The Paladin Principle

By DAVID MOON, Moon Capital Management
March 18, 2007

Have you ever walked down the street and seen a beautiful young woman holding hands with a guy who has a mohawk and a pair of pants about to fall off? The picture stumps you. 'How did those two end up together?'

There is some unseen force at work. Perhaps he's a millionaire. Maybe they're cousins from Alabama. Or they might even be in love ' the ultimate of unseeable and unpredictable forces.

Economic relationships are that way. Some are obvious; some aren't. For example, there's an obvious relationship between bankruptcies and loan defaults. People run out of money; they quit paying their bills. Interest rates and home sales are correlated. The price of coffee has something to do with the quantity of coffee demanded.

But some relationships are more anecdotal and require a little digging to understand. For example, if you want to measure or forecast the economic strength of a community, you might look at its local U-Haul stores. If a city is a net importer of rental moving trucks, people are transferring into that location; the area is attractive and the business environment is likely strong.

But if a city is a net exporter of moving vans and has to constantly replace its local inventory, people are leaving. Its economic base is deteriorating.

Many people have studied the influence of these unseen and not-so-obvious relationships. One of the more recent researchers into this area is Florida economist Haley Brooke, who calls this notion the Paladin Principle.

Dr. Brooke, a researcher in Tampa, noticed a correlation between the quality of the service staffs in a city's restaurants and the number of young unemployed workers in that city. If an economy is weak or there are a bunch of college students in town, it creates an abundance of young unskilled workers. It doesn't matter if some bright 20-year-old with a 4.2 high school GPA and a transcript full of AP courses will some day be a biomedical scientist; in college she's simply part of a swollen pool of unskilled workers. She allows both Cracker Barrel and Hooters the luxury of selecting the most attractive waitresses from an artificially large group of candidates.

More unemployment equals better restaurant service.

This sort of anecdotal tool is useful, but has its limitations. It's a sort of "come as you are" indicator, useful at face value, but mostly as confirmation of other, more traditional economic measures.

For example, it makes sense that if sales of the hardware necessary to conduct meetings by teleconference have been exploding, that's obviously not good for airlines or hotels, especially those heavily dependent on business travelers.

But what about companies that provide low-end bedding used by hotels? You might never think teleconferencing is related to a company like Time Warner shareholder Liberty Media. But what if I told you that Liberty Media owns the world's largest provider of in-room hotel movies? Now that's a relationship so obvious even Ray Charles could see it.

Look beyond the obvious. That's where you'll find both opportunity and danger.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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