Successful Nations Invest Heavily and Wisely

Investment is the critical spending driver of growth and a high and rising level of investment is normally a good sign.

For a country, investment running 

• below 20% of GDP foretells of shortages and gridlock; 
• above 40% is excessive and often presages a serious slowdown.

The sustainable sweet spot for investment is between 25% to 35% of GDP, and it can last for many years, particularly if the investment is going to projects that generate growth in the future.

Link between weak investment and weak growth is clear and it is so common.

If investments is too low as a share of GDP, around 20% or less for emerging countries, and stays low for a long period, it likely to leave the economy full of holes that make rapid growth unlikely.

Weak investment tends to degrade both the supply network and respect for the government.  

If a nation's supply chain is built on inadequate road, rail and sewer lines, supply cannot keep up with demand, which drives up prices.  

In this way, weak investment is a critical source of inflation - a cancer that has often killed growth in emerging nations.

Best and worst investments

The most productive investment binges are in 

• manufacturing, 
• technology, and 
• infrastructure, including roads, power grids and water systems.  

The worst are in 

• real estate, which often rings up crippling debts and 
• commodities, which often have a corrupting influence on the economy and society.

Although a case can be made that services will come to rival manufacturing as a catalyst for sustained growth, that day has yet to arrive.  

For now, the best investment binges are still focused on manufacturing and technology.

Additional Notes:

In Malaysia, investment peaked in 1995 at 43% of GDP, the second-highest level ever recorded in a large economy, behind China today.

Guided by an autocratic prime minister, the country poured money into some projects that proved useful, like a new international airport and many that did not.

The prime minister's grand vision included a new government district called Putrajaya, which today is home to just a quarter of the 320,000 people it was designed to house.  This is another classic case of a bad binge that left behind little of value.

Emerging countries: Watch for balanced growth and focus on manageable set of dynamic indicators

Emerging countries often grow in torrid streaks, only to fall into major crises that wipe out all their gains.

That is why among the nearly 200 economies currently tracked by IMF, only 40 have reached the "developed class".  

• The last to make it was South Korea, two decades ago.
• The rest are emerging, and most have been emerging forever.  

Economic trends are impermanent; churn and crisis are the norm.

All the rules aim, one way or another, to capture the delicate balances of debt, investment, inflation, currency values and other key factors required to keep an economy growing steadily faster than its peers

These are the basic principles.  Remember that economic trends are impermanent; churn and crisis are the norm.  

Recognize that any economy, no matter how successful or how broken, is more likely to return to the long-term average growth rate for its income class than to remain abnormally hot or cold indefinitely.

Watch for balanced growth and focus on a manageable set of dynamic indicators that make it possible to anticipate turns in the economic cycle.  

Modern Economies Follow a Cycle of Crisis, Reform, Boom (Revive) and Decay (Dying)

Modern economies follow a cycle - exploding in crisis, only to reform and revive before dying out once again.

The likely timing and direction of change depends in part on where a country stands on the cycle of crisis, reform, boom and decay.

In general, the fortunes of a nation are 

• most likely to turn for the better when a new leader rises in the wake of a crisis, and 
• most likely to decline when a stale leader is in power.

This cycle explain why so few booms last long enough to vault developing economies into the developed ranks and why those that make the leap are called "miracles":  they have defied the natural complacency and decay that kills most long booms.

Deflecting popular revolt by creating the welfare state

The fact that crisis and revolt can force elites to reform has been clear at least since the early critiques of Marx, who thought capitalism would collapse in a series of increasingly violent attempts to defend the upper classes.  

Instead, leaders proved capable of reforming capitalism, deflecting popular revolt by creating the welfare state, starting in Germany and Britain.

Political complacency means economic "miracle" cases are rare.

The link between boom times and political complacency is well documented.  

• Modern Japan and Europe are often described as too comfortably rich to push tough reform.  
• What is less well recognized is that even in normal periods, the cycle turns, constantly reshaping economies for better or worse.

The cycle of crisis, reform, boom and decay, turns erratically, even in democracies where elections are regularly scheduled.  

Nations may wallow in complacency for years, which helps explain why the "lost decades" in Africa and Latin America lasted longer than a decade.  

On the other hand, strong-willed leaders have been known to keep pushing reform for decades - but only in the rare "miracle" cases, including Korea, Taiwan and Japan before it fell off the miracle path in the 1990.

