Since the beginning of time, we as humans, have sought to find different pieces of information from our environment to guide us towards our destination or make important decisions.
In the early days, these included things such as observing the movements of the moons and stars or looking for landmarks which gave a sense of direction. Fast-forward a couple of hundred of centuries and we find ourselves inundated by different forms of information. But instead of making us feel more informed, this can result in making us feel more directionless and confused when we are unable to interpret it.
The concept ‘the signal and the noise’ coined by the American statistician Nate Silver is most fitting in this regard. In simple terms, the signal is a piece of information which when put in the right context enable us to make the right decisions, whilst the noise is all other information that when synthesized leads to nowhere and instead creates mere confusion.
In this aspect, this notion is very relevant to the situation we find ourselves in today. The abrupt spread of the global pandemic has brought most of the total business activity around the world to a halt. Markets have reacted accordingly with the abrupt sell-off we have witnessed from mid-February to mid-March. As a vehicle of people’s hopes and expectations, the markets were giving us a clear sign that they were and still are concerned despite the recent respite that we have experienced.
In the current situation, everyone is grappling with the arduous task of trying to figure out what the post-pandemic environment will look like. What changes will this entail in our behaviour which in turn will affect our spending and saving patterns? The bare truth is that nobody knows exactly and despite that, such an answer is really not that helpful.
One of the biggest concerns we have is that given that many of the economic indicators are published on a delayed basis, we do not know if the figures presented are still relevant. Others have decided that due to this unprecedented situation, we should be looking at a whole different set of data from the ones we are accustomed to.
The first source of information should be the current pandemic itself. It is the main actor in this global crisis and as such, it will be a core indicator of what lies ahead. This indicator is showing us that firstly both the number of new infections and that of daily deaths is on the decrease. This should be greeted as a positive indicator and urge us to keep a close eye for any signs of revival in the rates which may spell the undoing of this progress.
Secondly, one needs to start understanding what the level of damage inflicted is and whether it is permanent damage or just contained to the first two quarters of this year. In the words of the Federal Reserve, their objective is to act as a bridge between the pandemic-driven environment and a return to ‘normality’. In this regard, despite the unprecedented efforts and intentions of central banks including the ECB, there will be casualties.
The final pillar of information we require with regards to the outcome of the pandemic lies in the future. This information will outline how different our purchasing and saving conduct will be and whether we would have changed preferences as to what we assign value to. There always ought to be a degree of change given the depth and extent of this pandemic.
On the other hand, we have always sought to revert to some form of status quo and the tendency to overcompensate when we are deprived of a given good or service. In this context, we need to consider this first and foremost before secular changes such as the likes of increased automation and moving our lives to become increasingly digital, which was already occurring at different degrees.
Situations like these can be an amplifier to such trends which have already increased in popularity in recent months. Nevertheless in times like these, whilst one should embrace new data that comes along, these should always be treated with the necessary scepticism and thorough analysis which will serve as the hallmark of our process in determining the signal from the noise.
Disclaimer: Daniel Gauci is a financial advisor at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, views and opinions provided in this article are solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.