Value Investing – Economic Uncertainty (Lesson 23)

Railroad Fund

If you think of the economy as a train pulling a load on the track, you would base its near future position on its current and historical trend. It is unlikely its current speed will change; thus, we can predict its future position with some degree of confidence. The short-term position is easier to determine with greater conviction and accuracy than 3 to 6 time periods out. Why does our confidence decrease the further out in time the train travels? Inherently, we know that there are variables that can impact the outcome. What if the train slows down? What if there is engine trouble? Worse yet, what if the track is blocked and the train must stop to wait for repairs?

In economics, these unknown variables are referred to as uncertainty. Uncertainty is typically measured and reported at the macro level. This is due to vast resources available to predict the economic results in the near future with a high level of certainty. Again, the further out in time the prediction is made, the more uncertain the forecast becomes.