The Best Video to comprehend how the Economic Machine Works.

Published on 22 Sep 2013

Economics 101 -- "How the Economic Machine Works."

Created by Ray Dalio this simple but not simplistic and easy to follow 30 minute, animated video answers the question, "How does the economy really work?" Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.


To learn more about Economic Principles visit: http://www.economicprinciples.org.


[Also Available In Chinese] 经济这台机器是怎样运行的: http://www.youtube.com/watch?v=-ZbeYe...

Cyclical losses from economic cycles, time horizon and retirement planning

The value of assets such as stocks and real estate increases on average over the long run.

It also tends to fluctuate in waves - it will go up for a while, then down a little, then up some more and down again.

If you are not careful these waves can make you seasick, metaphorically speaking, of course.

If you watch these cycles happen but aren't aware of how to manage your response, you could find yourself making poor financial decisions as a result or even attempting to retire shortly after a devastating economic collapse, as happened to many people after the 2008 financial collapse.

What are the ways to prevent this from happening?




YOUR TIME HORIZON AND ECONOMIC CYCLES

The main thing to consider is your time horizon - the number of years you have remaining before your planned retirement date.

When you are young and first begin saving for retirement, it is easy to take a lot of risk without worrying about CYCLICAL LOSSES, because you think you will have more than enough time to regain that value.

This is a mistake a lot of people make, as they sell all their investments when the economy crashes, forgetting that economies eventually recover.

A recession is the worst time to sell your investments because you will get the worst possible price for them, for the reason of a national economic cycle rather than anything inherent to the investments themselves.



DON'T CONFUSE ECONOMIC CYCLES WITH TROUBLED INVESTMENTS

It is important, however, that you don't confuse economic cycles with troubled investments.

If your investments are doing poorly in a strong economy, consistently underperform or otherwise give you a reason to believe that the price won't recover, then don't stay on a sinking ship - sell those investments and buy something better.

Losses resulting from economic cycles, such as recessions, will recover; so remain persistent.

After you get some practice and become familiar with these cycles, you can even sell your investments just as they begin and then rebuy them when they lose a lot of their value, maximizing your wealth.

Another approach is then to sell them again slowly as their price recovers.

This reduces some of the risk associated with the economy's uncertain movements - something which so many people struggle to predict, even experts.

If you know how to ride these cyclical waves in the economy, you can actually use them to your advantage, but even if you just hold onto your investments and wait out the recession, you will regain the value eventually.



FINANCIAL PLANNING NEARING RETIREMENT

These cycles only really pose a risk to people who are getting ready to retire in the middle of one.

This is why you should absolutely manage a shift in the types of investment you hold as you get closer to your retirement.

When you are young, more volatile investments like equity index funds will give you the highest growth rates, even though the price roller coaster may make you dizzy.

As you get closer to your retirement date, the timing of these cycles can be very unfortunate, leaving you with little money to fund your retirement; so over the years you should gradually switch from high-risk to low-risk investments.

This means that you should regularly increase the percentage of your total investments that are allocated to things like low-risk bonds, fixed-rate annuities or even high-yield bank accounts.

That way, by the time you are ready to retire, the fluctuations in the economy will have little influence on the value of your investments.

This process of gradual risk reduction will help to give you the highest returns on your investments, while carefully managing the amount of risk to which you are exposed.

The complex relationship between stock market cycle and the economic cycle

The above depicts the economic life cycle for various business industries. 

The stock market reacts ahead of the economic cycle.

The idea is that our economy goes through periods of growth and decline as products, services, and business occur that spark consumer spending or lack thereof.

The eleven basic industries are annotated and noted as to where most successful in the economic cycle.

Economic Cycle versus Stock Market Cycle

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32660842#

Sam Stovall's Sector Investing, 1996 states that different sectors are stronger at different points along the business cycle. The table below describes this theoretical model throughout the business cycle.

