"It is difficult to make predictions, particularly about the future." — Mark Twain
There must have been times, not long back in human history, when
making economic forecast was a straight forward process based on rational
thinking. The economists could predict the demand supply equilibrium and
consequent price tendencies with reasonable accuracy. The investors and traders
could use these forecasts to make a strategy best suited to the likely economic
trends. The governments (and later central banks) could rely on these forecasts
and design their monetary policy and fiscal response. If that were not to be
the case, economics would not have got recognition as scientific discipline of
study.
However, by observing historical trends in correlation between
the economic forecasts and investors’/traders’ behavior and policy response to
the forecast, I find that investors, traders and policy makers have seldom
taken these forecasts seriously. In fact, the developed economies, with access
to a large pool of qualified, trained, and experienced economists, appear to
have faced far more serious economic (and market) debacles, than the poor third
world economies in 19th and 20th century.
In past couple of decades, I find that the function of making
economic forecast has become very complex, and to large extent speculative.
Some of the reasons for this could be listed as follows:
·
The dematerialization of money, assets, labor,
commodities and trade has completely changed the traditional demand-supply
dynamics. Both the demand and supply of money, assets, commodities and labor is
now significantly more sensitive to global conditions. The imbalances in
demand-supply equilibrium could be bridged much faster. Similarly, the
demand-supply gap can widen at much faster pace.
·
Globalization of trade & commerce has made
the markets worldwide. Events like weather conditions, natural disasters,
epidemics, etc. which traditionally impacted the demand supply equilibrium for
many months, and sometimes years, no longer necessarily have a durable impact
on local economy. The supply gaps could now be filled much faster through
import of money, labor and commodities.
·
Internet has made the access to information easier,
faster and cheaper. The market participants find it imperative to act on the
streaming information with lightning speed, to take the first mover advantage.
They have almost no time to verify the authenticity and repercussion of the
information before acting on it. This adds material degree of speculation to
the behavior of policy makers and market participants. This also makes it easy
for the unscrupulous (smart in common market parlance) elements to manipulate
the market and policy trends.
·
It has been seen that the policy response to
economic data is mostly driven by considerations of political expediency and
financial market buoyancy. Post dotcom bubble, as the digital economy has
progressed at tremendous speed, the socio-economic inequalities have also
increased at equivalent speed. The task of political establishment has
therefore become easier.
Politicians have to keep the financial markets buoyant to
placate the few rich; and keep subsidizing the majority poor to preserve their
political constituency. High fiscal deficits and low to negative real rates are
the two tools used almost universally by the governments across the world. Low
rates (i) help the government to borrow cheap for profligate fiscal policies
(more subsidies); and (ii) let the large corporates grow faster at the expense
of poor saver. Obviously, this strategy does not agree with the traditional
economic theory. There is nothing to indicate that the governments which are
enjoying support of both rich and the poor with brilliant ease would not want
the things to change.
·
Significant part of the global economy is now
turning digital. The trend is prominently visible even in many developing
countries. With this material changes are occurring in the consumption patterns
and trading practices. The incremental income is now mostly spent on services
(communication, travel, entertainment, etc.) even in lower middle class
households. The correlation between higher income/liquidity and commodity
inflation is weakening.
As a matter of routine practice, a myriad of experts have made
predictions about the best trades for the year 2021. A weak USD, commodity
inflation, industrial recovery, emerging markets are some of the overwhelming
consensus trades.
In my view, the investors and traders must analyze the situation
critically before agreeing with any of these trades. Personally, I am not too
inclined towards “weaker USD” and “commodity inflation” trade.
