Wednesday, June 30, 2010

Perceptions ... not a good basis for metrics of progress and performance

Dear Colleagues

I have said for a long time that using the stockmarket as a metric to assess economic performance is wrong ... so it is pleasing to find a stockmarket newsletters saying something along the same lines. I just read this:
If there is such a thing as one stock as a "tell" for the world economy, I'd nominate General Electric (GE). Not only does it have its hands in multiple industrial and consumer oriented markets, it has a large financial arm to boot.

With that said, I am wondering what, if anything, the chart is telling us nowadays. It is at lows for the year and is fast approaching its November 2009 lows. Excluding the flash crash and the day after, it's been a near continuous drop since April. Then again, what the heck was GE telling us in April as it had not a care in the world?

I'm not a big fan of the club that says the stock market is a great predictor of the future. For that group I'd like to ask what the market was predicting in early 2000 and the fall of 2007. I do think the market is a great indicator of PERCEPTIONS of reality. Seems like big money is turning our way in terms of evaluating about what is coming down the pike.
The phrase "perceptions of reality" is good ... it describes what seems to be going on in the capital markets ... but perceptions of reality are not a good basis for measuring performance.

I like old-fashioned accountancy ... a simple system that aims to reflect facts about economics and finance in a simple consistent way. Good accountancy is simple, clear and boring ... with rather little intellectual content. But modern accountancy is rarely good accountancy ... neither simple nor clear ... but worse, not much reflecting hard facts of economics and finance, but too frequently merely "constructs" that are derived from some remote set of facts!

If we look at the modern financial and economic landscape starting with facts and then moving to measures that are meaningful representations of these facts, there is considerable cause for both alarm and optimism. The alarm is that the prevailing measures are sending all the wrong signals to decision makers, and decision makers are moving into panic mode and doing more and more the wrong things. The optimism is that some of information technology and other fields of science are very good ... very powerful ... and could be mobilized to do important things for global good.

This is not the first time in history that there has been this sort of dual track situation ... and as in the past the world will probably get things half right and half wrong ... better than totally wrong, but way worse that what would be possible in a more well-informed world with better metrics about socio-economic performance.

I am more optimistic than pessimistic ... but wary that the powerful decision makers in politics, business and the broader establishment are not getting helped by the terrible system of business and economic media and metrics!

There is work to be done to improve media and metrics!

Peter Burgess

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