Chapter 2: The Chapter 2: The Economic Life Economic Life

CycleCycleJon GreenwaldJon Greenwald

Ipek KazanIpek KazanRaegen RichardRaegen Richard

5 Phases in the Economic 5 Phases in the Economic Life CycleLife Cycle

Up-cycle PhasesUp-cycle Phases RevivalRevival AccelerationAcceleration MaturationMaturation

Down-cycle PhasesDown-cycle Phases Ease-off Ease-off PlungePlunge

Expansion tends to last longer than recession.Expansion tends to last longer than recession. Each transition between phases is marked by a Each transition between phases is marked by a

red flag event.red flag event.

Up CycleUp CycleRevivalRevival

- - Red Flag Event:Red Flag Event: GNP turns positiveGNP turns positive

- Other Events:- Other Events: Mortgage rates decline and housing starts to Mortgage rates decline and housing starts to increaseincreaseLow financing rates boost consumer spendingLow financing rates boost consumer spendingIncreasing pressure on credit demand and pricesIncreasing pressure on credit demand and pricesInterest rates and inflation rise irregularlyInterest rates and inflation rise irregularly

Up CycleUp CycleAccelerationAcceleration

- - Red Flag Event:Red Flag Event: Speedup in inflationSpeedup in inflation- Other Events:- Other Events:

Consumer spending becomes more confidentConsumer spending becomes more confidentHousing activity increasesHousing activity increasesBusinesses start to rebuild inventories and spend Businesses start to rebuild inventories and spend more on plant and equipmentmore on plant and equipment

Up CycleUp CycleMaturationMaturation

- Red Flag Event:Red Flag Event: Sharp split between cautious Sharp split between cautious consumer spending and optimistic business consumer spending and optimistic business spendingspending

- Other Events:- Other Events: Consumers spend less as inflation accelerates and Consumers spend less as inflation accelerates and interest rates increaseinterest rates increaseEconomy keeps going because of optimistic Economy keeps going because of optimistic business menbusiness menGrowth suffers under pressure of accelerating Growth suffers under pressure of accelerating inflation and rising interest ratesinflation and rising interest rates

Down CycleDown Cycle Ease-offEase-off- - Red Flag Event: Red Flag Event: GNP turns negativeGNP turns negative- - Other Events: Other Events: Inflation and interest rates increaseInflation and interest rates increase Purchases of big ticket items and housing fall Purchases of big ticket items and housing fall offoff severely severely

Down CycleDown Cycle PlungePlunge- - Red Flag Event:Red Flag Event: Peaking of interest rates Peaking of interest rates- - Other Events: Other Events:

Businesses turn to extreme caution and liquidate Businesses turn to extreme caution and liquidate inventories rapidlyinventories rapidlyEmployment drops sharplyEmployment drops sharplyCorporate profits plummetCorporate profits plummet

- At the end: At the end: Inflation and interest rates begin to come downInflation and interest rates begin to come downDeclining rates help the economy return to the Declining rates help the economy return to the revival phaserevival phase

Hunt’s discussion is limited to mutual Hunt’s discussion is limited to mutual fundsfunds Provide highly liquid way to investProvide highly liquid way to invest Liquidity is important to keep value during Liquidity is important to keep value during

financial climate changefinancial climate change Investment vehicles used:Investment vehicles used:

StocksStocks BondsBonds Gold/CommoditiesGold/Commodities Money Market FundsMoney Market Funds

Investment Implications of the Investment Implications of the Life CyclesLife Cycles

Investment Implications of the Investment Implications of the Life CyclesLife Cycles

1. Stocks and Bonds1. Stocks and BondsRally in Plunge substantiallyRally in Plunge substantiallyFewer investment opportunities as getting into Fewer investment opportunities as getting into Expansion as inflation and interest rates riseExpansion as inflation and interest rates riseMore speculative in late AccelerationMore speculative in late AccelerationPoor investment during MaturationPoor investment during Maturation

Investment Implications of the Investment Implications of the Life CyclesLife Cycles

2. 2. Gold and CommoditiesGold and CommoditiesStart to perform well in the Acceleration and Start to perform well in the Acceleration and Maturation Maturation Fall apart early in Ease-offFall apart early in Ease-off

3. 3. Money Market FundsMoney Market FundsPoor investment in Revival due to unfavorable interest Poor investment in Revival due to unfavorable interest ratesratesBegin to perform well in AccelerationBegin to perform well in AccelerationOutperform most investments in MaturationOutperform most investments in MaturationStill performing well in ease-offStill performing well in ease-off

Factors leading to Life Cycle Factors leading to Life Cycle ChangesChanges

Volatility comes from smaller sectors that Volatility comes from smaller sectors that swing widely (net exports, consumer swing widely (net exports, consumer purchases of big-ticket items, inventory purchases of big-ticket items, inventory investments, etc.)investments, etc.)

Other factors:Other factors: - Federal Government Intrusions- Federal Government Intrusions - Global Factors- Global Factors - Shocks- Shocks - Financial Crises - Financial Crises

Best InformationBest Information

Old reliable factors:Old reliable factors: - Gross National ProductGross National Product- Producer Price IndexProducer Price Index- Money SupplyMoney Supply

Be careful about news mediaBe careful about news media Watch out for frequent revisionsWatch out for frequent revisions

Luck??Luck?? Long term success: read economy Long term success: read economy

effectivelyeffectively Short term booms: usually luck!!Short term booms: usually luck!!

QuestionsQuestions