What’s next for the economy?
One of the most important inputs into any investing process is an understanding of where the economy is going. After all, bonds are a contractual claim on future cashflows. If inflation picks up, their value depreciates. Stocks are a residual claim. They benefit from growth. An improving economy should help the stock market, while an increase in inflation hurts bonds.
So market analysts spend lots of time and effort trying to understand the future. But predicting the economy is challenging. There are leading indicators, lagging indicators, false flags, trends, and turnarounds. Our language reflects our uncertainty: we “examine the tea leaves,” or “look into the stars,” or try to sense “which way the wind is blowing.” And we never see data objectively. Our own expectations color what we see and how we react.
Macbeth was a man obsessed with the future. Early in the play he and his friend Banquo come upon three witches who foretell that Macbeth will be king. Banquo asks them to “look into the seeds of time, and say which grain will grow and which will not.” They answer in riddles, which are only made clear as the play progresses. Later in the play Macbeth goes back to them to find out what they foresee. Their cryptic predictions mislead him—because he hears what he wants to hear.
It’s important not to mislead ourselves when we look at leading indicators. In the past, a reliable leading statistic has been housing. After all, people don’t buy a new home unless they feel confident about their finances. The housing bubble disrupted that indicator, but five years on we seem to be reaching a kind of equilibrium, where trends in sales and prices have some predictive value again. And what do we see? Home prices in most of the world are rising. The US ranks 10th among 52 countries studied by the IMF. Europe is mixed, but generally positive. China and the Pacific rim are also growing, although Japan is falling slightly. Following a period of post-crisis stagnation, global home prices have risen for seven consecutive quarters.
The picture is encouraging. Global growth continues. But like Macbeth, we need to be careful not to see just what we want to see, or our fates will be filled with “double, double, toil and trouble.”
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!