The Economic Predictor

• By: Ready2invest: Jonty Crossick
• On: 27/04/2009 11:27:47
• In: Economics
• Comments: 0

When it's a bull market the risk is leaving the party too late.  When the market goes bearish the risk is arriving too late.  This is the psychology of humans.  We underprice risk when everyone else is buying and we overprice risk when all the world is sitting on its hands.  This is because most of us think that we’re behaving rationally when really we’re being driven emotionally.  Our egos are far more hurt when we mess up alone rather than if we mess up when everyone else messes up.  Misery loves company as they say.  The challenge is to permit ourselves to escape this behaviour trap.

To assist you we have developed a predicting model so that, at a touch of a button, you can get a real sense of where the economy is at and where it is heading.

I have selected what I believe to be good signals of how we are doing.  Things like unemployment stats, house sales numbers and the spread between base rates and LIBOR.  There are 10 areas we are tracking and reporting on.  We report whether the figures demonstrate crisis, green shoots, recovery or boom.

By seeing all these stats in one go we can get a great visual sense of where we are and what the trend is. The numbers will be updated every month and a summary presented visually with a narrative by me.

If the economy were a patient I would say that death has been averted and the patient is no longer abusing himself with alcohol. That’s not to say that the effects of the alcohol have disappeared but the patient is now eating lots of greens on a daily basis. What he needs now is an exercise routine and the dietary benefits will start to show through.

We shouldn’t let ourselves be taken down by all the fiscal drama and the cries of spendthrift.  All this could be sorted out with growth, a bit of inflation and some cuts and taxes in the up of the cycle.

But what will really get things going again is credit.  Remember, the antidote is often found resting near the poison in natural science. In homeopathy they treat the illness with a very small dose of the disease. As with credit and debt, the right application of credit, which is also the cause of the crisis, will heal the economy. 

It's also a question of size and time. The IMF has revised its estimate of the banking losses to $4.05 trillion.  That’s a total of 12 noughts although I expect you’re all getting blasé about thinking in trillions by now.

Banks need to repair their balances to repair such losses.  This will be achieved through government insurance schemes, public and private injections of capital, the abandoning of mark-to-market methods of reporting balance sheets etc. The problem is that the banking crisis has hit the real economy too leading to fresh loan problems and thus boomeranging back onto the banks.  This aggravates the problem.

There will be analysts who can model the above but I suspect that for all this to wash through the system will take a minimum of two years and possibly four years.  That means the credit cycle recovering significantly no earlier than Q1 2010 and no later than Q4 2011.

My suspicion is that we have hit bottom and that we will bounce along this nadir for the rest of 2009.  2010 will see mild improvements and things will start to recover more seriously in 2011.

That is why I remain convinced that 2009 is a great property-buying year.  It never pays to time your exit from the party at the last moment. And nor does it pay to time your entry once you have too much evidence of others being there.  You tend to find that all the best spots have been taken and the highest quality wine has been snaffled. Or in other words - don't convince yourself that you are being cautious and prudent when you are really being driven by fear.

The Predictor Model is at http://predictor.ready2invest.co.uk.  I would love to know what you think.