Sunday, June 12, 2016

Surprise Index

I used to say I was never disappointed...because I set expectations so low that I could only be pleasantly surprised. Recently I found out there's an Economic Surprise Index published by Citi and Bloomberg. In it, countries get a point if they exceed the collective expectation of economists on some metric and lose a point if they don't meet the expectation.

Recently one economist to whom I pay attention touted this Surprise Index as one of the indications that the economy or market would be bullish in the future. For the US, the Index had just tipped above zero after climbing pretty steadily for the past year or so. Last year, China was strong on the Index but now is lagging in the negatives. Japan was strong as was Sweden.

But does it mean that these economies are getting stronger or weaker? No. It just means they are beating the expectations is the Index is positive and not meeting expectations if it's negative. It has nothing to do with the underlying numbers. Similarly, the stock market punishes a company's stock value if the profits are less than expectations and pushes it upward if profits are higher than expected. The company can still be doing well, even very well relative to its industry (and strongest competitors) and still see its stock value tank.

The Economic Surprise Index is a nice metric but on the surface it appears meaningless. Kind of like efficiency in manufacturing companies. It's a nice metric but doesn't really tell you much except if you're beating expectations or not. Many companies don't take into account the variability of processes when analyzing or setting standards used in the efficiency measure. And you can have high levels of efficiency and still lose money because WIP inventory and/or scrap is piling up or deliveries are still late, or market pricing is off. Efficiency doesn't guarantee profitability. The Surprise Index moving up could just mean that expectations were so low that a nation's economy can only look like it's going up.

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