Forecasting the past

Economics is the only profession where you get paid for forecasting what already happened. Within the economics department of any financial institution, there will be one or more people whose job it is to predict what the economic data releases will be. So they "forecast" what the US non-farm payrolls release will be, or to put it another way, they try to predict what happened last month. Or they "forecast" the UK quarterly GDP number, or rather, they predict what the economy was doing three or four months ago.

This wouldn't make much sense, and it certainly wouldn't make sense to pay people serious money to do it, except for one thing: markets react to this stuff. If you can "predict" the non-farm payrolls number better than your opposite numbers at other firms, you can give your company a big trading advantage. Sometimes this advantage lasts no more than a few seconds after the data are released, but that can be enough to make a lot of money at the expense of the less skillful (or the poorer guessers).

This is a long introduction to a brief comment on the reaction to Friday's downgrade of Spain's sovereign debt ratings by Fitch. Everyone knew the extent of Spain's problems, and earlier in the week there was a brief sigh of relief when the Government squeezed through measures to address them. But Wall Street still tanked after the ratings cut. The objective facts about Spain didn't change either for the better or for the worse: like the economists I rattled on about earlier, Fitch was talking about the past. The only piece of new information was the ratings cut itself, but that was enough to trigger a swoon among investors.

For me, ratings agencies have always been a long way down the food chain within the financial sector. They do a job that nobody really needs; in fact, things would almost certainly be better if investors had to make their own credit judgments, rather than relying on the agencies. And they don't even do the job well: telling you what you already know is very much their stock in trade. Their credibility seemed to be pretty much shot after the sub-prime crisis, where they never seemed to get up with the game, let alone ahead of it. Yet as Fitch has just shown, they're still around to cause mayhem. Forgotten but not gone, more's the pity.