Time-wasting public discussions

November 20th, 2008

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Sometimes, we despair at the kinds of politicians we have in Australia (and by extension, the rest of the liberal democratic world). Recently, the Opposition frontbencher Andrew Robb accused the government’s Treasury department of “manipulating” figures when it made a forecast of 2% economic growth. That 2% is only 0.5% more optimistic than the RBA’s forecast of 1.5%.

To us, this is just nitpicking and exaggeration for the sake of playing the role of Opposition. As a result, some time are wasted during parliment time to address this issue. Can you believe that our dear politicians are sniping at each other while the nation is facing a serious economic problem that can turn out to be a serious recession (or maybe even a depression)?

All because of different methodologies used to make forecasts.

In the days to come, there will be a lot more public discussion on whether Australia will experience two consecutive quarters of negative growth or not (called a “recession”). Again, this will be a complete waste of time and energy. The US is already facing a major economic crisis and yet, there are some resistances in calling it a ‘recession’ (technically).

Here, as investors, we don’t really care whether Australia will hit technical recession next year. As we explained before in Example of precisely inaccurate information,

The price index is a very important number. It is used to derive real GDP growth from the nominal GDP growth. From the growth (or contraction) of real GDP, we can then define when an economy is technically out of (or in) recession.

Now, if the price index is a logically invalid number (let alone accurate), then how accurate will real GDP growth figures be for capturing the growth of output of an economy? If this figure is inaccurate, then how accurate will it be for defining when an economy is technically in recession? In that case, how useful will it be to be so precise in defining the exact point for which the economy is in technical recession?

By the time it is absolutely clear that Australia will fall into recession, it is already too late to change your investment plans accordingly. In fact, the Australian stock market has already factored in a significant recession. The smart money has already pulled out of stock market and sold down the Australian dollar.

Therefore, whenever you hear from the mainstream news media about stock prices falling because of “worries” of recessions, you know straight away that such stories are not written by investors for investors. You will save yourself a lot of time by skipping such stories.

For us, we are more worried about the long-term implications of bailouts, rescues, pump-priming, printing of money and so on.

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