Economic Business Cycle - Winter

I hope you remembered to spring forward your clocks. This is the last of 4 newsletters correlating the economic business cycle to winter. The previous newsletters discussed when the economy is: stabilizing known as spring, growing knows as summer, and stalling known as fall. This newletter covers when the economy is shrinking known as winter. At the end are some winter facts for your enjoyment.

When the economy is shrinking it is called a recession or depression. Some experts claimed a few years ago that the Federal Reserve was so powerful that this part of the economic business cycle could be avoided such that a recession or depression would never happen again. We have seen that these expers are wrong. A typical business cycle lasts between 5 - 8 years.

So what causes the economy to shrink? The Federal Reserve to achieve a 3% growth rate and consumers. Above a 3% rate, inflation is the concern and they put the brakes on the economy through monetary policy. You read about the Federal Reserve attempting to achieve a soft landing. A high inflation rate is very detrimental to us, remember the late 1970's and early 1980's, having a 20% interest rate is an ugly thing.

Us consumers make spending decisions based on how we view the economy and the future. When economic uncertainty exists, consumers stop spending as much and save more, a normal reaction. While the Fed can control monetary policy, they certainly can not control how people think. So the change in how us consumers think causes the economy to slow even further. The Fed moves rate relatively slowly in an attempt to keep consumers spending at a normal rate. While the Federal Reserve is powerful, it is not nearly as powerful as 200 - 300 million consumers.

How do we invest in this economic winter? Since the economy is shrinking and interest rates are falling, a few options exist. We want to avoid the stock market since stock price grow as the economy grows and shrink as the economy shrinks so the stock market is going to go down. We want to own money market funds for a low risk investor and take advantage of the higher interest rates and long term bonds for higher risk investors. Long term bonds that do not pay a coupon can yield a risk taking investor a good return.

What is the bottom line of these 4 newsletters on weather? You need to understand economic business cycles, where the economy is within the cycle, and how to invest for the future. An investment strategy based upon what happened in the past yields very poor results.

Our economy is in a season of stability known as spring. This winter part of this economic business cycle will come and is a few years away. Relax, when it does come you know how to profit from it.

WINTER FACTS

The probability of a white Christmas in Vancouver, British Columbia, Canada is approximately the same as for Washington, DC: 13 percent.

Johannes Kepler published perhaps the first scientific reference to snow crystals in a short treatise entitled On the Six-Cornered Snowflake in 1611.

According to meteorologist Vincent Shaefer, an estimated half million ice crystals are required to cover a one square foot (929 square centimetres) area with snow to a depth of ten inches (25 cm).

Herds of caribou in Canada's north can generate their own weather. Ice fog will form around the herd on especially cold days from the moisture exhaled by the animals.

A large avalanche in North America might release 300,000 cubic yards (230,000 cubic metres) of snow. That's the equivalent of 20 American football fields filled 10 feet (3.05 m) deep with snow.

Snowflakes falling at the rate of 3.6 to 6.4 km/hr (2-4 mph) can take about one hour to fall to the ground.

Economic Business Cycle - Autumn

The economic news this week, including the jobs data, showed that the economy is stable and starting to show signs of growth. This newsletter is the 3rd in a series correlating economic business cycles and weather cycles. When the economy is stable after a decline it correlates to spring, when it is growing it correlates to summer, and when the economy stops growing it correlates to autumn. At the end of the newsletter are some autumn weather facts.

If the economy is growing what causes it to stop growing? The answer is the Federal Reserve and the control of monetary policy. It is the policy of the Fed to have 3% economic growth. The problem with this policy is that it is impossible to accomplish it.

When growth is below 3%, the Fed spurs growth with low interest rates and adds money into the economy to get the economy to grow. It is impossible to get exactly 3%, and inevitably the economy grows faster than 3%. To get it back to 3% the Fed raises rates and withdraws money from the economy because of an inflationary concern. Our economy is very diverse and is hard to regulate growth because people spend money based upon their feeling of the future.

So what are the signs of the autumn phase of the business cycle? The Fed says that they are concerned about fighting inflation. Interest rates are above 3%, the Fed has been raising them for awhile and autumn begins when interest rates are high and the Fed stops raising them. The treasury yield curve goes from increasing to flat. People will be looking at how great stocks have done in the past and will start rushing to buy them.

When autumn hits in the economic business cycle, ABORT ABORT ABORT. This means get out of the stock market and get ready for the roller coaster ride down. Do Not Follow The Crowd!!!!!

Right now our economy is stable and we are in the spring phase of the economic business cycle. The autumn phase will come a few years from now.

AUTUMN FACTS:

The Great Galveston Hurricane of 1900 killed more Americans than the Johnstown Flood , San Francisco Earthquake, and Chicago Fire combined.

A polar air mass moving out of the Arctic across the Mississippi River Basin may evaporate more than nine times the water flowing out of the river mouth in Louisiana.

Only three years in recorded history have not seen tropical storm occurred in the Atlantic Ocean during August: 1941, 1961 and 1997.

Economic Business Cycle and Earnings

Data from the Federal Reserve of New York, the same info that the Federal Reserve analyzes to set policy, on the current state of the US economic business cycle is analyzed. As an economy recovers from a bottom stage; industrial production should increase, inventory should decline, and commodity prices should increase. This data is critical to an investment strategist that uses a strategy involving the economic business cycle.

The industrial production data shows that production, which had a very severe decline in 2008, has started to recover. This means that people and other businesses have increased spending. A positive sign.

The inventory data shows a buildup during 2008 and early 2009 that is starting to decline. With increased spending business inventories will decline. Inventories go up as business slows down and vice versa as most businesses sell product through a distribution system. Another positive sign.

The commodity data shows that prices are also starting to increase. This is expected as demand increases for commodities based upon the law of supply and demand. Another positive sign.

What is the bottom line of this data? The economy has moved from the bottom stage to an early growth stage. For an investor, you want to maintaim your current position of owning: stocks, mutual funds that invest in stocks, short term bonds, and avoid long term bonds.

Earnings season is upon us once again and this past week some earnings were reported. It was reported that most companies were reporting better than expected earnings which surprised many experts, so much for expert opinion. Improved earnings are favorble for the stock market and stock market indexes around the world went up last week.

For what it is worth, I will give you my opinion that this trend of better than expected earnings should continue for the rest of this quarter. This should continue to support the stock market. The main reason is that companies project earnings, in a conservative manner, based upon the business conditions that exist at the time of the announcement. Since business conditions improved during the quarter it should also lead to improved earnings. This normally happens as the economy is growing.

When a publicly traded company gives earnings guidance it tends to be conservative in nature for a few reasons including: it is impossible to predict the future and if you miss the earnings number the stock price will drop and executives can lose their job. It is done to manage expectations of the major investors such that if you beat the earnings number you look like smart and if you miss it you look incompetent. The #1 objective of the CEO and Board of Directors, besides keeping their job, is to increase stock price.

I look forward to watching the earnings reports during the next 4 - 6 weeks.