Have you ever heard of the Allegory of the Cave? It’s a story written by Plato, the ancient Greek polymath and philosopher.
In the story, a prisoner is chained inside a dark cave. All he can see of the world outside is shadows projected onto the cave wall. To him, these shadows are the world.
That is, until the chains are broken, the man steps outside and sees that his entire reality is only a poor approximation of the actual truth.
It’s a good read, and you should check it out if you have time.
But why do I bring this up?
Because I believe that many investors — instead of observing the true nature of the economy — are getting lost in the shadows of the cave.
Allow me to explain:
The Market As Cave Shadow
Most investors focus on the daily or weekly fluctuations of the market to ascertain which way the economy could be headed. It’s understandable why they would do that.
For one, a stock market crash sounds dramatic. And we’ve been told that a crash usually presages a major economic upheaval. Second, many investors have their retirements locked up in 401(k)s, which are dumped into index funds that broadly follow the major indices.
But the truth is, the stock market is not the economy. Just check out this statistic:
Over the past 31 recessions that have struck the U.S. since the Civil War, stock-market returns have been positive in 16 of them. This means the stock market goes down during a recession less than 50% of the time.
Pretty crazy, right?
The market then, is an inexact approximation of economic well-being. It’s the shadow on the cave wall. And because it’s such a poor facsimile, it forces us to look elsewhere to see how the American economy is actually performing,
The True Nature of the American Economy
So, where should we turn? I believe that freight and shipping are the most accurate indicators of economic health. Everything — from oil and petroleum to computers and cars and the materials that make them — must be shipped via boat, truck, or train.
Because of this, we can use the freight economy as a bellwether for the truth. So, what does it tell us?
Well, it’s been a bloodbath in the trucking industry as of late. In October, Convey — one of the hottest venture-backed freight brokerage startups — announced it was closing operations.
According to FreightWaves.com, a number of other mid-sized brokerages could be facing bankruptcy over the coming months.
But it’s not just the brokerages taking a hit. Employment is drying up across the whole of the trucking industry, at a faster pace than in the 2000 dot-com era or the Global Financial Crisis.
Contracts are simply drying up — there just aren’t enough loads to fill the trailers of America’s trucks. And the collapse is even spreading to the banks that lend to the freight industry. Just last week, Citizens Bank of Sac City, Iowa went under.
The explanation? Bad loans tied to the trucking industry.
Where there’s smoke, there’s fire. The stock market might not be the real economy. But the goods that are carried via trucks, the things we use every day, are real.
And if the freight industry is collapsing, it begs the question:
Is the American economy on solid footing? Or are we hurtling down a steep slope?
Let me know what you think.
-Alex
