Contradicting statistical evidence on the economic performance of the Eurozone gave a series of “Scottish showers” to markets last week. On the good side, it was the indices of economic activities in March presented by Markit, showing better than expected attainments in the Euro money zone on the fronts of manufacturing and services. On the contrary, Eurostat released an announcement saying that new orders to the Eurozone industry took a deep dive of 34 percent last month, the largest ever recorded.
The conflicting evidence did not, however, stop the European stock exchanges from recording more gains last week, particularly on Friday. London, Paris and Frankfort closed on the last day of the week at least three percent above the morning opening. Wall Street gained a bit less.
There is no doubt, however, that macroeconomics is the substantial base on which one can make predictions for all the markets of the economy, including the bourses. Of course, microeconomics play a vital role in the relevant markets and public companies are judged by investors on the account of their profitability and sales. In a generally negative macro environment though, where incomes and production plummet, it is particularly difficult for a single market to prosper. Mind you that there are companies and businesses which may do well in a recession period, but this is an exception, not the rule. So how can we predict the future if the macro and the micro analysis give contradictory results? Usually, the methods used to create models predicting the future are based on past time series for a large number of variables. Others take the time series for those variables in periods resembling the present one, in order to predict the next growth era. Those techniques are also employed now to make predictions. But is it wise to use old time series to predict a future, amidst a crisis the likes of which we have never known before? Everybody agrees that this present crisis is not like the ones we have seen over the last 60 years. It is equally true that all analysts say that what we see now has nothing to do with 1929 crash, just because at that time central banks and governments left the markets to rot and did not spend one dollar to help. The New Deal came years after, when everybody understood that the devastating effects of doing nothing was intolerable. In reality then, there is no close real historic analogue of what we are facing now. Isn’t it true that whole armies of mathematical economists were unable to come close to anything like predicting the present crisis? So is it wise to predict a way out from the present conjuncture by using techniques which proved useless? Economics, by its very nature, is a social science, not a mathematical one, and predictions should be made on this knowledge. In reality, the course of the present crisis is actually in the hands of central banks and governments, which use a hell of a lot of public means, to the tune of trillions, to counter attack the crisis. So the wisest thing to do in predicting the next growth period is ask them what they have in mind for the future. And speaking of predictions, one should always ask who drafts them.