Thursday, July 12, 2012

The Fed Index

This is part III of a series.

I’m confused.

As of this writing in July, 2012, news from around the world is uniformly bad. It’s moderately bad in North America, where US unemployment stubbornly prevails; it’s slightly less bad, though still bad, in Asia, where creeping wage inflation and declining exports are putting a damper on once-booming markets; and it’s grievously bad in Europe, where years of Greek, Spanish and Italian drunken profligacy are threatening the banking system and sending whole governments reeling toward insolvency.

Economic distress being nothing new, what, you ask, is so confusing about that?

Well, only that the single most accurate indicator of recent economic health has taken a rapid and dramatic surge to the upside. This indicator is so potent that, looked at in isolation, it would seem that the world has been magically cured of all its economic cancers, boils, infections and toothaches at once. It says that we’ve regained our collective mojo. That we can breathe a sigh of relief, and get back to drinking, gambling and buying Hummers. That, finally, dogs and cats can live together in harmony under one roof again.

What has led me to such great optimism?

Federer won Wimbledon. More, he is once again ranked number one. The world is back to normal.

There was a time, from approximately 2003 to 2008, when the world could do no wrong. The promise of capitalism was being fulfilled at every turn. From the Chinese peasant family who could buy its first air conditioner because its father landed a job assembling Ipods, to the family in Millburn, NJ who bought a house in June, only to find that it had doubled in value by October, to the lanky Australian backpacker who found he could stay on walkabout for 36 months because odd jobs were so easy to land around the globe, the world’s population was drinking deeply from the draft of a beer called Good Times.

And on the tennis courts, there was a man who could do no wrong. His name was Roger Federer, and he was unlike anything anybody had ever seen before. His feet were so agile and his shots so penetrating that he could beat his foes into ragged, whimpering submission, all without ever breaking a sweat or messing up his own hair too much. His mastery of opponents was all the more inconceivable because he made it all look so preposterously easy.

But then came the fall of 2008. Ironically, it came in the fall of 2008. The world crumbled and Federer crumbled. The levels of global financial and emotional distress were matched only by the dissonance of the shanks from Federer’s errant forehands and gasps from crowds as his balls landed fifteen rows deep at the otherwise hallowed grounds of Melbourne, Roland Garros and, uh, Flushing Meadows.

This was not the Great Depression, though, and for several years the world’s economies showed flashes of brilliance and periods of sustained recovery (see here, and here). Federer, too, showed his resilience, occasionally besting the overpowering Nadal and the grinding Djokovic.

But since the beginning of the financial crisis, we have yet to experience a period free from worry. Something has always been buggering up the works. For some reason, companies refused to hire actual people, even though they were flush with cash as early as 2009. Financial markets continued to be roiled by lack of transparency and fears of overvalued assets on bank’s balance sheets. More recently, declining tax receipts have put various governments in the precarious position of not being able to borrow at low enough rates to keep them solvent. Uncertainty prevailed throughout.

Similarly, though RFed occasionally wowed us with his sorcery, the true test of the completeness of his game – his world ranking – never recovered. First he lost the number one spot to Nadal, who had finally prevailed at Wimbledon of all places. Soon enough, the Djoker passed him too. Federer fans were despondent, and not just because they were unemployed and had to sell their Hummers to the scrap dealer.

Recently, though, the man himself has begun to declare his intent, and the belief in his own ability, to regain the world number one ranking. He worked hard on his one-handed backhand, which had taken a beating from Nadal’s nasty lefty topspin forehand. He tightened up his pinpoint serving, which had already been the best in the world. And he seemed to regain the single-minded focus required to hit his mysterious shots without peppering his play with a shank here and a flub there. He was getting older, so the thinking went, and he wanted to go out on top. Plus, he wanted his young, growing daughters to have the pleasure of seeing him hoist a grand slam cup.

And so it all came together over the last fortnight at Wimbledon. I’ve been fooled by Federer’s success before, thinking that it signaled a true turnaround. But this time it’s different. Since the beginning of the Fall, Federer has won grand slam tournaments, but never while beating the world’s top player along the way. In each case, he (only) beat Murray, instead of Nadal or Djokovic. And, he has never gained the number one ranking back.

Until now.

So that’s why I’m confused. The Federer Index is once again at an all-time high. But if you read the newspapers, it seems the world is still a mess. The two are all out of whack.

There can be only two solutions to this seeming paradox.

First, it could be that the Federer Index is not actually a very good indicator of the world’s economies. I find this impossible to believe. The connection is just too close. The ups and downs match too perfectly. I’ve charted the two trends on the same graph below, with Federer’s ranking on the right axis and the world economy on the left. As we know from reading New York Times science articles, correlation equals causation. Therefore it must be the case that the economy is on the mend.

So the second solution is that the world’s headlines are just wrong. Europe is not, in fact, headed for a fiscal cliff. The unemployment rate is somehow being measured incorrectly in the United States. And Asia is still hard at work making widgets for the rest of us. As for all those Hummers? Maybe they’re just all being hoarded out in LA.

Well, I don't really know, so I am going to go have a beer and enjoy the summer – you should too!