Cheat sheet: breaking down economic speak

Tim Boreham
06:30am January 23 2018

Policymakers have been hoping for a lift in “animal spirits” for several years. (Getty Images)

Like pilots talking about vectors and go-rounds, the nation’s brood of economists (if that’s the right collective noun) often speak a language of their own, which is then routinely bandied around the media and unsuspecting public with no explanation offered.

With 2018 shaping up as a formative one for economic variables such as housing prices, interest rates, wages growth and the pace of digital economy,  it’s time to get with the lingo.

Or at least enough to bluff friends and family – or impress the boss.

“Animal spirits”

In a David Attenborough documentary, animal spirits evokes footage of cavorting gazelles and salivating wolves.

In a business context, it’s when enterprises and individuals have confidence to invest and take risks when others are behaving like lemmings.

Back in 2014 then Reserve Bank governor Glenn Stevens rued the lack of animal spirits post the global financial crisis. But last year his successor Philip Lowe reported the elusive ingredient had returned, evidenced by increased business capital expenditure.

Judging from the buoyant stockmarket, the jungle is coming back to life.

Like a single malt whisky, animal spirits are best enjoyed in moderation, lest we see an outbreak of “irrational exuberance” (see “cryptocurrency mania” below).

“Crypto bubbles”

Bubbles are synonymous with champagne and good times, but not so in the context of everyday Australians buying into the new but often poorly-understood asset class of cryptocurrencies. Yes, forget Sydney and Melbourne house prices, bubble chat has moved to online currencies. Very 2018.

Bubbles, by their nature, are ephemeral and in recent weeks Bitcoins (as well as some of the other cryptos) have been subject to some fresh violent sell offs.

It’s a moot point whether this bubble abruptly bursts, or slowly deflates like a balloon left behind the couch after a New Year’s Eve shindig. But remember – Bitcoin “miners” don’t wear hard hats and carry shovels.

Cryptocurrencies have quickly become one of the most discussed markets amid wild price movements. (Getty Images)


“Macro prudential regulation” (a.k.a. Mac Pru)

Want to wind up the Australia Day barbie? Throw this one into the conversation and guests will grab their lamingtons and Coolabah casks and decamp in no time.

But anyone vaguely interested in the health of the financial system should heed the term – and we’ll be hearing more about it because the macro prudential approach has become all the rage with financial regulators around the world in recent years.

In short, it means taking actions to curtail risks that threaten the whole financial system or economy, rather than focusing on individual financial institutions (they do that, too, though). For instance, the local bank regulators in recent years have announced “caps” or “limits” on investment and interest-only home lending by the banking system.

The macro prudential approach assumes that risks occur endogenously – i.e. from within – rather than out of the blue (see “exogenous factors”).

It basically helps to ensure financial stability – one of the least baffling samples of economist speak and always a nice thing to have.

“Asymmetric shock”

This does not refer to frustrated home buyers shocked at the disparity between the $1 million sale price for a fibro shack in middle suburban Sydney.

Rather, it’s the theory that an event will affect one area of the economy more than another, thus creating problems for policymakers.

Take when the Australian dollar appreciates – it benefits importers while whacking manufacturers for a Big Bash League-style six. I’ll leave the calculations on periods when this has qualified as an asymmetric shock to the economists…

Hurricanes player Simon Milenko on the attack in a recent Big Bash League match. (Getty Images)


“Exogenous factors”

Like having a roll of gaffer tape in the glove box, this term is a handy emergency measure for economists and captains of industry, as it explains the otherwise inexplicable.

Put simply, it’s any external action or incident that impinges on the ability of policy makers to derive key measures such as GDP growth, thus turning educated guesswork into complete dart board stuff.

Exogenous factors are a close cousin to the “Black Swan” event, a random and unexpected episode unrelated to botanical garden waterfowl management plans.

See also:  Trump’s Tweets, Kim Jong-un’s foreign policy, one-in 100-year weather and Donald Rumsfeld’s famous ‘’unknown unknowns”.

“Quantitative easing (QE)”

This vogue term is not a reference to New Year’s weight loss pledges, or the pride of the Cunard fleet.

QE refers to the actions of central banks globally – notably the Federal Reserve – to buy corporate and government bonds and thus inject liquidity into markets during and after the financial crisis.

QE is also described as printing money, because how else do you buy such instruments?

With global economies returning to health, QE is sailing out of the harbour as central banks decrease their buying and don’t reinvest the money they receive when bonds mature, signalling a return to more normal settings.

“The Vix Index”

Also known as the “Fear Gauge”, this measure should not be confused with the homophonic Vicks, the world’s favourite mentholated therapeutic balm.

There’s little soothing about Vix, as it refers to a series of indices that predict the likely degree of movement on the sharemarket – up or down.

The higher the index, the wilder rollercoaster ride it’s been in a single day. During and after the global financial crisis, Vix movements were breathlessly reported alongside the daily prices for bullion, currencies and hogs bellies.

Conditions have settled, but is the volatility vix-en returning? The CBOE Volatility Index – which covers the S&P500 stocks and is trademarked VIX – soared 16 per cent on January 16. For cryptocurrency investors, it’s a pity there isn’t a similar instrument to warn of Bitcoin’s erratic movements. But hey, maybe next year.

For now, we can only recommend a soothing Vicks rub and a good lie down.

 

The views expressed are those of the author and do not necessarily reflect those of the Westpac Group.

Tim Boreham

Tim has been a business journalist for more than 30 years, working for The Australian, Business Review Weekly and the Melbourne Herald. At The Australian he covered banking for seven years and authored the Criterion investment column for more than a decade. Tim is now a freelance business writer and has founded The New Criterion as a separate weekly column. He also writes a column on biotechnology stocks for Biotech Daily and the online small caps website Stockhead.

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