This paper describes the fourfold role of a business economist with a futures commission merchant: short-term economic analysis for brokers and trading customers; long-term analysis for the asset management division; marketing the firm's expertise; and strategic planning as a member of the firm's executive committee. The author's earlier diversified training and experience are of considerable help in her current position.
In the fall of 1995, The Wall Street Journal wrote an article about the shrinking demand for business economists. In the first week of 1996, the Journal followed-up with the news that demand for academic economists is also on the wane. Changing demographics may play a key role in the academic environment, but corporate re-restructuring in the U.S. economy has certainly done a job on staff positions, where most economists are located. This trend underscores the importance of adapting our skills so as to minimize the probability of extended unemployment spells. Moreover, we should become more ingrained in the core business of our firms in order to contribute directly to the bottom line. In this article, I will describe my current position as the chief economist for Indosuez Carr Futures, a futures commission merchant with global presence and how my previous experience helped me to get where I am today.
Trained as a labor economist (although I have spent most of my career in the macroeconomic forecasting business), I should know better than most that general training such as a college education teaches us to be flexible in our careers and allows us to pursue different avenues. More specific training, such as graduate training in economics, hones our skills and narrows our field of pursuit. Furthermore, the skills we learn on the job tend to be even more specific in nature, but often chain-linked (somewhat like the new chain-weighted GDP measure). In retrospect, my career path from bank economist to finance professor and consultant to chief economist for the financial futures markets seems natural. My current role as an economist for a French-owned futures broker benefited from my earlier experiences even to the extent of my foreign language skills. I studied French in high school and college, speak Italian because of my ethnicity, and even dabbled in Spanish.
AN ECONOMIST IN THE FUTURES INDUSTRY
As you might expect, a major portion of my day involves commenting on the behavior of financial markets. Our customers are involved in the fixed-income market, the currency market and the equity market. Some are also interested in commodities such as industrial metals, energy, and agricultural products. The Chicago headquarters is allowed to deal only in financial futures at this time, so I mostly answer questions on the direction of the long bond, the shape of the yield curve, the direction of the dollar, and the strength (fragility) of the stock market. Our foreign offices in Europe and Asia don't fail to ask their own set of challenging questions on major commodity markets or American politics.
Participants in the financial futures market react to economic indicators (which are typically released only ten minutes after the market opens), forecasts of economic indicators (in the case of outlandish predictions), rumors (often on a slow news day), or on the comments of Federal Reserve governors. I am frequently reminded that prices also react to technical, rather than fundamental, factors. At these times, I must rely on the word of the technical analyst who claims that major "resistance" levels are being tested.
Like most market economists, part of my day is spent worrying about economic indicators. It is interesting to see how the importance of economic indicators has changed over the years, with some becoming less important or new ones emerging. For example, the unemployment rate was a major market mover in the early 1980s. Yet, by the mid-1980s, financial market participants had finally learned (persuaded by market economists) that nonfarm payrolls were a better gauge of changing employment conditions than the jobless rate. As the 1980s progressed, economists were "encouraged" by their traders to start predicting average hourly earnings and the factory workweek.
The appointment of Alan Greenspan as the Chairman of the Federal Reserve in 1987 leaf to the introduction of new indicators. For instance, the minute Greenspan said he relied on the National Association of Purchasing Management's (NAPM) diffusion index that covers the manufacturing sector, not only did market participants begin to monitor this series, but also the Chicago purchasing managers' index and the Philadelphia Fed's business outlook survey, which are similarly concocted. And when Greenspan mentioned consumer confidence, both the Conference Board's and University of Michigan's consumer sentiment series gained prominence.
The early 1990s saw the introduction of a leading inflation index compiled by the Center for International Business Cycle Research. The fact that this index gets so much attention is mainly due to the credibility of its architect, Geoffrey Moore. Weekly series also became more important. The Johnson Redbook series of retail sales and the Mitsubishi/ Wertheim chain store sales index are now monitored every Tuesday.
A major part of my job is to analyze economic conditions as the indicators are reported. However, it is also my job to discredit those series, such as the Johnson Redbook report, that market participants pounce on but are not good indicators of activity. Certainly, if all participants in the market react to an indicator, it is important to know what the indicator means. Yet, it is our job as economists to point out those series that don't give consistent indications of the economy, no matter how beloved these indicators are to financial market players.
To market players, economic indicators are not the end game, but merely a stepping stone to glean the direction of inflation and interest rates. Inflationary pressures (or the lack thereof) portend Federal Reserve policy actions. Will the Fed ease? Will they tighten? Fed easing is generally bullish for the bond and equity markets unless market participants believe the Fed is ignoring a potential inflation problem. Like economists who adapt to the shifting indicators that were to be monitored and forecasted, the Fed watcher's job also changed fairly dramatically since the late 1970s. Indeed, the two positions of economic analyst and Fed watcher have often become one (industry downsizing) as the need to spend endless time on the details of daily open market operations diminished. The daily monitoring of the technical factors that require the Fed to add or drain reserves from the banking system is more systematized, so that each institution need not have its own individual forecast. In the past, whenever the Fed added or drained reserves in excess of economists' expectations, it suggested that the Fed was changing policy. During this time, weekly money stock statistics were key indicators of Fed policy. However, when the Fed changed to a federal funds rate target rather than a reserves target, monetary aggregates became less important.
The Fed watcher's job changed again when the FOMC decided to announce policy changes after the end of their meetings. Since February 4, 1994, every change in Fed policy has corresponded with an FOMC meeting. When no policy action took place, the Fed simply annouNced that the meeting was over. During this period, every utterance by a Federal Reserve governor or district bank president has been analyzed to the nth degree. Now, Fed watchers have become interpreters of Fedspeak.
Although the headquarters of our futures firm is in Chicago, we have offices in Paris, London, Singapore, Madrid and New York. In addition, our parent, Banque Indosuez, has a worldwide presence. This past year, I've found that a major portion of my job involved explaining U.S. political conditions to my colleagues in our foreign offices as well as to our foreign customers. In particular, questions regarding the U.S. budget process began in the fall of 1995 and continued into 1996. (I must say that predicting political events is tougher than forecasting interest rates!) On a European road show in mid-November 1995, our clients in five major cities heard a different presentation during a one-week period regarding the U.S. budget process because something new happened each and every day. I became a political "expert" by virtue of being American!
SHIFTING TO LONG TERM ANALYSIS
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