Category Archives: Bibliophile: Mastering The Market Cycle

05 – GOVERNMENT INVOLVEMENT WITH THE ECONOMIC CYCLE – Mastering The Market Cycle

Posted on by under Bibliophile: Mastering The Market Cycle

Generally, the economy works as either a free economy or a communist economy. But the most accepted free economy also needs government interference sometimes. There are interventions made by controlling authorities for shaping the economy and help the economy to grow well.

Central Bank

Central Bank such as RBI concerns managing the economic cycle which is mainly through inflation and employment. Inflation has a two type –

  • Demand-pull where the demand for products increases more than of supply.
  • Cost-push where prices of labor and raw materials increases.

Central Bank involves in reducing money supply in the economy through increased interest rates, selling of securities which resulted in lower demand due to lower availability of money and inflation comes down.

Such an act also hampers the growth of an economy.

When it comes to generating more employment in the economy then the central bank increases the money supply to the economy through reducing interest rates, purchases of securities (quantitative easing), etc.

Central Bank has to maintain a balance between employment generation and limiting inflation.

 INTEREST RATE CUTS: DOES IT PROVIDE LONG-TERM BENEFITS?

Government

The government has a wide area of responsibilities and the economy is one of those. The government has the main tool for managing the economic cycle is fiscal which includes taxing and spending. So, for stimulating the economy, government cuts tax, increases government spending, provides stimulus packages. Government reversely increase taxes, reduce spending and another stimulus when they feel that the economy is overheating.

Also, the government has to look after the deficit which results in the increases in debt levels.

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The above stimulus will invite higher taxes when either economy overheating or debt level of economy crossing limits.

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If higher taxes and lower spending by the government with the fiscal surplus resulted in the lower down of debt level and the fund goes out of the economy. Reversely, lower taxes and higher spending by the government bring more fiscal deficits and that will have resulted in the increasing borrowing levels.

Similarly, currently, Government has cut corporate tax rates in India and this will have resulted in the above process mentioned in rate cut but in a longer period, this lower tax can be increasing a debt level. India is a developing economy that requires higher government spending as well so that that will surely going to increases a deficit and will increase a debt level. But for stimulating growth in the economy it is a welcome step. Otherwise, the economy starts failing. The government has to take appropriate steps whenever requires.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

04 – THE ECONOMIC CYCLE – Mastering The Market Cycle

Posted on by under Bibliophile: Mastering The Market Cycle

The economy also moves into the long term and short-term cycle as an industry, stock market and everything else moves which are explained further.

Long-Term cycle

We know that the growing economy graph going upwards in the long term but it has short-term ups and downs.

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Long term straight line is made up of small cyclical ups and downs of the economic cycle of recession and recovery, slowdown and prosperity. These are part of any economy.

Everyone gets agree with the above point but we also need to understand that long-term trends also having a cyclical move as same as the short term. Here we also need to put a focus.

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We can see that the GDP of India has moved from US$ 0.04 trillion to US$ 2.72 trillion which shows long-term up moves but if we see shorter-term momentum of growth rate than it shows highly fluctuating with ups & downs.

 When Population growing it will lead to more consumption and that encourages more production. For producing more, companies need more working hours and that will be converted into more GDP.

So, population growth remains key to the growth of an economy. If growth converts to degrowth then economy starting to shrink.

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When the growth of population changes, it affects the GDP growth for a longer period of time. When a child gets born then it takes around 20-22 years for a child to become an employee. Also, migration from other countries replaces the birth rate of the country. Migration from other countries also enhances consumption and productivity which resulted in growth in GDP.

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Another factor that affects GDP growth is productivity. As productive can be raised despite any growth in the population, then GDP also grows or getting slow with the slower or declining in productivity. We have seen the growth of productivity when human labour replaced by machines, new automobiles, electricity, and computer has introduced. But these all have taken decades of time to affect the GDP. So, for the year to year productivity remains steady. This is not a change that will come overnight and disrupt everything rather it will slowly create changes over a long period.

The aspiration to live a better life encourages people to work hard and produce more. Educational people contribute more to the economy but if people do not like to be educated then it will affect negatively the economy. Such negative effects need to be overcome by the migrated.

Technologies that introduce new businesses and replaced the older. Also, it affects employment.

Automation might have an effect on reducing employment, and thus income and consumption will also decline which again affects the GDP growth.

Globalization provides a chance to export to the other economies which enhances the GDP growth. But the impact negative to the economy which only relies on the import from the other economies.

Short-term cycle

We have seen that many factors take time to affect a long-term trend of GDP. Then why short-term fluctuations occur and why we need to focus on it?

