Covid numbers, Powell's speech and forecasting errors

Amid the doom and gloom news on the covid front there is a small glimmer of hope which is appearing. After touching a number of more than 400k for new daily case count on 30^th April, the next two days have seen lesser number of new daily cases. Somewhere in the range of 370k. Now whether this is a blip, or the direction has changed for good, we will get to know only in the future but for today it sounds as relief. There are multiple models which are estimating that the peek is yet to happen and is expected to happen around somewhere in June. Without getting into the intricate details of the working and efficacy of such forecasts (of which we are no expert) we would like to dwell a little deeper into the general forecasting issues itself today. But later, firstly we have a quick wrap up of market news around the globe.

Dow Jones closed with a gain of 240 points. DXY dropped below 91 yesterday. All of this was on the back of a dovish speech by Jerome Powell in Washington. Its content was keenly followed by the markets. He said that the US economic outlook has brightened but that is a high level 30 000-foot view and we need to see what is happening at street level. The way the pandemic has impacted the people on the ground has been different for everyone, the poorest have been hardest hit. There is still plenty of work to do and our maximum employment goal is an all-inclusive broad objective. Powell’s view would take some zing out of Friday’s unemployment number where significant gains are predicted. US 10-year yield is trading at 1.60. In India the manufacturing PMI data sprung a positive surprise, but it looks like the impending lockdowns will slow it down going forward. The Indian 10-year benchmark yield dropped to 6% yesterday. Promising auction results on Friday have added to the positive sentiment there. Rupee trades below 74 and stocks showed a marginal uptick yesterday

Coming back to prediction issues, our readers would note that the topic of forecasting errors has been a recurring theme in our notes over the years. The most basic forecasting technique relates to momentum, it can also be called the spreadsheet prediction. The basis is that one sees the event which is unfolding right now with speed and alacrity and just predicts that it might continue in the same vein in future too. One of the starkest examples of this phenomenon can be found in writings of 18^th Century British philosopher Thomas Malthus whose dire predictions on the growth in food production and population growth never came true. Malthus’s basic insight predicated on the state of rural Britain and France in 18^th century was that soon the human population will increase so much that it will outstrip the capacity of land to produce adequate food. This will result in widespread famines and a downfall of the human race. Readers would appreciate that we encounter the same ill while forecasting in excel where a formula in one cell can be stretched ad infinitum to produce any eye pleasing result. We encounter this phenomenon in the writing of futurist Alvin Toffler too.

Now let’s tackle the fundamental issue plaguing such forecasts, this issue we have previously introduced as the Yin and Yang property. Any action/event inevitably produces counter reactions which will impede it. These reactions accumulate over the years and give rise to an opposite phenomenon which then produces its own reactions and the cycle continues. Any surge in the virus will produce natural response in terms of lockdown, safety measures, oxygen production which will control it. Conversely any trough will be succeeded by flippant behaviour and complacency. The cycle continues till the herd immunity develops. In case of Malthus he failed to acknowledge that the growing hunger problem would result in developing innovative solutions to counter it. Similarly, many issues like climate change etc where dire predictions have been made today may find their nemesis in a breakthrough innovation in future (we just don’t know yet). Any rosy future with abundant resources and high life expectancy might find itself pitted against a mutated virus or nuclear war (we don’t know).  Hence the idea is never to think in a straight line and to guard against both complacency and morbid fear in equal measure.