Episode #49 – Economic Cycles and What To Watch For

Hi everyone and welcome to another wealthy and wise Wednesday, hope everything is going good in your world and welcome, I am glad you can join us today. You know every once in a while I get the thinking about the economy, actually not every once in a while, almost every day and I am sure you do too because some of the things that are going on in the economy directly affects you and certainly affects what is going on in your future and especially if you are getting to the point where retirement is on arising. So I thought that it would be a good idea to talk about economic cycles and hopefully not put you in a sleep but to give you some a really good basis as to what you know what we look for and what we are looking at and watching closely because economic cycles are bound to happen in your lifetime and typically a cycle probably goes you know about every ten years. In fact, I remember reading Warren Buffet saying that you can pretty much expect the economic cycle about ten years.

[00:01:20] So what is a cycle, what is an economic cycle? Well it consists of basically four things, you have expansion, you have contraction, you have troughs and you have peaks and you know those as they make up the graph, expansion and contraction and troughs and expansion to peaks and those kind of things continually cycle as you go along and in between there, there might be some recessions and luckily since 1929 anyway and 1930, we haven’t seen a depression but those things are certainly possible in the economic cycle as well. You know it is really interesting about dealing with gloomers. I certainly try to look at things objectively and I try not have a too much of a rose color glasses when looking at the economy and cycle as so forth but there are some that are just gloom and doom, I mean they just always predicting the absolute worst.

[00:02:36] Way back in the 70s there was a guy, he might still be out there maybe I shouldn’t mention his name, HR was his initials and this guy was predicting. This is the 70s, keep in mind, this guy was predicting the longest and the most devastating depression that was ever going to hit the United States and for a while my mom at the time, every once in a while she did some typing and some secretary works for him and so she would come home and talk about the upcoming newsletter that was going on and because I am just a teenager but already I am interested in the financial world and more curious what this guy was saying and the whole premise was we had interest going to through the roof, way double digits pushing 20%, with inflation right alongside going up double digit and he was pushing into that 20% range as well. And he had all these kind of collapsing because of low unemployment and I can’t remember everything about his number because obviously that was a long time ago but the point is he was just a doom and gloomer and everything he wrote about was the big crash and it sold.

[00:04:20] I think he did really well, I remember going to his house, he happened to life near my hometown in California and I remember going to his home, huge home, he wasn’t living like a recession or a depression was coming along, he lives pretty well. But his newsletter sold like crazy, so he had a huge falling. Well what happened in the 80s, you can give some credit to Ronald Reagan, I don’t know whoever you want to give the credit but things just turned around in the 80s were a boom. So my point is this, even though we want to keep an eye on the economy and we want to see some of this indicator, we don’t necessarily want to buy into gloom and doom, I kind of like Warren Buffet philosophy on our country, that is it is pretty pro country and pretty positive that even if recession and things like that hit us that we are going to come back ahead and I feel the same way. I am very pro America and the technology and the innovation and all that we have going for us.

[00:05:31] But as we look through the economy cycle, we have got the expansion which I think it is important to understand what is happening in there, basically we have had GDP growing every quarter. Now what is GDP? It is gross domestic products, that is taking everything sold in the country and adding all together. That is adding our gross domestic product and as long as that is moving forward, that is an expansion phase. As we start to slow then we start a little bit of contraction but we are not in the recession until we have had two negative quarters. So basically 6 months where we have had two quarters that have gone backward in GDP then we are technically in recession, now recession average is somewhere between 6 and 18 months historically and during that period, we see a slow in the economy, we see unemployment maybe down, we see interest rate. Sometimes the reason for this is because interest rate is reason, so we might see interest rate start to fall. We are in a real awkward situation right now because if we did go into recession, it will be really difficult to drop interest rate much lower than they are so that could be unique if that ever happened.

