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Zip your wallet against economic forecasts

The rise of macroeconomics, to such an extent that it dominates the national and global narrative, can only be described as stunning. It might be news to many that there is in fact no ‘Nobel Prize in Economics’ even though a Nobel Prize in Economics is awarded annually.

There is a ‘Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’ but it was invented by the Swedish Central Bank almost three quarters of a century after Alfred Nobel’s death. According to the New York Times, the prize is:

“an annoyance to the recipients of the five actual Nobel Prizes, those scholars from excluded scientific disciplines such as astronomy, and a living descendant of the donor, Peter Nobel, who has denounced it as a ‘PR coup by economists’.”

From leading commercial radio news breaks to the ‘vox pop’ responses constituents give when asked what is their greatest election issue, macroeconomics cannot be escaped. But that which provides fodder for TV and radio content producers and consumers provides little else.

Macroeconomics is useless, microeconomics is useful

While I believe macroeconomics is just about useless in explaining future returns, microeconomics is vital. Indeed, when explaining the success of Berkshire Hathaway in October 2003, Charles T. Munger noted,

“Year after year, in a kind of grind-ahead fashion, with very few failures, it eventually drew some attention, indicating that Warren and I knew something useful about microeconomics.” (Herb Kay Undergraduate Lecture at the University of California).

A doctor, a physicist, a biologist, a chemist, an engineer and an auto mechanic can identify a problem and fix it. And yet despite the self-proclaimed wisdom of the world’s best economists and central bankers, we remain mired low or no growth since the Great Recession of 2007-2009.

A senior Coalition Minister recently described to me the business and economic measures that were applied to decide that a restructure was necessary of a department responsible for social services. You won’t get any argument from me on that score. However, viewing everything through the lens of economic rationalism might not serve the needs of everyone in the community.

Economics as a dark art rather than a science

Macroeconomics is not a hard science, like mathematics or physics. It is a soft science and its analysis, and application to the pursuit of profits in financial markets, is more a dark art than it is a robust tool that can be relied upon to produce predictable outcomes.

Take the relationship between consumption and interest rates. Monetary policy levers have always been relied upon to crank up or turn down consumption and investment. Anyone who studied Economics 101 was taught that reducing the cost of money increased its demand, which would translate to consumption. By extension, the lower rates go, the more stimulus is provided. Yet today, we are discovering the exact opposite is true. The lower rates go, the more cash savers are required to have stored to fund their future spending. As rates fall, spending declines and savings increase. In Denmark where rates are negative, consumption as a percentage of GDP has declined and saving has increased.

When Charles Munger addressed the economics undergrads in 2003, he described one of the major problems with economics was the ‘fatal unconnectedness’. This term is first attributed to an English mathematician and process philosopher, Alfred North Whitehead. He spoke of its proliferation in academic disciplines where each professor didn’t know the models of the other disciplines, much less try to synthesize those disciplines with his own.

The New York Times articulated it slightly differently when in February 2015, Orlando Patterson wrote,

“It’s not the statistical models used by economists that are the problem, but the rejection of qualitative methods, other fields and viewpoints. The gulf between the economic view of the world and that of the lived experiences of the general population is often vast. For example, in June 2009, the National Bureau of Economic Research declared that the United States was no longer in a recession, in stark contrast with the felt, economic experience of 88 percent of Americans the following year.”

Even if the Angel Gabriel sat on the end of my bed one evening and told me what the GDP number would be in a year’s time, there would be little chance I could apply any certainty to the prospect of profiting from that information.

You might also recall this Cuffelinks article by my friend Ashley Owen who explained the zero correlation between annual GDP growth and stock market returns.

And in the interests of playing the ball and not the man, I won't name the famous economist who wrote: “The third and most exciting phase of the bull market has just begun and could run for years” in the weeks before the GFC.

Harden your head and heart to economic influences

Given that even when armed with the correct figure in advance of its release, we are unlikely to profit from the information macroeconomics gives us, why are we mesmerised by it?

For many financial advisers and institutions, their clients demand it, and it makes them look wise if not omniscient. What could be more convincing than a bank or broker wheeling out their ‘economissed’ to demonstrate that the stewards of the client’s life savings are across the issues facing the national and global economy as well as their likely impact on those savings?

Of course, I am not the first to point out that economics fails to add value but no amount of argument will convince their supporters otherwise. Faith of course comes from the heart not the head so there is little point in cerebral warfare.

For those of you who aren’t convinced, I ask you to commence the longest journey in the world - the one from the head to the heart – and consider managing your portfolio without reference to macroeconomics. Indeed, if someone tells you that you should be doing X or Y because GDP, unemployment or inflation will be A, B or C, zip up your wallet.


Roger Montgomery is the Founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able’. This article is for general educational purposes and does not consider the specific needs of any individual.


Don’t sweat the big stuff



May 20, 2016

Invest without reference to macroeconomics? Isn't that like fighting with one hand tied behind your back? Every company or asset is exposed to macroeconomic factors, and understanding how the asset is so affected is important in understanding its risks. And I've heard Roger, the author, talk about macroeconomics on TV before. So a bit hypocritical in my view.

George freeman

May 20, 2016

Good point. If you knew of a coming recession you could very clearly make money to the extent markets were not expecting it.

It all sounded like an article on the same topic a few weeks ago: http://cuffelinks.com.au/dont-sweat-big-stuff/

That one also talks to how to think about it all from a practical point of view, and it's written by Mark East of Bennelong fame.


May 19, 2016

Dear Roger

I am perplexed by your commentary.

Assuming the Angel Gabriel is accurate at telling the future and honestly conveys that information to you, then surely you would be astute enough to manage your clients assets to their advantage.

After all that is your job.

So some simple questions.

What would you do on behalf of your clients if you are informed by Angel Gabriel of a recession in Australia in 2017?

Do you think that you could profit from such information?

If not why not?

I await your next insight that defies logic.


May 20, 2016

We all know the old saying - Economists have predicted 9 out of the last 3 recessions.

Additionally, a recession doesn't automatically mean poor returns, since the economy is not a very good indicator to sharemarket returns! History has shown us that at times of negative GDP, the sharemarket has returned 40% over the next 12 months. Likewise GDP of 4% has resulted in sharemarket returns ranging from -40% to +40%!

Given this, I would likely disregard the prediction.

Warren Bird

May 19, 2016

I agree Jerome. Although long ago I moved on from being an economist to being an investor and my processes have for many years had no role for economic forecasts, I wouldn't lump all fundamental economic analysis together with GDP or unemployment forecasts and dismiss the lot.

Jerome Lander

May 19, 2016

Although economists might not be particularly helpful and may be fatally misled by their training, good strategists grounded in the more pragmatic can be very helpful when it comes to asset allocation.


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