Thursday, October 8, 2009

So here are two benchmarks we should all be monitoring more closely: extramarital affairs and the price of Latvian hookers.

Bloomberg News
Commentary by Matthew Lynn

May 27 (Bloomberg) -- When the economy starts to lift itself out of this recession, what will be the leading indicator that tells us we have turned the corner?

Some people track the price of shipping to gauge the health of global trade. Others look at the supply of freshly minted money pouring out of central banks. A few will say that signs of life in the housing markets are evidence of a recovery.

Forget them all. The one lesson we can draw from the global credit crisis is that all the traditional ways of measuring the state of the economy are about as useful as a bottle of suntan lotion in a snowstorm.

So here are two benchmarks we should all be monitoring more closely: extramarital affairs and the price of Latvian hookers. Both are telling us that there is still plenty of trouble ahead.

These two measures were proposed recently as reliable economic barometers, and they warrant consideration. Economists often say “animal spirits” play a role in keeping the wheels of the business cycle turning. They have given little advice on how we should measure those spirits. Now we may have the answer.

In the U.K., a Web site called allows married people who are planning to play a few matches away from home to meet up with each other. It has at least 300,000 members, indicating that the British have more on their minds than just the work expenses of politicians and the threat of unemployment.

Bull-Market Affairs

The Web site crunched its traffic and membership numbers and found that there was a big increase in both when there was a turning point in the FTSE-100 index, which measures the leading companies listed in London. When the market collapses, people plot affairs. And when the bulls rage, the same thing happens. When it is trading sideways, they stick with their partners.

“It has to do with people’s confidence levels,” says Rosie Freeman-Jones, a spokeswoman for the site. “When the markets are up, they think they can have an affair because they feel they can get away with anything. When the market hits the bottom, they are looking for a way to relieve the pressure.”

In a similar vein, John Hempton, who runs the financial blog Bronte Capital, has monitored the health of the Baltic economies based on the price of Latvian sex workers -- currently about 30 lati ($60) for the standard service.

“The contractual terms of prostitution are short (an hour, a night) and entry to the industry is unconstrained,” he says. “That means that the prices are very flexible.”

Price Collapse

True enough. His argument is that since the prices have collapsed by about two-thirds in a year, Latvia and the other Baltic states are still in big trouble with deflation lurking.

This benchmark may well be a valid way to get a snapshot of the economy. If prostitution was legal in all countries, it would probably make a good index for central banks to track. There could be few better ways of checking when we will flip from inflation to deflation and vice versa.

Of course, it is possible to detect some attention-seeking here. Illicit Encounters is trying to drum up some customers with an eye-catching press release. In the calm and reasoned space that is the blogosphere, it isn’t unheard of for people to try and cause a stir just to become well-known. You have to shout to get yourself heard on the Internet.

Even so, there are two interesting points to be made about the use of sex as a measuring stick for the economy and markets.

New Methods

First, the world is going through a traumatic time. All the conventional tools for predicting the course of the economy have been pretty useless. Certainly none of the standard models was telling us two years ago that we were heading into the greatest crisis since the Great Depression. So it isn’t surprising that some people are turning to alternative methods instead.

Next, the one thing we discovered in the last year is that a modern global economy can turn faster than a Formula One driver going into a tight corner. We slipped into a serious recession in the blink of an eye. We are going to need indicators that move just as fast if we are to have any chance of keeping up. What better than these two?

Right now, they are telling us we aren’t over the worst yet. Affairs increase when the market turns. Traffic soared in November as the markets collapsed, but it hasn’t surged again. The message: The jump in share prices of the past two months is a bear-market rally, not the start of a genuine recovery.

As for the Latvian hookers, there is no sign of prices recovering yet. The message: The International Monetary Fund should remain on high alert. And so should most of Europe’s banking system.

Infidelity Web sites and Latvian escorts can say a lot about where the economy is heading. Just be discreet if you decide to follow these two benchmarks.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)