It is not in the stars.
“The only function of economic forecasting is to make astrology look respectable.”
― John Kenneth Galbraith
The economic news of the last week is not difficult to interpret.
Economic forecasting has always been about more questions than answers. I suggest one question in particular.
Look at a few economic indicators from the last week, or maybe the forthcoming week:
- Interest rate rises in the US and UK: could be 0.75%
- UK£/US$ exchange rate down to $1.33/£.
- Oil price at $89.7/barrel
- Gas prices, and consequently electricity prices, rising.
- The UK has announced a massive programme to assist those coping with high energy bills – both household and businesses. Rumoured cost (no exact amounts quoted, it really is unknown) £100-150 billion.
- Economic statement from the UK Chancellor this Friday, probably including reducing Stamp Duty to help the housing market. This pushed up prices for a while last time.
You can add many others to this list.
It is not difficult to forecast the impact of many of these. While I love the J K Galbraith quote, we still find ourselves forecasting, with one certainty – the reality will be different.
The problem as I see it is not the forecasting. We can all do this, and we need to make plans. The issue is the questions we ask as a response to the forecasts. While there will be much media attention on downsides and emotions, there is one key question: So What?
We cannot control the markets, forecasts or the economy. We can ask ourselves what we need to do in response. The So What question is the first step.
I have my views about the direction of the UK economy, given the new government (not just King). I notice Martin Wolf in the Financial Times describing the energy assistance package as a huge gamble: I agree.
You may like the forecasts or not. You may be able to see the likely direction of travel.
Then, ask “So What?”, and make your own plans in response.
You can, at least, control your own actions, if not the events around you.
Stat of the Week – 10% The UK market share of Aldi, the German owned discount supermarket. This makes Aldi number 4 in UK supermarket market share, overtaking Morrisons, and catching up with Asda.
What this does not say: Morrisons being overtaken is marked by its acquisition private equity earlier in the year, following Asda’s debt financed acquisition earlier. Both Morrisons and Asda are still profitable, but their debt burdens may make retaking market share more difficult.
Buzzword of the Week – Bonds
Definition – Bonds represent the debts of issuers, such as companies or governments. These debts are sliced up and sold to investors in smaller units – for instance, a £1 million debt issue may be allocated to one-thousand £1,000 bonds. In general, bonds are considered to be more conservative investments than stocks and are more senior to stocks if an issuer declares bankruptcy. Bonds also typically pay regular interest payments to investors, and return the full principal loaned when the bond matures. As a result, bond prices vary inversely with interest rates, falling when rates go up and vice-versa.
.Alternate View – When looking at a Balance Sheet, remember these are debt, they have to be repaid. They may not be equal: some need to be repaid before others, especially if the business goes bust (maybe I mean “a crystallization event occurs”?) These can be traded, hence the potential investment angle. If you are trading bonds for profit, you could be described as an investor, maybe even a gambler. If you hold until the end, you are a lender.