Framework

Variant Perception keeps a step ahead of the business cycle by focusing on global, national and sectoral leading indicators. By studying leading and largely unrevised economic data, VP is able to offer forward looking insights that are useful to clients making trading, investment, inventory management and capital spending decisions, all in real time.

How do Consensus Analysts and Economists Perform?

Poorly! Economists often do a bad job at forecasting turning points in economic activity. Most economists have failed to forecast every single recession in the past forty years. They have even failed to recognize recessions when they had already started. Studies show that economic forecasters made their largest prediction errors at turning points in the business cycle.

Economists miss the start of recessions for two reasons: 1) they focus on coincident to lagging data, and 2) they use data series that are heavily revised, rendering them useless in real time.

Adjusting one's entire economic views following the latest economic data release is a recipe for confusion. Treating economic data as a flow of anecdotes – without putting any structure around them – is why the economic consensus has always failed to anticipate an oncoming recession.

Why Focus on Leading Indicators?

Variant Perception uses long standing relationships between leading and coincident datasets, and combines them to generate indices and other bespoke indicators that can be used to anticipate turning points in the business cycle.

VP looks at all economic data through a well-defined framework. Economic indicators fall into three categories:

> Leading indicators tell you about where the economy will be in the next quarter or year. These are by far the most important indicators to focus on and are the basis of Variant Perception’s approach. Leading indicators can be short-leading, providing two to three months’ lead on growth, or can be longer leading, providing six to twelve months of lead time.

> Coincident indicators tell you where the economy is today. They’re interesting but do not provide forward-looking insights. Typically, coincident indicators are data like industrial production, retail sales, and purchasing manager index reports. They tell you about today, but not much about where the economy is going.

> Lagging indicators tell you about where the economy was three to six months ago. Sadly, most Wall Street economists focus on coincident to lagging indicators. These are backward looking and are usually subject to the biggest revisions. Using lagging indicators to forecast economic activity is akin to trying to drive a car using the rear-view mirror.

Variant Perception concentrates only on leading indicators. VP avoids the vintage data problem by focusing whenever possible on real-time data and series that are subject to minor revisions. Revisions to data series complicate making decisions in real time. An investor’s trade, the timing of a manufacturing firm’s inventory cycle, a government’s fiscal decision, and a central bank’s policy setting that seemed appropriate at the time may all be regarded as mistakes when viewed with the revised data.

Variant Perception’s approach allows decision-makers to be a step ahead of the turns in the global business cycle.

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