Sunday Thoughts: calling the bottom is impossible, predicting the future is not

Sunday, December 14th, 2008 - credit crunch, economics, Employment, Qualifications, sunday thoughts

There are many economists and financial watchers now calling the bottom of the market, including Anthony Bolton in the Sunday Times. This many come as a surprise to many, particularly when both the North American and European markets have announced their most drastic jobs cuts in decades, and many individuals are facing up to the prospect of at best unstable employment prospects in 2009.

However, all this was predictable. History tells us that financial markets pick-up around nine months before the real economy turns – every recession has the same data. It also tells us that there is a bit of a rush on certain stocks, and that what lead the last bull-run won’t be leading the next revival.

Hence, most of the analysts look presently at building and construction firms as leading the revival, as effectively outside of Government spending they have been on stop now for about 18months plus. This tends to suggest that residential property will also be climbing quickly.

But the problem is that although everyone knows what is going to happen, they can not predict when it will happen. Further, these predictions when tested from a real economy view point, seem flawless: how could property lead an up turn when you still can’t guesstimate the value of your own home, because any potential purchaser has to be carrying a substantial 30%+ deposit to get a reasonable rate mortgage. The banking system is still not fixed.

The predicted when, impetus and scale of the up turn is led by taking norms and applying them to current market data. The biggest collector of market statistics are governments, and it is why the UK government set-up the Office of National Statistics to separate in-department collation from external analysis. The financial markets are doing the same thing, but it is at present a question of where they particularly are getting their data from, and how they see the window of “normal” economic behaviour. Most financial models work on a ten year cycle system, by looking back ten years, and surmise that “these are the normal behaviours.”

So lets look back ten years to 1998/9. Then, the boom was in full swing, awaiting the 2001 crash. Secondly publicly released data tells us that in 2001, UK banks were taking in £1, and lending out £1: by 2007, that had turned to lending out £6, and taking in £1. So the 10 year window probably being used by the financial markets and analysts involves: a tech boom and bust, followed by a credit fuelled bubble. Also, when the market does return, government owned banks won’t be fuelled by Asian savings, or lending the money they do have without tighter restrictions.

It all tends to suggest the window needs to change, or the setting of the setting of the norms within it – or both. If you want a far better analysis of this window and normalising issue, listen to Bill Gross’s  November podcast at bond traders PIMCO.

The question for the employment market is, when the financial turn around occurs, when will the unemployment market turn around in relation to the financial markets and the real ecnomy? Perhaps the answer to that is best analysed by looking at the number of industry sectors currently rushing to government doorsteps asking for essential bailouts – although most now from a PR view point are not asking for “bailouts” but short term financing; which again is more real evidence that the banking system is still not working! I see and predict real legislative intervention to force banks to lend. The sectors asking for financial aid are essentially saying:

We have a great industry, but when the economy turns, unless you want an inflation fuelled economic boom, our service will be in short supply because we will have let go of our trained workers. Give us access to the credit lines that the banks currently are not giving us.

These companies all have long lead timescales on finding, recruiting and most essentially training their employees to become productive: let them go now and that is an 18month to three years plus window of under produced compared to market demand product supply, that will result in quickly raising prices. I hence hope that one of the key issues the governments are looking at in whether to hand sectors financing – apart from a phone call to they government owned banks to ensure they are lending to these sectors – is a check of the availability of labour in both that sector, as well as that localised geography. I suspect actually a greater issue is looking at the 2010 election results to ensure a Labour win, so even if local labour supply is good the incumbents of 10 and 11 Downing Street will look there first.

So when will the economy turn? I don’t know, but I do see positive signs building, not least the downturn in the pound. Yes, this is not good for the long term UK economy, as it reflects the level of debt that those same politicians have accumulated. Much of that accumulated debt was through excess government spending (two in three jobs created in Wales since 2001 has been government sector – I hence don’t think Rhodri that Wales is better positioned for an economic up turn), and I can hence see pressures building for a Conservative UK government in 2010: partly through the thin line Labour have to walk to be successful to win the economic up turn gamble, and hence the electorate; and partly through the fact that all David Cameron has to do is not make a mistake. Back to the pound: a low pound makes imported goods expensive, and exports cheap – when those cars that need replacing now are replaced then, UK built cars will be cheaper to buy and finance than those produced overseas: the same could be applied to any consumer goods. It also bodes well for the holiday market – January through Easter is when the northern hemisphere makes it holiday choices, and a cheap pound makes even those low-cost flight powered holidays look expensive to the Brit’s, and London and Shakespeare look cheap to the Americans and Europeans. I hence suspect one of the first real signs of economic recovery in the UK being SkyNews reporting from a beach in Cornwall, with a red-faced land lady saying she has never seen it so busy.

But this is still prediction, and much as though the pressure economically will be building by summer 2009 for an economic turn, what can the individual learn from past downturns? Firstly, that whatever sector you are in, you will be affected – you can’t avoid the downturn when it is so large, and more so in the modern flexible workplace. But secondly that to avoid in the future such periods of unemployment, training and most specifically a degree severely reduces both the chance and periods of unemployment, and assures good earnings compared to the average citizen where ever you reside in the world. The key issue is that you can’t predict a downturn, and you can’t predict when the up turn will be – but data shows us what the long term outcome will be if certain choices are made in the now, and results seen in about three years. Hence personally, if I was a Vauxhall worker offered a nine month sabbatical on 30% pay, I would also ask for a tax deductable loan to fund a period of study to gain a significant long term qualification.

Economists, market predictors and weather forecasters can’t predict the when – if they could, they would all be billionaires. What they can predict is that (in this order): the what will happen after the when; the closer the when comes, what the breadth of choice and outcome will be; and tell you after the when has occurred that it has occurred.

As the owner of a recruitment business, I can say: I can’t tell you that you will never be unemployed again. But if you want to reduce your chances in the future and significantly increase your earnings, the best way is training and your ultimate goal (whatever your age) should be a degree.

Good Luck!

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2 Responses to “Sunday Thoughts: calling the bottom is impossible, predicting the future is not”

  1. Stacey Derbinshire Says:

    Nice writing style. I look forward to reading more in the future.

  2. Stocks and Bonds » Blog Archive » Sunday Thoughts: Calling the Bottom is Impossible, Predicting the … Says:

    […] Secondly publicly released data tells us that in 2001, UK banks were taking in £1, and lending out £1: by 2007, that had turned to lending out £6, and taking in £1. So the 10 year window probably being used by the financial markets and …[Continue Reading] […]

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