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Key indicators -- prioritizing the information deluge [ClearOnMoney]
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Commentary

Key indicators -- prioritizing the information deluge

7 Mar 2011 by Jim Fickett.

Choosing a limited number of key indicators and issues to watch helps the intelligent investor track the global situation and trends objectively. This is better than letting your own politics, say, or the newspapers headlines, prioritize your input.

There are thousands of economic, financial, and market indicators that one might watch, from the number of hectares under cultivation in Brazil, to US GDP. And there are thousands more less quantitative issues that impact investors, like the civil war in Libya, the slow death of Venezuela, and the opening of the Arctic.

Many investors simplify the world to only a few issues, and collapse everything into that framework. Often this framework is political, and investment choices are made on the basis of political loyalty and emotion. This can be comfortable in the short run.

And many investors hop from issue to issue, jumping on whatever is making news at the moment. The risk in emphasizing whatever is currently hot or exciting is that it is too easy to join the crowd.

More sophisticated investors, in order to invest rationally, need a broad understanding of the current global situation and trends. But if you don't let headlines or politics filter what you track, you still must narrow the input somehow. I doubt anyone can keep track of more than, say, a hundred indicators/issues.

I view this as a central problem for intelligent investing. So one of my primary goals, in building this site, is to follow 50-100 indicators/issues that are of key importance for investors. This is not, of course, the only goal, but it is a very important one.

That makes ClearOnMoney different. Most news sources, including newspapers but also many blogs, are almost exclusively interested in what is new. And keeping track of what is new is certainly an important function. But since there are so many people already on that assignment, I am trying to provide a different service, equally important and somewhat neglected. That is (1) choosing key situations that rational investors need to understand, and (2) tracking such situations consistently, whether there is any headline-making news or not.

A major difference between situation reporting, which I am trying to do, and news reporting, as most sources understand their task, is that in order to understand as many situations as possible, one should strive to cut down to the bare minimum what is needed to achieve that understanding in each case. There are many, many ways to look at US employment but, as I explained in an early tutorial, I think the 5 indicators that I track provide an adequate understanding. The US new home market is an important one to watch but, as I explained once, there is no need to follow 5 different indicators, when they all follow essentially the same path. In the case of European sovereign debt, the question of whether Portugal gets bailed out is exciting but, in the long run, probably inconsequential. I choose to follow the case of Spain, which I think is adequate, for now, to show how the overall situation in Europe is developing. (More broadly, I will start following Japan's sovereign debt more closely.)

It is difficult to prioritize all the things that ClearOnMoney is not yet tracking. I would appreciate any suggestions. Currently most commentators, including me, think inflation in emerging markets needs a close watch. For that reason I recently started tracking inflation in China, and hope to do the same for India and Brazil. In the US, state and local government debt is covered adequately now; I'd like to add more on current budgets and employment, since this will impact the economy strongly over the next few years.

Indicators can be dropped as well as added. When I started tracking mortgage modifications, it seemed they might make a big difference in how the foreclosure crisis would work out. That is looking very unlikely and I may decide to drop coverage.

Feedback, as always, is more than welcome, both on the general philosophy and on the specific topics covered. In particular, what indicator or issue should be addressed next?