Some important measurements to look out for.
Remember the theory of reflexivity in economics? It was one of George Soros’s pet subjects which the controversial hedge fund guru developed to explain his approach to trading.
This may be an oversimplification, but essentially it implies that trading is largely based on individual biases that ultimately form self-fulfilling prophecies. This has an inherent danger of disregarding economic fundamentals, or put even more simply, having a herd of traders shape the economic destiny of a country within an environment of short-termism and nano-second electronically generated trading.
Trading today is constructed on a number of “triggers”, such as daily, monthly and quarterly indicators and statistics, agency ratings, routine events such as interest rate announcements, statements by authorities or experts, deviations from expectations, tips, rumours, bad lunches, and “gut feelings”.
On top of that, these triggers themselves are not immune to massaging, insider trading, fraudulent manipulation as we saw with the LIBOR scandal, and simple downright mistakes, absence of context and misinterpretations, highlighted recently by economist Mike Schussler in his significant spat with Stats SA.
And that madness is what controls your economic destiny.
Or does it? It all comes down to that basic interplay that I dealt with in a recent article, between the measurable and immeasurable; the way we calculate and the way we behave; the way we think and the way we feel. And within that interplay, a very large measure is within our own control – the key attributes of which are awareness and resolve, or perhaps knowledge and patience. Those, over a longer term are far more powerful in shaping one’s destiny than following a manic-depressive herd. They also provide a deeper level of serenity and an ability of keeping cool while others flay about in frenetic frenzy.
Of course, very different rules apply if your approach is short-term trading or longer term investing. The dangers of the former are legend, yet many are drawn into that casino by large and quick returns that are promised in irritating pop-ups on various internet sites. Inevitably, most fail. A number of people I know carry significant scars from such gambles.
While a solid argument can be made for the view that behaviour drives our economic destiny, structures, systems, policies and measurements, it is clear that the latter also strongly influences the former, creating a circular relationship between cause and effect. So investment, as opposed to short term speculation has to be informed by these measurements. But they also have to be useful in guiding many aspects of economic life, such as when to extend or reduce debt; buying or selling a home; changing jobs and many more.
We are overwhelmed by hundreds of such indicators, each with their own relevance in time and place; all interrelated and yet at times conflicting and reflecting mixed signals. Too often essential context is missed in the reporting, not only in critical detail such as whether the metrics have been smoothed or seasonally adjusted to eliminate aberrations, but the strength of their influence and validity of comparisons.
If you are a glutton for statistics you can have a feast on the Bulletin of Statistics published quarterly by Stats SA. However, some other very important indicators are sourced by other government bodies such as the Reserve Bank and SARS.
Like the daily indicators I dealt with previously, I believe that if you become familiar with just a few of the essential monthly and quarterly statistics and indicators, you will have the critical tools to put all of the others into context and have the essential ingredients for sound investment and other economic life decisions.
GROSS DOMESTIC PRODUCT (GDP). Everyone is obsessed with this measurement. It reflects the total value of goods and services produced in a year and is released quarterly by Stats SA. “Economic growth” means simply changes in this number compared with the previous year. I personally believe it has some severe flaws, over and above the interpretation traps that Mike Schussler alluded to, but that will be an article on its own. Flawed or not it triggers a number of important assessments and decisions in board rooms, international rating agencies, foreign and domestic investors, government, the Treasury and the Reserve Bank. In turn these influence a very wide spectrum of our economic lives such as jobs, interest rates and taxes. Many of the routine monthly and quarterly statistics are components of GDP so GDP is a good composite reflector of economic performance as a whole.
COMPOSITE BUSINESS CYCLE INDICATORS. (BCI). This is a surprising omission from general coverage of economic indicators. Published monthly by the Reserve Bank, they come in three self-explanatory separate parts: leading, coincident and lagging. The strength of the leading BCI (which can be found on this page of the SARB website) is that it is a 12 to 15 month predictor of future trends. In addition, its 12 components capture not only the most important monthly indicators that receive far greater individual coverage, but also some of the mood measurements such as business confidence.
PRICE TRENDS. We’ve all heard about the Consumer Price Index (CPI) which is published monthly by Stats SA. I’ve yet to meet anyone who believes that their cost of living has increased in the past year by only the 6.4% measured in August. That’s the trouble with averages – no-one is average! But its veracity is vehemently defended by Stats SA and that aside it has a key influence on our economic life such as on wages and salaries, jobs, interest rates, and taxes.
An earlier indicator of price movements is the Producer Price Index (PPI) which is also published monthly by Stats SA. The PPI tracks the rate of change in the prices charged by producers of goods.
The major factors that drive prices in an economy are: labour (wages and salaries) capital (interest rates and profit expectations); government (taxes and municipal rates); electricity (Eskom tariffs); fuel and other imports (the Rand exchange rate).
FOREIGN TRADE. To the chagrin of many a politician, we are an “open” economy, which means that a significant source of our economic welfare comes from trade with others. The key indicator that has to be included in a basket of monitoring measurements is the current account of the balance of payments (BOP) published by the Reserve Bank. This comes in two components, of which the most significant is the Trade Balance published monthly by SARS. It reflects the difference between the value of our exports to and imports from other countries in physical goods. The other component of the current account is the exchange of services such as insurance, dividends and interest paid and received, but trading in physical goods is the overwhelming number in the current account. An important part of the balance of payments is the capital account, drawn down by trade deficits and topped up by surpluses as well as reflecting foreign investment flows.
Foreign trade impacts directly on many economic factors such as jobs, prices and the exchange rate. A sustained deficit ultimately puts pressure on the flow of capital which in turn puts pressure on interest rates.
PURCHASING MANAGER’S INDEX. (PMI). This indicator has become a keen favourite for many economists since it was launched in 1999. Also known as the Kagiso PMI, it is viewed as perhaps the best early signs of economic trends, and is based on a monthly survey amongst purchasing managers in manufacturing. While manufacturing itself forms only about 15% of GDP, the sector is the most sensitive to underlying forces in the economy. So of all the other sectoral measurements, surveys and indices, the PMI arguably trumps them in relevance.
Of course there are many more measurements that could be included in your own economic telescope. In keeping with the intent of restricting a dedicated following to just a few of the most significant, I would stick to the above five. Get to know and understand them, and follow them regularly and you will have a better grasp of economic events around you.
At least you will have more confidence in not following the whims of the hysterical.