Government economists must be nice folks.

They’ve had to break a lot of bad news to us since this recession started over a year ago. But they’re nice. They’re breaking it to us as gently as possible.

They ask, “Do you want the bad news first? Or the really bad news?”

And Wall Street’s reflex to avoid reality is quick to ask (and all too willingly accept) for the bad news. This allows professional traders and money managers to hold off on giving up hope altogether.

It’s hope that has kept the market going so far. Hope for an economic recovery in the second half of 2009 as early as 2010. Hope Congress won’t see this as an opportunity to “fix” everything with a newly hired army of business-stifling bureaucrats. Hope the good times will return –eventually.

The Meekness of Hope

Of course, hope isn’t an investment strategy. There are no price-to-hope ratios in which we can use to judge whether this stock is a good buy or that one is better. But it doesn’t matter.

Hope carried the market out of the depths of the credit crunch lows. Remember, that was when overleveraged hedge funds and traders were forced to sell into a weak market. Fading hope put a quick end to that rally. Investors are voluntarily selling out this time around.

But hey, the economists are being nice. A few weeks ago they broke the bad news to us. They said the U.S. GDP, the total value of all goods and services produced and consumed in the country, declined at the annual rate of 3.8% in the last three months of 2008.

We all knew it seemed a bit optimistic, but hey, they’re economists and being wrong is acceptable. They saved the really bad news until yesterday. About 22 hours ago the government revealed its “revised” GDP figures. A hopeful Wall Street was expecting a decline of 5.4% for the quarter. As usual, hopes were dashed when the actual decline came in at the rate of 6.2%.

“Oops.”

The economy declined at the fastest rate since 1982. The Dow dropped another 100 points or so on the news.

The Good Side

But here’s the thing. As we predicted about six months ago, Wall Street would eventually become completely fixated on the economy. That’s how it always is when times get tough. And there will be no sustainable recovery in the markets until the economy shows some signs of life.

If we wait for the government economists to tell us what’s going on, we’ll be months behind the curve. We’ll miss the real buying opportunity. After all, they didn’t even say the recession officially started in November 2007 until almost a year later.

So we’ve got to find our own way to determine the health of the economy. If we could, we’d be months and months ahead of the herd. And any advantage you can get is extremely valuable in a market like this.

That’s why I look at the electricity consumption as a real time GDP indicator free from any government economist’s rounding errors or political influence.

A Trustworthy GDP Indicator

I can cite more than a dozen academic studies which have correlated electricity consumption to GDP/per capita income growth. They span six continents and the past five decades. They all arrive at the same conclusion; there is a strong relationship between GDP growth and electricity consumption.

We’ve seen how good academic theories work out time and time again (i.e. derivative hedging models, LTCM, etc.). More importantly, it passes the rational person test. In other words, it’s common sense.

An economy that’s growing is a great thing. Entrepreneurs are working late, fearful of competition encroaching on their success and of missing an opportunity. Factories are running at high rates. They often add additional shifts and stay open all night while they’re expanding elsewhere. People go to restaurants to celebrate their efforts and success. Businessmen fly around the world to cut deals, find partnerships, and get their companies in position to grow.

There’s nothing better than a vibrant economy. As you might expect, this all takes a lot of electricity. The small business who keeps the lights on and heat going late into the evening while everyone’s putting in some OT to keep up with orders. Factory machinery running at full power for longer periods will soak up quite a bit more electricity. And on and on.

You know, it just makes sense and it works in real world applications too.

The Great Fall of China

We’ve covered the rapid decent of the once-mighty Chinese economy here in the Prosperity Dispatch for months and months. We didn’t get remotely excited for China’s $586 billion bailout (there’s that “hope” thing again). We’ve covered the ongoing crisis hitting China’s factories over the past six months or so.

By now, it should be no surprise to any of our readers China should be in a recession. The “official” numbers tell a completely different story. The latest report had China’s economy growing faster than a 6% annual rate. That’s with exports down 20% to 30% and falling.

If you look at the trustworthy GDP indicator, there’s a much different story. According to the China Electricity Council’s latest report:

China will see a continuous power glut in 2009 as the global economic downturn forces factories to scale back output and electricity consumption… [China’s electricity consumption] dropped 12.88 percent compared with the same period of the previous year. The power consumption in coastal provinces such as Guangdong and Zhejiang dropped more than 20 percent.

Clearly, there are much bigger problems there than the “official” GDP data lead on. As a result, I still think it’s a bit too early to be betting big on China.

Great Information is Tough to Find

There’s an old adage, advice is worth what you pay for it. Quite frankly, that’s what makes the electricity consumption/GDP indicator so valuable. It’s not easy to find. You’re not going to see this data for every country published on some heavily visited econo-data web site. It’s too real. It paints too much of a clear picture.

With the economy in the tank, the last thing a hopeful Wall Street wants is a big dose of reality. And that’s what it would get if everyone was looking at each individual country’s electricity consumption data.

The way things are going, it looks like we’re on the verge of getting that “best buying opportunity in 5 lifetimes” we’ve been waiting for. We hoped it wouldn’t come to that, but again, hope doesn’t get you very far when it comes to investing successfully.

By Andrew Mickey