Forecasting and thinking about the future

The accuracy of weather forecasts is a reasonable question and can be easily answered for the short run? Posing the same question about economic forecasts for the coming year, for example, provides such a range of answers that it makes you wish you had not asked it. There is little consistency in the answers given, at least after reading a series of articles thrown up on the subject by an internet search engine. Warren Buffett’s view of certain forecasts is the following at – http://www.cbsnews.com/8301-505123_162-37840783/why-you-should-listen-to-economic-forecasts-with-caution/

“We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, (Berkshire Hathaway vice chairman) Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

And yet in order to make decisions for the short and longer run, everyone has to assess the future as best they can. This is also true when advising the next generation. How then to proceed given the present state of the world and how it may evolve?

Over the past few weeks, I have read numerous reports on the prospects for 2013. Initial conclusions are that there is a herd instinct to point to similar overall forecasts for countries and regions, but enough commentary on details to become confused about what might actually happen in regions of the world and in specific industries and their firms.

Regions, countries, industries and firms

A first issue is whether it makes sense to talk about the prospects for countries and regions. A region such as Europe and Asia has many countries, some coupled by economic and trade agreements. North America consists of two countries, linked to Mexico through NAFTA to make three. Russia is on its own but talked about in terms of the BRIC countries of Brazil, Russia, India and China. Geographically, the world is also split into so-called sovereign nation states, some of which have remarkably straight boundaries, as in Africa and between Canada and the US.

 Increasingly, economic interaction does not correspond to national borders as seen by the growth of international trade, and investment of all types from direct investment to short term monetary transactions. Does it make sense then to talk about the prospects for countries or even regions of the world, when borders have become so porous to trade, financial transactions, the movement of persons and communications?

Communications technology has further increased the erosion of borders and barriers established politically. Local political decision-making can be effective when discussing garbage pick-up, street cleaning, water and sewage services, but in many areas where states claim sovereignty often they cannot enforce it and may willingly relinquish it by signing international agreements. While some favour creating more countries, such as Quebec, Scotland and regions of Spain, others negotiate further cooperation between countries. Compared with the1950s when the total number of sovereign countries was in the double digits, the number is now about 200 with numerous agreements which actually weaken the sovereignty which nations claim to want.

Another way to look at and forecast global economic prospects is to ask how firms are going to perform and prosper and the industries to which they belong. A firm engages in producing a product (good and/or service) or a range of products and is diversified. It is more or less vertically integrated, now referred to as being part of a supply chain. A multinational firm will have its activities spread over geographical and political space, and its fortunes will depend on how it manages these operations which have a technical, spatial and political dimension. Some are more successful than others. Note that Ed Whitacre, the former CEO of ATT, was fingered in 2009 to become the CEO of GM when it emerged from bankruptcy proceedings. He served in this capacity until Sept 2010 with the aid of a $52bn investment from the US government and $9.5bn from the Canadian government. Whitacre had no previous experience of the automobile industry but had management skills which allowed him to lead the GM turnaround. How is it possible to predict the likelihood of success when a new leader is put in place, and was success due to his leadership?

Back to the economic prospects for 2013 and the longer run. I feel there may be less uncertainty about by how firms and industries are likely to perform, than how countries and regions may prosper. Those who think otherwise can diversify their investments in an ETF that covers a number of firms in an industry, country or region of the world or some combination of these three, or they can invest in a fund with a mix such as Thai equities and fixed income instruments. The opportunities for different strategies are numerous but the investor looks for help from forecasts. The investment opportunities for which individuals may have the most information is not a region, country, industry or firm but things like real estate in the area where they live, and hobbies which they pursue such as books, jewelry, stamps and art collecting.

 

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