Friday 18 November 2011

You, me, a German & an economist walk into a bar...

Buy a German a drink and you'll be told that the economy is wundenbar, prices are robust and unemployment is at a generation-low. Change seats, if you have the stomach for it, and do the same for an economist and he'll be squealing like a bag-full of pigs... You could argue that the economist is highly-skilled, well-educated and therefore worth the price of a beer but more often than not you'd be wasting your money..!

The disconnect between the economy and stock-market performance is not always fully understood. The supposition that the stock-market reflects the economy is false, palpably so! If anything, the stock-market tries to predict the future, usually one year out, which is why traders and professional money-managers will talk about the '12-month economic lag' on current pricing. That means current stock-market prices reflect the predicted conditions 12 months hence... The variables we scan from which we make our predictions are mostly the subjective interpretations of the current circumstances we find in 'the real world'. Euphemistically, these predictions elevated in status to FORECASTS by analysts or economists are nothing more than, well, predictions and unless the forecaster has divine authority it's nothing more than, yes you guessed it, a prediction! Extrapolating this theory in the media, a Bloomberg or a Reuters or any other similar financial-media company would then collate these FORECASTS (ie: predictions), calculate the middle-ground (an insipid concept at best) and elevate the average FORECAST (ie: prediction), to unimaginable status by renaming this number the CONSENSUS FORECAST (ie: the average prediction). In reality that's the same as buying lukewarm tea because half the world likes ice-tea and the other half like their tea hot. 

These CONSENSUS FORECASTS (ie: average predictions) are applied to a company specifically, a sector broadly, an economy generally and in recent times to the global economy as a whole. Investment strategy is a discussion for another time. Even so, applying CONSENSUS as reality to your personal investment strategy is, quite simply, intellectually poor... You'd be selling yourself short. 

Returning to our two lechers above, whilst the German lives in the now, the economist lives in the future. One lives in ignorant bliss and the other is blissfully ignorant for everybody knows that today's reality is not always tomorrow's certainty. The same applies to markets, today's prediction is not always tomorrow's reality. One more thing, three years ago the US financial crisis heralded the end of America and by implication the rest of the world. Surprisingly then we're still here. We'll say the same about Europe...






No comments:

Post a Comment