We are not following the herd


"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, we 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, we 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:

1) 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.

2) 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.

3) 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.

4) 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.

5) 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 our view, the investors and traders must analyze the situation critically before agreeing with any of these trades. Personally, we are not too inclined towards “weaker USD” and “commodity inflation” trade.


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