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Why are economists, market speaking different languages?

Eurobond investors have had to ignore a lot of associate economic risks namely; rising debt-to-debt GDP ratio to over 60 percent of GDP last year
Eurobond investors have had to ignore a lot of associate economic risks namely; rising debt-to-debt GDP ratio to over 60 percent of GDP last year, up from 49 percent in 2015 even as economists and the market read from a different script. FILE PHOTO | NMG 

Since 2016, when Kenya issued its first Eurobond, there has been plenty of debate around the country’s growing debt book. The subject has become a frontline issue in almost every expert chat. Economists and pundits of all shades have chimed in preaching the same “gloom and doom” gospel.

But after all these years it seems even the “elephant’s opinions” do not carry a lot of weight. Markets have chugged along just fine. The Eurobond papers have done well – yields on the five-and-10 year (2016) issues, for instance, are trading at 6.22 percent and 5.37 percent (as at October 2018), down from 6.48 percent and 7.81 percent (2016), respectively.

Now, whether its investors hunting for yield or this is just another reaction to quantitative easing, it really doesn’t matter, investors appear to ignore all but one thing; markets.

Which leads me to the question; are economists too cool for their own good? Are they market naïve? And why has the relationship between economists and investors remained troubled?

Just found out the other day that even the Oracle of Omaha (Warren Buffett) has had a healthy disdain for economists. In a 2016 CNBC interview, he stated, “I don’t pay any attention to what economists say, frankly…. think about it. You have all these economists with 160 IQs that spend their life studying the field, but can you name one super-wealthy economist that’s ever made money out of securities? No.”

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Buffett’s belief that economists do not add value for investors is a probably widely shared view. Of course, every rule has an exception.

David Ricardo, one of most renowned 19th Century economist, became the richest economist in history with an estate estimated in the billions of shillings, in today’s equivalent, at the time of his death.

That notwithstanding, although most economists make a good living, few become rich from their knowledge of market economics.

But back to our example, it’s worth noting that Eurobond investors have had to ignore a lot of associate economic risks namely; rising debt-to-debt GDP ratio to over 60 percent of GDP last year, up from 49 percent in 2015, increasing interest payments now standing at 22 percent of government revenue from 15 percent in 2015, drop in country credit ratings from B1 (2012) to B2 (2019) by Moody’s, high fiscal deficits and so on.

One could easily argue that markets choose to operate under “strange rules” because the players have risk money on the line and are, therefore, motivated differently.

Some may say that investors desire to profit from both growth and recessions places them at odds with economists. Others (like yours truly) believe that investor’s lack of attention on facts, logic and basic economics is a strategy unto itself.

In all, to put it succinctly, the two groups would never have a “meeting of minds”. Adapting high finance to investing is mission impossible.

The gulf in-between is too wide to reconcile. That said, my biased conclusion is that economists could learn to lean a little bit more on the markets.

Mwanyasi is Managing Director, Canaan Capital Limited.

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