Envestnet’s Karabell: Widely Used Economic Data Are Outdated

Numbers, like the GDP and inflation, actually mean little in a rapidly changing world, says Zachary Karabell, at the Envestnet Advisor Summit

Zachary Karabell is author of “The Leading Indicators: A Short History of the Numbers that Rule Our World.” Zachary Karabell is author of “The Leading Indicators: A Short History of the Numbers that Rule Our World.”

It’s almost impossible not to analyze the global economy in terms of GDP growth, trade deficits, unemployment data, inflation figures and interest rate changes.

These indicators, after all, have been around for decades, and most of the world leans on them to figure out what the future holds.

Yet the numbers actually mean little in a world that’s changing as rapidly as our world is, says Zachary Karabell, head of global strategies at Envestnet in Chicago and author of “The Leading Indicators: A Short History of the Numbers that Rule Our World,” because the conventional indicators that guide our thought processes were, constructed at a different time -- a time when the world was much smaller and more “static,” and numbers/indicators that hadn’t existed until then were needed to explain the challenges of such cataclysmic events as the Great Depression and World War II.

They may have had some relevance up until the 1950s, but today, in a world of global markets and “unfettered capital,” a world of unbridled commerce where products are made and sold in so many different places, and where technology changes from day-to-day, Karabell -- who spoke at Envestnet’s 2014 Advisor Summit in Chicago on Wednesday -- believes that the use of traditional indicators to predict future outcomes is totally counterproductive, particularly at the individual level. And events that may have occurred once or twice in the past, such as greater job growth resulting from higher GDP, should not be counted upon as indicators for the future.

It’s difficult, of course, not to rely on the familiar and a world without traditional indicators can seem scary, particularly for financial advisors, whose clients have not only become accustomed to basing their decisions on the standard indicators but also rely on their advisors to explain the cause and effect of these indicators.

Karabell, though, believes that this is a great time for advisors to think innovatively, to avail of their individual analytical capabilities and rely on the technology and tools at their disposal, in order to continue figuring out the changing world on their own terms. He believes it’s important to remember John Maynard Keynes’ dictum, that “it is better to be vaguely right than precisely wrong.”

He also believes that no decisions, financial planning or otherwise, should be taken in function of GDP projections or the direction of interest rates. As such, advisors and clients need to tune out the macro and figure out what’s important at the individual level, Karabell said in a separate interview, to “figure out what their question is and to go from there.”

As such, advisors and clients will be able to work toward using more personal, “made-to-order” indicators that are better suited to their needs and that can help them accomplish their objectives in a much better way.

 Check out ThinkAdvisor’s special section on Envestnet’s Advisor Summit.

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