Stage:  Consumer Expectations:  Industrial Production:  Interest Rates:  Yield Curve:

Full Recession Reviving Bottoming Out Falling Normal

Early Recovery Rising Rising Bottoming Out Normal (Steep)

Full Recovery Declining Flat Rising Rapidly (Fed) Flattening Out

Early Recession Falling Sharply Falling Peaking Flat/Inverted

The graph below, courtesy of StockCharts.com , shows these relationships and the order the key sectors respond to the economic cycle. The Stock Market Cycle precedes the Economic Cycle as investors try to anticipate how the market will react to the changes to the economy.

http://www.marketoracle.co.uk/Article371.html

Introductory Lectures to Business Cycles

Business Cycles, Part 0 of 4- Interest and Capital,
Prof. Krassimir Petrov

1:02:36 - 3 years ago

The theory of Interest, Production, and Capital is the foundation for understanding Economic Growth and Business Cycles.http://video.google.com/videoplay?docid=-6484061137769305763&hl=en&emb=1#docid=-5669706349089810530

http://video.google.com/videoplay?docid=3236390700554076825#docid=2786446863132957274

Business Cycles, Part 1 of 4 - Introduction, 
Prof. Krassimir Petrov

1:06:14 - 3 years ago

An introductory 65 min lecture describing the nature of business cycles. Explains business fluctuations, phases, periodicity, comovement, persistence, amplitude, cyclicality, and introduces major business cycle theories.

http://video.google.com/videoplay?docid=8415267688491832655#

Business Cycles, Part 2 of 4 - Business Cycle Indicators, Prof. Krassimir Petrov

1:02:32 - 3 years ago

The lecture explains the behavior of 18 different procyclical leading or lagging macroeconomic variables/indicators throughout the business cycle.

http://video.google.com/videoplay?docid=5546452117626581217#
Business Cycles, Part 3 of 4 - The Austrian Boom,

Prof. Krassimir Petrov

1:12:14 - 3 years ago

Explaining the Boom - what happens and why; characteristics of booms; why booms cannot last forever; why they inevitably turn to bust. The next part,part 4 is devoted to the "Bust".

http://video.google.com/videoplay?docid=-2382683217626362775&hl=en&emb=1#

BusinessCycles, Part 4 of 4 - The Austrian Bust, Prof. Krassimir Petrov

1:06:20 - 3 years ago

Crisis, Bust, Deflationary Depression, Stagflation, and other fundamental Austrian School concepts.

Profiting from the economic cycle using the Investment Clock

Forecasting future asset class returns are, needless to say, challenging. To do so effectively requires, among other things, a clear picture of your starting point. Where are we in the cycle ? What is the timing for increased inflation? To generate profits for clients one must be able to model in real time when the world economy moves from one phase in the cycle to another.

The Investment Clock approach recognises different points within the economic cycle and differentiates between phases which are likely to generate growth and inflation readings based on past trends and the current momentum of lead indicators. These indicators are updated on a monthly basis to build an expectation of how the global economy may perform over the coming three to six months.

The growth reading sets the relative weighting of cyclical and defensive assets (North-South on the clock diagram). The inflation reading sets the weighting of financial assets versus real assets (East-West).

Time lags in the release of economic data mean it reflects what has already happened in the economy. However, to profit we need to recognise in real time when the world economy moves from one Investment Clock phase to another. Therefore, we need a “now-cast” of each possible economic growth and inflation outcome, growth and inflation being the two key mPublish Posteasures of economic activity. To build this now-cast, we consider an array of trend indicators, leading indicators and price signals from the markets themselves. This now-cast drives fund positioning on a real time basis.

With the benefit of hindsight we can identify the historic phases of the US economic cycle by taking note of the major peaks and troughs in the growth and inflation cycles.

Based on back testing, some asset classes perform better than others in each phase: the Investment Clock links the phases of the economic cycles to the performance of the asset classes:



The Investment Clock below shows the four key stages of an economic cycle:

• Stagflation (like we saw in mid-2008). A difficult time for most markets where growth has moved below trend but inflation concerns are high. As the Clock shows, we believe this is a period where Cash can outperform most other investments.

• Reflation (July 2008-March 2009). Often characterised by a period of interest rate cuts, we believe this is often a period of the cycle when bonds can perform well.

• Recovery (such as that which has been experienced through the summer of 2009). Often follows a period of reflation and can represent the best conditions for stocks to perform well; improving growth with falling inflation.

• Overheat (where we believe we were headed in Q4 2009 and into Q1 2010). Typically when commodities tend to shine through as the prospect of inflation rises are coupled with growth above trend.




http://www.fidelityinstitutional.com/deadly_win/multiasset.html

Economic Cycle versus Stock Market Cycle