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The background for anyone reading this for the first time:

  1. This blog series follows 9 small investors with different risk (and personality) profiles (for their profiles read this post, and your can find their investment strategies here).
  2. I’m a fan of equities (because I believe in productive assets) and of passively-managed exchange-traded index-tracker funds (because I mostly don’t believe in investor management fees) – so this is also really an experiment to see how the Satrix SWIX Top 40 (an equity ETF) bears out against the other options available for small investors.

This is normally the part where I wear nine different hats and give my thoughts on the week as each type of investor. However, I feel like all nine would be fully occupied watching the election results come out live, getting very frustrated by news24’s website, and generally shaking their heads at Agang, which is being outperformed by many political parties that I’ve not heard of.

So instead, I’m going to start by saying that it’s the start of a new month for my investors, so The Recent Finance Graduate and The Scrooge just got hit with more fees (how awkward). And isn’t it incredible how badly the direct share investment side of things is going? It’s eclipsed only by a bad art/valuable/antiques buy.

And then, I’m going to start introducing some indicators into all of this (there’s been a long standing request to include some key variables into my posts, so I’m going to start).

Before I get there, here’s a (very broad) summary of some economic ideas:

  • From a Keynesian perspective, you might say that an economy is all about consumption. You have people buying stuff (demand), which is then met by supply from either within the economy or from trade, and the price is a negotiation between demand and supply.
  • From a Marxist perspective, an economy is built on production, which is all about the proletariat as a labour force. And it is the productivity of labour that drives prices (because price is a function of how much labour went into the product to make it in the first place).
  • From an Austrian perspective, you could say that an economy is built on transactions, and the way that those transactions are financed and/or influenced by regulation. Prices are a function of the market and the money supply, as influenced by the Reserve Bank.

In general, I think that the economy is a combination of almost everything:

  1. Consumption is a driving force – without it, there is no need for production. But there is also a base rate of consumption, because people must survive. And survival is predicated on consumption.
  2. Prices are, in part, driven by production. It makes no sense in the long term to produce items at a cost that is higher than the selling price. Practically speaking, there is a relationship between cost and the market price – that is how businessmen do business.
  3. Credit and money supply affect the ability to consume and the ability to produce. Businesses expand production on credit. Consumers spend on credit. In many ways, the flow of money is its own force.

Then over and above that, you have some economic agents that influence the way the smaller economic agents act. The primary example is the government: when the government spends money, it does so in such scale that it has a multiplier effect on the way that the rest of the economy functions. Almost anything a government does has impact on the rest of the economy.

What all of this means: when you are looking at an economy, you have a number of paints that combine to give you the full picture. Your mind’s eye then has to compile and interpret – always acknowledging that, just like normal vision, you can’t see through solid objects and around corners. You can also be colourblind, short-sighted, long-sighted and astigmatic. And/or just plain blind.

Here’s the list of the daily indicators for those key forces I mentioned above:

  1. The Exchange Rate (because that says something about trade and future consumption)
  2. The Gold Price (because that will impact production in the gold-mining industry – which is well-important in SA)
  3. The Platinum Price (because that impacts production in the platinum-mining industry – almost just as important)
  4. The Oil Price (because that impacts production and consumption across the board)
  5. The yield on 10 Year Government Bonds (which tells you how people feel, in general, about inflation – the higher the yield, the higher the expected inflation).
  6. The All Share Index (because that gives an indication of how everyone else is interpreting the above indicators).

Then there are the big monthly/quarterly/annual indicators:

  1. The interest rate set by the Central Bank (because this drives credit expansion/contraction in the next period)
  2. Jobs data (unemployment rates, participation rates, etc – because that tells you something about production and future consumption)
  3. The balance of trade (trade surpluses and deficits tell you something about how we’re competing on the global stage)
  4. The CPI index (an estimate of consumer inflation)
  5. The PPI index (an estimate of producer inflation – that is, what is inflation for companies, factories, etc)
  6. The M2 Money supply (we’re back to the question of how much credit is flowing around out there)
  7. Government spending (what they’re spending influences the rest of us)
  8. The PMI index (what’s happening with production).
  9. And GDP, obvs.

As this series of posts continue, the plan is for each of those indicators to get some attention, and an explanation of how they tie in to the lives of the small investors.

Until next week.