Suite101.com Market Timing Model: Brinker's Model--Economy

» Demogremlin - Brinker's Model--Economy

Let me run through the indicators on Glen's site to see if I can understand what we are seeking.

Inflation:
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What are we after here?
It seems to me that the change in inflation rate is more important than the absolute number.

If we had a way to lock in a 10% inflation rate (quite high by historical standards), so that this became a stable expectation for the future, then we could expect earnings to grow 10% faster than with no inflation, so a p/e multiple contraction might not happen.

But if the inflation rates are changing, this adds uncertainty. So it seems that what we want to pay particular attention to is the rate of change in inflation. Rising inflation is bad, disinflation is good. This makes sense, because people psychologically expect trends to continue.

Monetary Aggregates:
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What is the significance of these? Are these used primarily to forecast future inflation trends? Or do they have some other function?

Debt
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How does this figure into the model?

Productivity
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This is important in relation to GDP growth and inflation. We can tolerate higher growth with higher productivity. It also relates to unemployment. Low unemployment normally leads to wage hike pressures. If the wage hikes are offset by increases in productivity, then inflation will not be a problem. Otherwise, it will.

Unemployment
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High unemployment means lower GDP output. This means lower earnings. However, wage pressures are lower (or negative), so disinflation should result.

Also, as noted above, with low unemployment, there are inflationary pressures.

SHOULD WE ADD GDP GROWTH?
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It seems we need the GDP numbers to fully appreciate some of the others, as noted above.

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Do I understand the relevance of these factors adequately? If not, please explain further.

QUESTIONS:
1. How much weight should be given to economic considerations in the model? Should we start with 25% and see what that gets us?

2. It seems that the two biggest factors for market considerations that come out of the economic indicators is INFLATION expectation, and EARNINGS expectation. Sould we try to make these indicators give us predictions about these two things. Or should it include other things as well?

3. We need to pick a time frame. Our model might be bullish for 3 months, but bearish for 12 months. What is the time frame our model will be most effective at predicting?

4. Do we come up with a "most likely inflation expectation number" and a "most likely earnings expectation number" and have a way of assigning a number between -1 and +1 to these numbers?

Some thoughts.

I will probably post a similar message with respect to monetary policy, valuation, and sentiment.

Panspar

-- posted by Demogremlin