Looking Foreward, Not Backwards

The media is confusing many investors with the avalanche of financial information.

Main confusion is: What are leading indicators? What are trailing indicators?

Trailing indicator is an economic measurement of how we did economically in the previous days, months or years. For example, it is like telling how the weather in XYZ was last week, but it wouldn't let you know whether to put on a sweater or just a T-shirt. Two of the most popular trailing indicators are the GDP and quarterly earning's announcement. Both the GDP and quarterly earnings tell us how the economy had performed 3 months ago. It should not be use to predict how the economy will perform 3 or 6 months from now.

We can expect a negative GDP for the upcoming quarters, but many will be confused and think that this is where the economy is headed towards, but GDP only shows us how our economy was for the past 3 months. It adds no value in predicting the direction of the economy.

Leading indicators or controlling economical indicators, as I would like to call them, predict/even determine the state of the economy in 3 months to even a year from now. Two of the key controlling indicators of the economy are the supply of money and the interest rates: LIBOR (Cost of banks to borrow from each other).

We are seeing the supply of money increased in this country by 2 trillion dollars -1 trillion from the various actions taken by the US government, and more than 1 trillion being injected into the system from the Federal reserves thru the various auctions.

We also see that the LIBOR rate had came down from 5.24% (December 2007) to 3.12% (Current). This is a significant sign showing that our credit is beginning to flow again.

The bottom line: Investor should stop looking at the rear view mirror while investing.