Predicting The Future Isn’t As Hard As It Seems Part 2

Looking ahead is a tricky thing.

Yesterday we talked in length about how we can plot the Business Confidence Index (PMI) or the Consumer Confidence Index against GDP Growth to create an accurate view of economic factors from which we can extrapolate future economic trends.

But, importantly, we only create a view — to get a truly accurate prediction of what is to come, we need to determine a trend. 

So, today we’ll dig into the data and draw some conclusions.

First off, here’s the bread-and-butter formula that will help us determine the rate of change between our data points as a percentage:

Rate Of Change% = ((NEW – OLD) / OLD) * 100

So, if we know the PMI for this month, and the PMI for last month, then we can easily calculate the month over month (MoM) rate to determine if it’s moving up or down. With two points of data, we can determine a trend, and that’s why it’s so much more powerful than looking at a single point.

To make this calculation easier, I went ahead and wrote some code to organize it for you.

In the ReadySetCrypto Discord, you can use our computation bot to get the Month Over Month (MoM) & Year Over Year (YoY) rates easily.

Here’s the command structure:

!pmi <Latest Reading> <Last Month’s Reading> <Last Year’s Reading> <US or EU or CN or CON>

As an example, I’ll look at the US ISM for May 2020.

US ISM Data: https://tradingeconomics.com/united-states/business-confidence 

US ISM Latest Reading 05/2020: 41.5

US ISM Last Month’s Reading 04/2020: 49.1

US ISM Last Year’s Reading 05/2019: 52.3

Start by typing the command:

!pmi

Then the latest PMI reading:

US ISM Latest Reading 05/2020:

41.5

Then the previous month PMI reading:

US ISM Last Month’s Reading 04/2020:

49.1

Then the PMI reading a year prior to your first reading:

US ISM Last Year’s Reading 05/2019:

52.3

Finally, denote your index based on the economy. US, EU, and CN are possible, as well as CON for consumer sentiment.

US

Put it all together and this is what you would have:

!pmi 41.5 49.1 52.3 US

Putting that anywhere in the ReadySetCrypto Discord would output the following:

Nice and simple!

Here are similar calculations for the Euro Area, China, and Consumer Sentiment using May 2020 data:

ESI Data: https://tradingeconomics.com/euro-area/business-confidence 

ESI Latest Reading 05/2020: 33.6 ESI

Last Month’s Reading 04/2020: 44.5

ESI Last Year’s Reading 05/2019: 47.6

!pmi 33.6 44.5 47.6 EU

Caixin Data: https://tradingeconomics.com/china/manufacturing-pmi 

China Caixin Latest Reading 05/2020: 49.4

China Caixin Last Month’s Reading 04/2020: 50.1

China Caixin Last Year’s Reading 05/2019: 49.4

!pmi 49.4 50.1 49.4 CN

UMCS Data: https://data.sca.isr.umich.edu/ 

UMCS Latest Reading 05/2020: 71.8

Last Month’s Reading 04/2020: 89.2

UMCS Last Year’s Reading 05/2019: 98.2

!pmi 71.8 89.2 98.2 CON

If you’d like to use the code I wrote for this, feel free to fork the repo I uploaded with it over at the ReadySetCrypto public GitHub:

https://github.com/readysetcryptocodes/PMIDiscordFormatter

Conclusion

So, what can we draw from all of this?

Well, when you pair an abysmal negative GDP forecast with the sharpest rate-of-change declines on record, the economy will likely fall into a deep depression, the deepest we’ve ever seen.

Yes, that’s obvious, but it precipitates a huge bullish-to-bearish reversal in consumer and business sentiment — also explaining the rapid decline in the stock market and the corporate bond market plus the huge rally in sovereign bonds from mid-February to early-March.

That schism is key. Economics seeks balance, and the imbalance in markets and economies will play a crucial role in the days ahead.

Acting upon that, the bond market, currency market, and commodity market continue to price in the next depression while stocks advance pricing in a quick recovery. If the economy reopens and economic growth fails to improve, or we get a second wave, the stock market may plunge again, retesting the March lows as reality kicks in that even bullish tech stocks can’t fix a broken economy.

But, now you have an easy way to track global growth, you’ll have a solid idea of where markets will go in the months and years ahead.

When you’re ready to take it to the next level, you can always build a more advanced model.

Replicate this process and you’ll still be able to predict global economic sentiment with even better accuracy, allowing you to not only help you to make better investment decisions but also make better decisions in life.

The future favors the prepared.