In my previous posts, I introduced one of my longtime ideas – actually, it’s a tool – for gauging the economy, using seasons and a sort of annual clock.
Consider the following chart, which outlines specific indicators that emerge at each time on the economic clock:
How to Gauge the Economy to Know When and Where to Invest 213
|Time||Economic Status||Economic Result|
|1:00||Rising interest rates||Steady growth and inflation|
|2:00||Falling share prices||Falling profits and subdued confidence|
|3:00||Falling commodity prices||Construction in decline|
|4:00||Falling overseas reserves||Funds passed between Central Banks|
|5:00||Tighter money||Access to credit is scarce|
|6:00||Falling property values||Property decline and recession|
|7:00||Falling interest rates||To stimulate the economy|
|8:00||Rising share prices||Increased profits and confidence|
|9:00||Rising commodity prices||Construction increasing|
|10:00||Rising overseas reserves||Funds passed between Central Banks|
|11:00||Easier money||Borrowing becomes easier|
|12:00||Rising property values||Top of the Boom|
Here are the broad trends to watch for:
- 12:00-3:00: Real estate values are in decline. The economy is slowing down.
- 5:00: Property foreclosures and small business bankruptcy increase.
- 3:00-6:00: Unemployment, contraction of world economies, and recession.
- 4:00-6:00: Stocks enter a bear market. More profitable to develop property. Property landlords achieve higher rents.
- 6:00: Depth of the recession.
- 6:00-9:00: Recovery phase of the economy.
- 7:00: Banks and lenders free up liquidity. Period of bank expansion.
- 8:00: Easier credit and access to money.
- 10:00: Increased building activity. Development and absorption of vacant land.
- 9:00-12:00: Boom phase of the economy.
How Economic Cycles are Driven by Human Emotions
I’ve been studying human behavior in relation to the economic emotions that create the economic cycles since I started investing as a teenager. What I’ve discovered is that specific human emotions are the catalysts and drivers that alter the economic landscape of supply and demand, boom and bust. Three primal traits stand out above all else: greed, fear, and indecision.
Watch for Greed Between 8:00 and 1:00
Between 8:00 and 1:00 of the economic clock, the emotion in play is greed. With the easing of the monetary policy and with economic spring in motion, the banking sector is eager to lend funds. Borrowers follow the usual path of leveraged returns and can access up to 100% of the purchase. They start to ac- cumulate debt until their debt levels hit record heights around 12:00.
Banks love to lend between 8:00 and 11:00; it’s a no-brainer for them. The wholesale rate of cash versus the lending interest rate to borrowers ensures massive profits for banks. Unfortunately, speculative investors fuel the bonfire of insanity at 12:00. The economic party is winding down and they predictably pay exorbitant high prices for real estate. They soon find themselves upside down on their loans at 3:00. They owe more on their properties than they are worth. Lots of foreclosures are about to hit the market.
Watch for Fear Between 1:00 and 6:00
Fear rules here as the first sign of a slump appears and recession is on the horizon. Corporate failures are increasing and Wall Street is becoming nervous in this fall season. Share prices begin their decline. The subsequent sell-off of shares and the downturn eventually flows onto the property market, a lagging indicator.
The speculative excess of summer and the insanity that ensued is prevalent. Banks significantly tighten up monetary supply at 5:00. The cash flow that lubricates the economy has stalled and we hit the depth of the recession at 6:00, characterized by high unemployment, bankruptcies, and panic.
Indecision Governs Between 6:00 and 8:00
Here, the economic recovery is slow to start. As an investor, I’m eagerly awaiting 7:00. This is when banks and lenders start to free up liquidity. They need to increase profits. Most people are still licking their financial wounds and are hesitant and indecisive. Quantitative easing is in full force and central banks are attempting to resuscitate the economy with the printing press. Wall Street commences a bullish run, in anticipation of more buoyant economic conditions, and acts as a leading indicator.
The media will provide the bright spark that consumers are longing to hear. The banking sector lowers interest rates to incentivize investors to come in from the cold. At 8:00, we have easier credit and access to money. The road to economic spring is just around the corner.
In my next post, I will offer my thoughts on how to invest in each season for maximum profitability.
I’d love to hear from you – in your experience as someone who has an interest in investing wisely, have you noticed some of what I’ve discovered relating to the economic clock I write about? What have been your personal insights regarding this? Thank you for sharing.
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