There are factors that cause short-term fluctuations in GDP growth. We always need to focus on those factors to get an edge to our investment. The actual investment game is to getting superior returns than average. We should not focus on the correct forecast but should focus on the superior forecast.

Many of the economists extrapolate current trends and publish reports on it. Such information is available with every so that it does not add much value. Also, we do not get superior returns by doing the same what the majority is doing. It is easy to make any forecast on the excel sheet but it is very difficult to keep it near to reality.

Spending patterns of the individual affect the production of the companies and that has an impact on the GDP growth.

Similarly, companies feel that demand remains robust then they keep on producing more and more but what happens when demand does not come. These unsold goods added to the inventories and companies has to cut production until inventory does not come back at a normal level.

Recession in an automobile has impacted the inventories of OEMs

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Few events also affect the performance of GDP such as war, changes in tax rate & trade barriers by government, cartels in the price of commodity, drought, flood, hurricane, and earthquake.

Superior forecast where we identify the deviation from the long-term trend and recent status of it. Identifying such deviation provides us with an edge. But identifying such is not an easy task and not all unconventional deviation also gets correct. We remember people for their correct unconventional prediction but they also have many failed predictions.

These all short-term factors affect GDP growth in a shorter time frame but that also helps us to get an edge into our investment. So that we require to have a keen understanding of all and focus on it for taking benefits.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

03 – THE REGULARITY OF CYCLES – Mastering The Market Cycle

Posted on by under Bibliophile: Mastering The Market Cycle

The world is full of randomness and people behave differently at different times so that it is difficult to predict the exact future. If we study the science and mathematics cycles then those have predictable sets of rules and moves in a regular way. But economics, companies, and participants are relying on the psychological influences so that they do not behave in a regular way. When emotions have an involvement then things become more difficult to predict.

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So that Greed and Fear of the investors remain regular in every cycle. This affects the prices of the assets.

As per the Cambridge dictionary, the definition of cycle “a group of events that happen in a particular order, one following the other, and are often repeated.”

We can see that many factors affect the occurrence of the events and that makes it difficult to predict the exact for the future. Current global scenario, we have an ample number of factors that can affect the cycle such as crude, the decision of the USA, domestic economic conditions, etc.

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Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

Mastering The Market Cycle – 02- THE NATURE OF CYCLES

Posted on by under Bibliophile: Mastering The Market Cycle

Cycle changes for the different time period, details, extent but it will be ups and downs forever which changes the investment environment & behavior.

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There are cycle moves in an identical phase such as a low to the middle point, middle point to a higher point, higher point to middle point with correction, middle point to lower point and then again to the middle to a new high. It is not necessary that the cycle starts from the low and ends at high or at again low, but it can start with any point and end up at any point.

Actually, the cycle never starts nor ends. We need to know why this upswing starts, where we are into the cycle, are we near the end of up/downturn, etc. Such answers need to be sought for the better judgment of the cycle.

Details of every cycle can change such as speed, time, reason, duration, etc. but cycle repeats.

Mr. Marks has quoted a story that blind persons touch the different parts of the elephant and make a story based on that touched part. Mr. Marks has explained that we are also similar to them, we also do not try to put things together and make a judgment. We must remember past events and keep in mind the cyclical nature of things. We also keep on thinking that the bull/bear run will continue forever but we need to focus on the previous cycles and understand the cycle that no phase-in cycle remains forever.

Cyclical development into one area also affects the other area of the cycle. That is if growth in an economy starts going down then the central bank will also work on reducing interest rates which involves a different cycle.

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We must have to understand that cycles are interconnected and one affects others, others affect another. We can study individual cycles for the analysis purpose but for the conclusion, we need to combine all together. Without putting everything together, we cannot reach a conclusion that where we stand at the cycle.

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We have seen that it takes time when we pump air into the balloon but it takes very little when air goes out from the balloon. Similarly, asset booms take time to occur but the majority of the time bust happens very rapidly.

Every boom and bust having a similar lesson that excessive optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; that overly generous capital markets ultimately lead to unwise financing, and thus to danger for participants.

Generally, we do not learn lessons from past mistakes and doing the same things with the expectation of different results. This is never going to happen. Every time when asset prices start moving towards the bubble territory then people start running to take the asset with the missing feeling. And similarly, when asset prices are near to bust then all running away from the asset. This is a common and repeatedly occurred event. And every time, people keep believing that it’s different this time. But it’s never different but yes the majority of people are different in the different cycles which make them a force to think that it’s different this time. Those who have survived during the different cycles must know that every cycle having the same characteristics and it will always be going to occur.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks