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Economics of the twitter era


06 Jul 2018

Economics in the Twitter Era

By: Sasfin Wealth

The global economy is going through a period of significant structural change – just one of these changes is the fact that a social media platform such as Twitter has a real influence on how economists and investors do their jobs. This is according to Paul Donovan, Global Chief Economist at UBS Wealth Management, who was recently hosted by Sasfin Wealth for the Beyond Global Wealth investment roadshows.

Donovan argues that economics is simple in the sense that because we make economic decisions all the time, everybody can understand the basic tenets of economics. After all, the decision to use some of your valuable time to sit and read this article rather than choosing to do something else, is an economic one. Economics is perfectly simple to understand, but economics is not simplistic, certainly not to be squeezed into 240 characters.

The issue with Twitter, he adds, is that we have entered into a period of sound-bite economics which is not very helpful for us as investors, especially in an era where the number of revisions made to economic data are increasing, and they generally biased upwards.

To illustrate the point, Donovan provides an example from the United States to demonstrate that this is not just an emerging market problem, or that China's data is inherently unreliable.

“In 2015, the United States’ Bureau of Economic Analysis reported that in the first quarter of that year, the US economy grew at 0,2%. This is not a good result, it's basically no growth at all or a stalled economy. Six weeks later, the Bureau reported an error, saying that the economy had in fact grown at -0,7%. This is a disaster, it's a really nasty economic downturn that requires policy revisions, Congress review and so on.

Another six weeks later, the Bureau released yet another statement saying, “guess what, we made another mistake, the economy has in fact grown at -0,2%.” This is not good but it's certainly not a disaster requiring emergency policy change.

And eight weeks after that, believe it or not, there was yet another update.  “You'll never guess what's happened,” said the Bureau, “we've made a mistake and the US economy is actually growing at 2,4%. In 2016, twelve months later, the Bureau of Economic Analysis reported that the US economy grew at 3.2% -  and that's the last number we have.”

What’s important to take out of the above example, he says, is that for the same three-month period in 2015, depending on when you asked the question, the US economy enjoyed no growth at all, or a really terrible recession, or trend growth, or above-trend growth.

What we can conclude from this situation is that investors cannot trust single data points. If you’re saying that your portfolio is built on five economic indicators, you're going to lose money. 

Individual data points are prone to error and revision, so what we have to do is take a step back and look at the broad picture of what is happening in the world when making investment decisions. If one of your indicators doesn't fit, the indicator is probably where the error lies.

Donovan says that never in his career did he ever think that after twenty-six years as a professional economist, the first thing he’d do every morning is check his Twitter feed, but that is what he needs to do as a way to assess what kind of day he’ll have. That isn’t because Twitter is a reliable source of economic data.

Twitter reveals the noise, conversations and reporting that add volatility to the market. “It is important for me to see the full spectrum of conversations, so that I am well equipped to distinguish the truth from the falsehoods,” Donovan says.

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