[People Met Through Books] Reading Economic Indicators Is the First Step in Investing... Solid Fundamentals Bring Opportunities Anytime

'Reading Economic Indicators' Author Vincent (Kim Du-eon)
Economic Indicators, Milestones of the Current Situation
Proper Understanding and Utilization, First Step in Investment
In Times of Rapid Changes like Inflation
Strong Fundamentals, Ready to Restart Anytime
In the New Cold War Era, Existing Frameworks Change
US, China, Europe Overseas Economic Indicators Also Important
High Interest in Current Inflation
To Predict Consumer Price Trends
Must Understand Oil Prices, Exchange Rates, Producer Prices

There is a Jewish proverb that says, "Give a man a fish, and you feed him for a day; teach a man to fish, and you feed him for a lifetime." While the ability to obtain fish from others can be considered a skill, there are many uncertainties involved in such situations. Therefore, it is important to know how to fish so that you can reliably secure fish whenever you want. In the same vein, Vincent (Kim Du-eon), author of Reading Economic Indicators (Wisdom House), emphasizes the importance of understanding economic indicators. Rather than wandering aimlessly following rumors, having the ability to interpret situations directly reduces the need to search for information or worry about its validity.

Last year, the Nasdaq and KOSPI indices fell by 34% and 25%, respectively, compared to the beginning of the year. We are facing the end of the New Normal era (low interest rates, low inflation, low growth) and entering an inflationary period. The author stresses that during such rapid changes, having the opportunity to start anew is extremely important. He advises that this opportunity stems from solid fundamentals. On the 30th of last month, we asked Vincent about how important economic indicators are and which ones should be prioritized as basic knowledge.

-Many investors tend to focus more on acquiring so-called advanced investment information rather than interpreting economic indicators. How influential is interpreting economic indicators in investing?

▲Investing is an act born out of expectations for the future. There is no investment without the expectation that things will go well. Ironically, this expectation begins with accurately understanding the present. Economic indicators may not be everything, but there is no doubt that they are the best milestones to grasp the current situation. Understanding and utilizing economic indicators well is the first step in investing.

-Economic indicators seem quite vast. Is there an appropriate approach to them?

▲It is good to categorize economic indicators into two types based on their attributes. First, hard data that reflects the real economy, such as industrial production, household consumption, and employment indicators; and soft data, which is survey-based information reflecting the sentiment of economic agents. Next, it is necessary to understand the structure by expenditure type to assess the relative importance by country.

-Interpreting economic indicators to anticipate several moves ahead in investing does not seem easy.

▲The timeliness limitation of hard data in investment using economic indicators is clear. For example, as of the end of June, which marks the close of the second quarter, the official data available to confirm a country's economic size (GDP) is still the first quarter results. Investing looks toward the second half of the year, but the data currently available is for the first quarter (January to March), which is a limitation. For this reason, it is often said in the stock market that investing based on economic indicators is difficult to succeed. Basics may always feel clich?, but if your fundamentals are strong, you can always start again, and the confidence to restart will serve as the catalyst for successful investing.

-Then what should be done? Are there any supplements?

▲The timeliness limitation can be supplemented with soft data. Since soft data is survey-based, it can capture the current situation immediately. Of course, human sentiment is fickle and prone to swings, so previous figures often change. However, in terms of supplementing timeliness, the utility of soft data is high. The key is to understand the sequence between soft data and performance-centered hard data. The book focuses on this aspect.

-You mentioned the need to weigh the importance when approaching foreign economic indicators. What does that mean?

▲The national accounts identity is a criterion for weighing importance. For example, the equation GDP = C + I + G + XM, where Gross Domestic Product equals consumption + business investment + government spending (including investment) + net exports. What must be considered is that, just as economies, societies, and cultures differ by country, the proportions vary. For instance, consumption accounts for 67% of the U.S. economy. Therefore, the first step to understanding the U.S. economy is to analyze consumption-related economic indicators.

-You introduced economic indicators for the U.S., China, and Europe. How much impact does interpreting foreign economic indicators have on domestic investment effectiveness?

▲We are indeed in a new Cold War era. The U.S.-China hegemonic competition is manifesting as a reorganization of the global value chain (GVC). Looking at history, hegemonic competition between great powers tends to last at least several decades. Since the existing framework is changing, the importance of foreign economic indicators is paramount. Foreign economic indicators are useful for understanding what the existing framework is. Before the U.S.-China competition intensified, there was the term Chimerica, referring to a virtuous cycle where China produced and the U.S. consumed. In this structure, Korea supplied intermediate goods necessary for China's production. In other words, there was a high correlation between China's export data and Korea's export data. The growth rate of China's exports was an important indicator for understanding the Korean economy.

-Recently, the U.S. has been focusing on attracting production facilities (factories). The changes in economic indicators resulting from this likely carry their own significance.

▲The U.S. Inflation Reduction Act (IRA) and reshoring strategies (bringing overseas production bases back home) have significant implications for the Korean economy going forward. If Korean companies start building factories in the U.S. instead of China, changes will appear in Korea's capital account data. Also, the relationship between China's exports and Korea's exports will differ from before.

-Economic indicators seem to reflect the economic maturity of a country. How advanced is Korea's use of economic indicators?

▲The most statistically advanced country in the world is the U.S. Its statistics can be considered the global standard. Korea's statistics mostly adopt the U.S. method, which deserves high marks. Like the numerous soft data in the U.S., Korea is also preparing many soft data sets. For example, the Federal Reserve Bank of Atlanta used to release GDP quarterly but now publishes it daily, known as ATL GDPNOW. The Bank of Korea has also started releasing a Korean-style daily GDP indicator. However, utilization is another matter. Korea is in a transition to an advanced economy, making investment increasingly important. It is time to develop strategies and tactics for investment using economic indicators.

-What is the current situation as seen through economic indicators? How is it expected to change?

▲Interest in inflation is high. We must start by concretely defining inflation through economic indicators. For example, inflation can be defined by the Consumer Price Index (CPI). Then, we need to consider which economic indicators to focus on to understand the direction of consumer prices. If we assume consumer prices are the prices consumers pay for goods, these prices are set by companies, which is called the Producer Price Index (PPI). Therefore, the leading indicator of consumer prices is producer prices. In Korea, producer prices are influenced by the prices of imported raw materials. Thus, producer prices are affected by import prices. In other words, to forecast consumer prices, it is important to understand the trends of producer prices and import prices. Import prices are influenced by international crude oil prices, which are among the most important raw material prices, and the KRW-USD exchange rate. If international crude oil prices rise, the cost of imported products increases, and if the KRW-USD exchange rate rises (KRW weakens), imported products become more expensive than before. Therefore, understanding the flow from international crude oil prices → KRW-USD exchange rate → import prices → producer prices is crucial to forecasting consumer prices.

Who is Vincent?

He is a big data economist. He serves as the head of MFO at the financial startup Uprise and is a professor in the Department of Economics at Hansung University. He has worked as a big data economist at the National Assembly Budget Office's NABO Macroeconomic Analysis Team, Hana Financial Investment Research Center's Asset Analysis Office, and KB Securities Asset Allocation Strategy Department.

This content was produced with the assistance of AI translation services.