Pharaoh’s dreams and the art of financial forecasting
Many will recall the biblical story of Pharaoh’s dreams, which were interpreted to forecast seven years of famine, preceded by seven years of plenty. That story is, arguably, the first explanation of economic cycles.
The art of economic forecasting
Economic forecasting is never perfect, but it can be eerily close to accurate. A search of published material on economic forecasting suggests that farmers initially made significant contributions to the art of economic forecasting.
Farmers understand market fluctuations caused by weather and solar patterns and, on closer examination, they identified a large degree of cyclicality. Two farmers stand out—Samuel Benner and George Tritch.
They were responsible for what we now refer to as ‘The Benner Cycle’ and ‘Mr Tritch’s Chart’. Both lived in the United States of America and published their findings in the 1870s.
While some critics dismiss the accuracy of their forecasts, their forecasts are worth thinking about as a long-term framework.
Mr Tritch’s Chart—shown below—is as follows:
- The top line shows when panic has happened and will happen again
- The middle line shows years of good times, high prices and a good time to sell investments
- The bottom line shows years of hard times, low prices, and good times to make investments
Forecasting for today?
The 2019 calendar year is shaping up to be a turning point in Mr Tritch’s chart and it shows that there have been seven years of plenty! The last seven years have seen record levels in share market returns, and record prices in residential real estate.
Many people of retirement age have been beneficiaries of sustained good times, but according to the Tritch calculations things are about to change.
Sitting behind the increased fortunes of many people is also the willingness of large numbers of people across the globe to go heavily into debt. Governments and big business have also become heavily indebted.
The causes of the next downturn may not be immediately apparent, but most agree there are some serious issues that could create a significant shift in the global economy.
Some of the causes for concern are: trade wars; de-globalisation; rising interest rates; Brexit; Australia’s report from the Royal Commission into the Financial Services industry; disruptive technology; geopolitical developments; population growth; and social unrest.
I could have added climate change to that list as well!
Industries facing headwinds
The following industries in Australia are facing headwinds due to a combination of factors and, as a general proposition, companies in these industries may not perform as well as they have in the past:
- Banking and insurance
- Residential building companies
- Law firms
- Petrol car manufacturers
- Energy providers
Sources of hope
The following industries are likely to provide investors with sustainable returns:
- Medical products and services without government interference
- B2B (Business to business) companies (not focused on end consumers)
- High Tech companies in areas such as big data, artificial intelligence etc
- Water supply, purification etc
- Businesses that benefit from demographic changes, particularly ageing.
Pharaoh’s dream and modern dreamings
Taken together there are some curious pieces of information in this blog, and perhaps they explain something about the spirit of the age in which we live.
I have used the word dreaming in the same way as the Aboriginal people do when they explain complex matters with a simple story.
‘Tell him he’s dreaming,’ is Darryl Kerrigan’s famous line in the classic Australian film The Castle. Sometimes it pays to dream. To be a good investor you need to form a view of the future, and to be able to explain things in terms of a framework.
Hopefully, this article will provide such a framework. Some people refer to Mr Tritch’s Chart as a guide to investing on the waves. It isn’t perfect, but it’s the best guide I can find. Happy dreaming.
Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi and Where to Retire in Australia.
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