• Central bank policies are more desperate than ever to fight the deflation of financial markets;
  • Once countercyclical policies unravel, it is hard to escape the dire whirlpool of side effects;
  • Can the Tocalino Index say anything about the bouts of exuberance in U.S. stock exchanges?

Years ago, while exploring and associating some economic data in a spreadsheet, I developed a curious indicator. At the time, I wrote a brief presentation of the Tocalino Index. Based on statistical records, I take the most promising population group for aggregate consumption and divide it by the sum of the rates of unemployment and core inflation in the U.S.

The chart below shows American households by the age group of their main provider. Ten years of research show their average annual share of national aggregate consumption.

Emancipated young people, from age 25 onwards, have an increasing contribution to consumer demand. While those groups above 55 years of age show a drop in their participation. Therefore, the consumer market should gain momentum when the 25 to 54-year-old cohort increases, and decelerate when the size of this population decreases. Inflation, by increasing the cost of goods and services, makes consumption less affordable. Worse yet, unemployment is a factor that dramatically inhibits the expenditures of the individual or his/her entire family.

By expressing this basic concept with a very simple formula, the Tocalino Index by itself deserves greater attention in any free-market capitalist economy. But the result is truly remarkable when we compare it to the behavior of the stock market in the U.S.

In August 2014, the index appeared on different websites and caught the attention of some reputable professionals. Among them were the people responsible for Peak Prosperity's Daily Digest (by Chris Martenson) and the savvy investment strategist and analyst Lance Roberts. I also received an email from the former Chairman of the Department of Economics at the University of Chicago, Harald Uhlig, who is now a consultant for the Federal Reserve Bank of Chicago and the European Central Bank. In 1990, his Ph.D. thesis addressed "Costly Information Acquisition, Stock Prices and Neoclassical Growth." Uhlig suggested the use of GDP in my formula. The suggestion was logical and welcome. But in trying to do so, in different ways, it only diminished the correlation between the index and the stock market.

Although the indicator is not equally relevant when adapted to Brazil (probably due to the low purchasing power of the population), I follow it carefully. After all, the American stock market has its influence on all others around the globe.