In 1921, a Swiss psychologist named Hermann Rorschach published a test where patients’ responses to ten inkblots were recorded and analysed.
He died soon thereafter and never saw his images and associated test system become widely used and well known, but also controversial among psychologists. The popular understanding of the Rorschach test – that everyone sees different things in the inkblots, and that what you see says a lot about you – is obviously oversimplified. But it is a useful analogy. Often, judgement is in the eye of the beholder. This is clearly the case in art and aesthetics but can also be the case in economics and investing.
At the best of times, the global economy has many, many moving parts, which makes it difficult to get a precise handle on where things stand and where they are headed. It is even more difficult now, given the massive and still-lingering disruption of the pandemic and associated policy intervention. Moreover, most of the data on economic activity, inflation, spending and so on is produced with a lag of a month or longer. It is also subject to revision. And this data itself also reflects what happened several months ago. In the case of inflation, for instance, headline numbers compare prices in one month with the same month a year prior. Policy changes and external shocks take time to filter through the economy, affecting different sectors at different speeds. And then, of course, tastes and preferences also change.
Therefore, sometimes different people can look at the same set of economic numbers and have different conclusions. Are things really good or really bad? It depends where you look and who you ask. And from a financial markets point of view, it is not just about whether things are good or bad, but how good or bad things are relative to what was expected.
Surprised
Surprise indices are a good way of illustrating this. They show how incoming economic data compares with the consensus expectations. In other words, whether the data is better or worse than expected. Chart 1 shows the US, Europe and China, the three biggest economies.
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