The Cardboard Box Indicator

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Since our immediately preceding post reminded readers of the not-so-great quality of many government statistics, what measures can the public use to gauge the health of the economy?

John Dizard, in a Financial Times article, “Useful thinking from inside the box,” reminds us of a metric that was once used by some savvy investors (the sort who would be interviewed at a Barron’s Roundtable) as a reasonable proxy for overall growth trends: cardboard box demand. And the cardboard box indicator is sending warning signals:

Before Alan Greenspan was known for making scary speeches, market people knew he spent a lot of time looking at the market for cardboard boxes. Most things you use are put in a cardboard box at some point, and box use, production, inventories, and pricing are, therefore, useful indicators. Boxes, in this context, are specific to the North American market, as distinct from pulp and newsprint, which are global markets. What is the box world telling us?

According to my Houston [forest products] traders, not encouraging things. The conventional line from the Fed and the economy bulls is that the US housing market may be weak, but beginning to stabilise, and that the rest of the economy is continuing strong. The overall recovery in growth the Fed expects later this year would make a rate cut inadvisable.

However, the box story is not quite so bullish. As my trader says: “Box demand has been weak for the last five months or so. In April, supposedly you saw an uptick on a year-on-year basis, but on an average weekly basis it was still in decline. There was one extra shipping day in April 2007 compared with April 2006, and if you take that out, box shipments actually declined this April.

“Also, when we talk to people in the field about what is going on now, they say that they are not seeing any great increase in demand, and that there is no way that the producers will be able to get the increase in the containerboard price they are trying to impose.”

Still, the market for boxes, and the containerboard that is used to make them, is pretty finely balanced. Hesitant producers and consumers are keeping low inventories, which helps to prop up prices. And there is a trend to “consolidation” in the containerboard industry, which means that a smaller number of producers may, in the future, be able to use market power to keep up prices even in a weak environment.

“One trade we’re looking at is buying the back months in containerboard. It’s so backwardated that you could see a fall of $40 a tonne in prices [a typical decline in a recession], and your forward purchase would still not liquidate negative [be unprofitable].”

So is that our future: stagnant to falling real demand, but sticky, cartel-like prices and opportunities for a few traders of inefficient markets?
Sounds a lot like the 1970s. Not like what we’re seeing discounted in the equity markets.

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