[00:06:57] Some of the more solid indicators of recession start with asset prices declining, things like stocks and real estate as they start to soften and start to go backward, that is a good indicator. We might also see unemployment when unemployment starts to rise, that means companies, manufacturers and jobs are not expanding and that might show a recession to a certain extent. And also in inverted yield curve. Now what does that means? You know if you look at a yield curve on a graph, you are going to see long-term interest rate and you are going to see short-term interest rate and the inverted yield curve is when the long-term interest rates are lower than the short-term interest rate. In other word, you can go put money in the saving account and get a better rate return than a ten-year treasury bond for instance and that means we have got an inverted yield curve and most likely somewhat of a recession that we are in. As I have mention the depression, we have only had one of them, hopefully you will never and I will never see one in our lifetime but that is a 10% decline in GDP, so 10% is huge by the way. You think about GDP on an annual basis, they love it to grow somewhere between 2 or 4% but a decline of GDP drop in 10% well that is huge, that is like you know five years of growth wiped out in a single moment so to speak.

[00:08:32] Back in the 1930, we saw unemployment touch on 25% unemployment. I mean that is huge, you look around your neighborhood and one out of 4 people aren’t even working, you can imagine what happens to home and foreclosure and oh it can get ugly. So hopefully we don’t see one of those depressions but we certainly are going to see contractions, we might even see recession, in all those period of time, we have about since probably 1945, there has been about 10 expansion and contraction period or we just call them economic cycle. And again a 10, 12 years’ period of time is pretty normal for an economic cycle and if we look since 09, we have been pretty much on expansion, so we need to start looking at some things and to make sure that we are eyes wide open in what is going on here and when I think about that, I go back to some of these ratios and graphs and chart that we have to look at.

[00:09:45] One of them being the [00:09:46] PE and they know we have looked at this before because it is a great indicator and right now it says 32.44 and it has only been higher one other time in history, that was just before the crash of 2000 which we saw the [00:10:06] at that point drop 50%. So we are definitely into high territory and so we want to watch that for sure, that is a great indicator. Another really good indicator is GDP to market capitalization, this is if we can define this really easy. There is an index out there called the [00:10:27] 5000, it is basically 5000 and if you use that as a kind of a barometer of the entire market, we can just call it market capitalization of this 5000 stocks and we will define that with the GDP that grows domestic product, we come up with a ratio and that ratio right now is a 142.1. Now what is good, you can sit by this chart but this chart shows GDP or this ratio in that 70-80% area where 141 or 142 and again the highest it has ever been 2000 just before that massive sell-off and recession that we hit right after the turn of the century.

[00:11:24] So those are two indicators that we need to look at, you know that indicator that GDP to market is to send that 151 right now as you can see if you are looking at the chart, so 151 is pretty high. Again not being doom and gloom, not trying to say oh watch out, here comes recession. But if you have any kind of worry, if you have got money in the market, maybe you have got this 401k that has just packed to the hill with equity and you are a few years away from retirement, it is probably time to talk to somebody and really see if there is something that, some moves that you could be making especially if you are going to start using that for income. So as we look at the economic cycle, we see the expansion, we see the contraction, we see the trough and we ultimately see the peak which is kind of where we might be right now, it is those time where we just want to be smart and look at things. There is time to be aggressive and that is going to be down in the trough when things are looking not so pretty but we can buy things on sale and we can pick up asset that have soften and fallen back in value quite a bit.

[00:12:45] So that is the whole economic cycle kind of in a nutshell and I think it is wise especially at this point in time to really look where the cycle is, where you are, where your investments are, how they are doing and then eventually you might even run what is called the stress test to see what would happen if the market took a 30, 40, 50% hit, what would that do, how would that look in your portfolio? And then again like we talked about in our last podcast and video was then we start preparing for opportunities, we look for those times where we can get involved when markets are soaring and we are getting in some good prices. So okay that is it, the economic cycle in 15 minutes or less, please let me know if you have any questions, send them to questions@wisemoneytools.com, I will answer them just as quickly as I can. Thanks for listening, always remember to subscribe to both the podcast and the videos, never miss a bit and we will try to keep you inform, alright till next week, take care.

Leave a Reply

  • (will not be published)