Our indicators explained

Economics, Politics Pixelics's picturePixelics

Here at Pixelics we use a number of economic indicators to help us gauge where the Australian economy is at, where it might be headed and whether or not major asset classes are reaching "bubble" territory. Our indicators are always up to date; we use an application programming interface (API) to feed official data into our indicators as it becomes available, with our economists' analysis of the trend updated as they see fit.

Where things get interesting for investors or anyone interested in growing or protecting their wealth is in how we display and use that data. You will notice that most indicators have a Y-Axis range somewhere between +/- 5. Our private credit growth indicator, for example, currently ranges from -2 to +3.

aus-private-credit-growth3.png#asset:6524

If you followed this indicator you would have invested in equities and real estate in the early-2000's after it had bottomed out, and cashed out of equities in 2007 when personal, business and total credit breached +2. Our financial assets to income indicator would have told you the same thing.

Creating the indicators

What we do is take the raw data, calculate the standard deviations from the long-term trend, and when the standardised residual approaches +/- 2 it sets off the alarm bells (generally speaking 95% of the data points should be within 2 standard deviations from the mean). For other indicators, e.g. Bitcoin or the Australian dollar, we use Z-Scores to compare actual against expected values to assist in our attempts to spot outliers.

Now, it is not a hard and fast rule and our economists regularly examine and score each indicator given the context in which it exists. For instance, if the People's Bank of China (PBOC) decided to double its interest rate in a short period of time it could have a dramatic and unforeseen (by our indicators) effect on the Australian economy. But while this technique might miss the top or bottom by several months - anyone who claims an accuracy better than that is, quite simply, not telling the truth - it has proven itself reliable in the past in predicting the pattern of events.

Interpreting the indicators

The point of our indicators is not to help investors pick individual stocks or asset classes - we do not do that here at Pixelics - but to help them time the business cycle's turning points. If a particular indicator is running hot it could mean price declines for that asset class are around the corner. If they are all running hot, the economy may be about to experience a financial crisis and/or the onset of a recession. Similarly when our indicators are bottoming out, it could be a precursor to a long run of asset price appreciation.

Avoiding losses and acquiring assets when they are cheap are one of the best means, especially for the casual investor who does not have the time to follow the intricacies of the business cycle or examine the books of individual companies, to ensure superior long-run returns. Individual strategies will vary but if you can get out of a market before the top and back in somewhere near the bottom, the two phases of the business cycle where prices can rise or fall more than 20% in a very short period of time, you will be all the better for it. That is why we created our indicators, and we will continue to expand our library as we deem fit.

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Notes published by this user are not attributable to a particular author. This user's notes usually, but not always, address a specific Pixelics feature or technical issue as opposed to original research.