Transcript Chapter 2: The Economic Life Cycle

Chapter 2: The
Economic Life Cycle
Jon Greenwald
Ipek Kazan
Raegen Richard
5 Phases in the Economic Life Cycle
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Up-cycle Phases
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Down-cycle Phases
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Revival
Acceleration
Maturation
Ease-off
Plunge
Expansion tends to last longer than recession.
Each transition between phases is marked by a red flag event.
Up Cycle
Revival
- Red Flag Event: GNP turns positive
- Other Events:
Mortgage rates decline and housing starts to increase
Low financing rates boost consumer spending
Increasing pressure on credit demand and prices
Interest rates and inflation rise irregularly
Up Cycle
Acceleration
- Red Flag Event: Speedup in inflation
- Other Events:
Consumer spending becomes more confident
Housing activity increases
Businesses start to rebuild inventories and spend more on plant
and equipment
Up Cycle
Maturation
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Red Flag Event: Sharp split between cautious consumer
spending and optimistic business spending
- Other Events:
Consumers spend less as inflation accelerates and interest rates
increase
Economy keeps going because of optimistic business men
Growth suffers under pressure of accelerating inflation and
rising interest rates
Down Cycle
Ease-off
- Red Flag Event: GNP turns negative
- Other Events:
Inflation and interest rates increase
Purchases of big ticket items and housing fall off
severely
Down Cycle
Plunge
- Red Flag Event: Peaking of interest rates
- Other Events:
Businesses turn to extreme caution and liquidate inventories
rapidly
Employment drops sharply
Corporate profits plummet
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At the end:
Inflation and interest rates begin to come down
Declining rates help the economy return to the revival phase
Investment Implications of the Life Cycles
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Hunt’s discussion is limited to mutual funds
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Provide highly liquid way to invest
Liquidity is important to keep value during financial climate
change
Investment vehicles used:
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Stocks
Bonds
Gold/Commodities
Money Market Funds
Investment Implications of the Life Cycles
1. Stocks and Bonds
Rally in Plunge substantially
Fewer investment opportunities as getting into Expansion as
inflation and interest rates rise
More speculative in late Acceleration
Poor investment during Maturation
Investment Implications of the Life Cycles
2. Gold and Commodities
Start to perform well in the Acceleration and Maturation
Fall apart early in Ease-off
3. Money Market Funds
Poor investment in Revival due to unfavorable interest rates
Begin to perform well in Acceleration
Outperform most investments in Maturation
Still performing well in ease-off
Factors leading to Life Cycle Changes
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Volatility comes from smaller sectors that swing widely
(net exports, consumer purchases of big-ticket items,
inventory investments, etc.)
Other factors:
- Federal Government Intrusions
- Global Factors
- Shocks
- Financial Crises
Best Information
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Old reliable factors:
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Gross National Product
Producer Price Index
Money Supply
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Be careful about news media
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Watch out for frequent revisions
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Luck??
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Long term success: read economy effectively
Short term booms: usually luck!!
Questions