” said George. “The six month average has been running around 300 a month, this period the number jumped to 460. Now, we know that we are not counting month to month, but the sudden spike is refreshing for a number of reasons.”
George looks to the early work of Charles Dow, founder of Dow Jones, the Wall Street Journal, and author of the long-forgotten Dow Theory, which was intended to help investors understand what was going to happen next in the economy and the stock market.
Among the many rules that constituted the Dow Theory was that Railroads stocks would lead any market rally or decline. That was because Dow figured that businesses would start (or stop) shipping items before the revenue from those sales hit their bottom-line.
George’s theory is that IP networks are to the 21st century what railroads were to the 19th.
Over the last six months the CCIE numbers have been steadily going down. Last August the U.S. CCIE number went down by one. The last report in January the number of U.S. CCIE’s grew by eight. Over the last 50 or so days the number has grown by 83 new CCIEs in the U.S.
Is this a change in trend? Are the markets starting to bottom? With all of the bad news in the press, you have to want to be a contrarianIf this were the Dow Theory, then the prediction would be that companies are creating more CCIE’s in anticipation of expansion and adding new networks.
Is George Morton correct? I say “yes,” but wearing my economics blogger hat I’ll endorse his conclusion for what might be a surprising reason: it doesn’t matter.
The market will eventually bottom and turn. It always does. Those trillions of dollars parked in money market funds are real and will emerge when the market turns. This CCIE number might indeed indicate that the market is turning for exactly the reasons George postulates, though the numbers are so small that it could really be for any number of reasons. AT&T could simply have noticed, for example, that its top network folks aren’t CCIE’s and should be, so they sent them all in to take the test. It could be that slim.
But investors are optimists, remember, or they wouldn’t invest. That bit about the market turning followed by the overall economy is important. I can argue that the economy turns BECAUSE of the market and the market turns IN ANTICIPATION of the economy, which means it’s all voodoo economics and always has been.
No matter. If the market makes that bold turn in the next 30-60 days George will be shown to be the genius I always knew him to be, the market will in turn lead the economy (though because of the huge housing inventory I expect this to be a bumpy recovery and you should, too) and we’ll all be eventually prosperous again.
It always happens, you know. All we need is a sign.