Who do you believe?

Sure, you’d like to think there’s some genius in head office weighing up global forces, supply and demand curves, domestic economic indicators, demographics and the human fact. Alas, the truth is the chief financial officer just takes last year’s numbers and adds a bit. Or takes away a bit if there’s stuff happening. For this he or she is paid a lot of money.The various analysts working for stock brokers aren’t much better. In fact, most of them are worse. They just take last year’s numbers for any given company and ask the CFO or investor relations manager of said company for a nudge and a wink about what’s going to happen next. That means the well-paid analysts are merely reporting the nudge the CFO gave last year’s budget numbers while claiming it’s an insightful rendition of the company’s financial outlook and a sound basis on which to buy said stock.The way forecasting is carried out is most easily demonstrated by the crystal ball herd’s miserable attempts to predict what the Australian dollar might be up to at any one time. Inevitably, most market economists simply add a cent or two to the current trend. The most risqué ones might add five cents. That is why they’re generally wrong. Most surveys of economists foolish enough to have a punt on the Aussie result in a swarm just in front of the current price. There are also usually one or two outliers markedly higher and lower than the mob. Most years the outliers get it right – but you never know whether it will be the forecast on the much higher or much lower side.As I’ve no doubt written before here, there are two types of economists: those who can’t forecast the Australian dollar, and those who don’t know they can’t forecast the Australian dollar. That doesn’t stop them trying and it doesn’t matter because this stuff about the dollar is a mere digression. It’s just thrown in as a sidelight to the main thesis about the tendency of the forecaster chorus to chase the trend.Thus, when the Aussie was rallying, soothsayers were falling over themselves to predict parity with the greenback any day soon. Now they’re saying the little Aussie bleeder will fall to 50 or 40 or a pretty clam shell and a handful of pippies. (Hot tip: go long clam shells.)Ditto the oil price forecasters, steadily outbidding each other when oil was rallying – $160, $180, do I hear $200? $220 anyone? Now they’ve been doing the same on the downside. The one who makes the lowest forecast gets his or her name in the paper. The same game is being played by various economists about what China’s growth rate might be next year. The IMF says nine-and-a-bit per cent, someone else says 9 if they’re lucky. Then the next couple of forecasts break below that to 8.5% and now I’m hearing 8% and figures starting with 7. Most of the people bidding the growth rate down and nearly all those reporting their claims actually have no idea. They’re just feeding off a self-reinforcing whirlpool of anecdotes and guesses. It has ever been thus. Understanding what China’s real growth rate might be is hard enough when just trying to figure out what happened six months ago, let alone what might happen in the next six. That’s why I take more notice of what BHP is saying about China than any academic or financial markets economist. The Biggest Australian has people on the ground constantly taking the temperature and blood pressure of major customers, rather than reading what someone wrote after talking to an analyst who spoke to a CFO who expressed either his fear or greed about the way ahead.There is another interesting thing about the current extremely volatile environment beyond the forecasting racket: the reception of those forecasts.For example, I recently spoke at a banking and finance conference in Perth a day or two after BHP’s latest quarterly production report. The report was mainly just the usual bunch of numbers about how many tonnes and carats of one sort or another was dug over the previous three months. But it also carried an important paragraph about China, the big driver for all resources stocks. That paragraph said:“Consistent with the outlook statement given at our interim and preliminary results, China has not been immune to the global slowdown. Macroeconomic indicators show that Chinese growth has softened during the quarter, albeit from very high levels. We expect volatility and uncertainty to continue in the short term. Notwithstanding this short-term uncertainty, we remain confident that the ongoing industrialisation and urbanisation of China and other developing economies will continue to drive strong longer-term demand for our products.”I read that out to the Perth conference and asked the 200 or so people in the room whether they thought it was a bullish or bearish statement about China. Some 199 people stuck up their hand for bullish while one fella down the front thought it was bearish. The particularly curious thing though is that that single paragraph was overwhelmingly seen as bearish by the media, adding to the doom and gloom about the market, while a bunch of Perth bankers, accountants and receivers overwhelmingly thought it was positive. Maybe’s it’s all in the eye of the beholder and your eye is coloured by the crowd you’re hanging out with. For what it’s worth, I think the BHP message remains fundamentally positive – the China story is holding true, albeit with a softening at present. That is what BHP chairman Don Argus reiterated at the AGM in London. Never mind what some screen jockey is parroting, consider the following comments by Argus at the AGM and make your own judgement about whether the commodities boom or just the commodities bubble is dead: “Macroeconomic indicators now show that the Chinese growth has softened recently, albeit from very high levels. We believe that softening is due to both domestic and global factors.“With receding inflationary pressures, large financial reserves and a deep desire to grow, the Chinese economy should show some resilience and we note the IMF growth forecast of around 9 per cent for 2009. “Despite this short-term uncertainty, we remain convinced that the ongoing industrialisation and urbanisation of China and other developing economies is still at a relatively early stage and will continue to drive strong long-term demand for our products. “Over the next 20 years, we believe Chinese cities will grow by another 350 million people. “We note that the China National Bureau of Statistics has just released the latest gross domestic product data which shows that third quarter growth came in at 9 per cent year on year.”Sounds like the China story holding strong to me.Michael Pascoe is a finance and economics commentator with more than 30 years experience in publishing and broadcasting.This column was originally published in the November edition of Australia’s Mining Monthly magazine.

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